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Letter To Shareholders 

To Our Shareholders

In many respects 2013 was a terrific year.  While we were pleased with our solid top line sales growth of 6.7%, it is the bottom line where we were able to deliver significant improvement - something to be truly excited about.  We finished the year on a strong note, delivering an increase in fourth quarter net income of 480%, bringing our year-end net income in at a 112.8% improvement from 2012.  Our goal is to achieve double digit improvement on both top and bottom line results.  However, given the sluggish albeit improving economy, we are proud to post mid-to-high single digit top line growth and triple digit bottom line increases. 

There were a few key factors driving this performance.  First, we experienced double digit sales growth in our Building Supply segment.  Adding to this were sales increases in the Disposable Protective Apparel and Infection Control segments.  Second, and most importantly, we delivered improved margin performance.  The greatest impact came from improved margins in the Building Supply segment, where we were able to leverage the larger and increasing sales base.  Third, we saw continued market acceptance of our new Building Supply segment products such as TECHNOply™, our new economy version of our synthetic roof underlayment, and our newest housewrap, the REX™ Wrap Fortis non-perforated breathable housewrap. Both experienced significant sales growth in 2013.

Our proven track record of managing the business in a prudent manner truly delivered outstanding bottom line improvement this year.  We remain committed to this type of execution and it is what allowed us to leverage our infrastructure, as seen in our improved margins.  We will continue to look for ways to further drive top line sales to take full advantage of these improved operating efficiencies.  In addition, we will continue to innovate and launch new products.  It remains critical for us to further drive brand recognition and our reputation for quality, and to obtain industrial certifications to enhance market acceptance and facilitate our speed to market.  

2013 Financial Performance

For the year, consolidated sales grew 6.7% to $43,806,000 from $41,058,000 in sales for 2012.  Growth in sales came from all three business segments. The Building Supply segment posted sales gains of $2,624,000; the Disposable Protective Apparel segment increased by $3,000; and the Infection Control segment recorded an increase of $121,000.

Our Building Supply segment continued to post double digit sales growth. In 2013, the Building Supply segment posted record sales of $26,373,000, increasing 11% from $23,749,000 in 2012.  As a reminder this is after posting 10% growth in 2012. We experienced strong growth from our REX™ Wrap house wrap, which achieved a 20.4% increase in sales.  Our REX™ Synfelt synthetic roof underlayment posted a modest gain of 1.3%. For the year, our synthetic roof underlayment sales represented 61% of this segment’s sales, with 35% coming from house wrap sales and 4% from woven material. 

The Building Supply segment represents 60% of our sales and we believe that it will continue on its long-term growth path as the construction and renovation markets continue to strengthen. In early 2012, we introduced TECHNOply™. We launched this product in order to capture market share in the lower price-point portion of the market. In 2013, sales of TECHNOply™ nearly doubled from the previous year and represented 11% of total synthetic roof underlayment sales, as compared to 6% for 2012.  Our newest housewrap, REX™ Wrap Fortis non-perforated breathable housewrap, is starting to pick up sales momentum. In 2013, sales of the REX™ Wrap Fortis grew three-fold and represented 7% of total housewrap sales, compared to 3% in 2012.  We expect both of these new products to continue to experience strong growth and contribute significantly to our growth in the years to come.  

Our Disposable Protective Apparel segment experienced an increase in sales to $13,191,000 from $13,188,000 in 2012.  The increase was primarily due to an increase in sales of protective apparel to our regional and national distributors. This increase was partially offset by a decrease in sales to our major international supply chain partner.  On the positive side, sales to our major international supply chain partner’s end users were not impacted, and we expect sales to this distributor to increase in 2014.  We are continuing to put more emphasis on a broader and more diversified distribution strategy for our Critical Cover® protective apparel product line.  We believe that this will allow us to gain market share and continue the momentum in growth that we have established. 

Our Infection Control segment posted a 2.9% sales increase to $4,242,000 from $4,121,000 in 2012.  The increase was primarily driven by an 8.5% increase in mask sales to $2,986,000; however, this was offset by an 8.3% decrease in shield sales to $1,256,000. The increase in mask sales was the result of an increase in medical, dental and industrial sales.

Gross profit for the year ended December 31, 2013 increased by 12.3% to $16,232,000 from $14,460,000 in 2012.  Our gross profit margin for 2013 climbed to 37.1% from 35.2% for 2012.  The major factor impacting gross margin was an increase in our Building Supply segment margin. Historically, the Building Supply segment has carried lower margins, and we have been working on increasing margins in this segment. 

The increase in sales and improvement in gross margin had a significant positive impact on the Company’s bottom line. For the full year, Alpha Pro Tech posted a 112.8% increase in net income of $1,102,000 to $2,079,000, or $0.11 per diluted share, compared to $977,000, or $0.05 per diluted share, in 2012.  This marked the company’s 15th consecutive year of profitability.

Maintaining a strong balance sheet is a key component of our growth strategy.  This provides us with the flexibility to invest in opportunities while remaining financially stable.  In addition to our strong cash position, which stood at $8,215,000 as of December 31, 2013, compared to $4,554,000 at the end of 2012, our working capital of $30,915,000 represented a 4.6% increase from December 31, 2012.  Our current ratio stands at a healthy level of 19:1.  This is a reflection of management’s diligent approach and means that we should be able to continue to fund our growth from this strong financial foundation. 

Current assets increased to $32,640,000 as of December 31, 2013 from $31,214,000 at the end of 2012.  At the 2013 year end, in addition to our 80.4% increase in cash, our inventory levels decreased 17.6%, or $3,024,000, to $14,140,000 from $17,164,000 at the end of 2012.  This was primarily due to decreases in inventory for all three of our business segments.  The Building Supply segment had a 27.5% decrease in inventory, the Disposable Protective Apparel segment had an 8% decrease in inventory and the Infection Control segment had a 10.6% decrease in inventory. 

Shareholders’ equity increased slightly to $35,581,000 as of December 31, 2013 from $34,833,000 in 2012.  In addition, our book value increased to $1.85 per share from $1.68 per share in 2012.  During 2013 we returned $3,134,000 to shareholders through the repurchase of 1,931,350 shares of common stock.  As of December 31, 2013, we had returned $13,926,000 to shareholders through our share repurchase program by buying back 10,524,978 shares.  We retire all stock upon its repurchase.

The company remains debt free and has an unused $3.5 million line of credit.  Our consistent approach to managing our assets provides us with the ability to continue to pursue and fund our growth initiatives.  

2013 Review

This past year, we were able to deliver solid performance on many fronts and the Company is well-positioned to capture growth opportunities in 2014 and beyond.  As stated earlier, we delivered solid sales growth of 6.7% but the real news this year was our outstanding bottom line performance.  In addition to the improvement in gross margin, we also were able to manage selling, general and administrative expenses as a percentage of sales down to 29.9% in 2013 from 31.4% in 2012.  The combination of these two factors allowed us to more than double our net income from a year ago.  Our ability to manage costs in both of these areas speaks volumes to our commitment to deliver shareholder value.  

Like 2012, we finished the year strong.  While the overall sales increase in the fourth quarter was in line with the year at 6.7%, our Disposable Protective Apparel segment delivered growth of 19.3%, Infection Control segment sales were up 4.3% and Building Supply segment sales were up 0.7%.  Most encouraging, unlike some years in the past, where we have had two segments grow, only to have a portion of those increases offset by another segment experiencing a decrease, this year, all three segments posted sales gains in the fourth quarter and for the year as well, which allowed us to leverage our fixed infrastructure costs. 

We delivered particularly strong bottom line results in the fourth quarter with a 480% increase in net income.  Net income as a percentage of sales for the quarter rose to 6.5% in 2013 from 1.2% in 2012.  Driving this significant improvement was a 16.2% increase in gross profit to $3,933,000 and a gross profit margin of 37.4%, which was up from 34.4% in the same period of 2012.  One of the main contributors to the margin improvement was an increase in the Building Supply segment margin.

As the housing market continues to show signs of recovery, we expect the Building Supply segment to continue on its growth trajectory.  As a matter of fact, since 2007, we have been able to grow this segment from $5 million to more than $26 million in sales in 2013.  This represents an increase of more than 5 times. This is one reason why we strongly believe that as the housing market continues to improve over the next decade, we will be in a strong position to capture additional sales opportunities.

Our Disposable Protective Apparel segment showed modest improvement in 2013, due in large part to the previously mentioned purchasing cycle of our major international supply chain partner.  Given the inventory levels of that distributor’s customers, we are confident that we will return to normal sales levels in the first half of 2014.  We remain optimistic about our continued sales growth opportunities, especially as distribution expansion and improvements continue to gain momentum.

In the Infection Control segment, we were pleased with the sales increase of 2.9% in 2013.  During the fourth quarter, this segment experienced sales growth of nearly 4.3%, which we believe is encouraging going into 2014.  In addition, during the year, we took steps to restructure some of the manufacturing of this segment in order to take some costs out of the business.  This also helped to improve overall margins during the year.  This segment now represents about 9.7% of our overall consolidated sales.   

Outlook

We are encouraged about the future growth prospects for Alpha Pro Tech.  Our performance this past year was quite strong in many regards.  We posted solid growth, significantly increased bottom line profits and, like 2012, we finished the year stronger than we started it.  Our distribution network continues to strengthen, and our Building Supply segment continues to deliver stellar performance in a down construction market.  We will continue to innovate, launch new products and further build our brands in all of our business segments. The management team is firmly committed to growing the Company and delivering value for our customers, employees and shareholders.  We will continue to manage the business in a prudent manner in order to maintain our position of financial strength.  We remain focused on what we do best - providing solutions that protect people, products and environments.

During the year ahead, we look forward to sharing with you our new milestones and accomplishments as we lead the Company through its next stage of growth.  On behalf of the Board of Directors and the entire management team, we would like to thank our customers, suppliers, distributors, employees and shareholders for their continued support. 

Sincerely,  

Sheldon Hoffman
Chief Executive Officer
Director

Alexander W. Millar
President
Director