Alpha Pro Tech, Ltd. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company develops and sells Building Supply products and Disposable Protective Apparel, including face masks and shields. Results are unaudited. COVID-19-driven demand for personal protective equipment (PPE) was the principal driver of growth.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $30.027 million | $12.027 million | $73.681 million | $35.745 million |
| Gross profit / margin | $15.136 million / 50.4% | $4.220 million / 35.1% | $36.303 million / 49.3% | $13.129 million / 36.7% |
| Operating income / margin | $10.370 million / 34.5% | $0.906 million / 7.5% | $22.521 million / 30.6% | $2.611 million / 7.3% |
| Net income / net margin | $8.107 million / 27.0% | $0.437 million / 3.6% | $19.668 million / 26.7% | $2.665 million / 7.5% |
| Diluted EPS | $0.58 | $0.03 | $1.41 | $0.20 |
| Operating cash flow | Not separately reported by quarter | $17.038 million | $1.099 million |
- Q3 sales grew 149.7% year over year; nine-month sales grew 106.1%. Disposable Protective Apparel sales rose 364.7% in Q3 and 232.9% for the nine months. Building Supply sales increased 6.3% and 11.0%, respectively.
- Q3 PPE segment sales were $22.359 million, including $13.4 million of face masks. Nine-month PPE sales were $51.004 million. The filing attributes stronger gross margins primarily to product mix, particularly higher-margin masks and shields.
- SG&A increased to $4.580 million in Q3 and $13.236 million for nine months, but fell as a share of sales to 15.3% and 18.0%, respectively, from 26.4% and 28.3%.
Financial position and liquidity
- At September 30, cash and cash equivalents were $24.583 million, versus $6.548 million at year-end 2019. Current assets were $52.740 million, current liabilities $8.072 million, and working capital $44.668 million. The current ratio was 7:1.
- Nine-month operating cash flow of $17.038 million, together with $1.564 million of financing cash flow, drove the $18.035 million increase in cash; investing used $0.567 million. Operating cash flow included working-capital demands, including a $5.569 million increase in trade receivables and a $1.852 million increase in inventory.
- Total liabilities were $9.953 million, including $2.550 million of operating lease liabilities. No conventional borrowings are reported. The $3.5 million Wells Fargo credit line expired in May 2020 and was not renewed; management said it was unnecessary given available operating funds.
- Customer advances for future PPE orders were $3.218 million, recorded as current liabilities and contributing to cash. The filing says cash should be sufficient for projected working capital and planned capital expenditures for the foreseeable future.
Changes, outlook, risks and unusual items
- The pandemic caused exceptional PPE demand; management reported strong mask and garment orders extending into 2021 and expected continued mask sales growth in Q4 2020 and into 2021. Much of mask production was already presold.
- Management expected face shield sales to decline significantly from Q2 and Q3’s unprecedented levels because of increased competition and market surplus, while remaining above historic levels. Sales for the second half of 2020 were expected below the approximately $6 million previously anticipated.
- Building Supply orders were above historical backlog levels at quarter-end. Management anticipated continued growth in Q4 and 2021, while warning that economic uncertainty could affect short-term demand. No precise revenue or earnings guidance was provided.
- Management expected higher gross margins to continue through the rest of 2020 and into 2021 on pandemic-related sales, but warned that faster raw-material price increases could reduce profits. Supply constraints, shortages, shipping delays, and workforce limitations remained risks; U.S. manufacturing sites were operating at or above normal rates.
- Nine-month income tax expense included an estimated $2.0 million nonrecurring tax benefit from stock-option exercises. The reported effective tax rate was 14.3%; excluding that benefit, management estimated it at 23.0%.
- Stock-option exercises generated $1.970 million of financing cash flow. The company repurchased 55,100 shares for $0.406 million during the nine months and had $6.745 million available under its repurchase program at September 30. Diluted weighted-average shares were 13.978 million for the nine-month period.
- Key risks include reversal of pandemic-related PPE demand, face-shield oversupply, supply-chain disruption and rising input costs, customer payment or extended-term requests, and potential weakness in housing-related demand. The company stated that COVID-19’s future impact could not be predicted with confidence.
Investor verification points
- Check whether PPE demand, especially N-95 masks and protective garments, and the reported orders extending into 2021 convert into shipments and revenue.
- Track face-shield demand, pricing, raw-material costs, product mix, and gross margins against management’s outlook.
- Assess receivables, inventory, customer advances, and operating cash conversion; distinguish advance-funded cash from recurring operating cash generation.
- Separate the one-time stock-option tax benefit from ongoing earnings and monitor dilution from options and equity awards.
- Compare Building Supply backlog and sales with housing and re-roofing trends, and monitor COVID-related supplier, facility, and workforce disruptions.