Alpha Pro Tech, Ltd. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; filed November 6, 2019. Financial statements are unaudited. The company develops and sells building weatherization products and disposable protective apparel, primarily in the United States. Beginning in Q1 2019, face masks and face shields were combined with Disposable Protective Apparel; prior periods are presented on the current segment basis.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $12.027 million | $12.104 million | $35.745 million | $35.655 million |
| Gross profit / margin | $4.220 million / 35.1% | $4.585 million / 37.9% | $13.129 million / 36.7% | $13.759 million / 38.6% |
| Operating income / margin | $906,000 / 7.5% | $1.769 million / 14.6% | $2.611 million / 7.3% | $3.305 million / 9.3% |
| Net income / margin | $437,000 / 3.6% | $1.539 million / 12.7% | $2.665 million / 7.5% | $3.007 million / 8.4% |
| Diluted EPS | $0.03 | $0.11 | $0.20 | $0.21 |
Q3 sales slipped 0.6% year over year while net income fell 71.6%. For nine months, sales rose 0.3% but net income decreased 11.4%. Q3 weakness reflected lower gross profit and higher SG&A, as well as a $387,000 unrealized marketable-securities loss; the prior-year quarter included a litigation-counsel cost recovery that did not recur. Nine-month results also reflected lower gross margin, partly offset by improved other income, including securities gains.
Segments and operating drivers
- Building Supply: Q3 sales increased 3.4% to $7.215 million; nine-month sales increased 1.0% to $20.423 million. Roof underlayment and housewrap grew, while other woven material declined sharply as a large customer worked through excess inventory and reduced orders.
- Disposable Protective Apparel: Q3 sales decreased 6.1% to $4.812 million; nine-month sales decreased 0.7% to $15.322 million. Q3 declines in garments and face shields were partly offset by higher mask sales. Nine-month mask sales were affected by a milder flu season and face shields by a nonrecurring prior-year sale.
- Management attributed margin pressure to the end of duty-free treatment under the U.S. Generalized System of Preferences, increased rebates, and product mix—including growth in lower-margin economy underlayment. The new TECHNO SB 25 product was initially priced lower; management said pricing increases were planned for late Q4.
Cash, liquidity, debt and capital
- At September 30, cash was $5.106 million, investments $348,000, working capital $24.516 million, and the current ratio 12:1. Cash decreased $1.901 million from year-end 2018.
- Nine-month operating cash flow was $1.099 million; investing cash use was $1.031 million, including $1.164 million of capital expenditures; financing cash use was $1.969 million, primarily $2.064 million of share repurchases.
- Accounts receivable increased to $6.169 million and inventory to $11.255 million; management cited higher receivables from late-quarter sales and increased Building Supply inventory. Days sales outstanding were 44, versus 40 at year-end 2018.
- No borrowings were outstanding on the $3.5 million Wells Fargo revolving facility; full borrowing capacity was reported available. The facility expires in May 2020, bears interest at prime plus 0.5%, and the company said it was in covenant compliance.
- Operating lease liabilities totaled $2.962 million. Adoption of ASC 842 in January 2019 added approximately $3.455 million to both assets and liabilities. Total liabilities were $4.621 million; the filing reports no other borrowings.
- The company repurchased 548,000 shares for $2.064 million during the first nine months and had $635,000 remaining under its repurchase authorization. Shares outstanding were 13,004,507 at quarter-end.
Outlook, risks and notable items
- No formal earnings or revenue guidance is provided. Management expected continued growth in synthetic roof underlayment and housewrap given product performance and its outlook for housing starts; it expected gross margin in the mid-to-high 30% range next year.
- Management said the large customer’s excess inventory and lower orders for other woven material were expected to persist through year-end. It also cited distributor changes affecting apparel sales and uncertainty around customer order timing.
- Key exposures include tariff costs following termination of GSP duty-free treatment, rebates and product-mix pressure, customer and distributor concentration/order variability, inventory and receivables, and volatility in marketable-security values. The $387,000 Q3 securities loss was unrealized.
- Management stated existing cash and available credit were expected to cover projected working capital and planned capital expenditures for the foreseeable future. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- Management reported no subsequent events requiring disclosure. Adoption of the new credit-loss accounting standard was planned for fiscal 2020; its impact had not yet been determined.
Investor verification checklist
- Track whether planned TECHNO SB pricing changes improve gross margin and whether GSP-related tariff costs or rebates continue to weigh on profitability.
- Monitor recovery in other woven material orders and apparel sales, including distributor transitions and customer inventory levels.
- Assess inventory growth, receivable collection trends, operating cash conversion, and planned capital spending against the company’s liquidity and credit-facility expiry.
- Review marketable-security valuation effects, share repurchases, and the company’s progress evaluating the 2020 expected-credit-loss standard.