Alpha Pro Tech, Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The company develops and sells building-weatherization products, disposable protective apparel, and infection-control products. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $13.213 million | $12.692 million | $35.421 million | $33.298 million |
| Gross profit / margin | $4.886 million / 37.0% | $4.579 million / 36.1% | $13.005 million / 36.7% | $12.299 million / 36.9% |
| Operating income | $1.400 million | $1.211 million | $2.485 million | $1.880 million |
| Net income | $966,000 | $905,000 | $2.130 million | $1.395 million |
| Diluted EPS | $0.05 | $0.05 | $0.11 | $0.07 |
- Q3 sales increased 4.1%; nine-month sales increased 6.4%. Nine-month net income rose 52.7%, while Q3 net income grew 6.7%.
- Nine-month operating cash flow was $973,000, down from $5.349 million. Investing used $586,000 and financing used $1.549 million; cash declined $1.162 million to $7.053 million.
- At September 30, cash was $7.053 million and investments were $2.426 million. Working capital was $31.825 million; the company reported a 16:1 current ratio.
- Total liabilities were $3.789 million; the filing reports no borrowings on the $3.5 million Wells Fargo credit line, renewed through May 2016. The company says cash and available credit should cover foreseeable working capital and planned capital expenditures.
- Total assets were $40.459 million and shareholders’ equity was $36.670 million. Capital spending on property and equipment was $892,000 for the first nine months.
Material changes and segment trends
- For the first nine months, Building Supply sales rose 5.0% to $21.482 million; Disposable Protective Apparel sales rose 10.4% to $10.612 million; Infection Control sales rose 3.1% to $3.327 million.
- Management attributed Building Supply growth mainly to synthetic roof underlayment. TECHNOply sales were about 3.5 times the prior-year period. REX Wrap Fortis sales remained slower than anticipated, with improvement expected next year.
- Protective Apparel growth came mainly from national and regional distributors, partly offset by lower sales to a major international supply-chain partner. Infection Control nine-month shield sales rose 12.3%, while mask sales declined 0.8%.
- Nine-month gross margin was slightly lower year over year, although Q3 margin improved. SG&A was 28.1% of sales for the first nine months versus 29.7% a year earlier.
Outlook, risks, and notable items
- No quantified financial guidance is provided. Management expects its new Building Supply products to support broader market share, but noted slower-than-anticipated uptake for REX Wrap Fortis. It also cited a strategy to diversify distribution for Critical Cover apparel.
- Nine-month results included $409,000 of gains on investments in common stock and warrants, including a $379,000 realized gain on marketable securities and a $30,000 warrant gain. Investment fair-value changes also affected other comprehensive income; Q3 included an after-tax unrealized loss of $278,000.
- Operating cash flow was substantially below the prior-year period, with cash uses including increased receivables and prepaid expenses. Receivables rose 21.2% from year-end, while days sales outstanding improved to 38 days from 47.
- The company purchased $13.486 million of inventory from its 41.66%-owned unconsolidated affiliate, Harmony Plastics, in the first nine months, compared with $9.132 million in the prior-year period. Harmony is not consolidated; the company reports no impairment of its $2.924 million investment.
- The company repurchased 950,100 shares for $2.034 million in the first nine months and had $1.560 million remaining under its repurchase authorization at quarter-end. It accrued $346,000 in executive bonuses for the period.
- Management identified no subsequent events requiring disclosure and concluded disclosure controls were effective, with no material change in internal control over financial reporting. The company plans to adopt revenue-recognition standard ASU 2014-09 in fiscal 2017; its impact had not been determined.
Important facts for investors to verify
- Whether operating cash generation improves and whether receivables and inventory remain well controlled.
- How much earnings growth is repeatable apart from marketable-security and warrant gains.
- Progress in REX Wrap Fortis sales, TECHNOply growth, and apparel distribution diversification.
- The scale and terms of ongoing purchases from Harmony and the affiliate’s ability to supply the company’s needs.
- Use of remaining share-repurchase authorization and the effect of further buybacks on liquidity and share count.
- The eventual financial and reporting impact of ASU 2014-09 adoption.