Alpha Pro Tech, Ltd. — Q1 2019 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018. Alpha Pro Tech makes building weatherization products and disposable protective apparel, sold mainly in the United States. During the quarter, it combined the former Infection Control segment (masks and shields) with Disposable Protective Apparel; prior-period segment data is presented on the current basis.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $12.304 million | $11.442 million | Up 7.5% |
| Gross profit / margin | $4.804 million / 39.0% | $4.455 million / 38.9% | Up 7.8%; margin broadly flat |
| Operating income / margin | $1.002 million / 8.1% | $428,000 / 3.7% | Up 134.1% |
| Net income / margin | $1.218 million / 9.9% | $508,000 / 4.4% | Up 139.8% |
| Diluted EPS | $0.09 | $0.04 | Up $0.05 |
| Operating cash flow | $(1.429) million | $(2.496) million | Cash use narrowed |
Sales growth came from Disposable Protective Apparel, up 21.6% to $5.806 million; Building Supply sales declined 2.6% to $6.498 million. U.S. sales were $12.040 million and international sales were $264,000. Other income included $277,000 of equity income from unconsolidated affiliate Harmony and a $170,000 gain on marketable securities.
Financial position and cash flow
- Cash was $4.488 million at March 31, down $2.519 million from year-end; investments were $417,000. Working capital was $24.678 million and the current ratio was 13:1.
- Total liabilities were $4.811 million, including $3.295 million of operating lease liabilities recognized following adoption of the new lease standard. The filing reports no borrowings under its $3.5 million credit facility; the full $3.5 million was available at quarter-end, and management said it did not expect to use the facility in the near future.
- Operating cash use reflected, among other items, a $2.721 million increase in accounts receivable and a $529,000 increase in inventory, partly offset by a $1.302 million decrease in prepaid expenses. Investing activities used $142,000, primarily for property and equipment. Financing activities used $948,000, including $1.008 million of share repurchases.
- Accounts receivable, including related-party receivables, totaled $8.039 million, up $2.721 million from year-end. Management attributed the increase mainly to extended Building Supply payment terms, with most related receivables due in Q2. Days sales outstanding were 49 days, versus 40 at December 31, 2018.
Material changes and management commentary
- Management attributed the 7.5% sales increase to $1.033 million of growth in Disposable Protective Apparel, partly offset by a $171,000 Building Supply decline. Protective clothing grew across supply-chain partners; mask sales were lower amid a less severe flu season.
- Building Supply sales were affected by unusually severe weather during part of the quarter, as well as lower premium synthetic roof underlayment and economy housewrap sales. Management noted growth in economy roof underlayment and its premium REX Wrap Fortis housewrap.
- SG&A declined 5.3%, principally because a mediated litigation settlement expense recorded in Q1 2018 did not recur. Increased trade-show expenses, compensation and commissions partly offset the decrease. The prior-period settlement amount is not clearly stated in the filing text.
- Management expects 2019 gross margin to be similar to 2018 and expects cash to increase next quarter, citing seasonal cash patterns and collection of extended-term receivables. It stated that cash and available credit should cover projected working capital and planned capital expenditures for the foreseeable future.
- The company repurchased 255,000 shares for $1.008 million during the quarter; $1.691 million remained available under the repurchase program at March 31.
Outlook, risks and unusual items
- Outlook statements are subject to risks and uncertainties; the company undertook no obligation to update forward-looking statements. The filing provides no specific revenue or earnings forecast.
- Key near-term monitoring points include collecting extended-term receivables, seasonal working-capital requirements, inventory realization, and the effect of weather and demand on Building Supply products. Management notes that less favorable market conditions could require inventory write-downs and changing customer circumstances could require additional doubtful-account allowances.
- Harmony is an unconsolidated affiliate in which the company owns 41.66%. Alpha Pro Tech purchased $5.274 million of inventory from Harmony in Q1 2019 and recorded $277,000 of equity income. Management reported no investment impairment at quarter-end.
- Adoption of ASC 842 on January 1, 2019 added approximately $3.455 million of right-of-use assets and lease liabilities to the balance sheet. Operating lease expense was approximately $201,000 in Q1.
- Management concluded disclosure controls were effective as of March 31, 2019 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether extended-term receivables were collected as expected in Q2 and how receivables and cash conversion developed afterward.
- Whether the Apparel segment’s growth continues and whether Building Supply demand recovers from weather-related weakness.
- The sustainability of earnings growth, including the impact of the nonrecurring prior-year litigation expense and Q1 gains on marketable securities and Harmony income.
- Liquidity, credit-facility covenant compliance, lease obligations and the pace of share repurchases relative to operating cash flow.
- The effect of the segment reclassification when comparing historical segment performance.