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During this past year we were faced with several challenges, some of them more significant than others. One of these challenges occurred when our largest distributor of Disposable Protective Apparel products made the decision to launch its own line of private label disposable apparel. As we announced in the first quarter of 2010, we decided to meet this competitive challenge head-on and act quickly to transition away from selling them Alpha Pro Tech Critical Cover® shoe and boot covers to this distributor. This was not an easy decision, as it would have a significant impact on our revenues and earnings for the year. However, by taking this swift action we believe we have put the Company in a better position for many years to come.
The year also had its share of successes. We continue to experience strong growth in our Building Supply segment, which we believe is even more impressive given the continuing state of the construction industry during these past few years. This segment grew nearly 27% during the year, which is even more noteworthy considering that this came on top of 86% growth in 2009. Our core products continue to be met with much enthusiasm from the industry. We are also excited about our future prospects with the launch of a new non-perforated breathable house wrap - REX™ Fortis house wrap. This new house wrap opens up a whole new and larger market segment for us.
While our financial performance was not as strong as we would have preferred, mainly due to our Disposable Protective Apparel distribution strategy change, we were able to remain profitable and debt free. As we have stated in the past, management remains focused on fiscal responsibility and creating shareholder value. We manage the business in this manner in order to continue to build upon our strong foundation for future growth, create stability in the business, and deliver profits on a consistent basis. It is during times of change like these that we believe the value of these benefits is truly realized. Alpha Pro Tech remains in a strong position to continue to weather tough times and excel during the good periods.
Even though our financial results for 2010 were greatly impacted by the challenges we experienced, Alpha Pro Tech recorded its second highest level of sales in the company’s history. For the year, consolidated top-line sales were $41,890,000, a decrease from the $59,697,000 in 2009. Both the Disposable Protective Apparel and the Infection Control segments experienced sales declines of $6,239,000 and $15,658,000 respectively. This was partially offset by a sales increase of $4,090,000 in our Building Supply segment.
Our Infection Control segment sales decreased to $6,052,000 from $21,710,000 in 2009. The decrease was primarily the result of a 76.9 % drop in mask sales to $4,002,000 and a 62.8% decrease in shield sales to $1,416,000. The decrease in mask sales can be directly attributed to a lessening of concerns surrounding the H1N1 Influenza A. In 2009, we experienced a 283% increase in mask sales due to the threat of a pandemic outbreak. Shield sales were also impacted by the abating pandemic threat as well as the lack of a large one-time order of $1,700,000 in 2009, which did not occur in 2010.
Sales for the Disposable Protective Apparel segment decreased by 27.5% to $16,462,000 from $22,701,000 in 2009. The decrease in this segment was primarily due to our former largest distributor’s decision to launch a competing line of products, and based on the resulting change in our relationship with this distributor, we decided to shift away from them as the sole distributor of our Critical Cover® protective apparel product line. This was partially offset by increased sales to a broader based distribution network, including a major international supply chain partner through which our sales nearly doubled during 2010. It is important to note that we believe the decision to move sales away from this distributor for competitive reasons will allow us in the long run to achieve higher sales through a larger and stronger base of distribution relationships.
The Building Supply segment continued its strong growth trajectory by posting its highest level of sales in its sixth full year of operation. Sales from this segment climbed more than 26.8% to a record $19,376,000 from $15,286,000 in 2009. The primary drivers behind this growth were the 21.2% increase in sales of REX Synfelt™ synthetic roof underlayment and a 40.4% growth in REX Wrap™ house wrap sales. For the year, our synthetic roof underlayment sales represented 69% of this segment’s sales with 31% coming from house wrap sales. This compares to 72% for synthetic roof underlayment and 28% for house wrap in the previous year.
We believe our Building Supply segment will continue on its long-term growth path and continue to move into an industry-leading position. Our distribution strategy continues to strengthen, and we have added additional sales personnel to further this effort. In addition, in the fourth quarter we introduced our new ICC-ES approved REX™ Fortis house wrap, which is our first non-perforated breathable house wrap. The non-perforated breathable house wrap market represents the majority of the total house wrap market. Reception to this new product has been terrific and we attained an encouraging level of initial sales in the fourth quarter and expect it to be a contributing factor to our growth in 2011.
The overall decrease in sales in 2010 also had an impact on the company’s bottom line. However, we continue to remain focused on profitability. This marked the company’s 12th consecutive year of profitability. For 2010, Alpha Pro Tech posted net income of $1,301,000, or $0.06 per diluted share, compared to $9,041,000, or $0.39 per diluted share in 2009.
Gross profit decreased by 43.1% to $16,422,000 from $28,874,000 in 2009. Our gross profit margin for 2010 dropped to 39.2% from 48.4% for the prior year. The major factor impacting gross margin was a change in product mix. Sales for the year were shifted towards the Building Supply segment, which carry lower margins, as a higher percentage of sales, combined with the decrease in sales from the Infection Control segment, which has higher margins.
Your management team remains continuously focused on maintaining financial stability, especially during this time of transition, and that focus is reflected in our strong balance sheet. In addition to the solid cash position and zero debt level, our current ratio stands at a robust level at 39.1 to 1. This is a dramatic increase from the 6.1 to 1 in 2009. This is a reflection of management’s diligent approach and means that we should be able to fund our growth from this strong financial foundation.
Working capital increased approximately 3% to $29,829,000 from $28,994,000 from a year ago. At year end, our cash position stood at $5,316,000, compared to $9,753,000 in 2009, however it remains higher than the $4,578,000 in 2008. Our inventory levels increased 32.3%, or $4,224,000, to $17,318,000 from $13,094,000 in 2009. This was primarily due to increased inventory for the Building Supply segment in order to meet current and expected sales, as well as an increase for the Disposable Protective Apparel segment due to our strategy of maintaining a strong inventory position to better compete. We also made the decision to stockpile inventories of our N-95 particulate respirator masks in our Infection Control segment. Although inventories for both Disposable Protective Apparel and Infection Control segments were up on a year-over-year comparison, they were lower than levels at the ends of the second and third quarters of 2010.
Shareholders’ equity increased 4.8% to $35,512,000 from $33,871,000 in 2009. In addition, due to our improved shareholders’ equity, our book value increased 4.6% to $1.58 per share from $1.51 per share in 2009. 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.
As we did in 2007 for the Building Supply segment, we made the decision to implement a significant change to our distribution strategy for our Disposable Protective Apparel segment. As mentioned above, we made this change because our largest distributor decided to compete directly against us by launching its own private label line. There were two reasons we were confident in making this decision. The first is that we knew there was demand for our products from the end customer. This demand allows us to reach these customers through new distribution partners and channels. The second reason is that we have taken this path before in our Building Supply segment to great success. We strongly believe that this is just the catalyst we need to reposition the product line across a broader distribution channel and that it is in the best long-term interest of the company.
We are already beginning to reap the benefits of this distribution change as seen in sales to our new major international supply chain partner. We have already attained a preferred vendor status and have received their Outstanding Sales Growth Results for two consecutive years, 2009 and 2010, in our category. We also received an award for Outstanding Delivery Quality for our aggregate service level performance in 2010. Alpha Pro Tech was also a finalist for their Overall Supplier of the Year award for 2010 across all categories. Sales to this major strategic channel partner nearly doubled in 2010, and we expect continued growth in 2011.
A real bright spot in 2010 was the continued strong performance of our Building Supply segment. Sales of this segment made up 46.3% of total sales for the year and nearly reached $20,000,000. We continue to experience strong industry acceptance of both our REX Synfelt™ synthetic roof underlayment and REX Wrap™ house wrap products. We are additionally encouraged by our recent introduction of REX Wrap™ Fortis, our new non-perforated, breathable house wrap.
The non-perforated breathable house wrap market accounts for the majority, approximately 65%, of the total house wrap market. By adding the REX Wrap™ Fortis house wrap to our line, we are now able to gain access to this portion of the market, which had previously been unavailable to us. We anticipate that the Building Supply segment of our business to continue on its strong growth trajectory for several years, especially when the construction industry recovers further.
The Infection Control segment, which comprised 14.4% of total sales in the year, experienced a significant drop when compared to 2009. During 2009, this segment had significant sales growth due mainly to a higher than normal level of sales of our N-95 respirator masks due to the H1N1 Influenza A pandemic. While the fears of the pandemic have since abated, we have built up our inventory levels of N-95 respirator masks in order to be better prepared to meet any potential future demand should it or another global need arise.
Subsequent to year end, in February 2011, we entered into an asset purchase agreement to sell our line of pet beds. Sales of this product line were approximately $250,000 in 2010 and incurred a loss for the year. Pet beds were included as part of the Infection Control segment.
This past year we were faced with challenges and opportunities, and we achieved some important accomplishments. We are addressing our challenges head-on and in the long run we will come out a better, stronger company. Our strategy remains the same - deliver value to our customers and to our shareholders everyday. We have built a strong foundation on which to be nimble enough to utilize our competitive advantages, while managing the business in a prudent manner in order to maintain our position of financial strength. To reach our goals, we remain focused on providing innovative solutions to meet our customers’ ever-changing needs. We keep that focus by remembering to do what we do best and that is providing solutions that protect people, products and environments.
During the upcoming year, 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,
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Sheldon Hoffman
Chief Executive Officer
Director
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Alexander W. Millar
President
Director |
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