Alpha Pro Tech, Ltd. — Q2 2016 Form 10-Q
Business context and reporting period. The unaudited quarter and six months ended June 30, 2016. Alpha Pro Tech develops, manufactures, and markets building weatherization products, disposable protective apparel, and infection-control products, primarily in the U.S.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $12.708 million | $12.095 million | $24.555 million | $22.749 million |
| Gross profit; margin | $4.540 million; 35.7% | $3.916 million; 32.4% | $8.785 million; 35.8% | $7.741 million; 34.0% |
| Operating income; margin | $1.089 million; 8.6% | $246,000; 2.0% | $1.723 million; 7.0% | $323,000; 1.4% |
| Net income; margin | $797,000; 6.3% | $288,000; 2.4% | $1.304 million; 5.3% | $436,000; 1.9% |
| Diluted EPS | $0.05 | $0.02 | $0.07 | $0.02 |
- Segment sales, Q2: Building Supply $7.924 million (up 12.0%); Disposable Protective Apparel $3.624 million (down 5.6%); Infection Control $1.160 million (down 2.1%). Building Supply sales were a second-quarter record.
- Cash flow, first half: Operating activities provided $2.862 million, versus $1.210 million used in the prior-year period. Investing used $204,000, including $163,000 for property and equipment; financing used $1.751 million, primarily for share repurchases. Cash increased $907,000 to $10.588 million.
- Liquidity and debt: Working capital was $30.307 million and the current ratio was 16:1 at June 30. The company had no borrowings on its $3.5 million revolving credit facility, renewed through May 2018; stated availability was $3.5 million. Total liabilities were $2.872 million. Management believes cash and available credit will cover foreseeable working capital and planned capital expenditures.
- Balance sheet: Total assets were $38.493 million; shareholders’ equity was $35.621 million. Inventory declined to $12.656 million from $16.398 million at year-end 2015, while accounts receivable increased to $5.113 million from $2.762 million. Receivable days were reported at 29, down from 39 at year-end.
Material changes versus prior comparable periods
- First-half sales rose 7.9%, led by Building Supply growth of 13.9%; apparel sales edged down 0.5%, while Infection Control rose 2.0%.
- Gross margin improved 3.3 percentage points in Q2 and 1.8 points for the first half. Lower SG&A and depreciation also contributed to sharply higher operating and net income.
- The effective tax rate increased to 32.6% in Q2 and 31.9% for the first half, from 23.6% and 21.2%, respectively. Management attributed the difference primarily to equity income from the unconsolidated affiliate not being subject to a tax provision.
- During the first half, the company repurchased and retired 890,100 shares for $1.751 million. Shares outstanding were 16,960,356 at June 30, versus 17,850,456 at December 31, 2015.
Outlook, commentary, and notable matters
- Management expected Building Supply to continue low-double-digit growth for full-year 2016 and gross margin to remain in a similar range for the balance of the year; it also said it continued working to reduce product costs. The filing cautions interim results are not necessarily indicative of full-year results.
- Management cited unusually warm, dry spring weather as a factor in lower apparel sales to distributors supplying shoecovers for residential-home entry. Q2 mask sales fell 7.9%, partly offset by shield sales growth of 11.7%.
- The company’s 41.66%-owned Harmony Plastics joint venture generated equity income of $93,000 in Q2 and $191,000 in the first half. Alpha Pro Tech purchased $3.107 million of inventory from Harmony in Q2 and $5.930 million in the first half. Management reported no impairment of its $3.231 million investment.
- The President and Chairman receives a bonus equal to 5% of pre-tax profit excluding bonus expense; $62,000 was accrued for Q2 and $101,000 for the first half. The filing also reports legal fees paid to a law firm whose majority member serves on the Board: $25,000 in Q2 and $50,000 in the first half.
- Management reported no subsequent events requiring disclosure and concluded disclosure controls were effective; no material change in internal control over financial reporting was reported. Several upcoming accounting standards were under evaluation, with impacts not yet determined.
Important facts for investors to verify
- Whether Building Supply growth and the stated low-double-digit full-year outlook are sustained, and whether apparel and mask sales recover.
- How much of operating cash flow reflects inventory reduction and whether the substantial receivables increase converts to cash; review subsequent-period working-capital movements.
- The terms and ongoing activity of the Harmony relationship, including affiliate purchases, equity earnings, and the recoverability of the investment.
- Share-repurchase pace and remaining authorization: $1.527 million was available at June 30 after the program was expanded by $2 million in May 2016.
- The drivers and sustainability of improved gross margins and the higher effective tax rate. The filing gives no quantified full-year earnings or revenue guidance.