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APT > SEC Filings for APT > Form 10-Q on 7-Aug-2013All 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-Aug-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", or "we," "our" or "us") 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 are recorded at the invoice amounts 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, revenue is 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.

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 records compensation expense for the fair 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            For the Six Months Ended
                                                           June 30,                             June 30,
                                                   2013                2012              2013               2012
Net sales                                              100.0 %             100.0 %          100.0 %            100.0 %
Gross profit                                            36.4 %              35.5 %           37.5 %             35.5 %
Selling, general and administrative expenses            28.5 %              29.7 %           32.5 %             31.6 %
Income from operations                                   6.3 %               3.9 %            3.2 %              1.8 %
Income before provision for income taxes                 6.6 %               5.5 %            3.6 %              3.4 %
Net income                                               4.2 %               3.4 %            2.4 %              2.2 %

Three and six months ended June 30, 2013 compared to three and six months ended June 30, 2012

Sales. Consolidated sales for the three months ended June 30, 2013 increased to $11,156,000, from $10,851,000 for the three months ended June 30, 2012, representing an increase of $305,000, or 2.9%. This increase consisted of increased sales in the Building Supply segment of $615,000 and increased sales in the Infection Control segment of $128,000, partially offset by decreased sales in the Disposable Protective Apparel segment of $438,000.

Building Supply segment sales for the three months ended June 30, 2013 increased by $615,000, or 9.6%, to a record $7,057,000, as compared to $6,442,000 for the same period of 2012. The increase was primarily due to a 15.5% increase in sales of REX™ Wrap housewrap and a 0.5% increase in sales of REX™ SynFelt synthetic roof underlayment. Synthetic roof underlayment sales were adversely affected by an extended and harsher than normal winter that affected construction activity in many of the markets where our products are used, but sales are expected to be stronger in the coming quarter. The sales mix of the Building Supply segment for the three months ended June 30, 2013 was 65% for synthetic roof underlayment and 35% for housewrap. This compared to 68% for synthetic roof underlayment and 32% for housewrap for the three months ended June 30, 2012. 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 June 30, 2013 decreased by $438,000, or 12.6%, to $3,054,000, compared to $3,492,000 for the same period of 2012. The decrease was primarily due to a decrease in sales of disposable protective apparel to our major international supply chain partner. This partner's sales to its end users for three months ended June 30, 2013 were consistent with the same period of 2012.

Infection Control segment sales for the three months ended June 30, 2013 increased by $128,000, or 14.0%, to $1,045,000, compared to $917,000 for the same period of 2012. Mask sales were up by 30.0%, or $173,000, to $750,000, and shield sales were down by 13.3%, or $45,000, to $295,000.

Consolidated sales for the six months ended June 30, 2013 increased to $20,606,000, from $20,470,000 for the six months ended June 30, 2012, representing an increase of $136,000, or 0.7%. This increase consisted of increased sales in the Building Supply segment of $188,000 and increased sales in the Infection Control segment of $80,000, partially offset by decreased sales in the Disposable Protective Apparel segment of $132,000.


Alpha Pro Tech, Ltd.

Building Supply segment sales for the six months ended June 30, 2013 increased by $188,000, or 1.6%, to $12,221,000, as compared to $12,033,000 for the same period of 2012. The increase was primarily due to an 18.6% increase in sales of REX™ Wrap housewrap, partially offset by a 10.6% decrease in sales of REX™ SynFelt synthetic roof underlayment, resulting from the harsh winter. The sales mix of the Building Supply segment for the six months ended June 30, 2013 was 62% for synthetic roof underlayment and 38% for housewrap. This compared to 68% for synthetic roof underlayment and 32% for housewrap for the six months ended June 30, 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. For the first six months of 2013, TECHNOply™ had three times the sales of the same period in 2012 and contributed approximately 9% of total synthetic roof underlayment sales, as compared to 3% 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. For the first six months of 2013, REX™ Wrap Fortis sales increased seven-fold over the same period of 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.

Sales for the Disposable Protective Apparel segment for the six months ended June 30, 2013 decreased by $132,000, or 2.1%, to $6,274,000, compared to $6,406,000 for the same period of 2012. The decrease was primarily due decreased sales to our major international supply chain partner, partially offset by 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. In addition, our international supply chain partner's year to date sales to its end users was up 6%, demonstrating demand for our products.

Infection Control segment sales for the six months ended June 30, 2013 increased by $80,000, or 4.0%, to $2,111,000, compared to $2,031,000 for the same period of 2012. Mask sales were up by 13.0%, or $172,000, to $1,495,000, and shield sales were down by 13.0%, or $92,000, to $616,000.

Gross Profit. Gross profit increased by $205,000, or 5.4%, to $4,057,000 for the three months ended June 30, 2013 from $3,852,000 for the same period of 2012. The gross profit margin was 36.4% for the three months ended June 30, 2013, compared to 35.5% for the same period of 2012.

Gross profit increased by $443,000, or 6.1%, to $7,720,000 for the six months ended June 30, 2013 from $7,277,000 for the same period of 2012. The gross profit margin was 37.5% for the six months ended June 30, 2013, compared to 35.6% for the same period of 2012. The gross profit margin for the three and six months ended June 30, 2013 was positively affected by an increase in the Building Supply segment margin.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $41,000, or 1.3%, to $3,183,000 for the three months ended June 30, 2013 from $3,224,000 for the three months ended June 30, 2012. As a percentage of net sales, selling, general and administrative expenses decreased to 28.6% for the three months ended June 30, 2013 from 29.8% for the same period of 2012.

The change in expenses for the second quarter by segment was as follows:
Building Supply was down $72,000, or 6.4%, and Infection Control was down $69,000, or 35.8%, partially offset by Disposable Protective Apparel, which was up $54,000, or 6.8%, and corporate unallocated expenses, which were up $46,000.

Selling, general and administrative expenses increased by $221,000, or 3.5%, to $6,695,000 for the six months ended June 30, 2013 from $6,474,000 for the six months ended June 30, 2012. As a percentage of net sales, selling, general and administrative expenses increased to 32.5% for the six months ended June 30, 2013 from 31.7% for the same period of 2012.

The change in expenses by segment for the six months was as follows: Disposable Protective Apparel was up $67,000, or 4.1%, and corporate unallocated expenses were up $265,000. This was partially offset by Building Supply, which was down $32,000, or 1.4%, and Infection Control, which was down $79,000, or 21.0%. The increase in corporate unallocated expenses was primarily due to a severance accrual for manufacturing personnel that will not be replaced, as we have restructured some job functions.


Alpha Pro Tech, Ltd.

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 $81,000 were accrued for the three months ended June 30, 2013, as compared to $66,000 for the same period of 2012. Executive bonuses of $82,000 were accrued for the six months ended June 30, 2013, as compared to $78,000 for the same period of 2012.

Depreciation and Amortization. Depreciation and amortization expense decreased by $34,000, or 16.3%, to $175,000 for the three months ended June 30, 2013 from $209,000 for the same period of 2012. The decrease for the second quarter was primarily attributable to decreased depreciation for the Disposable Protective Apparel and Building Supply segments.

Depreciation and amortization expense decreased by $69,000, or 16.3%, to $356,000 for the six months ended June 30, 2013 from $425,000 for the same period of 2012. The decrease for the six months was primarily attributable to decreased depreciation for the Disposable Protective Apparel segment and, to a lesser extent, the Building Supply segment.

Income from Operations. Income from operations increased by $280,000, or 66.9%, to $699,000 for the three months ended June 30, 2013, compared to $419,000 for the three months ended June 30, 2012. The increased income from operations was due to an increase in gross profit of $205,000, a decrease in depreciation and amortization of $34,000 and a decrease in selling, general and administrative expenses of $41,000.

Income from operations increased by $291,000, or 77.0%, to $669,000 for the six months ended June 30, 2013, compared to $378,000 for the six months ended June 30, 2012. The increased income from operations was due to an increase in gross profit of $443,000 and a decrease in depreciation and amortization of $69,000, partially offset by an increase in selling, general and administrative expenses of $221,000.

Equity in Income of Unconsolidated Affiliate. For the three months ended June 30, 2013, we recorded equity in income of unconsolidated affiliate of $38,000, compared to $171,000 for the same period of 2012. For the six months ended June 30, 2013, we recorded equity in income of unconsolidated affiliate of $71,000, compared to $318,000 for the same period of 2012.

Income before Provision for Income Taxes. Income before provision for income taxes for the three months ended June 30, 2013 was $738,000, compared to income before provision for income taxes of $593,000 for the three months ended June 30, 2012, representing an increase of $145,000, or 24.5%. The increase in income before provision for income taxes was due primarily to an increase in income from operations of $280,000, partially offset by a decrease in equity in income of unconsolidated affiliate of $133,000 and a decrease in net interest income of $2,000.

Income before provision for income taxes for the six months ended June 30, 2013 was $742,000, compared to income before provision for income taxes of $705,000 for the six months ended June 30, 2012, representing an increase of $37,000, or 5.3%. The increase in income before provision for income taxes was due primarily to an increase in income from operations of $291,000, partially offset by a decrease in equity in income of unconsolidated affiliate of $247,000 and a decrease in net interest income of $7,000.

Provision for Income Taxes. The provision for income taxes for the three months ended June 30, 2013 was $264,000, compared to the provision for income taxes of $219,000 for the same period of 2012. The provision for income taxes for the six months ended June 30, 2013 was $252,000, compared to the provision for income taxes of $261,000 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 equity in income of unconsolidated affiliate as a result of the Company modifying its tax reporting for Harmony.


Alpha Pro Tech, Ltd.

Net Income. Net income for the three months ended June 30, 2013 was $474,000, compared to net income of $374,000 for the three months ended June 30, 2012, an increase of $100,000, or 26.7%. The net income increase was primarily due to an increase in income before provision for income taxes of $145,000, partially offset by an increase in income taxes of $45,000. Net income as a percentage of net sales for the three months ended June 30, 2013 was 4.2%, and net income as a percentage of net sales for the same period of 2012 was 3.4%. Basic and diluted earnings per common share for the three months ended June 30, 2013 and 2012 were both $0.02.

Net income for the six months ended June 30, 2013 was $490,000, compared to net income of $444,000 for the six months ended June 30, 2012, an increase of $46,000, or 10.4%. The net income increase was primarily due to an increase in income before provision for income taxes of $37,000 and a decrease in income taxes of $9,000. Net income as a percentage of net sales for the six months ended June 30, 2013 was 2.4%, and net income as a percentage of net sales for the same period of 2012 was 2.2%. Basic and diluted earnings per common share for the six months ended June 30, 2013 was $0.03. Basic and diluted earnings per common share for the six months ended June 30, 2012 was $0.02.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2013, we had cash and cash equivalents of $6,129,000 and working capital of $28,907,000, representing a decrease in working capital of 2.3%, or $654,000, from December 31, 2012. As of June 30, 2013 our current ratio was 21:1, compared to a 19:1 ratio as of December 31, 2012. Cash and cash equivalents increased by 34.6%, or $1,575,000, to $6,129,000 as of June 30, 2013, compared to $4,554,000 as of December 31, 2012. The increase in cash and cash equivalents was due to cash provided by operating activities of $3,222,000, partially offset by cash used in investing activities of $150,000 and cash used in financing activities of $1,497,000.

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 June 30, 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 June 30, 2013. As of June 30, 2013, we did not have any borrowings under this credit facility.

Net cash provided by operating activities of $3,222,000 for the six months ended June 30, 2013 was due to net income of $490,000, adjusted by the following:
amortization of share-based compensation expense of $108,000, depreciation and amortization of $356,000, equity in income of unconsolidated affiliate of $71,000, a decrease in accounts receivable of $501,000, a decrease in inventory of $2,881,000, an increase in prepaid expenses of $866,000 and a decrease in accounts payable and accrued liabilities of $177,000.

Accounts receivable decreased by $501,000, or 7.9%, to $5,849,000 as of June 30, 2013 from $6,350,000 as of December 31, 2012. The decrease 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. The number of days that sales remain outstanding as of June 30, 2013, calculated by using an average of accounts receivable outstanding, was 50 days, compared to 49 days as of December 31, 2012.

Inventory decreased by $2,881,000, or 16.8%, to $14,283,000 as of June 30, 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 $2,766,000, or 34.7%, to $5,214,000, a decrease in inventory for the Disposable Protective Apparel segment of $65,000, or 1.2%, to $5,486,000 and a decrease in inventory for the Infection Control segment of $50,000, or 1.4%, to $3,583,000.

Prepaid expenses increased by $866,000, or 37.7%, to $3,165,000 as of June 30, 2013 from $2,299,000 as of December 31, 2012. The increase was primarily due to an increase in prepaid inventory.

Accounts payable and accrued liabilities as of June 30, 2013 decreased by $176,000, or 10.7%, to $1,477,000 from $1,653,000 as of December 31, 2012. The change was primarily due to a decrease in trade payables of $123,000 and a decrease in accrued liabilities of $53,000. The decrease in accrued liabilities was primarily due to a decrease in accrued bonuses of $141,000, partially offset by an increase in payroll accrual of $88,000.

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