Alpha Pro Tech(APT) - 2018 Q4 - Annual Report

Part I - Business and Risk Factors This section outlines the company's business operations, product segments, competitive landscape, key risk factors, and property details Business Overview Alpha Pro Tech operates in Building Supply, Disposable Protective Apparel, and Infection Control segments, distributing innovative products primarily in the U.S. with manufacturing in the U.S. and India - The company's business is structured into three main segments: Building Supply, Disposable Protective Apparel, and Infection Control[12] - The primary distribution channel is a network of independent distributors, with most orders being filled within 30 days rather than maintaining a large backlog[26] - Manufacturing is conducted in U.S. facilities (Georgia, Arizona, Utah) and supplemented by a 41.66% owned joint venture in India (Harmony Plastics) and other subcontractors in Asia and Mexico[32][33][34] Net Sales by Geographic Region (in thousands) | Geographic Region | 2018 | 2017 | |-------------------|--------------|--------------| | United States | $45,595 | $43,169 | | International | $1,029 | $856 | | Consolidated | $46,624 | $44,025 | Products The company offers specialized products across its Building Supply, Disposable Protective Apparel, and Infection Control segments, including weather-resistant housewrap, protective apparel, and patented face masks - Building Supply products include REX™ housewrap and REX™ SynFelt synthetic roof underlayment, designed for durability and weather resistance[17][18] - Infection Control products feature patented designs like the Positive Facial Lock® and Magic Arch® in their face masks, including an N-95 respirator recommended by the CDC during the 2009 H1N1 pandemic[20] Competition The company faces intense competition from larger, well-resourced companies like DuPont, Interwrap, Kimberly-Clark, 3M, and Cardinal Health across its various market segments - Major competitors in the construction supply market are DuPont for housewrap and Interwrap Inc. for synthetic roof underlayment[36] - In the medical, dental, industrial, and cleanroom markets, the company competes with large corporations such as Kimberly-Clark, 3M, Johnson & Johnson, and Cardinal Health[36] Risk Factors The company faces significant risks including adverse economic conditions, reliance on limited suppliers and large customers, international manufacturing challenges, intellectual property protection, intense competition, and stock price volatility - The business is vulnerable to unfavorable economic conditions, loss of large customers, and reliance on a limited number of suppliers and contractors, particularly for its Disposable Protective Apparel and Building Supply segments[47][48][50] - International manufacturing and joint ventures, particularly in Asia and India, expose the company to risks such as changes in foreign regulations, trade barriers (tariffs), currency fluctuations, and political instability[52][53] - The company faces intense competition from more established companies with greater resources, which could affect pricing, market share, and the acceptance of new products[57][58][59] Properties The company leases all its primary facilities, including its executive office in Canada and manufacturing/operational sites in Georgia, Arizona, and Utah, with leases expiring between 2019 and 2024 Leased Facilities Overview | Location | Segment/Use | Size (sq ft) | Lease Expiration | |---------------------------|-----------------------------|--------------|------------------| | Markham, ON, Canada | Executive Office | 4,200 | Feb 28, 2021 | | Valdosta, GA | Building Supply Mfg. | 165,400 | Jan 1, 2024 | | Nogales, AZ | Disposable Apparel Ops | 60,000 | Dec 31, 2019 | | Salt Lake City, UT | Face Mask Mfg. | 34,500 | Jul 31, 2024 | Part II - Market, Financials, and MD&A This section covers the company's common stock market, share repurchase activities, detailed management discussion and analysis of financial performance, and comprehensive financial statements Common Stock Market and Repurchases The company's common stock trades on NYSE American under 'APT', with active share repurchases in Q4 2018 and a $2 million program expansion authorized in December 2018 Issuer Purchases of Equity Securities (Q4 2018) | Period | Total Shares Purchased | Avg. Price Paid/Share | |------------------------|------------------------|-----------------------| | Oct 1 - 31, 2018 | 72,600 | $3.53 | | Nov 1 - 30, 2018 | 48,400 | $3.51 | | Dec 1 - 31, 2018 | 85,900 | $3.71 | | Total Q4 2018 | 206,900 | $3.60 | - As of December 31, 2018, $2,699,000 was available for repurchase under the company's share repurchase program following a $2,000,000 expansion authorized in December 2018[76] Management's Discussion and Analysis (MD&A) In FY2018, consolidated sales increased by 5.9%, net income grew 37.7% to $3.6 million due to lower SG&A and tax rates, and the company maintained strong liquidity with $7.0 million cash and an unused $3.5 million credit facility Results of Operations (2018 vs. 2017) Consolidated sales increased 5.9% to $46.6 million in 2018, driven by growth in Disposable Protective Apparel and Building Supply, leading to a 37.7% rise in net income despite a gross margin decline Financial Performance Summary (2018 vs. 2017) | Metric | 2018 | 2017 | Change | |-----------------------------|---------------|---------------|-----------| | Net Sales | $46,624,000 | $44,025,000 | +5.9% | | Gross Profit | $17,711,000 | $17,452,000 | +1.5% | | Gross Profit Margin | 38.0% | 39.6% | -1.6 p.p. | | Income from Operations | $3,874,000 | $2,926,000 | +32.4% | | Net Income | $3,625,000 | $2,633,000 | +37.7% | | Diluted EPS | $0.26 | $0.18 | +44.4% | Segment Sales Performance (2018 vs. 2017) | Segment | 2018 Sales | 2017 Sales | Change | |-------------------------------|---------------|---------------|--------| | Building Supply | $26,035,000 | $24,641,000 | +5.7% | | Disposable Protective Apparel | $15,612,000 | $14,250,000 | +9.6% | | Infection Control | $4,977,000 | $5,134,000 | -3.1% | - The decrease in SG&A expenses was primarily due to a $619,000 death benefit accrual in 2017 for the former President, which was not repeated in 2018[100] - The effective tax rate decreased to 17.9% in 2018 from 28.3% in 2017, mainly due to the U.S. Tax Cuts and Jobs Act, which lowered the federal corporate tax rate[107][108] Liquidity and Capital Resources As of December 31, 2018, the company maintained strong liquidity with $7.0 million cash and $24.5 million working capital, despite a cash decrease driven by $3.2 million in stock repurchases, and has an unused $3.5 million credit facility Key Balance Sheet and Liquidity Metrics (as of Dec 31) | Metric | 2018 | 2017 | |---------------------|---------------|---------------| | Cash | $7,007,000 | $8,763,000 | | Working Capital | $24,540,000 | $24,177,000 | | Current Ratio | 14:1 | 10:1 | - Net cash used in financing activities was $3.2 million, primarily from repurchasing 999,900 shares of common stock for $3.6 million, partially offset by $0.4 million from stock option exercises[119][120] - The company has a $3.5 million credit facility with Wells Fargo, which was unused as of December 31, 2018[111] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for FY2018 and FY2017, including the independent auditor's report, management's internal control report, and detailed financial statements with accompanying notes - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[136] - The independent auditor, Tanner LLC, issued an unqualified opinion, stating the financial statements are presented fairly in all material respects[138] Notes to Consolidated Financial Statements The notes detail accounting policies, segment performance, new accounting standard adoptions (ASC 606, ASU 2016-01), the 41.66% Indian joint venture, significant customer concentration, and the ongoing stock repurchase program - The company adopted new accounting standards ASU 2014-09 (Revenue from Contracts) and ASU 2016-01 (Financial Instruments) effective January 1, 2018, with the latter resulting in unrealized gains/losses on marketable securities being recorded in net income[191][192] - The company purchased $16.5 million and $14.6 million of inventory from its 41.66%-owned unconsolidated affiliate, Harmony Plastics, in 2018 and 2017, respectively[211] Customer Concentration (% of Net Sales) | Customer | 2018 | 2017 | |------------|-------|-------| | Customer A | 20% | 19% | | Customer B | 12% | 10% | Segment Income Reconciliation to Net Income (in thousands) | Description | 2018 | 2017 | |-------------------------------------|-------------|-------------| | Building Supply Income | $3,836 | $4,143 | | Disposable Protective Apparel Income| $2,862 | $2,516 | | Infection Control Income | $1,722 | $1,844 | | Total Segment Income | $8,420 | $8,503 | | Unallocated Corporate Expenses | ($4,006) | ($4,833) | | Provision for Income Taxes | ($789) | ($1,037) | | Consolidated Net Income | $3,625 | $2,633 | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with no material changes in Q4 2018, and no auditor attestation report was required - The principal executive and financial officers concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[257] - No changes in internal control over financial reporting occurred during the fourth quarter of 2018 that materially affected, or are reasonably likely to materially affect, internal controls[259] Part III - Corporate Governance and Executive Compensation This section provides information on the company's corporate governance, executive compensation, and equity compensation plans, primarily by reference to the proxy statement Directors, Compensation, and Related Party Transactions Information on directors, executive compensation, security ownership, and related party transactions is incorporated by reference from the 2019 Proxy Statement, with equity compensation plan details provided - Disclosure for directors, executive officers, corporate governance, executive compensation, security ownership, and related transactions is incorporated by reference from the forthcoming 2019 Proxy Statement[260][261][262][266] Equity Compensation Plan Information (as of Dec 31, 2018) | Plan Category | Securities to be Issued Upon Exercise of Outstanding Options | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | |---------------------------------------------|--------------------------------------------------------------|---------------------------------|------------------------------------------| | Equity compensation plan approved by shareholders | 1,022,913 | $2.69 | 1,522,250 | Part IV - Exhibits and Schedules This section lists all exhibits and financial statement schedules filed as part of the Form 10-K, including required certifications Exhibits and Financial Statement Schedules This section lists all exhibits and financial statement schedules filed with the Form 10-K, noting that financial statement schedules are omitted as permitted for a smaller reporting company - The report includes the consolidated financial statements in Item 8 and a list of exhibits filed with the report[269][271] - Financial statement schedules are not included, as the company qualifies as a smaller reporting company[270]