Alpha Pro Tech, Ltd. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; filed August 9, 2023. Unaudited results. The company develops and sells building weatherization products and disposable protective apparel, primarily in the United States.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $16.115m | $17.373m | $29.914m | $35.034m |
| Gross profit / margin | $6.106m / 37.9% | $5.612m / 32.3% | $11.088m / 37.1% | $12.054m / 34.4% |
| Operating income / margin | $1.312m / 8.1% | $1.320m / 7.6% | $1.738m / 5.8% | $3.244m / 9.3% |
| Net income / margin | $1.146m / 7.1% | $0.693m / 4.0% | $1.698m / 5.7% | $2.215m / 6.3% |
| Diluted EPS | $0.10 | $0.05 | $0.14 | $0.17 |
- Q2: Sales fell 7.2% year over year, while gross profit rose 8.8% and net income rose 65.4%. Higher gross margin and other income more than offset lower sales; operating income was essentially flat.
- Six months: Sales fell 14.6%, gross profit fell 8.0%, operating income fell 46.4%, and net income fell 23.3%. Lower operating income was partly offset by higher other income.
- Segments: Q2 Building Supply sales decreased 2.6% to $10.537m; Disposable Protective Apparel sales decreased 14.9% to $5.578m. For the first half, the respective declines were 9.0% to $19.167m and 23.1% to $10.747m. In Q2, Building Supply segment income was $1.527m versus $1.915m; Apparel segment income was $1.324m versus $0.223m.
- Cash flow: First-half operating cash flow was $0.987m (versus $0.943m); investing cash use was $0.390m, primarily equipment purchases; financing cash use was $1.538m, principally share repurchases. Cash declined $0.941m to $15.349m.
- Liquidity and obligations: June 30 working capital was $50.338m and the current ratio was 27:1. Total liabilities were $3.220m, including $1.309m of operating lease liabilities. The balance sheet reports no borrowings. Cash was $15.349m; inventory was $21.971m and accounts receivable, including related-party receivables, totaled $9.521m.
Material changes and management commentary
- Q2 Building Supply core products performed comparatively well: housewrap sales rose 17.6% and synthetic roof underlayment rose 0.9%; other woven material sales fell 45.5%. Management cited soft housing demand, interest rates, economic uncertainty, and price pressure, but said its core products were outperforming their markets.
- Q2 Apparel garment sales rose 7.6%, but face mask sales fell 71.6% and face shield sales fell 84.4%, reflecting distributor excess inventory and normalization after elevated COVID-related demand. First-half garment sales rose 8.9%, while masks and shields fell 74.2% and 82.4%, respectively.
- Management attributed improved gross margins partly to lower ocean freight rates and expects gross margin to remain in a similar range through the rest of 2023, subject to sales mix. It plans to launch self-adhered roofing products in late 2023. No formal full-year revenue or earnings guidance is provided in the filing.
- Management believes cash and expected operating cash flows will cover foreseeable working capital and planned capital expenditures. During the first half, the company repurchased 475,000 shares for $1.930m; $2.265m remained available under the repurchase program at June 30.
- Harmony Plastics, the 41.66%-owned unconsolidated affiliate in India, contributed $0.212m of first-half equity income. The company purchased $9.870m of inventory from Harmony during the first half. Foreign currency exposure and joint-venture risks are among the disclosed risks.
Outlook, risks and unusual items
- The filing identifies risks including weaker housing and broader economic conditions, customer or order losses, supplier and international manufacturing dependence, competition, foreign currency exposure, COVID-related effects, climate or natural events, cybersecurity, litigation, and stock-price volatility.
- A risk factor refers to failure to remediate a material weakness in internal control over financial reporting. Separately, management concluded disclosure controls were effective at a reasonable assurance level as of June 30, and reported no material quarterly change in internal control. The filing does not clarify the status of the referenced weakness.
- The company wrote off a $0.490m equipment deposit in 2022 after vendors failed to deliver equipment and is suing for the deposit, lost profits, and other relief. The case remained unresolved; no recovery has been recognized, and the amount or outcome is uncertain. Management does not expect ordinary-course litigation to have a material effect.
- Q2 and first-half other income benefited from interest income and equity income from Harmony; comparisons also benefited from the absence of the prior-year $0.490m equipment-deposit write-off. First-half interest income was $0.327m versus $0.011m.
Key investor verification points
- Assess whether first-half sales and operating-income declines stabilize, especially in Apparel masks and shields and Building Supply other woven material.
- Verify receivables collection trends: days sales outstanding rose to 53 days from 35 at year-end, while receivables increased with higher June sales.
- Monitor whether lower freight costs and changing product mix sustain gross margins, and whether the planned roofing launch contributes meaningful sales.
- Review the status and potential recovery from the unresolved equipment litigation and clarify the material-weakness reference in the risk disclosures.
- Track Harmony-related purchases, affiliate performance, currency exposure, and the pace of share repurchases against available cash.