Alpha Pro Tech, Ltd. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; compared with the corresponding 2020 periods. The company develops and sells building weatherization products and disposable protective apparel, including masks and face shields. Results are unaudited.
Financial highlights
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $17.806 million | $25.500 million | $40.967 million | $43.654 million |
| Gross profit / margin | $6.232 million / 35.0% | $12.613 million / 49.5% | $15.411 million / 37.6% | $21.167 million / 48.5% |
| Operating income / margin | $1.830 million / 10.3% | $7.882 million / 30.9% | $6.233 million / 15.2% | $12.151 million / 27.8% |
| Net income / diluted EPS | $1.671 million / $0.12 | $6.220 million / $0.46 | $5.390 million / $0.40 | $11.561 million / $0.84 |
| Operating cash flow | Not separately presented in the supplied cash-flow statement | $(2.969) million | $16.749 million |
Q2 sales fell 30.2% and net income fell 73.1% year over year; first-half sales declined 6.2% and net income declined 53.4%. The first-half 2020 comparison includes an estimated $2.0 million nonrecurring tax benefit from stock-option exercises. First-half 2021 effective tax rate was 20.1%, versus 6.4% in 2020 (22.6% excluding that benefit).
At June 30, cash was $15.538 million, working capital $50.110 million, and the current ratio 19:1. Total liabilities were $5.344 million, including $3.148 million of operating lease liabilities; the filing reports no finance leases. The former $3.5 million bank credit line expired in May 2020 and was not renewed. Cash declined $7.754 million in the first half, reflecting operating cash use, capital expenditures, and share repurchases.
Material changes and operating drivers
- Protective apparel: Q2 sales declined 55.6% to $8.008 million, mainly as face-mask sales fell 89.4% and face-shield sales fell 93.2% from pandemic-driven 2020 demand. Protective-garment sales rose 36.3% to a quarterly record. First-half segment sales declined 20.3% to $22.829 million.
- Building supply: Q2 sales rose 31.5% to $9.798 million; first-half sales rose 20.9% to $18.138 million. Management cited strong housing-related demand and product shortages in the market.
- Margins: Gross margin contracted as the sales mix shifted away from higher-margin masks and shields, while raw-material and freight costs rose. Management cautioned that costs could increase faster than selling prices.
- Working capital and investment: Inventory increased $5.248 million and prepaid expenses increased $2.135 million from year-end. The company spent $1.468 million on property and equipment in the first half and had approximately $4.0 million committed to Building Supply capacity investments, of which $2.450 million had been paid.
- Capital returns: The company repurchased 336,000 shares for $3.708 million in the first half, including 150,000 shares for $1.342 million in Q2. Remaining authorization was $777,000 at June 30.
- Affiliate: Equity income from Harmony Plastics, the 41.66%-owned unconsolidated joint venture, was $510,000 for the first half. The company purchased $13.789 million of inventory from Harmony during that period.
Outlook, risks, and other disclosures
No quantified full-year revenue or earnings guidance is provided. Management expects mask and face-shield sales to move closer to pre-pandemic levels, anticipates growth in pre-pandemic demand for protective garments, and expressed optimism about Building Supply growth and strong open orders. Garment orders have normalized, but elevated channel inventory could weigh on future sales. A roughly $4.0 million Building Supply equipment expansion is underway; some equipment was expected to become operational in Q3–Q4 2021, while a delayed final component was expected in Q1 2022.
Management said cash on hand should cover foreseeable working-capital needs and planned capital expenditures. It emphasized uncertainty around COVID-19, including variants and economic recovery; supply-chain disruptions, raw-material and freight inflation; housing-market conditions; customer concentration and order reductions; reliance on suppliers and international manufacturing; competition; and other risks. The filing states there were no material changes to previously disclosed risk factors, no material subsequent events, and disclosure controls were effective as of June 30, 2021.
Important facts for investors to verify
- Whether post-pandemic PPE demand and channel inventory levels continue to normalize as management anticipated.
- Whether raw-material, freight, and other cost increases further pressure gross margins, and whether selling prices can offset them.
- Whether Building Supply demand and open orders support the planned capacity expansion, including the timing and cost of delayed equipment.
- Cash conversion and liquidity: first-half operating cash flow was negative despite $5.390 million of net income, with inventory and prepaid expenses rising.
- Related-party exposure to Harmony, including substantial inventory purchases, and the joint venture’s contribution to reported earnings.
- Execution of planned capital commitments and any further share repurchases, given the remaining authorization and cash decline.