Alpha Pro Tech, Ltd. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; filed August 6, 2020. The company manufactures building-weatherization products and disposable protective apparel, including masks and face shields. Results are unaudited.
Financial performance
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Net sales | $25.50m | $11.42m | $43.65m | $23.72m |
| Gross profit / margin | $12.61m / 49.5% | $4.11m / 36.0% | $21.17m / 48.5% | $8.91m / 37.6% |
| Operating income / margin | $7.88m / 30.9% | $0.70m / 6.2% | $12.15m / 27.8% | $1.71m / 7.2% |
| Net income | $6.22m | $1.01m | $11.56m | $2.23m |
| Diluted EPS | $0.46 | $0.08 | $0.84 | $0.17 |
- Q2 sales grew 123.4% year over year; H1 sales rose 84.1%. Disposable Protective Apparel drove most of the increase: segment sales rose 283.6% in Q2 and 172.6% in H1. Building Supply sales increased 11.1% and 13.6%, respectively.
- Management attributed higher gross margins primarily to the product mix shift toward masks and face shields, which generally carry higher margins. SG&A increased in dollars but declined as a share of sales.
- H1 operating cash flow was $16.75m, versus $0.19m a year earlier. Cash increased to $24.74m from $6.55m at year-end 2019. The filing identifies $6.48m of customer advances for future PPE orders as a significant cash-flow contributor.
- At June 30, current assets were $48.71m and current liabilities $11.66m; working capital was $37.05m and the current ratio 4:1. The ratio was 12:1 at year-end, largely reflecting the new customer advances.
- The company reported no outstanding borrowings. Its $3.5m Wells Fargo credit line expired in May 2020 and was not renewed because management considered it unnecessary. Lease liabilities totaled $2.78m.
Changes, outlook and risks
- COVID-19 demand and fulfillment: PPE demand surged, while India’s government-mandated shutdown temporarily disrupted garment production and supply. U.S. manufacturing sites were operating at or above normal rates at the time of filing. Management cited raw-material constraints, supply-chain delays, possible further shutdowns and rising input costs as risks.
- Orders and capacity outlook: As of August 1, the company reported approximately $66m of N-95 mask orders booked since January 27, with approximately $12m fulfilled in H1. Management expected about $43m of orders with 2020 request dates to be fulfilled by year-end and about $23m in 2021. It expected Q3 N-95 sales to exceed Q2, phase 2 production lines to begin operating late in Q3, and fiscal 2021 N-95 production capacity to exceed $100m. Face-shield sales in H2 were expected to exceed H1’s approximately $6m. These are management expectations, not guarantees.
- Management expected continued H2 growth in disposable protective garments, but warned the India disruption could affect Q3 supply and sales. Building Supply had not experienced a material negative pandemic impact to date, though weaker housing activity remained a risk.
- Tax item: H1 tax provision was $0.79m and the estimated effective rate 6.4%, reflecting a disclosed estimated $2.0m nonrecurring Q1 tax benefit related to stock-option exercises. Excluding that benefit, management estimated a 22.6% H1 effective rate.
- Other income was lower year over year, partly because 2019 included larger marketable-securities gains. The company reported no material subsequent events and no material changes to previously disclosed risks other than the expanded COVID-19 risk discussion. Management concluded disclosure controls were effective.
Key investor verification points
- Track whether booked N-95 and face-shield orders convert to shipments and cash on the stated timelines, and whether production expansion reaches expected capacity.
- Monitor raw-material availability, India joint-venture output, customer order cancellations, and any effect of pandemic-related demand normalization on PPE sales and margins.
- Assess cash-flow quality: customer advances are obligations to fulfill future orders, while receivables and inventories also increased with sales.
- Reconcile the unusual H1 tax benefit and effective tax rate with subsequent-period tax expense and cash taxes.
- Note the filing reports 13,587,847 shares outstanding at June 30 in the equity statement, while the cover page reports 13,587,845 shares outstanding as of August 3; verify the applicable share count.