Alpha Pro Tech, Ltd. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are with FY2021. The company develops and sells building weatherization products and disposable protective apparel, masks, and face shields. Sales are predominantly in the United States.
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $61.981 million | $68.637 million | Down 9.7% |
| Gross profit / margin | $21.683 million / 35.0% | $25.298 million / 36.9% | Profit down 14.3%; margin down 1.9 percentage points |
| Operating income / margin | $4.650 million / 7.5% | $7.927 million / 11.5% | Income down 41.3% |
| Net income / margin | $3.282 million / 5.3% | $6.756 million / 9.8% | Income down 51.4% |
| Diluted EPS | $0.26 | $0.50 | Down 48% |
| Cash from operations | $4.277 million | $(0.480) million | Improved |
- Segment sales: Building Supply was $36.937 million, up 0.1%; Disposable Protective Apparel was $25.044 million, down 21.1%. Apparel declines included face masks down 43.8%, face shields down 25.6%, and garments down 10.7%.
- Cash and liquidity: Cash was $16.290 million and working capital was $50.156 million at year-end. The reported current ratio was 22:1. Cash declined $17,000 year over year.
- Debt and obligations: The filing reports no borrowings; operating lease liabilities totaled $1.774 million, including $899,000 current. The company expected to pay an approximately $900,000 remaining balance on Building Supply equipment when it became operational in Q1 2023.
- Cash uses: Investing activities used $492,000; financing activities used $3.802 million, including $3.882 million for share repurchases. The company repurchased 910,700 shares during 2022.
Material changes and unusual items
- Sales fell primarily because pandemic-related demand for protective apparel and PPE continued to normalize. Building Supply sales were nearly flat as a late-year slowdown offset stronger earlier quarters.
- Gross margin weakened amid higher freight, raw-material, and labor costs. Price increases implemented late in Q3 had a positive effect; management said freight costs had eased from peaks but remained above pre-pandemic levels.
- Other income included a $490,000 write-off for equipment deposits after vendors failed to deliver mask-production equipment. The company sued to recover the deposit and seeks additional damages; any recovery is uncertain and was not recorded.
- The company corrected foreign-currency translation errors relating to its India affiliate: $773,000 of accumulated loss for periods before 2021 and $96,000 for 2021. Prior-period financial statements were revised, not restated; the corrections affected the affiliate investment, accumulated other comprehensive loss, and equity, but not net income, EPS, or cash flows.
Outlook, risks, and controls
- Management was cautiously optimistic about 2023 disposable garment sales, citing more regular distributor orders and the expected return of in-person customer meetings. It expected face-mask sales to face further pressure from market saturation.
- Management saw potential for Building Supply growth and planned to launch self-adhered roofing products. It also expected gross margin to improve in 2023, while cautioning that inflation could constrain improvement. No quantified earnings or revenue guidance was provided.
- Key risks include continued supply-chain and labor disruptions, higher input and logistics costs, dependence on suppliers and the India joint venture, customer concentration, competition, weaker construction activity, and uncertain post-pandemic PPE demand. Three customers each accounted for at least 10% of 2022 sales; the largest accounted for 20%. One customer represented 47% of year-end receivables.
- Management concluded internal control over financial reporting and disclosure controls were ineffective at December 31, 2022 due to a material weakness in foreign-currency translation accounting. Remediation steps were underway. The auditor gave an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
- The company stated that cash and expected operating cash flows should cover projected working capital and planned capital expenditures for the foreseeable future. This is forward-looking and subject to the risks described in the filing.
Important facts for investors to verify
- Whether the foreign-currency translation control weakness has been fully remediated and whether subsequent filings report additional errors.
- Progress on the equipment lawsuit, potential recovery of the written-off $490,000 deposit, and the operational status and cost of the delayed equipment.
- Whether freight, raw-material, and labor costs improve enough to support management’s margin outlook.
- Trends in PPE orders and customer inventories, construction demand, and the company’s concentrated customer and supplier exposures.
- Cash conversion and receivable collection, particularly given the increase in days sales outstanding to 35 from 24 and the major customer’s share of year-end receivables.