Alpha Pro Tech, Ltd. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company develops and sells building weatherization products and disposable protective apparel, including N-95 respirators, face shields and protective garments. Results are unaudited; comparisons are with Q1 2019 unless noted.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $18.154 million | $12.304 million |
| Gross profit / margin | $8.554 million / 47.1% | $4.804 million / 39.0% |
| Operating income / margin | $4.270 million / 23.5% | $1.002 million / 8.1% |
| Income before taxes | $4.314 million | $1.461 million |
| Net income | $5.342 million | $1.218 million |
| Diluted EPS | $0.39 | $0.09 |
| Operating cash flow | $9.342 million | $(1.429) million |
- Sales rose 47.5%. Disposable Protective Apparel sales grew 82.5% to $10.597 million, led by pandemic-related demand for face masks and shields; Building Supply sales grew 16.3% to $7.557 million.
- Gross margin expansion reflected a sales mix shift toward higher-margin masks, particularly N-95 respirators, and face shields. SG&A increased 11.6% to $4.102 million but declined as a share of sales, from 29.9% to 22.6%.
- Net income included an estimated nonrecurring $2.0 million tax benefit from exercises of disqualified incentive and non-qualified stock options, partly offset by an estimated $1.0 million tax expense. The filing reports a $1.028 million income-tax benefit; excluding the estimated nonrecurring benefit, management estimated a 22.5% effective tax rate.
- Other income was $44,000, versus $459,000, reflecting a $59,000 marketable-securities loss versus a $170,000 gain and lower equity income from Harmony, the unconsolidated affiliate ($87,000 versus $277,000).
Cash, liquidity and balance sheet
- Cash and cash equivalents were $17.365 million at March 31, 2020, versus $6.548 million at December 31, 2019. Working capital was $31.624 million. The current ratio was 4:1, down from 12:1, principally because of customer advances recorded as current liabilities.
- Operating cash flow included $7.161 million of customer advances for future-dated PPE orders. Receivables also increased by $3.986 million, primarily from higher sales and extended payment terms. Thus, quarterly operating cash generation was materially influenced by advances and working-capital movements.
- The company reported no borrowings under its $3.5 million Wells Fargo credit line, with $3.5 million of capacity available at quarter-end. The facility was due to expire in May 2020; management expected renewal. The company said cash and available credit should cover foreseeable working-capital needs and planned capital expenditures.
- Total liabilities were $12.875 million, including $2.999 million of operating lease liabilities; the filing reports no finance leases and no credit-line borrowings. Lease commitments extend through 2024.
- Capital expenditures were $288,000. Financing cash flow was $1.716 million, including $1.841 million from option exercises and $125,000 of share repurchases.
COVID-19 outlook, risks and unusual items
- Management said COVID-19 positively affected Q1 results through a surge in PPE demand, but emphasized that the pandemic’s future impact was uncertain. The filing provides no formal earnings or revenue guidance.
- As of May 1, the company had booked approximately $46.8 million in N-95 orders since January 27, of which about $3.7 million was fulfilled in Q1; approximately 8% of booked orders had 2021 request dates. It had also booked more than $13.3 million of face-shield orders, with about $1.3 million fulfilled in Q1 and approximately 14% of orders having 2021 request dates. Management expected remaining 2020-request-date backlogs for these products to be fulfilled by year-end, subject to stated uncertainties.
- The company was preparing a second phase of N-95 production expansion, expected to be operational by late summer 2020; the stated order-fulfillment forecast did not include added phase-two capacity. Management expected high demand for higher-margin masks and shields to continue at least through the rest of 2020.
- Risks include raw-material shortages and supply-chain delays, possible cost increases faster than selling prices, capacity constraints, government allocation requirements under the Defense Production Act, and potential customer relationship effects if orders cannot be filled. The India joint venture’s government-mandated closure was extended through May 18, 2020, threatening supply of protective garments; management anticipated short-term fulfillment impacts. U.S. manufacturing sites were operating, most at or above normal rates. A Utah facility delay following a March earthquake affected N-95 production, but the facility had returned to normal operations.
- Management also warned that weakened housing activity could reduce Building Supply demand, and that economic stress could affect customer payments. The company noted potential workforce and operating-cost effects from pandemic measures.
Important facts for investors to verify
- Whether booked N-95 and face-shield orders are fulfilled on schedule, and whether those orders convert to recognized revenue and cash collections.
- Whether the second production expansion becomes operational on the expected timetable and delivers planned capacity, while monitoring input availability, costs and margins.
- The duration and operational consequences of the India closure and broader supply-chain disruptions, including any impact on customer relationships.
- Renewal and terms of the credit facility due to expire in May 2020, and liquidity after customer advances are applied to future orders.
- The sustainability of Q1 profitability: results benefited from favorable PPE mix and a nonrecurring tax benefit, while demand, market conditions and investment values remain uncertain.