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APT > SEC Filings for APT > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for ALPHA PRO TECH LTD


7-May-2013

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, 2012.

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:

Marketable Securities: The Company periodically invests a portion of its cash in excess of short-term operating needs in marketable equity securities. These investments are classified as available-for-sale in accordance with U.S. GAAP. The Company does not have any investments classified as held-to-maturity or trading securities. Available-for-sale investments are carried at their fair value using quoted prices in active markets for identical securities, with unrealized gains and losses, net of deferred income taxes, reported as a component of accumulated other comprehensive income. Realized gains and losses, and declines in value deemed to be other-than-temporary on available-for-sale investments, are recognized in earnings. The cost of securities sold is based on the specific identification method. Investments that the Company intends to hold for more than one year are classified as long-term investments in the accompanying condensed consolidated balance sheets.


Alpha Pro Tech, Ltd.

Accounts Receivable: Accounts receivable is 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 when management determines that the potential for recovery is remote.

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: (1) the Building Supply segment, consisting of construction weatherization products, such as housewrap and synthetic roof underlayment; (2) the Disposable Protective Apparel segment, consisting of disposable protective apparel such as shoecovers, bouffant caps, coveralls, frocks, lab coats, gowns, hoods and other miscellaneous products; and (3) the Infection Control segment, consisting of face masks and eye shields. All financial information presented herein reflects the current segmentation.


Alpha Pro Tech, Ltd.

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, 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 net
sales for the periods indicated:

                                                       For the Three Months Ended March 31,
                                                          2013                      2012
Net sales                                                       100.0 %                   100.0 %
Gross profit                                                     38.8 %                    35.6 %
Selling, general and administrative expenses                     37.2 %                    33.8 %
Loss from operations                                             -0.3 %                    -0.4 %
Income before provision for income taxes                          0.0 %                     1.2 %
Net income                                                        0.2 %                     0.7 %

Three months ended March 31, 2013 compared to three months ended March 31, 2012

Sales. Consolidated sales for the three months ended March 31, 2013 decreased to $9,450,000, from $9,619,000 for the three months ended March 31, 2012, representing a decrease of $169,000, or 1.8%. This decrease consisted of decreased sales in the Building Supply segment of $427,000 and decreased sales in the Infection Control segment of $48,000, partially offset by increased sales in the Disposable Protective Apparel segment of $306,000.

Building Supply segment sales for the three months ended March 31, 2013 decreased by $427,000, or 7.6%, to $5,164,000, as compared to $5,591,000 for the same period of 2012. The decrease was primarily due to a 23.3% decrease in sales of REX™ SynFelt synthetic roof underlayment, as a result of a harsh winter, partially offset by a 22.5% increase in sales of REX™ Wrap housewrap. The sales mix of the Building Supply segment for the three months ended March 31, 2013 was 58% for synthetic roof underlayment and 42% for housewrap. This compared to 69% for synthetic roof underlayment and 31% for housewrap for the three months ended March 31, 2012.

In 2012, we introduced TECHNOply™, an economy version of our synthetic roof underlayment, to capture market share in the lower end of the market. In the first quarter of 2013, TECHNOply™ had 18 times the sales of the same period in 2012 and contributed approximately 10% of total synthetic roof underlayment sales for the quarter, as compared to 6% for all of 2012. TECHNOply™ is expected to be a growth product for the Company. Sales of our newest housewrap, REX™ Wrap Fortis non-perforated breathable housewrap, are starting to gain traction. In the first quarter of 2013, REX™ Wrap Fortis sales increased six-fold over that of the first quarter in 2012 and comprised 9% of total housewrap sales. Sales of REX™ Wrap Fortis are expected to increase significantly in 2013. 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 March 31, 2013 increased by $306,000, or 10.5%, to $3,220,000, compared to $2,914,000 for the same period of 2012. The increase was primarily due to an increase in sales of disposable protective apparel to regional and national distributors. Management is emphasizing 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.


Alpha Pro Tech, Ltd.

Infection Control segment sales for the three months ended March 31, 2013 decreased by $48,000, or 5.2%, to $1,066,000, compared to $1,114,000 for the same period of 2012. Mask sales were basically flat, down by 0.1%, or $1,000, to $745,000 and shield sales were down by 12.8%, or $47,000, to $321,000.

Gross Profit. Gross profit increased by $238,000, or 6.9%, to $3,663,000 for the three months ended March 31, 2013 from $3,425,000 for the same period of 2012. The gross profit margin was 38.8% for the three months ended March 31, 2013, compared to 35.6% for the same period of 2012. The gross profit margin was positively affected by an increase in the Building Supply segment margin, as material costs have been reduced.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $262,000, or 8.1%, to $3,512,000 for the three months ended March 31, 2013 from $3,250,000 for the three months ended March 31, 2012. As a percentage of net sales, selling, general and administrative expenses increased to 37.2% for the three months ended March 31, 2013 from 33.8% for the same period of 2012.

The change in expense by segment was as follows: Disposable Protective Apparel was up $14,000, or 1.6%, Building Supply was up $39,000, or 3.5%, and corporate unallocated expenses were up $219,000, partially offset by Infection Control, which was down $10,000, or 5.4%. Corporate unallocated expenses were up primarily due to a severance payment accrual for manufacturing personnel that will not be replaced, as we have restructured some job functions.

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. Executive bonuses of $1,000 were accrued for the three months ended March 31, 2013, as compared to $13,000 for the same period of 2012.

Depreciation and Amortization. Depreciation and amortization expense decreased by $35,000, or 16.2%, to $181,000 for the three months ended March 31, 2013 from $216,000 for the same period of 2012. The decrease for the first quarter was primarily attributable to decreased depreciation for the Disposable Protective Apparel segment.

Loss from Operations. Loss from operations decreased by $11,000, or 26.8%, to $30,000 for the three months ended March 31, 2013, compared to $41,000 for the three months ended March 31, 2012. The decreased loss from operations was due to an increase in gross profit of $238,000 and a decrease in depreciation and amortization of $35,000, partially offset by an increase in selling, general and administrative expenses of $262,000.

Equity in Income of Unconsolidated Affiliate. For the three months ended March 31, 2013, we recorded equity in income of unconsolidated affiliate of $33,000, compared to $147,000 for the same period of 2012.

Income before Provision for Income Taxes. Income before provision for income taxes for the three months ended March 31, 2013 was $4,000, compared to income before provision for income taxes of $112,000 for the three months ended March 31, 2012, representing a decrease of $108,000, or 96.4%. The decrease in income before provision for income taxes was due primarily to a decrease in equity in income of unconsolidated affiliate of $114,000 and a decrease in net interest income of $5,000, partially offset by a decrease in loss from operations of $11,000.

Provision (benefit) for Income Taxes. The benefit for income taxes for the three months ended March 31, 2013 was $11,000, compared to the provision for income taxes of $42,000 for the same period of 2012. The change in the effective tax rate was primarily due to changes in the treatment of the Company's joint venture in India for U.S. income tax reporting purposes. The Company no longer accrues tax on the equity in income of unconsolidated affiliate as a result of the Company modifying its tax reporting for Harmony.

Net Income. Net income for the three months ended March 31, 2013 was $15,000, compared to net income of $70,000 for the three months ended March 31, 2012, a decrease of $55,000, or 78.6%. The net income decrease was primarily due to a decrease in income before provision for income taxes of $108,000, partially offset by a decrease in income taxes of $53,000. Net income as a percentage of net sales for the three months ended March 31, 2013 was 0.2%, and net income as a percentage of net sales for the same period of 2012 was 0.7%. Basic and diluted earnings per common share for the three months ended March 31, 2013 and 2012 was $0.00.


Alpha Pro Tech, Ltd.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2013, we had cash and cash equivalents of $3,331,000 and working capital of $28,953,000, representing a decrease in working capital of 2.1%, or $608,000, from December 31, 2012. As of March 31, 2013and December 31, 2012, our current ratio was 19:1. Cash and cash equivalents decreased by 26.9%, or $1,223,000, to $3,331,000 as of March 31, 2013, compared to $4,554,000 as of December 31, 2012. The decrease in cash and cash equivalents was due to cash used in financing activities of $830,000, cash used in investing activities of $71,000 and cash used in operating activities of $322,000.

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 March 31, 2013, the prime interest rate was 3.25%. This credit line was renewed in May 2012 and expires in May 2014. The available line of credit is based on a formula of eligible accounts receivable and inventories. Our borrowing capacity on the line of credit was $3,500,000 as of March 31, 2013. As of March 31, 2013, we did not have any borrowings under this credit facility.

Net cash used in operating activities of $322,000 for the three months ended March 31, 2013 was due to net income of $15,000, adjusted by the following:
amortization of share-based compensation expense of $55,000, depreciation and amortization of $181,000, equity in income of unconsolidated affiliate of $33,000, an increase in accounts receivable of $1,147,000, a decrease in inventory of $865,000, an increase in prepaid expenses of $217,000 and a decrease in accounts payable and accrued liabilities of $40,000.

Accounts receivable increased by $1,147,000, or 18.1%, to $7,497,000 as of March 31, 2013 from $6,350,000 as of December 31, 2012. The increase in accounts receivable was primarily related to extended payment terms that we provided on most Building Supply segment sales through February 2013 to remain competitive, as our competition offers these extended payment terms as well. We started this program in October 2012, and the majority of the receivables are due to be collected in April and May, which should improve our cash position in the second quarter of 2013. The number of day that sales remain outstanding as of March 31, 2013, calculated by using an average of accounts receivable outstanding was 66 days, compared to 49 days as of December 31, 2012.

Inventory decreased by $865,000, or 5.0%, to $16,299,000 as of March 31, 2013 from $17,164,000 as of December 31, 2012. The decrease was primarily due to a decrease in inventory for the Building Supply segment of $783,000, or 9.8%, to $7,198,000, a decrease in inventory for the Disposable Protective Apparel segment of $14,000, or 0.3%, to $5,536,000 and a decrease in inventory for the Infection Control segment of $68,000, or 1.9%, to $3,565,000.

Prepaid expenses increased by $217,000, or 9.4%, to $2,516,000 as of March 31, 2013 from $2,299,000 as of December 31, 2012. The increase was primarily due to an increase in prepaid insurance for our Building Supply segment.

Accounts payable and accrued liabilities as of March 31, 2013 decreased by $41,000, or 2.5%, to $1,612,000 from $1,653,000 as of December 31, 2012. The change was primarily due to a decrease in trade payables of $349,000, partially offset by an increase in accrued liabilities of $308,000. The increase in accrued liabilities was primarily due to an increase in sales commissions, accrued severance payments and accrued payroll.

Net cash used in investing activities was $71,000 for the three months ended March 31, 2013, compared to net cash used in investing activities of $368,000 for the same period of 2012. Our investing activities for the three months ended March 31, 2013 consisted of the purchase of property and equipment. Our investing activities for the three months ended March 31, 2012 consisted of the purchase of property and equipment of $366,000 and the purchase of intangible assets of $2,000.

Net cash used in financing activities was $830,000 for the three months ended March 31, 2013, compared to net cash used in financing activities of $205,000 for the same period of 2012. The increase in net cash used in financing activities for the three months ended March 31, 2013 was due to the payment of $872,000 for the repurchase of common stock, partially offset by the proceeds of $42,000 from the exercise of stock options. Our net cash used in financing activities for the three months ended March 31, 2012 was due to the payment of $205,000 for the repurchase of common stock.


Alpha Pro Tech, Ltd.

As of March 31, 2013, we had $1,858,000 available for additional stock purchases under our stock repurchase program. For the three months ended March 31, 2013, we repurchased 553,600 shares of common stock at a cost of $872,000. As of March 31, 2013, we had repurchased a total of 9,147,228 shares of common stock at a cost of $11,664,000 through our repurchase program. We retire all stock upon its repurchase. Future repurchases are expected to be funded from cash on hand and cash flows from operating activities.

We believe that our current cash balance and the funds available under our credit facility will be sufficient to satisfy our projected working capital and planned capital expenditures for the foreseeable future.

New Accounting Standards

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ("ASU") No. 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The amendments in ASU No. 2011-08 provide guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit, if any. If an entity determines that the carrying amount of a reporting unit is less than its fair value, the two-step goodwill impairment test is not required. This guidance became effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this guidance did not have a significant impact on the Company's consolidated financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income. This update requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders' equity. This update impacts presentation only and had no effect on the Company's consolidated financial position, results of operations or cash flows.

Management periodically reviews new accounting standards that are issued. Although some of these accounting standards may be applicable to the Company, management has not identified any other new standards that it believes merit further discussion, and the Company expects that none would have a significant impact on its consolidated financial statements.

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