Business context and reporting period
Alpha Pro Tech, Ltd. filed this unaudited Form 10-Q for the quarter ended September 30, 2023. It develops, manufactures and markets building weatherization products and disposable protective apparel, primarily in the United States. Its two segments are Building Supply and Disposable Protective Apparel. Unless stated otherwise, amounts are U.S. dollars.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $16.053 million | $14.722 million | $45.967 million | $49.756 million |
| Gross profit / margin | $6.035 million / 37.6% | $4.818 million / 32.7% | $17.123 million / 37.3% | $16.872 million / 33.9% |
| Operating income / margin | $1.423 million / 8.9% | $0.647 million / 4.4% | $3.161 million / 6.9% | $3.890 million / 7.8% |
| Net income / diluted EPS | $1.430 million / $0.12 | $0.503 million / $0.04 | $3.128 million / $0.26 | $2.718 million / $0.21 |
For the nine months, operating cash flow was $4.929 million, capital expenditures were $0.487 million, and financing cash outflow was $2.569 million, principally reflecting share repurchases. Cash increased $1.873 million from year-end 2022 to $18.163 million. At September 30, 2023, working capital was $50.705 million and the current ratio was 27:1. Total assets were $64.611 million and shareholders’ equity was $61.391 million. No conventional borrowings are reported; total liabilities were $3.220 million, including $1.251 million of operating lease liabilities and $0.764 million of deferred tax liabilities.
Material changes versus comparable periods
- Q3 sales rose 9.0%, led by Building Supply, up 19.2% to $11.449 million. Housewrap sales rose 25.7% and other woven material rose 164.5%; synthetic roof underlayment fell 4.5%. Disposable Protective Apparel sales declined 10.0% to $4.604 million as mask and face-shield sales fell, partly offset by 5.1% growth in garments.
- Nine-month sales fell 7.6%. Building Supply was nearly flat at $30.616 million; Disposable Protective Apparel fell 19.6% to $15.351 million, chiefly due to lower face-mask and face-shield demand. Apparel garments increased 7.7%.
- Gross margin improved in both periods. Management attributed the improvement in 2023 partly to lower ocean freight rates. Q3 operating income more than doubled, while nine-month operating income declined 18.7% as higher SG&A and depreciation more than offset gross-profit growth.
- Nine-month net income increased 15.1%, supported by higher other income, including higher interest income and affiliate earnings, and the absence of the $0.490 million fixed-asset loss recorded in 2022.
Outlook, risks, contingencies and other notable items
- Management expects gross margin to remain in a similar range for the balance of 2023, subject to sales mix. It expects further Building Supply growth despite weaker housing starts, citing market-share gains, and anticipated a launch of self-adhered roofing products in late 2023 or early 2024. No quantified revenue or earnings guidance is provided.
- Management said mask and shield sales remain pressured by excess channel inventory and does not expect other woven material to drive growth for the remainder of 2023. It also cited economic uncertainty, housing-market weakness, pricing pressure, suppliers, international manufacturing, foreign currency, customer concentration, competition, IT security, climate events and legal/regulatory matters as risks.
- The company has an unresolved Utah lawsuit seeking at least $0.490 million for equipment paid for but not delivered, plus lost profits and other relief. The deposit was written off; any recovery is uncertain and has not been recorded. Management does not expect ordinary-course litigation to have a material effect.
- The company repurchased 724,110 shares for $2.979 million during the first nine months and had $1.217 million remaining under its repurchase authorization at September 30. It stated that cash and expected operating cash flow should cover foreseeable working-capital needs and planned capital expenditures.
- Management concluded disclosure controls were effective at a reasonable assurance level and reported no material change in internal control during the quarter. The risk discussion nevertheless identifies failure to remediate a material weakness as a potential risk; the filing text does not clearly explain its current remediation status.
Important facts for investors to verify
- Whether Building Supply growth and the new roofing product launch materialize, and how housing conditions and pricing affect demand and margins.
- How quickly protective-apparel channel inventories normalize, particularly for masks and face shields.
- Receivables rose to $8.440 million and days sales outstanding increased to 44 from 35 at year-end; monitor collection and working-capital trends.
- Progress and possible recovery in the unresolved equipment lawsuit, and the status of the cited internal-control material weakness.
- Ongoing related-party purchases from Harmony, the unconsolidated Indian affiliate: $14.871 million for the first nine months of 2023, with associated foreign-currency exposure.