APT

Business Context and Reporting Period

Company: Alpha Pro Tech, Ltd.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2006
Business Overview: The company manufactures and distributes disposable protective apparel, infection control products, extended care products (medical bed pads, pet beds), and engineered construction weatherization products. Operations are conducted through four segments: Disposable Protective Apparel, Infection Control, Extended Care, and Engineered Products.

Key Financial Metrics

Liquidity: The company maintains a current ratio of 10.94:1. It has a $3,500,000 credit facility with no outstanding borrowings as of September 30, 2006.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 11.1% ($896,000) for the quarter and 11.3% ($2,724,000) for the nine months compared to the same periods in 2005.
• Profitability: Net income rose 27.3% for the quarter and 24.1% for the nine months. Operating margins improved due to higher gross profits and reduced depreciation.
• Segment Performance:
  • Engineered Products: Sales surged 41.9% (quarter) and 70.6% (nine months), driven by construction weatherization products.
  • Infection Control: Sales increased 22.8% (quarter) and 39.3% (nine months), attributed to strong demand for N-95 respirators due to Avian Flu concerns.
  • Disposable Protective Apparel: Sales increased 2.0% for the quarter but decreased 6.2% for the nine months.
  • Extended Care: Sales declined 17.1% (quarter) and 14.6% (nine months) due to lower medical bed pad sales.
• Cash Flow: Net cash used in operating activities was $702,000 for the nine months ended September 30, 2006, a significant improvement from the $3,162,000 used in the prior year period. This was primarily due to reduced inventory buildup compared to 2005.

Outlook, Risks, and Unusual Items

• Management Commentary: Management expects the Engineered Products segment to contribute significantly to revenue growth for the remainder of 2006 and into 2007. The company anticipates growth in the Disposable Protective Apparel segment in 2007 following the launch of the ComforTech line.
• Joint Venture: The company holds a 41.66% interest in Harmony Plastics Private Limited (India). Harmony repaid $300,000 of a long-term advance in Q3 2006. The company recorded $36,000 in equity income for the quarter.
• Accounting Changes: The company adopted SFAS 123R (Share-Based Payment) effective January 1, 2006, recognizing $12,000 in compensation expense for the nine months ended September 30, 2006.
• Risks:
  • Market Risk: Operations are exposed to foreign currency exchange rate fluctuations due to subcontracting in China and Mexico and a joint venture in India. The company does not hedge these risks.
  • Inventory: Inventory levels increased by $968,000 to service anticipated sales growth, particularly in Engineered Products.

Investor Verification Checklist

• Inventory Valuation: Verify the adequacy of the $311,000 reserve for slow-moving or obsolete inventory given the $968,000 increase in total inventory levels.
• Accounts Receivable: Confirm the collectability of the $5,666,000 receivable balance, which increased 43.3% year-over-year, driven by sales growth in the last two months of the quarter.
• Joint Venture Performance: Monitor the financial health and repayment schedule of the Harmony Plastics Private Limited joint venture in India.
• Segment Sustainability: Assess the sustainability of the Infection Control segment's growth, which is currently driven by temporary Avian Flu concerns.
• Cash Burn: Review the trend of negative operating cash flow ($702,000 used in nine months) to ensure it does not accelerate despite profitability.