Alpha Pro Tech, Ltd. — FY 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are to FY 2022. The company develops and sells building weatherization products and disposable protective apparel, primarily in the United States.
Financial performance
| Metric | FY 2023 | FY 2022 | Change |
|---|---|---|---|
| Net sales | $61.232 million | $61.981 million | Down 1.2% |
| Gross profit / margin | $22.829 million / 37.3% | $21.683 million / 35.0% | Profit up 5.3%; margin up 2.3 points |
| Operating income / margin | $4.132 million / 6.7% | $4.650 million / 7.5% | Down 11.1% |
| Net income / margin | $4.189 million / 6.8% | $3.282 million / 5.3% | Up 27.6% |
| Basic and diluted EPS | $0.35 | $0.26 | Up $0.09 |
| Operating cash flow | $8.458 million | $4.277 million | Up $4.181 million |
- Segment sales: Building Supply rose 9.4% to $40.396 million, led by housewrap and other woven materials. Disposable Protective Apparel fell 16.8% to $20.836 million, as declines in masks and face shields outweighed growth in garments.
- Profit drivers: Lower ocean freight costs supported gross margin. Operating income declined as SG&A rose 9.6% to $17.772 million and depreciation and amortization increased. Net income benefited from other income of $1.293 million versus a $255,000 expense in 2022, including higher interest income and affiliate earnings and the absence of a prior-year $490,000 equipment-deposit impairment.
- Liquidity: Cash was $20.378 million and working capital $50.498 million at year-end; the current ratio was 21:1. Cash increased $4.088 million during the year. Capital expenditures were $792,000.
- Debt and obligations: The filing reports no borrowings in the presented balance sheet. Operating lease liabilities were $4.848 million, including $661,000 current; future minimum lease payments totaled $7.806 million before imputed interest.
Material changes and notable items
- Building Supply sales reached a record, while apparel segment sales contracted as pandemic-related excess inventories continued to weigh on mask and shield demand. Fourth-quarter mask and shield sales improved to about twice the prior quarter.
- Inventory declined 17.5% to $20.131 million. Inventory write-downs increased to approximately $292,000 from $152,000.
- The company repurchased 951,010 shares for $4.002 million in 2023; $2.194 million remained authorized at year-end. It does not plan to pay dividends in the foreseeable future.
- The company revised prior-period equity classifications for share repurchases, reallocating amounts between additional paid-in capital and retained earnings. Management said the revision was not material and did not affect total equity, net income, EPS, assets, liabilities, or cash flows; no restatement was made.
- U.S. patents expired February 4, 2024. Management notes this may make intellectual property protection more difficult.
Outlook, risks and contingencies
- Management expects Building Supply growth in 2024, especially housewrap, while acknowledging uncertainty in housing starts and the broader economy. It expects gross margin to remain in a similar range, but freight costs could rise amid geopolitical disruption.
- Management expects continued garment growth and is cautiously optimistic about mask and shield recovery, while noting that those markets remain saturated with excess distributor inventory. These are expectations, not guarantees; the filing provides no numerical revenue or earnings guidance.
- A new five-year, 137,500-square-foot Nogales lease, at approximately $76,000 monthly rent, is intended to consolidate apparel operations and relocate mask production, with expected cost savings and operating synergies. The move began in 2024.
- Key risks include reliance on suppliers and contractors, international manufacturing and the India joint venture, supply-chain constraints, intense competition, customer concentration, foreign-currency translation of the India investment, and economic, geopolitical, cybersecurity, and natural-disaster disruptions.
- Three customers each represented at least 10% of 2023 sales and together accounted for 52%: 20%, 18%, and 14%. Harmony, the 41.66%-owned India affiliate, supplied $18.822 million of inventory in 2023.
- The company is pursuing a lawsuit over $490,000 paid for undelivered equipment and seeks additional damages, including lost profits. The deposit was written off in 2022; any recovery is uncertain and has not been recorded. Management does not expect ordinary-course litigation to have a material effect.
- The auditor issued an unqualified opinion on the financial statements. Management assessed internal control over financial reporting as effective; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether Building Supply growth and new roofing products can offset continued weakness in masks and face shields, and whether management’s 2024 expectations are being achieved.
- Customer concentration, Harmony sourcing and performance, and the company’s ability to maintain alternative suppliers without disruption.
- Execution, costs, and realized savings from the Nogales consolidation, including the added lease commitment.
- Freight costs, inventory quality and write-downs, and the impact of expired patents on product differentiation and protection.
- Progress and potential recovery in the undelivered-equipment lawsuit; any recovery remains unrecognized until received.