Alpha Pro Tech, Ltd. — Q3 2017 Form 10-Q
Business context and period. The unaudited report covers the quarter and nine months ended September 30, 2017, compared with the same 2016 periods. Alpha Pro Tech develops and sells building weatherization products, disposable protective apparel, and infection-control products, primarily in the United States.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $12.049 million | $11.779 million | $34.082 million | $36.334 million |
| Gross profit / margin | $4.712 million / 39.1% | $4.516 million / 38.3% | $13.493 million / 39.6% | $13.302 million / 36.6% |
| Income from operations | $1.115 million | $1.205 million | $2.798 million | $2.927 million |
| Net income / net margin | $1.103 million / 9.2% | $1.019 million / 8.7% | $2.457 million / 7.2% | $2.323 million / 6.4% |
| Diluted EPS | $0.07 | $0.06 | $0.16 | $0.14 |
| Operating cash flow | Not stated separately for the quarter | $2.674 million | $6.016 million |
Liquidity and debt. At September 30, cash was $8.968 million, working capital was $25.646 million, and the current ratio was 14:1. Total liabilities were $2.281 million; the company reported no borrowings on its $3.5 million Wells Fargo credit line, which was due to expire in May 2018. Management said available cash and credit were sufficient for foreseeable working capital and planned capital spending.
For the first nine months, cash decreased $488,000. Operating activities provided $2.674 million; investing activities used $386,000, including $923,000 of capital spending partly offset by $537,000 from a property sale; financing activities used $2.776 million, primarily for stock repurchases. Receivables rose $1.073 million from year-end, and days sales outstanding increased to 42 from 30.
Changes and operating drivers
- Q3 sales increased 2.3% year over year, with increases in all three segments. Nine-month sales declined 6.2%, reflecting an 11.1% decline in Building Supply and a 2.1% decline in Protective Apparel, partly offset by 11.0% growth in Infection Control.
- Building Supply nine-month sales fell mainly because synthetic roof underlayment sales were down 25.3%; housewrap rose 10.0%. Management cited lower sales to private-label distributors and competitive pricing pressure. Q3 housewrap sales rose 20.3%.
- Gross margin improved year to date, but operating income declined as SG&A rose 3.2% to $10.269 million. For Q3, SG&A rose 9.2% to $3.450 million, partly due to added sales and marketing investment.
- Net income increased despite lower operating income, supported by other income. That included a $385,000 gain on sale of property; equity income from unconsolidated affiliate Harmony was $105,000 for Q3 and $339,000 year to date, lower than in the comparable 2016 periods.
- The company repurchased 898,242 shares for $2.901 million in the first nine months. At September 30, $1.604 million remained available under the repurchase program.
Outlook, risks, and unusual items
- Management expected fiscal 2017 gross margin to be around 39% and the effective tax rate to be in the low 30% range. It expected Building Supply growth in 2018 and described a newly announced REX Wrap Fortis product as a potential growth opportunity; these are forward-looking expectations, not guarantees.
- The company’s claims against VWR International were rejected by the court in August 2017. VWR is seeking attorneys’ fees and costs, and counterclaims against Alpha Pro Tech remain. The company intends to defend itself, but said any material loss cannot reasonably be estimated.
- A one-time $866,000 cumulative-effect accounting adjustment upon adoption of stock-compensation guidance reduced additional paid-in capital and increased retained earnings; it was not reported as current-period income.
- Management stated that adoption of the new revenue-recognition standard in Q1 2018 was expected to have limited to no impact. The impact of other pending accounting standards was not yet determined.
- Disclosure controls were concluded to be effective at September 30, 2017. The filing reported no subsequent events requiring disclosure.
Important facts for investors to verify
- Whether Building Supply, especially synthetic roof underlayment, recovers and the new housewrap product gains traction.
- Whether improved gross margins can be sustained while SG&A and sales investment remain elevated.
- Receivables collection trends, given higher receivables and days sales outstanding.
- The outcome and potential financial exposure from the VWR litigation and fee claim.
- Harmony’s operating performance and the company’s purchases from the affiliate, which totaled $11.097 million in the first nine months.
- Cash deployment, including continued share repurchases, and renewal or replacement of the credit facility before its stated May 2018 expiry.