Alpha Pro Tech, Ltd. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018, compared with FY 2017. This filing is an annual report; it does not provide a clear standalone fourth-quarter income statement or cash-flow summary.
Business context and financial performance
The company develops and sells building weatherization products, disposable protective apparel, and infection-control products, primarily through distributors in the United States. FY 2018 net sales were $46.624 million; 97.8% came from the United States.
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net sales | $46.624 million | $44.025 million | +5.9% |
| Gross profit / margin | $17.711 million / 38.0% | $17.452 million / 39.6% | Profit +1.5%; margin -1.6 points |
| Operating income / margin | $3.874 million / 8.3% | $2.926 million / 6.6% | +32.4% |
| Net income / margin | $3.625 million / 7.8% | $2.633 million / 6.0% | +37.7% |
| Diluted earnings per share | $0.26 | $0.18 | Up $0.08 |
| Operating cash flow | $2.000 million | $4.008 million | Down $2.008 million |
Building Supply sales were $26.035 million (+5.7%); Disposable Protective Apparel sales were $15.612 million (+9.6%); Infection Control sales were $4.977 million (-3.1%). Building Supply and Apparel growth more than offset lower Infection Control sales.
Liquidity, debt, and capital allocation
- At December 31, 2018, cash was $7.007 million, working capital was $24.540 million, and the current ratio was 14:1. Cash declined 20.0% year over year.
- The company reported no borrowings and no other debt. Its Wells Fargo facility provides up to $3.5 million, subject to eligible receivables and inventory; the full $3.5 million was available at year-end. The filing gives different expiration dates in separate sections—May 2020 in MD&A and May 2021 in the notes.
- Investing cash use was $0.570 million, including $0.606 million for property and equipment. Financing cash use was $3.186 million, principally $3.580 million of share repurchases, partly offset by $0.394 million from option exercises.
- The company repurchased and retired 999,900 shares for $3.580 million in 2018; $2.699 million remained authorized for repurchases at year-end. It has no plans to pay dividends in the foreseeable future.
Material changes, outlook, and risks
- Gross margin declined due to increased rebates and freight costs and a change in Building Supply product mix. Management expects 2019 gross margin to be similar to 2018.
- Management reported three consecutive years of strong housewrap sales and expects further growth. It described planned economy and premium versions of the TECHNO SB roofing-underlayment line as growth opportunities; the filing did not provide quantified sales guidance.
- Operating income improved partly because SG&A fell $0.643 million. The comparison benefited from a $0.619 million death-benefit accrual in 2017 for the former president, which did not recur in 2018. The effective tax rate fell to 17.9% from 28.3%, principally reflecting U.S. tax reform.
- Operating cash flow weakened, notably due to a $1.334 million increase in prepaid expenses, an $0.881 million decrease in accounts payable and accrued liabilities, and higher receivables. Management nevertheless believes cash and available credit are sufficient for foreseeable working-capital needs and planned capital expenditures.
- The company relies on a limited number of suppliers and contractors, including Asian subcontractors and its 41.66%-owned Indian joint venture, Harmony. Purchases from Harmony were $16.517 million in 2018; equity income from Harmony was $0.587 million.
- Two customers represented 20% and 12% of 2018 sales; one represented 24% of year-end receivables and the other 14%. Customers are not contractually required to buy fixed quantities.
- Other disclosed risks include intense competition, pricing and product-mix changes, acceptance of new products, international manufacturing and trade exposure, intellectual-property protection, cybersecurity, and volatility in the company’s investment in a publicly traded entity. Management said foreign-currency exposure was not material and did not expect significant effects from inflation or interest-rate fluctuations.
- Adoption of the lease standard on January 1, 2019 was expected to increase both assets and liabilities by approximately $3.5 million. Ordinary-course litigation is pending or threatened; management did not expect it to materially affect financial condition or results.
Items investors should verify
- Standalone fourth-quarter 2018 results and whether year-end demand or shipments differed materially from the full-year trend; the filing does not provide a clear standalone Q4 value.
- The Wells Fargo facility’s actual maturity date, given the May 2020 versus May 2021 discrepancy, and the facility’s borrowing-base availability over time.
- Whether the lower gross margin persists and whether planned housewrap and TECHNO SB products generate the growth management anticipates.
- Customer and supplier concentration, including the financial and operational dependence on Harmony and outsourced manufacturing.
- Cash-flow conversion and the composition and recoverability of the larger prepaid balance; also monitor the effect of continued share repurchases on liquidity.
- The expected balance-sheet impact of lease adoption and any material developments in litigation or the publicly traded investment.
Assurance: The independent auditor issued an unqualified opinion on the financial statements. Management reported effective internal control over financial reporting; the auditor did not provide an internal-control attestation.