Alpha Pro Tech, Ltd. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021, compared with FY2020. This is an annual report, not a standalone fourth-quarter filing. The company develops and sells building-weatherization products and disposable protective apparel, including masks and face shields.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $68.637 million | $102.700 million | Down 33.2% |
| Gross profit / margin | $25.298 million / 36.9% | $50.482 million / 49.2% | Margin down 12.3 percentage points |
| Operating income / margin | $7.927 million / 11.5% | $31.582 million / 30.8% | Operating income down 74.9% |
| Net income / margin | $6.756 million / 9.8% | $26.888 million / 26.2% | Net income down 74.9% |
| Diluted EPS | $0.50 | $1.92 | Down $1.42 |
| Net cash from operating activities | Use of $0.480 million | Source of $18.274 million | Declined $18.754 million |
- Segment sales: Building Supply rose 20.6% to $36.889 million; Disposable Protective Apparel fell 56.0% to $31.748 million. The apparel decline reflected lower pandemic-related mask and face-shield demand; garment sales increased 3.5%.
- Cash and liquidity: Cash was $16.307 million at year-end, down from $23.292 million. Working capital was $50.331 million and the current ratio was 20:1. Inventory increased 49.1% to $24.969 million, a key use of operating cash.
- Debt: No outstanding borrowings or other debt at year-end. The former $3.5 million Wells Fargo credit facility expired in 2020 and was not renewed.
- Capital allocation: FY2021 share repurchases totaled $4.408 million for 439,000 shares. The company had $2.078 million remaining under its repurchase authorization at year-end and does not plan to pay dividends.
Material changes and notable items
- FY2021 sales and profitability declined substantially from pandemic-driven FY2020 levels. The 2020 tax provision included an estimated $2.0 million nonrecurring tax benefit related to stock-option exercises.
- Building Supply achieved record sales, supported by higher demand for roofing underlayment and housewrap. Apparel sales were affected by reduced mask and face-shield demand and elevated channel inventory in the second half.
- Gross margin moved closer to pre-pandemic levels, according to management, as high-margin mask and shield sales receded; higher raw-material, ocean-freight and transportation costs also weighed on margin. Inventory write-downs were $376,000, versus $114,000 in 2020.
- The company invested $2.524 million in property and equipment in 2021. It committed approximately $4.0 million to Building Supply capacity expansion; a major equipment item with about $1.0 million due on delivery was delayed, with delivery expected in late Q2 2022 and operation expected in Q3 2022.
- Management reported immaterial prior-period tax-accounting errors and revised 2020 tax expense upward by $198,000; it said the revision was not material. The 2021 financial statements received an unqualified audit opinion; the auditor reported no critical audit matters, and management and the auditor concluded internal control over financial reporting was effective.
Outlook, risks and contingencies
- Management anticipated strong continued Building Supply growth in 2022, citing new-home construction, dealer expansion and distribution growth. It noted that roofing demand could retract. Mask and face-shield sales were expected to remain above pre-pandemic levels in the short term, but duration and demand were uncertain.
- Management expected elevated freight, transportation and raw-material costs to pressure gross margins; cost increases could outpace pricing. Supply-chain constraints, labor and material shortages, and shipping delays could affect production and fulfillment.
- COVID-19 effects remain uncertain, including the potential for changing PPE demand, operational interruptions and higher costs. Other risks include dependence on third-party and international manufacturers, the India joint venture, competition, customer order volatility and economic conditions.
- Customer concentration is notable: two customers accounted for 21% and 13% of FY2021 net sales. The filing also identifies supplier concentration in Asian contract manufacturers and Harmony, the India joint venture in which the company owns 41.66%.
- The company disclosed ordinary-course pending and threatened litigation; management did not expect the ultimate liability, if any, to materially affect financial condition or results.
Investor verification priorities
- Verify the durability of Building Supply growth and 2022 capacity-expansion timing, costs and delivery; assess whether demand can absorb the increased inventory.
- Track PPE demand normalization, channel inventory and customer concentration, particularly the sales exposure to the two largest customers.
- Monitor inventory levels, operating cash conversion, freight and raw-material costs, and the ability to pass cost increases through to customers.
- Reconcile inconsistencies in the filing text: it says there were no contract liabilities at December 31, 2021, while Note 8 reports $2.238 million of contract liabilities netted against receivables; and geographic disclosures conflict on whether approximately $8.09 million of Australian sales occurred in 2020 or 2021.
- Confirm that the remaining repurchase authorization and planned capital spending remain consistent with cash generation and liquidity needs.