ALPHA PRO TECH, LTD. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 10, 2021. This is an annual report, not a standalone fourth-quarter report. The company develops and sells building weatherization products and disposable protective apparel, including masks and face shields.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $102.700 million | $46.665 million |
| Gross profit / margin | $50.482 million / 49.2% | $16.972 million / 36.4% |
| Income from operations | $31.582 million | $3.022 million |
| Net income | $27.086 million | $3.000 million |
| Diluted EPS | $1.94 | $0.23 |
| Cash provided by operating activities | $18.274 million | $3.101 million |
- Sales rose 120.1%. Disposable Protective Apparel sales increased 259.0% to $72.120 million; Building Supply sales increased 15.1% to $30.580 million.
- COVID-19-related demand drove sharp increases in masks and face shields. PPE accounted for most of the sales growth; the filing reports masks were about 58% and shields 15% of apparel-segment sales.
- Gross margin increased primarily because of the product mix, including higher-margin masks and shields. SG&A rose 36.1% to $18.171 million, but declined to 17.7% of sales from 28.6%.
- Net income included an estimated $2.0 million nonrecurring tax benefit related to stock-option exercises. The reported effective tax rate was 16.0%; management estimated 22.2% excluding that benefit.
Liquidity, debt and capital
- Year-end cash was $23.292 million, compared with $6.548 million a year earlier; working capital was $49.451 million. The current ratio was 9:1, versus 11:1.
- Total assets were $68.802 million and total liabilities were $8.782 million. The company had no outstanding borrowings or other debt at year-end; its $3.5 million Wells Fargo credit facility expired in May 2020 and was not renewed.
- Operating cash flow was $18.274 million. Investing activities used $0.862 million and financing activities used $0.668 million. Receivables, inventory and prepaid expenses increased substantially alongside higher sales and capacity needs.
- The company repurchased 223,100 shares for $2.666 million in 2020 and had $4.486 million remaining under its repurchase authorization. It has no current plan to pay dividends.
Outlook, risks and notable items
- Management expected 2021 sales to remain strong versus historical levels, while markets normalize. It anticipated first-quarter 2021 N-95 mask sales would be materially below fourth-quarter 2020, though above first-quarter 2020, with possible further declines as supply increases, competition grows and customer inventories unwind.
- Management expected face-shield sales to remain above pre-pandemic levels and cited historically high open orders for disposable garments. It also expected Building Supply growth based on open orders and committed approximately $4.0 million to equipment to expand capacity; $1.191 million had been deposited by year-end.
- Key uncertainties include COVID-19 developments and PPE demand normalization; raw-material, freight and shipping cost increases; supply-chain interruptions and production constraints; and potential order delays or cancellations. International manufacturing and the India joint venture add sourcing and execution risks.
- Customer concentration is material: two customers each represented 20% and 12% of 2020 sales. The company also relies on a limited number of manufacturers and its India joint venture, Harmony, from which it purchased $18.623 million of inventory in 2020.
- Management said ordinary-course litigation was not expected to have a material effect, while acknowledging outcomes cannot be predicted with certainty. The independent auditor identified revenue audit evidence as a critical audit matter given the exceptional sales increase and new customers; the auditor issued an unqualified opinion on the financial statements.
- Management assessed disclosure controls and internal control over financial reporting as effective. The company, as a smaller reporting company, did not include an auditor attestation on internal control.
Investor verification priorities
- Track quarterly PPE sales, especially N-95 masks, against the steep 2020 surge and management’s expectation of normalization.
- Verify whether the $4.0 million Building Supply capacity investment is completed and translates into shipments, margins and cash returns.
- Monitor gross margin and input, freight and fulfillment costs as product mix and supply conditions change.
- Review customer concentration, receivable collection and inventory levels, including potential cancellations or obsolescence of pandemic-era orders.
- Assess Harmony and other supplier capacity, delivery performance and continuity amid international logistics and shutdown risks.