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APT > SEC Filings for APT > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for ALPHA PRO TECH LTD | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ALPHA PRO TECH LTD


7-Nov-2012

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, 2011.

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. These and 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 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:

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.


Alpha Pro Tech, Ltd.

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. Allowances are recorded 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.

Revenue Recognition: For sales transactions, we comply with the provisions of 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 are accrued monthly.

Stock-Based Compensation: Alpha Pro Tech accounts for stock-based awards using Financial Accounting Standards Board ("FASB") Accounting Standards Codification 718, Stock Compensation ("ASC 718"). 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 of the U.S. Treasury yield curve in effect at the time of grant, expected life 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 building supply construction weatherization products, as well as a line of high-value, disposable protective apparel and infection control products for the cleanroom, industrial, pharmaceutical, medical and dental markets. 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 Building Supply segment, consisting of construction weatherization products, such as housewrap and synthetic roof underlayment; the Disposable Protective Apparel segment, consisting of disposable protective apparel such as shoecovers, bouffant caps, gowns, coveralls, lab coats, frocks and other miscellaneous products; and the Infection Control segment, consisting of face masks and eye shields. All financial information presented herein reflects the current segmentation.

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.


Alpha Pro Tech, Ltd.

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

 RESULTS OF OPERATIONS

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

                                      For the Three Months Ended            For the Nine Months Ended
                                             September 30,                        September 30,
                                       2012                2011              2012               2011
Net sales                                  100.0 %             100.0 %          100.0 %            100.0 %
Gross profit                                35.4 %              36.3 %           35.5 %             36.9 %
Selling, general and
administrative expenses                     28.6 %              29.8 %           30.6 %             33.0 %
Income from operations                       5.2 %               4.8 %            3.0 %              1.7 %
Income before provision for
income taxes                                 5.9 %               6.2 %            4.3 %              3.2 %
Net income                                   3.9 %               3.8 %            2.8 %              2.0 %

Three and Nine months ended September 30, 2012 compared to Three and Nine months ended September 30, 2011

Sales. Consolidated sales for the three months ended September 30, 2012 increased to $10,740,000 from $10,120,000 for the three months ended September 30, 2011, representing an increase of $620,000, or 6.1%. This increase consisted of increased sales in the Disposable Protective Apparel segment of $517,000 and increased sales in the Building Supply segment of $113,000, partially offset by decreased sales in the Infection Control segment of $10,000.

Building Supply segment sales for the three months ended September 30, 2012 increased by $113,000, or 2.0%, to $5,844,000, as compared to $5,731,000 for the same period of 2011. The overall segment increase of 2.0% consisted of a 21.3% increase in sales of REX™ Wrap housewrap and a 4.9% decrease in sales of REX™ SynFelt synthetic roof underlayment. The sales mix of the Building Supply segment for the three months ended September 30, 2012 was 66% for synthetic roof underlayment and 34% for housewrap. This compared to 72% for synthetic roof underlayment and 28% for housewrap for the three months ended September 30, 2011.

In early 2012, we introduced TECHNOply™, an economy version of our synthetic roof underlayment, to capture market share in the lower end of the market. This product is currently contributing approximately 5% of total synthetic roof underlayment sales and is expected to be a growth product for the Company. Sales of our REX™ Wrap Fortis non-perforated breathable housewrap continue to be lower than anticipated, although sales of this product are expected to contribute more significantly to the sales line as the higher-end building market improves. We will continue to introduce new products in our Building Supply segment as we see opportunities arise.

We believe that the outlook for the Building Supply segment is promising and that we are in a good position to take advantage of significant growth prospects as the housing market continues to recover.

Sales for the Disposable Protective Apparel segment for the three months ended September 30, 2012 increased by $517,000, or 15.8%, to $3,779,000, compared to $3,262,000 for the same period of 2011. This was our strongest quarter in this segment since the third quarter of 2010. The increase was primarily due to an increase in sales of disposable protective apparel to our major international supply chain partner. With management's emphasis on developing a more diversified and broader distribution strategy for our Critical Cover® protective apparel product line, we believe that we will continue to grow our market share.

Infection Control segment sales for the three months ended September 30, 2012 decreased by $10,000, or 0.9%, to $1,117,000, compared to $1,127,000 for the same period of 2011. Shield sales were down by 3.0%, or $11,000, to $350,000, and mask sales were up by 0.1%, or $1,000, to $767,000.


Alpha Pro Tech, Ltd.

Consolidated sales for the nine months ended September 30, 2012 increased to $31,210,000 from $29,342,000 for the nine months ended September 30, 2011, an increase of $1,868,000, or 6.4%. This increase consisted of increased sales in the Building Supply segment of $1,043,000 and increased sales in the Disposable Protective Apparel segment of $1,146,000, partially offset by decreased sales in the Infection Control segment of $321,000.

Building Supply segment sales for the nine months ended September 30, 2012 increased by $1,043,000, or 6.2%, to $17,877,000, as compared to $16,834,000 for the same period of 2011. The increase was primarily due to a 10.8% increase in sales of REX™ Wrap housewrap and a 4.1% increase in sales of REX™ SynFelt synthetic roof underlayment. The sales mix of the Building Supply segment for the nine months ended September 30, 2012 was 68% for synthetic roof underlayment and 32% for housewrap. This compared to 69% for synthetic roof underlayment and 31% for housewrap for the nine months ended September 30, 2011.

Sales for the Disposable Protective Apparel segment for the nine months ended September 30, 2012 increased by $1,146,000, or 12.7%, to $10,185,000, compared to $9,039,000 for the same period of 2011. The year-to-date increase in sales was primarily due to increased sales to our major international supply chain partner.

Infection Control segment sales for the nine months ended September 30, 2012 decreased by $321,000, or 9.3%, to $3,148,000, compared to $3,469,000 for the same period of 2011. Mask sales were down by 8.2%, or $186,000, to $2,089,000, medical bed pad and pet bed sales were down $100,000, to $0, as this product line was sold in the first quarter of 2011, and shield sales were down by 3.1%, or $35,000, to $1,059,000, all compared to the nine months ended September 30, 2011. The overall mask sales decrease for the first nine months of 2012 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, partially offset by an increase in medical mask sales.

Gross Profit. Gross profit increased by $127,000, or 3.5%, to $3,798,000 for the three months ended September 30, 2012 from $3,671,000 for the same period of 2011. The gross profit margin was 35.4% for the three months ended September 30, 2012, compared to 36.3% for the same period of 2011.

Gross profit increased by $261,000, or 2.4%, to $11,075,000 for the nine months ended September 30, 2012 from $10,814,000 for the same period in 2011. The gross profit margin was 35.5% for the nine months ended September 30, 2012, compared to 36.9% for the same period of 2011.

The gross profit margin for the three and nine months ended September 30, 2012 was affected by the Building Supply segment margin, which has declined due to increased raw material costs and competitive pricing pressures. Although consolidated gross profit margin is down year over year, it has been consistent at 35.6% in the first quarter, 35.5% in the second quarter and 35.4% in the third quarter of this year.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $59,000, or 2.0%, to $3,076,000 for the three months ended September 30, 2012 from $3,017,000 for the three months ended September 30, 2011. As a percentage of net sales, selling, general and administrative expenses decreased to 28.6% for the three months ended September 30, 2012 from 29.8% for the same period in 2011.

The change in expenses for the three months ended September 30, 2012 by segment was as follows: Infection Control was down $5,000, or 2.9%, and corporate unallocated expenses were down by $76,000. Building Supply was up $44,000, or 4.5%, and Disposable Protective Apparel was up $96,000, or 13.0%.

Selling, general and administrative expenses decreased by $144,000, or 1.5%, to $9,550,000 for the nine months ended September 30, 2012 from $9,694,000 for the nine months ended September 30, 2011. As a percentage of net sales, selling, general and administrative expenses decreased to 30.6% for the nine months ended September 30, 2012 from 33.0% for the same period in 2011.

The change in expense by segment was as follows: Building Supply was down by $27,000, or 0.8%, Infection Control was down $113,000, or 17.0%, and corporate unallocated expenses were down by $248,000. Disposable Protective Apparel was up $244,000, or 10.8%.

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 $71,000 were accrued for the three months ended September 30, 2012, as compared to $70,000 in the same period of 2011. Bonuses of $149,000 were accrued for the nine months ended September 30, 2012, as compared to $104,000 in the same period of 2011.

Depreciation and Amortization. Depreciation and amortization expense decreased by $1,000, or 0.6%, to $166,000 for the three months ended September 30, 2012 from $167,000 for the same period in 2011. Depreciation and amortization expense decreased by $25,000, or 4.1%, to $591,000 for the nine months ended September 30, 2012 from $616,000 for the same period in 2011. The decrease for the nine months was primarily attributable to decreased depreciation for the Disposable Protective Apparel segment.


Alpha Pro Tech, Ltd.

Income from Operations. Income from operations increased by $69,000, or 14.2%, to $556,000 for the three months ended September 30, 2012, as compared to income from operations of $487,000 for the three months ended September 30, 2011. The increase was due to an increase in gross profit of $127,000 and a decrease in depreciation and amortization of $1,000, partially offset by an increase in selling, general and administrative expenses of $59,000.

Income from operations increased by $430,000, or 85.3% to $934,000 for the nine months ended September 30, 2012, as compared to $504,000 for the nine months ended September 30, 2011. The increase in income from operations was due to an increase in gross profit of $261,000, a decrease in selling, general and administrative expense of $144,000 and a decrease in depreciation and amortization expense of $25,000.

Equity in Income of Unconsolidated Affiliate. For the three months ended September 30, 2012, we recorded equity in income of unconsolidated affiliate of $84,000, as compared to $134,000 for the same period of 2011. For the nine months ended September 30, 2012, we recorded equity in income of unconsolidated affiliate of $402,000, as compared to $368,000 for the same period of 2011.

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, 2012 was $638,000, compared to income before provision for income taxes of $628,000 for the three months ended September 30, 2011, representing an increase of $10,000, or 1.6%. The increase in income before provision for income taxes was due primarily to an increase in income from operations of $69,000, partially offset by a decrease of $50,000 in equity in income of unconsolidated affiliate and by a decrease of $9,000 in net interest.

Income before provision for income taxes for the nine months ended September 30, 2012 was $1,343,000, compared to income before provision for income taxes of $935,000 for the nine months ended September 30, 2011, representing an increase of $408,000, or 43.6%. The increase in income before provision for income taxes was due primarily to an increase in income from operations of $430,000 and an increase in equity in income of unconsolidated affiliate of $34,000, partially offset by a decrease in net interest income of $15,000 and a net gain on sales of assets of $41,000 in 2011 which did not recur in the same period of 2012.

Provision for Income Taxes. The provision for income taxes for the three months ended September 30, 2012 was $224,000, compared to the provision for income taxes of $242,000 for the same period of 2011. The estimated effective tax rate was 35.1% for the three months ended September 30, 2012, compared to 38.5% for the same period in 2011.

The provision for income taxes for the nine months ended September 30, 2012 was $484,000, compared to provision for income taxes of $357,000 for the same period of 2011. The estimated effective tax rate was 36.0% and 38.2% for the nine months ended September 30, 2012 and September 30, 2011, respectively.

Net Income. Net income for the three months ended September 30, 2012 was $414,000, compared to net income of $386,000 for the three months ended September 30, 2011, an increase of $28,000, or 7.3%. The increase was primarily due to an increase in income before provision for income taxes of $10,000 and a decrease in income taxes of $18,000. Net income as a percentage of sales for the three months ended September 30, 2012 was 3.9%, and net income as a percentage of sales for the same period of 2011 was 3.8%. Basic and diluted earnings per common share for the three months ended September 30, 2012 was $0.02, and basic and diluted earnings per common share for the same period of 2011 was $0.02.

Net income for the nine months ended September 30, 2012 was $859,000, compared to net income of $578,000 for the nine months ended September 30, 2011, an increase of $281,000, or 48.6%. The net income increase was primarily due to an increase in income before provision for income taxes of $408,000, partially offset by an increase in income taxes of $127,000. Net income as a percentage of sales for the nine months ended September 30, 2012 was 2.8%, and net income as a percentage of sales for the same period of 2011 was 2.0%. Basic and diluted earnings per common share for the nine months ended September 30, 2012 was $0.04, and basic and diluted earnings per common share for the same period of 2011 was $0.03.


Alpha Pro Tech, Ltd.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2012, we had cash and cash equivalents of $5,891,000 and working capital of $30,151,000, representing an increase in working capital of 1.4%, or $413,000, since December 31, 2011 and an increase of 2.3%, or $690,000, since June 30, 2012. As of September 30, 2012, our current ratio was 27:1, compared to a 35:1 ratio as of December 31, 2011. Cash and cash equivalents decreased by 21.5%, or $1,612,000, to $5,891,000 as of September 30, 2012, compared to $7,503,000 as of December 31, 2011. The decrease in cash and cash equivalents was due to cash used in financing activities of $778,000, cash used in investing activities of $67,000 and cash used in operating activities of $767,000.

We have a $3,500,000 credit facility with Wells Fargo Bank, consisting of a line of credit with interest at prime plus 0.5%. As of September 30, 2012, the prime interest rate was 3.25%. This credit line was renewed in May 2012 and expires in May 2014. Our borrowing capacity on the line of credit was $3,500,000 as of September 30, 2012. The available line of credit is based on a formula of eligible accounts receivable and inventories. As of September 30, 2012, we did not have any borrowings under this credit facility.

Net cash used in operating activities was $767,000 for the nine months ended September 30, 2012, compared to net cash provided by operating activities of $2,760,000 for the nine months ended September 30, 2011. The net change in operating activities for the two periods ending September 30 was $3,527,000, which resulted primarily from an increase in inventory for the nine months ended September 30, 2012 of $1,125,000 as compared to a decrease of inventory of $2,931,000 for the same period of 2011, for a net difference of $4,056,000. Excluding this increase in inventory, cash flow from operating activities would have been higher in the first nine months of 2012 as compared to the same period of 2011.

The net cash used in operating activities of $767,000 for the nine months ended September 30, 2012 was due to net income of $859,000, adjusted by the following:
amortization of share-based compensation expense of $171,000, depreciation and amortization of $591,000, equity in income of unconsolidated affiliate of $402,000, an increase in deferred income taxes of $17,000, an increase in accounts receivable of $1,382,000, an increase in inventory of $1,125,000, a decrease in prepaid expenses of $269,000 and an increase in accounts payable and accrued liabilities of $269,000.

Accounts receivable increased by $1,382,000, or 29.2%, to $6,107,000 as of September 30, 2012 from $4,725,000 as of December 31, 2011. The number of days of sales outstanding as of September 30, 2012 was 46 days, compared to 41 days as of December 31, 2011. The increase in accounts receivable was primarily a result of increased sales in the third quarter of 2012, as compared to the fourth quarter of 2011.

Inventory increased by $1,125,000, or 7.2%, to $16,691,000 as of September 30, 2012 from $15,566,000 as of December 31, 2011. The increase was primarily due to an increase for the Building Supply segment of $1,344,000, or 18.8%, to $8,480,000 as of September 30, 2012, although inventory for the Disposable Protective Apparel segment decreased by $116,000, or 2.5%, to $4,494,000 as of September 30, 2012, and inventory for the Infection Control segment decreased by $103,000, or 2.7%, to $3,717,000 as of September 30, 2012.

Prepaid expenses decreased by $269,000, or 12.0%, to $1,974,000 as of September 30, 2012 from $2,243,000 as of December 31, 2011. The decrease was primarily due to a decrease in prepaid deposits on inventory from Asia.

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