Alpha Pro Tech, Ltd. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. The company develops and sells building weatherization products, disposable protective apparel, and infection-control products, primarily in the United States.
Financial performance and position
- Q2 revenue: $12.095 million, down 1.3% year over year. First-half revenue: $22.749 million, up 2.4%.
- Profitability: Q2 gross profit was $3.916 million (32.4% margin), versus $4.508 million (36.8%). Operating income was $246,000 versus $1.034 million; net income was $288,000 versus $895,000. Diluted EPS was $0.02 versus $0.05.
- For the first half, gross profit was $7.741 million (34.0% margin), versus $8.118 million (36.6%); operating income was $323,000 versus $1.084 million; net income was $436,000 versus $1.164 million. Diluted EPS was $0.02 versus $0.06.
- Cash flow: First-half operating cash flow was negative $1.210 million, compared with negative $834,000. Investing cash flow was negative $121,000 and financing cash flow negative $250,000. Cash declined $1.581 million to $3.914 million.
- Liquidity and debt: Working capital was $32.046 million and the current ratio 20:1 at June 30. The company reported no borrowings on its $3.5 million revolving credit facility, with $3.5 million available; the facility expires in May 2016. Management said cash and available credit should cover foreseeable working-capital needs and planned capital expenditures.
- Balance sheet: Total assets were $40.222 million, including $1.495 million of marketable securities and $19.218 million of inventory. Total liabilities were $2.988 million and shareholders’ equity was $37.234 million. Inventory rose 16.2% from year-end; cash and investments together fell from $8.335 million to $5.409 million.
Changes and operating drivers
- Q2 Building Supply sales fell 4.6%, mainly amid severe weather and competitive underlayment pricing. Disposable Protective Apparel sales rose 1.2%; Infection Control sales rose 13.3%. First-half sales increased in Apparel (4.6%) and Infection Control (12.4%), while Building Supply was down 0.4%.
- Lower gross margins reflected competitive pricing and higher rebates in Building Supply and Apparel, plus higher manufacturing costs, especially in Apparel. SG&A increased 6.7% in Q2 and 6.4% in the first half, with legal costs, sales and marketing salaries, and first-half foreign-exchange losses cited as drivers.
- Operating income declined substantially in both periods. In addition to weaker operating performance, 2014 included investment-related gains of $218,000 in Q2 and $409,000 for the first half; these gains did not recur in 2015.
- First-half operating cash use was driven principally by a $2.674 million inventory increase, partly offset by a $1.667 million decline in prepaid expenses. Management said inventory was broadly flat versus Q1 and expected it to decline in coming quarters.
- First-half comprehensive loss was $433,000, including an $869,000 after-tax unrealized loss on marketable securities. The securities portfolio was valued at $1.495 million at June 30.
Outlook, risks, and other notable items
- Management expects continued 2015 growth in the Critical Cover protective-apparel line, anticipates that two new roofing distributor programs may increase Building Supply sales in the second half, and expects housewrap demand to benefit from improving housing and construction activity. These are expectations, not quantified guidance.
- The TECHNO synthetic-underlayment product family recorded strong growth; the company introduced TECHNO SB in Q2. REX Wrap Fortis housewrap sales remained below expectations, despite year-over-year growth.
- A $115,000 Apparel shipment scheduled for Q2 arrived after quarter-end; management said Q2 segment sales otherwise would have been up 4.2%.
- Key exposures include weather-related demand effects, competitive pricing and rebates, manufacturing costs, foreign-exchange movements, inventory obsolescence assumptions, and investment-value fluctuations. The filing says interim results are not necessarily indicative of full-year results.
- The company repurchased 409,100 shares for $968,000 in the first half and had $2.420 million remaining under its repurchase program at June 30. It expanded the program by $2 million in June.
- Two executive officers signed five-year employment agreements, with specified potential severance, retirement-consulting, death, or disability payments; no amounts were accrued because triggering conditions had not been met. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether gross margins recover as management works to reduce product costs, and whether competitive pricing and rebate pressure persists.
- Whether expected roofing distributor programs, TECHNO SB, and protective-apparel growth translate into improved sales and profitability.
- Whether inventory declines as expected and operating cash flow turns positive; monitor inventory quality and receivables collection.
- Marketable-securities valuation and the effect of further unrealized losses on comprehensive income and equity.
- Future share repurchases, remaining credit-facility availability and renewal before its May 2016 expiration.