Alpha Pro Tech, Ltd. — Q1 2012 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. The company sells building weatherization products, disposable protective apparel, and infection-control products, primarily in the United States.
Financial results and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net sales | $9.619 million | $8.945 million; up 7.5% |
| Gross profit / margin | $3.425 million / 35.6% | $3.273 million / 36.6% |
| Operating income (loss) | $(41,000) | $(352,000) |
| Net income (loss) | $70,000 | $(112,000) |
| Net margin | 0.7% | (1.3%) |
| Operating cash flow | $(1.468) million | $(2.704) million |
| Cash and cash equivalents | $5.462 million at March 31 | Down $2.041 million from year-end 2011 |
| Working capital / current ratio | $29.361 million / 25:1 | Working capital down 1.3% from year-end |
| Debt and credit | No borrowings under $3.5 million facility | Facility expires May 2012; renewal expected |
Gross margin fell by 1.0 percentage point, reflecting a greater sales mix of lower-margin Building Supply products and pressure from raw-material costs and competitive pricing. Net income included $147,000 of equity income from unconsolidated affiliate Harmony; the company reported an operating loss.
Material changes versus Q1 2011
- Building Supply sales rose 17.8% to $5.591 million, led by synthetic roof underlayment and housewrap.
- Disposable Protective Apparel sales were nearly flat at $2.914 million. Growth with an international supply-chain partner was offset by declines involving a former major distributor.
- Infection Control sales fell 13.7% to $1.114 million. Mask sales declined; the prior-year comparison also included bed-pad and pet-bed sales, which were sold in Q1 2011.
- SG&A declined 3.9% to $3.250 million, while gross profit increased 4.6%. The operating loss narrowed by $311,000.
- Cash used in operations improved by $1.236 million year over year, but remained negative. Higher receivables and prepaid inventory deposits were significant cash uses.
- The company repurchased and retired 151,350 shares for $205,000 during the quarter.
Outlook, commentary, and risks
- No quantified earnings or revenue guidance is provided. Management said the new TECHNOply economy roof underlayment was expected to begin contributing to sales in Q2 2012, and expected the REX Wrap Fortis housewrap to contribute more significantly during 2012.
- Management expressed optimism about Building Supply distribution expansion and the longer-term shift from felt to synthetic roof underlayment, while acknowledging a weak building and housing market.
- Risks highlighted by results and commentary include raw-material cost increases, competitive pricing, weak construction markets, and competing product lines introduced by former major distributors.
- Receivables rose 36.1% from year-end to $6.431 million; days sales outstanding increased to 53 from 41, partly due to late-quarter sales and extended customer payment terms. Prepaid expenses rose 45.3%, primarily from inventory deposits in Asia.
- Management stated that cash and available credit should cover foreseeable working-capital needs and planned capital expenditures. The credit facility renewal was expected but had not yet occurred as of the filing.
- Harmony is an unconsolidated affiliate. Alpha Pro Tech reported a $2.582 million investment balance and purchased $3.622 million of inventory from Harmony in the quarter. Management stated the company does not guarantee Harmony’s facility financing.
- Disclosure controls were assessed as effective as of March 31, 2012; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Weighted-average share count discrepancy: The income statement reports 20,988,087 weighted-average shares for Q1 2012, while the EPS note reports 22,988,087 for the same period. Verify the correct denominator; reported EPS is rounded to $0.00.
- Cash-flow classification inconsistency: The cash-flow statement reports investing outflow of $368,000 and financing outflow of $205,000. The MD&A liquidity paragraph appears to reverse those classifications; verify against the statements.
- Credit facility: Confirm whether the $3.5 million line, due to expire in May 2012, was renewed and on what terms.
- Liquidity and working capital: Track conversion of elevated receivables and prepaid inventory deposits into cash, alongside continuing operating cash outflows.
- Growth and margins: Assess whether TECHNOply and Fortis deliver the expected sales contribution and whether Building Supply growth can offset lower margins and competitive cost pressures.