Alpha Pro Tech, Ltd. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The company develops and sells building weatherization products, disposable protective apparel, and infection-control products, primarily in the United States. Financial statements are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $12.109 million | $11.282 million | $23.551 million | $22.032 million |
| Gross profit / margin | $4.719 million / 39.0% | $4.487 million / 39.8% | $9.174 million / 39.0% | $8.780 million / 39.9% |
| Income from operations | $1.107 million | $1.016 million | $1.535 million | $1.682 million |
| Net income / net margin | $959,000 / 7.9% | $804,000 / 7.1% | $1.467 million / 6.2% | $1.354 million / 6.1% |
| Diluted EPS | $0.07 | $0.05 | $0.10 | $0.09 |
- Q2 sales increased 7.3%; six-month sales increased 6.9%. Building Supply and Disposable Protective Apparel drove growth, while Infection Control sales declined slightly.
- Six-month operating income fell 8.7%, primarily reflecting higher SG&A, including expense associated with a litigation settlement. Management said operating income excluding litigation expense would have increased significantly, but did not provide the settlement expense amount.
- Q2 net income rose 19.3% and six-month net income rose 8.3%, with lower income-tax provisions contributing materially. Effective tax rates were 17.5% and 16.7%, respectively, versus 29.8% and 29.4% in 2017; management attributed the reduction to U.S. tax reform.
Cash, liquidity, and capital
- At June 30, cash was $7.158 million, working capital was $24.103 million, and the current ratio was 12:1. Cash decreased $1.605 million from year-end 2017.
- Operating cash flow was $132,000 for the first half, versus $1.677 million a year earlier. Prepaid expenses rose $1.023 million; receivables increased $521,000; and payables and accrued liabilities declined $610,000.
- Investing cash outflow was $240,000, all for property and equipment. Financing cash outflow was $1.497 million, principally $1.617 million of share repurchases, partly offset by $120,000 from option exercises.
- The company reported no borrowings on its $3.5 million revolving credit facility; full borrowing capacity was available at June 30. It said cash and the facility should cover foreseeable working capital and planned capital expenditures.
- Six-month repurchases totaled 453,000 shares for $1.617 million. Remaining authorization at June 30 was $2.662 million.
Management commentary, outlook, and notable items
- Building Supply sales grew 4.6% in Q2 and 8.3% for the first half, supported by housewrap and other woven material; lower synthetic underlayment sales partly offset growth. Management cited continued housewrap growth and expected further segment growth.
- Disposable Protective Apparel sales rose 16.3% in Q2 and 7.8% for the first half. Management attributed growth to its international supply-chain partner and national and regional distributors, and said it was working to sustain momentum.
- Infection Control sales declined 6.2% in Q2 and 1.9% for the first half, mainly due to lower mask sales to a private-label distributor.
- Management expected 2018 gross margin to be lower than 2017 but remain in the “high thirty percent range.” Increased rebates and Building Supply product mix affected first-half margins. No specific revenue or earnings guidance was provided.
- A competitor’s attorneys’ fee award followed litigation in which the company’s claims were denied. The parties reached a settlement in May 2018, and the company accrued the agreed amount. It is pursuing recovery from former litigation counsel, but recovery is uncertain; the settlement amount is not clearly stated in the filing.
- Adoption of the equity-security accounting standard moved unrealized investment gains and losses into earnings beginning January 1, 2018. The company recorded a $65,000 first-half unrealized loss, including a $97,000 loss in Q2. Adoption also reclassified a $458,000 accumulated loss to retained earnings.
- Management reported disclosure controls were effective at quarter-end and no material change in internal control over financial reporting. It reported no subsequent events requiring disclosure.
Important facts for investors to verify
- The settlement amount and any eventual recovery from former litigation counsel.
- Whether the company can sustain Building Supply and Apparel growth and improve or maintain gross margins amid rebates and changing product mix.
- Why operating cash flow was low relative to net income, including the continuing effects of prepaid expenses, receivables, and payables.
- The impact of investment-price volatility on reported earnings and the remaining share-repurchase authorization.
- The eventual balance-sheet impact of the forthcoming lease-accounting standard; management had not yet determined its effect.