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APT > SEC Filings for APT > Form 10-Q on 10-Nov-2011All Recent SEC Filings

Show all filings for ALPHA PRO TECH LTD

Form 10-Q for ALPHA PRO TECH LTD


10-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with our condensed consolidated financial statements (unaudited) and the notes to our condensed consolidated financial statements (unaudited), which are included elsewhere in this report, and our audited financial statements and the notes thereto, which appear in our Form 10-K for the year ended December 31, 2010.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain information set forth in this Form 10-Q contains "forward-looking statements" within the meaning of federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to potential acquisitions, and other information that is not historical information. When used in this report, the words "estimates", "expects", "anticipates", "forecasts", "plans", "intends", "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. We may make additional forward-looking statements from time to time. All forward-looking statements, whether written or oral and whether made by us or on our behalf, also are expressly qualified by this special note.

Our forward-looking statements are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe that there is a reasonable basis for them, including, without limitation, management's examination of historical operating trends, data contained in our records and other data available from third parties. However, we cannot assure you that management's expectations, beliefs and projections will result or be achieved or accomplished. Our forward-looking statements apply only as of the date made. Except as required by law, we undertake no obligation to publicly update or revise forward-looking statements that may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors. Many other factors could affect Alpha Pro Tech Ltd.'s ("Alpha Pro Tech" or the "Company") future operating results and financial condition and could cause actual results to differ materially from expectations based on the forward-looking statements made in this document or elsewhere by Alpha Pro Tech, or on its behalf.

Where to find more information about us. We make available, free of charge, on our Internet website (http://www.alphaprotech.com) our most recent Annual Report on Form 10-K, our most recent Quarterly Report on Form 10-Q, any current reports on Form 8-K furnished or filed since our most recent Annual Report on Form 10-K and any amendments to such reports as soon as reasonably practicable following the electronic filing of such report with the Securities and Exchange Commission ("SEC"). In addition, in accordance with SEC rules, we provide electronic or paper copies of our filings free of charge upon request.

Critical Accounting Policies

The preparation of our financial statements in conformity with U.S. generally accepted accounting principles ("U.S.GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of net sales and expenses during the reported periods. We base estimates on past experience and on various other assumptions that are believed to be reasonable under the circumstances. The application of these accounting policies on a consistent basis enables us to provide timely and reliable financial information. Our critical accounting polices include the following:

Inventories: Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (computed on a standard cost basis, which approximates average cost) or market. Provision is made for slow-moving, obsolete or unusable inventory. We assess our inventory for estimated obsolescence or unmarketable inventory and write down the difference between the cost of inventory and the estimated market value based upon assumptions about future sales and supply on-hand, if necessary. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.


Alpha Pro Tech, Ltd.

Accounts Receivable: Accounts receivable are recorded at the invoice amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. The Company determines the allowance based upon historical write-off experience and known conditions about customers' current ability to pay. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.

Revenue Recognition: For sales transactions, we comply with the provisions of the SEC Staff Accounting Bulletin No. 104, Revenue Recognition, which states that revenue should be recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) title transfers and the customer assumes the risk of loss; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. These criteria are satisfied upon shipment of product, and revenues are recognized accordingly.

Sales Returns, Rebates and Allowances: Sales are reduced for any anticipated sales returns, rebates and allowances based on historical experience. Since our return policy is only 90 days and our products are not generally susceptible to external factors such as technological obsolescence or significant changes in demand, we are able to make a reasonable estimate for returns. We offer end-user product specific and sales volume rebates to select distributors. Our rebates are based on actual sales and accrued monthly.

Share Based Compensation: Alpha Pro Tech accounts for share based awards using FASB ASC 718, Stock Compensation. ASC 718 requires companies to record compensation expense for the value of all outstanding and unvested share-based payments, including employee stock options and similar awards.

The fair values of stock option grants are determined using the Black-Scholes-Merton option-pricing model and are based on the following assumptions: expected stock price volatility based on historical data and management's expectations of future volatility, risk-free interest rates from published sources, years to maturity based on historical data and no dividend yield, as management currently does not expect the Company to pay dividends in the near future. The Black-Scholes-Merton option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and that are fully transferable. In addition, the option-pricing model requires the input of highly subjective assumptions, including expected stock price volatility. Our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect their fair value.

OVERVIEW

Alpha Pro Tech is in the business of protecting people, products and environments. We accomplish this by developing, manufacturing and marketing a line of high-value, disposable protective apparel and infection control products for the cleanroom, industrial, pharmaceutical, medical and dental markets. We also manufacture a line of building supply construction weatherization products. Our products are sold under the "Alpha Pro Tech" brand name, as well as under private label.

Our products are grouped into three business segments: the Disposable Protective Apparel segment, consisting of disposable protective apparel; the Building Supply segment, consisting of construction weatherization products, such as housewrap and synthetic roof underlayment; and the Infection Control segment, consisting of face masks and eye shields and which previously included a line of medical bed pads and pet beds which line was sold during the first quarter of 2011.

Our target markets include pharmaceutical manufacturing, bio-pharmaceutical manufacturing and medical device manufacturing, lab animal research, high technology electronics manufacturing (which includes the semi-conductor market), medical and dental distributors and construction, building supply and roofing distributors.

Our products are used primarily in cleanrooms, industrial safety manufacturing environments and health care facilities, such as hospitals, laboratories and dental offices, as well as building and re-roofing sites. Our products are distributed principally in the United States of America through a network consisting of purchasing groups, national distributors, local distributors, independent sales representatives and our own sales and marketing force.


Alpha Pro Tech, Ltd.


RESULTS OF OPERATIONS

The following table sets forth certain operational data as a percentage of sales
for the periods indicated:

                        For the Three Months        For the Nine Months Ended
                         Ended September 30,              September 30,
                         2011           2010           2011           2010
Net sales             100.0%         100.0%         100.0%         100.0%
Gross profit           36.3%          36.7%          36.9%          39.2%
Selling, general and   29.8%          32.6%          33.0%          32.1%
administrative
expenses
Income from             4.8%           2.2%           1.7%           5.1%
operations
Income before           6.2%           3.1%           3.2%           6.0%
provision for income
taxes
Net income              3.8%           1.9%           2.0%           3.8%

Three and Nine Months ended September 30, 2011 compared to Three and Nine Months ended September 30, 2010

Sales. Consolidated sales for the three months ended September 30, 2011 decreased to $10,120,000 from $10,325,000 for the three months ended September 30, 2010, a decrease of $205,000, or 2.0%. This decrease consisted of decreased sales in the Disposable Protective Apparel segment of $461,000 and decreased sales in the Infection Control segment of $176,000, partially offset by increased sales in the Building Supply segment of $432,000.

Sales for the Disposable Protective Apparel segment for the three months ended September 30, 2011 decreased by $461,000, or 12.4%, to $3,262,000, compared to $3,723,000 for the same period of 2010. The decrease was primarily due to a significant decline in sales to our former largest distributor, partially offset by increased sales to our current largest distributor, a major international supply chain partner from whom the Company received two awards in 2010, as well as increased sales to other national and regional distributors. Alpha Pro Tech was informed in the first quarter of 2010 that our former largest distributor had decided to launch its own competing private label line of disposable protective apparel. Sales to this distributor have declined substantially each quarter since then and, although down from historical levels, were still significant until the beginning of the second quarter of 2011. Sales to this distributor are expected to be minimal in the coming quarters, as sales were only approximately $50,000 for the three months ended September 30, 2011.

Building Supply segment sales for the three months ended September 30, 2011 increased by $432,000, or 8.2%, to $5,731,000, as compared to $5,299,000 for the same period of 2010. The increase was primarily due to a 13.4% increase in sales of REX™ SynFelt synthetic roof underlayment, partially offset by a 3.4% decrease in sales of REX™ Wrap housewrap. The sales mix of the Building Supply segment for the three months ended September 30, 2011 was 72% for synthetic roof underlayment and 28% for housewrap. This compared to 68% for synthetic roof underlayment and 32% for housewrap for the three months ended September 30, 2010.

We plan to continue to evolve our product offering in 2012. The launch of our ICC-ES (ICC Evaluation Service) approved REX™ Wrap Fortis non-perforated breathable housewrap has been slower than anticipated, but the product is expected to start contributing more significantly to the sales line commencing in 2012. The non-perforated breathable housewrap market accounts for the majority of the total housewrap market, and this new product is expected to increase our housewrap sales and market share.

We remain optimistic about the future of the Building Supply segment, as our distribution channel strategy continues to strengthen. In addition, we feel that we are in a very good position to capitalize on considerable growth opportunities for our REX™ SynFelt synthetic roof underlayment as the market continues to evolve from felt paper to synthetic roof underlayment. Our REX™ Wrap housewrap, a high-quality, multi-color printed housewrap, we believe, gives us a distinct competitive advantage in the marketplace and as a result, our year to date revenue is growing even during the current weak building market and difficult economic environment. Additionally, when the housing market starts to rebound, we will be in a position to benefit from the significant growth opportunities.


Alpha Pro Tech, Ltd.

Infection Control segment sales for the three months ended September 30, 2011 decreased by $176,000, or 13.5%, to $1,127,000, compared to $1,303,000 for the same period of 2010. Mask sales were down by 5.9%, or $48,000, to $766,000, medical bed pad and pet bed sales were down by $107,000, to $0, as this product line was sold in the first quarter of 2011, and shield sales were down by 5.6%, or $21,000, to $361,000. The overall mask sales decrease for the third quarter of 2011 was primarily due to a decline in industrial mask sales as a result of our previous largest industrial distributor launching its own line of masks and a decline in medical mask sales, partially offset by an increase in dental mask sales.

Consolidated sales for the nine months ended September 30, 2011 decreased to $29,342,000 from $33,175,000 for the nine months ended September 30, 2010, a decrease of $3,833,000, or 11.6%. This decrease consisted of decreased sales in the Disposable Protective Apparel segment of $4,556,000 and decreased sales in the Infection Control segment of $1,170,000, partially offset by increased sales in the Building Supply segment of $1,893,000.

Sales for the Disposable Protective Apparel segment for the nine months ended September 30, 2011 decreased by $4,556,000, or 33.5%, to $9,039,000, compared to $13,595,000 for the same period of 2010. The decrease was primarily due to a decline in sales of disposable protective apparel to our former largest distributor. The nine month decrease was partially offset by a 6.9% increase in sales to our major international supply chain partner. The year to date increase to this partner would have been greater had it not been for the large stocking orders placed by this partner in the second quarter of 2010, but sales to this partner's end users were up 44% year to date, demonstrating a strong demand for our products.

Building Supply segment sales for the nine months ended September 30, 2011 increased by $1,893,000, or 12.7%, to $16,834,000, as compared to $14,941,000 for the same period of 2010. The increase was primarily due to a 11.3% increase in sales of REX™ Wrap housewrap and a 13.2% increase in sales of REX™ SynFelt synthetic roof underlayment. The sales mix of the Building Supply segment for the nine months ended September 30, 2011 and 2010 was 69% for synthetic roof underlayment and 31% for housewrap.

Infection Control segment sales for the nine months ended September 30, 2011 decreased by $1,170,000, or 25.2%, to $3,469,000, compared to $4,639,000 for the same period of 2010. Mask sales were down by 28.7%, or $914,000, to $2,275,000, medical bed pad and pet bed sales were down by 73.9%, or $283,000, to $101,000, and shield sales were up by 2.4%, or $27,000, to $1,093,000, all compared to the nine months ended September 30, 2010. The overall mask sales decrease for the first nine months of 2011 was primarily due to a decline in industrial mask sales as a result of our previous largest industrial distributor launching its own line of masks, as well as a decline in medical mask sales.

On February 8, 2011, the Company entered into an asset purchase agreement to sell its line of pet beds and on March 30, 2011, entered into a second asset purchase agreement, with the same principal purchaser, to sell its line of medical bed pads. Both of the transactions were executed in the three months ended March 31, 2011.

Gross Profit. Gross profit decreased by $117,000, or 3.1%, to $3,671,000 for the three months ended September 30, 2011 from $3,788,000 for the same period in 2010. The gross profit margin was 36.3% for the three months ended September 30, 2011, compared to 36.7% for the same period of 2010.

Gross profit decreased by $2,184,000, or 16.8%, to $10,814,000 for the nine months ended September 30, 2011 from $12,998,000 for the same period in 2010. The gross profit margin was 36.9% for the nine months ended September 30, 2011, compared to 39.2% for the same period of 2010.

Gross profit margin for the first nine months of 2011 was affected by the change in product mix in which Building Supply segment sales, which have lower margins, increased as a percentage of total sales. Building Supply segment sales comprised 57.4% of total sales for the nine months ended September 30, 2011, compared to 45.0% for the same period of 2010. For the first nine months of 2011, gross profit margin in the Disposable Protective Apparel segment, although similar to the average of the prior four quarters, was down, as compared to the same period of 2010, due to competitive pricing pressures from our former largest distributor. Management expects gross margin to be approximately 37% going forward.


Alpha Pro Tech, Ltd.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $344,000, or 10.2%, to $3,017,000 for the three months ended September 30, 2011 from $3,361,000 for the three months ended September 30, 2010. As a percentage of net sales, selling, general and administrative expenses decreased to 29.8% for the three months ended September 30, 2011 from 32.6% for the same period in 2010.

The decrease of $344,000 in expenses was primarily due to a decrease in professional fees and public company expenses of $113,000, decreased marketing expenses and commissions of $105,000, decreased rent and utilities of $33,000, decreased factory indirect expenses of $30,000 and decreased office and other miscellaneous expenses of $63,000.

The change in expense by segment was as follows: Disposable Protective Apparel was down $233,000, or 24.0%, Infection Control was down $144,000, or 44.7%, and Building Supply was down $134,000, or 12.3%. The remaining change primarily consisted of a $166,000 increase in corporate unallocated expenses, caused by an increase in employee compensation and bonuses, partially offset by a decrease in professional fees.

Selling, general and administrative expenses decreased by $969,000, or 9.1%, to $9,694,000 for the nine months ended September 30, 2011 from $10,663,000 for the nine months ended September 30, 2010. As a percentage of net sales, selling, general and administrative expenses increased to 33.0% for the nine months ended September 30, 2011 from 32.1% for the same period in 2010.

The decrease of $969,000 in expenses was primarily due to a decrease in employee compensation of $420,000, decreased professional fees and public company expenses of $272,000, decreased travel expenses of $140,000, decreased factory indirect expenses of $103,000, decreased marketing expenses of $115,000, decreased insurance of $29,000, decreased telecommunication expenses of $25,000 and decreased miscellaneous expenses of $5,000, partially offset by increased Building Supply segment rent and utilities of $119,000 due to the lease of a larger facility and increased commissions for the Building Supply segment of $21,000.

The change in expense by segment was as follows: Disposable Protective Apparel was down $532,000, or 19.1%, Infection Control was down $398,000, or 37.4%, and Building Supply was up by $144,000, or 4.6%. The remaining change primarily consisted of a $186,000 decrease in corporate unallocated expenses, caused principally by decreased professional fees.

The Company's Chief Executive Officer and President are each entitled to a bonus equal to 5% of the pre-tax profits of the Company, excluding bonus expense. Bonuses of $70,000 were accrued for the three months ended September 30, 2011, as compared to no bonuses in the same period of 2010. Bonuses of $104,000 were accrued for the nine months ended September 30, 2011, as compared to no bonuses in the same period of 2010.

Depreciation and Amortization. Depreciation and amortization expense decreased by $34,000, or 16.9%, to $167,000 for the three months ended September 30, 2011 from $201,000 for the same period in 2010. Depreciation and amortization expense increased by $11,000, or 1.8%, to $616,000 for the nine months ended September 30, 2011 from $627,000 for the same period in 2010. The decrease for the quarter and the nine months was primarily attributable to decreased depreciation related to the Building Supply segment.

Income from Operations. Income from operations increased by $261,000, or 115.5%, to $487,000 for the three months ended September 30, 2011, as compared to $226,000 for the three months ended September 30, 2010. The increase in income from operations was due to a decrease in selling, general and administrative expenses of $344,000 and a decrease in depreciation and amortization of $34,000, partially offset by a decrease in gross profit of $117,000.

Income from operations decreased by $1,204,000, or 70.5%, to $504,000 for the nine months ended September 30, 2011, as compared to $1,708,000 for the nine months ended September 30, 2010. The decrease in income from operations was due to a decrease in gross profit of $2,184,000, partially offset by a decrease in selling, general and administrative expenses of $969,000 and a decrease in depreciation and amortization of $11,000.

Equity in Income of Unconsolidated Affiliates. For the three months ended September 30, 2011, we recorded equity in income of unconsolidated affiliates of $134,000, as compared to $90,000 for the same period of 2010. For the nine months ended September 30, 2011, we recorded equity in income of unconsolidated affiliates of $368,000, as compared to $262,000 for the same period of 2010.


Alpha Pro Tech, Ltd.

Net Gain on Sales of Assets. On February 8, 2011, we entered into an asset purchase agreement to sell our line of pet beds and, on March 30, 2011, entered into a second asset purchase agreement, with the same principal purchaser, to sell our line of medical bed pads. As consideration for the acquired assets, we received $235,000, which was comprised of $181,000 of inventory sold at cost, plus an additional $54,000 in compensation for non-inventory assets and goodwill. The net gain from these two transactions was $41,000. In addition, we signed a three year non-compete agreement that covers these product lines.

Income before Provision for Income Taxes. Income before provision for income taxes for the three months ended September 30, 2011 was $628,000, compared to income before provision for income taxes of $321,000 for the three months ended September 30, 2010, representing an increase of $307,000, or 95.6%. The increase in income before provision for income taxes was due primarily to an increase in income from operations of $261,000, an increase of $44,000 in equity in income of unconsolidated affiliates and an increase in net interest income of $2,000.

Income before provision for income taxes for the nine months ended September 30, 2011 was $935,000, compared to income before provision for income taxes of $1,990,000 for the nine months ended September 30, 2010, representing a decrease of $1,055,000, or 53.0%. The decrease in income before provision for income taxes was due primarily to a decrease in income from operations of $1,204,000, partially offset by an increase of $106,000 in equity in income of unconsolidated affiliates, an increase in net interest income of $2,000 and a net gain on sales of assets of $41,000.

Provision for Income Taxes. The provision for income taxes for the three months ended September 30, 2011 was $242,000, compared to provision for income taxes of $127,000 for the same period of 2010. The estimated effective tax rate was 38.5% for the three months ended September 30, 2011, compared to 39.6% for the same period in 2010.

The provision for income taxes for the nine months ended September 30, 2011 was $357,000, compared to provision for income taxes of $738,000 for the same period of 2010. The estimated effective tax rate was 38.2% for the nine months ended September 30, 2011, compared to 37.1% for the same period in 2010.

Net Income. Net income for the three months ended September 30, 2011 was $386,000, compared to net income of $194,000 for the three months ended September 30, 2010, an increase of $192,000, or 99.0%. The net income increase was primarily due to an increase in income before provision for income taxes of $307,000, partially offset by an increase in income taxes of $115,000. Net income as a percentage of sales for the three months ended September 30, 2011 was 3.8%, and net income as a percentage of sales for the same period of 2010 was 1.9%. Basic and diluted income per common share for the three months ended September 30, 2011 was $0.02, and basic and diluted income per common share for the same period of 2010 was $0.01.

Net income for the nine months ended September 30, 2011 was $578,000, compared to net income of $1,252,000 for the nine months ended September 30, 2010, a decrease of $674,000, or 53.8%. The net income decrease was primarily due to a decrease in income before provision for income taxes of $1,055,000, partially offset by a decrease in income taxes of $381,000. Net income as a percentage of sales for the nine months ended September 30, 2011 was 2.0%, and net income as a percentage of sales for the same period of 2010 was 3.8%. Basic and diluted income per common share for the nine months ended September 30, 2011 was $0.03, and basic and diluted income per common share for the same period of 2010 was $0.06.


Alpha Pro Tech, Ltd.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2011, we had cash and cash equivalents of $7,218,000 and working capital of $29,753,000, representing a slight decrease in working capital of 0.3%, or $76,000, since December 31, 2010. As of September 30, 2011, our current ratio was 30:1, compared to 39:1 as of December 31, 2010. Cash and cash equivalents increased by 35.8%, or $1,902,000, to $7,218,000 as of September 30, 2011, compared to $5,316,000 as of December 31, 2010. The increase in cash and cash equivalents was due to cash provided by operating activities of $2,760,000, partially offset by cash used in financing activities of $854,000 . . .

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