Alpha Pro Tech, Ltd. — Q3 2011 Form 10-Q
Business context and reporting period. The company develops and sells disposable protective apparel, building weatherization products, and infection-control products, primarily in the U.S. This unaudited report covers the three and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. The medical bed-pad and pet-bed product lines were sold in Q1 2011.
Financial results and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $10.120 million | $10.325 million | $29.342 million | $33.175 million |
| Gross profit / margin | $3.671 million / 36.3% | $3.788 million / 36.7% | $10.814 million / 36.9% | $12.998 million / 39.2% |
| Operating income | $487,000 | $226,000 | $504,000 | $1.708 million |
| Net income | $386,000 | $194,000 | $578,000 | $1.252 million |
| Diluted EPS | $0.02 | $0.01 | $0.03 | $0.06 |
- Cash flow: Nine-month operating cash flow was $2.760 million, versus cash used of $3.980 million in 2010. Investing activities used $4,000; financing activities used $854,000, principally for share repurchases. Cash increased $1.902 million to $7.218 million.
- Liquidity and debt: Working capital was $29.753 million and the current ratio was 30:1 at September 30. The company reported no borrowings on its $3.5 million Wells Fargo line of credit, which expires in May 2012. Total liabilities were $1.615 million.
- Balance sheet: Total assets were $37.069 million. Inventory was $14.206 million, down from $17.318 million at year-end 2010; accounts receivable was $4.794 million, up from $3.816 million. Shares outstanding fell to 21.707 million from 22.424 million at year-end.
Material changes versus prior periods
- Q3 sales declined 2.0%; nine-month sales declined 11.6%. For nine months, apparel sales fell 33.5% and infection-control sales fell 25.2%, while Building Supply sales rose 12.7%.
- Management attributed apparel weakness primarily to a former largest distributor introducing a competing private-label product; sales to that distributor were about $50,000 in Q3 and expected to be minimal in coming quarters. Infection-control mask sales also faced distributor competition and weaker medical demand.
- Building Supply growth reflected higher housewrap and synthetic underlayment sales. The segment represented 57.4% of nine-month sales, versus 45.0% in 2010; management cited this lower-margin mix shift as a key reason gross margin fell to 36.9%.
- Q3 net income nearly doubled as lower SG&A more than offset a modest gross-profit decline. Nine-month operating income fell 70.5%, and net income fell 53.8%, primarily reflecting lower gross profit.
- The company repurchased 730,428 shares for $857,000 in the first nine months, including 620,665 shares for $728,000 in Q3. Approximately $2.005 million remained available under the repurchase program at quarter-end.
Outlook, commentary, risks, and unusual items
- Management expects gross margin to be approximately 37% going forward. No specific revenue or earnings guidance was provided.
- Management said the launch of REX Wrap Fortis breathable housewrap was slower than anticipated, but expected a more significant sales contribution beginning in 2012. It expressed optimism about synthetic roof underlayment growth and potential benefits from a housing-market recovery.
- The company believed cash and available credit would cover foreseeable working-capital needs and planned capital expenditures. Actual results remain subject to forward-looking-statement risks; the filing highlights distributor losses, competition, weak construction markets, and inventory estimates as relevant considerations.
- Asset sales of the pet-bed and medical bed-pad lines generated $235,000 in proceeds and a $41,000 gain; the company also agreed to a three-year non-compete covering those products. Executive bonuses of $104,000 were accrued for the first nine months under compensation terms tied to pretax profits.
- The company’s 41.66% investment in India-based Harmony generated $368,000 of nine-month equity income. Alpha Pro Tech purchased $9.201 million of inventory from Harmony during the period. Management stated the joint venture’s bank debt was not guaranteed by the company.
- Management reported effective disclosure controls as of September 30, 2011 and no material change in internal control over financial reporting during the quarter. The filing did not identify a material foreign-currency exposure; purchases and sales were principally settled in U.S. dollars.
Most important facts for investors to verify
- Whether apparel and infection-control sales stabilize after distributor losses and competitive product launches.
- Whether Building Supply growth, including Fortis and SynFelt, continues and offsets the lower-margin product mix.
- Whether gross margin holds near management’s approximately 37% expectation and operating profitability improves.
- Whether receivables collection remains sound: days sales outstanding increased to 44 from 33 at December 31, 2010.
- Whether cash generation, repurchases, the May 2012 credit-facility renewal, and the Harmony investment and related-party purchasing remain consistent with management’s liquidity assessment.