Alpha Pro Tech, Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. Financial statements are unaudited. The company manufactures building weatherization products and disposable protective apparel.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $14.722 million | $14.475 million | $49.756 million | $55.442 million |
| Gross profit | $4.818 million | $4.942 million | $16.872 million | $20.353 million |
| Gross margin | 32.7% | 34.1% | 33.9% | 36.7% |
| Operating income | $647,000 | $849,000 | $3.890 million | $7.081 million |
| Net income | $503,000 | $766,000 | $2.718 million | $6.156 million |
| Diluted EPS | $0.04 | $0.06 | $0.21 | $0.45 |
| Operating cash flow | Not separately presented for the quarter | $2.331 million | $421,000 |
- Q3 sales rose 1.7% year over year, as protective-apparel sales increased 16.2% and Building Supply sales declined 4.6%. Nine-month sales fell 10.3%: Building Supply grew 8.7%, while Disposable Protective Apparel declined 29.9% as pandemic-related demand eased.
- Nine-month operating income declined 45.1% and net income declined 55.8%. Management attributed weaker profitability principally to lower gross profit, increased freight, transportation, raw-material and labor costs, and lower equity income from Harmony. Nine-month results also included a $490,000 write-off for undelivered equipment.
- At September 30, cash was $15.517 million, working capital was $50.595 million, and the current ratio was 27:1. Total assets were $66.505 million and shareholders’ equity was $62.685 million.
- No conventional borrowings are shown on the balance sheet. Lease liabilities totaled $2.010 million; total liabilities were $3.820 million. Cash declined $790,000 from year-end 2021.
- Operating cash flow of $2.331 million was offset by $349,000 of capital expenditures and $2.772 million of financing outflows, principally $2.832 million of share repurchases. Cash was $15.517 million at period-end.
Material changes and business developments
- Building Supply nine-month sales increased on stronger housewrap, synthetic roof underlayment and other woven-material sales. Q3 segment sales softened amid lower home-construction activity, dealer inventory and weaker sales of housewrap and woven material; synthetic underlayment remained a relative strength.
- Protective-apparel sales increased in Q3, mainly from garments, but declined for the nine-month period as mask, shield and garment demand normalized from pandemic-influenced 2021 levels. Management expects mask and face-shield sales to continue moving toward pre-pandemic levels.
- Accounts receivable rose to $7.299 million from $4.780 million at year-end; reported days sales outstanding increased to 48 from 24, partly reflecting increased terms for a major international channel partner. Inventory was $25.124 million, little changed overall, but Building Supply inventory increased and apparel inventory decreased.
- The company repurchased 759,700 shares during the first nine months for $2.832 million; 12,477,306 shares were outstanding at September 30. Approximately $1.246 million remained available under the repurchase program at quarter-end.
Outlook, risks and contingencies
- Management expected a general Building Supply sales slowdown in Q4 2022 as housing starts declined, while seeking to offset weakness through broader distribution, multi-family and commercial markets, and new products. Management expressed growth optimism but cited uncertainty around interest rates, recession risk and construction activity.
- Management expected gross margins to improve in 2023, helped by product price increases implemented late in Q3 and lower ocean-freight rates, but cautioned that persistent inflation could constrain improvement. The filing provides no specific revenue or earnings guidance.
- Supply-chain disruption, logistics and inflationary costs, raw-material availability, COVID-19 developments, housing-market weakness, customer and supplier concentration, competition, international manufacturing and the Harmony joint venture are material risks. Management stated that available cash and expected operating cash flow should fund foreseeable working capital and planned capital expenditures.
- A roughly $4.0 million Building Supply equipment expansion was delayed by supply-chain issues; the delayed equipment was expected in late Q4 2022 and operational the following quarter. About $900,000 remained payable on delivery.
- The company sued equipment vendors over undelivered machinery, seeking at least $490,000 in compensatory damages plus lost profits and other relief. The deposit was written off; any recovery was not recorded because the case remained in its early stages and the outcome was uncertain. No counterclaims had been asserted as of the filing.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to the risk factors in the 2021 Form 10-K.
Key facts for investors to verify
- Whether gross-margin improvement materializes as price increases offset freight, labor and raw-material costs.
- Whether receivables collection and the extended payment terms for the major international partner remain manageable.
- How quickly the delayed production equipment is delivered and brought online, and whether the company can recover the equipment deposit or lost profits through litigation.
- Whether Building Supply demand and dealer inventories stabilize, and how protective-apparel sales perform as pandemic-related demand normalizes.
- Future cash generation, capital spending and share repurchases, including remaining authorization under the program.