Alpha Pro Tech, Ltd. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The company develops and sells building weatherization products and disposable protective apparel, including masks and face shields. Results are unaudited. Comparisons are with Q1 2020 unless noted.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $23.161 million | $18.154 million | +27.6% |
| Gross profit / margin | $9.179 million / 39.6% | $8.554 million / 47.1% | Profit +7.3%; margin down 7.5 points |
| Operating income / margin | $4.403 million / 19.0% | $4.270 million / 23.5% | Income +3.1%; margin down 4.5 points |
| Income before taxes | $4.726 million | $4.314 million | +9.6% |
| Net income | $3.719 million | $5.342 million | -30.4% |
| Diluted EPS | $0.27 | $0.39 | Down $0.12 |
| Operating cash flow | -$3.220 million | $9.342 million | Down $12.562 million |
Net income was lower mainly because Q1 2020 included an estimated $2.0 million nonrecurring tax benefit related to stock-option exercises. The company reported a $1.007 million tax provision in Q1 2021 versus a $1.028 million tax benefit in Q1 2020. Management stated that excluding the prior-year tax benefit, Q1 2021 net income and EPS would have exceeded the comparable period.
Sales increased in both segments: Disposable Protective Apparel rose 39.9% to $14.821 million, and Building Supply rose 10.4% to $8.340 million. U.S. sales were $20.898 million; international sales were $2.263 million.
Cash, liquidity and capital
- Cash was $17.884 million at March 31, down $5.408 million from year-end. Working capital was $50.955 million and the current ratio was 14:1.
- Operating cash use reflected higher prepaid expenses (up approximately $4.010 million) and inventory (up $2.029 million), among other working-capital movements. Investing cash use was $0.130 million.
- Financing cash use was $2.058 million, including $2.366 million of share repurchases, partly offset by $0.308 million from stock-option exercises. The company repurchased 186,000 shares and had $2.119 million remaining under its repurchase authorization.
- The company reported $3.367 million in operating lease liabilities. It had no finance leases and no conventional borrowings reported. Its former $3.5 million credit line expired in May 2020 and was not renewed; management said it was not needed given available funding.
Changes, outlook and risks
- Revenue reached a record first quarter, but gross margin fell as product mix shifted and raw-material and freight costs increased. Management warned that cost increases could outpace sales-price increases and further pressure margins.
- Management reported softer face-mask demand than in earlier pandemic quarters and expects mask and face-shield sales to move toward pre-pandemic levels. Factors include customer stockpiles, added market supply and competition, and improving vaccination and pandemic conditions.
- Protective garment sales were a first-quarter record, supported by strong open orders, particularly from a major international channel partner. Building Supply open orders were also described as unprecedented, with management optimistic about continued growth, while noting housing-market uncertainty as a risk.
- The company committed approximately $4.0 million for Building Supply capacity expansion, expected to be operational later in 2021; $1.668 million had been paid as deposits by quarter-end. Management said cash on hand was expected to cover foreseeable working-capital needs and planned capital expenditures.
- Key uncertainties include COVID-19 developments and demand normalization, supply-chain disruptions and raw-material/freight inflation, customer concentration or reduced orders, international manufacturing and joint-venture risks, and potential weakness in housing demand. Management stated it could not reliably predict the pandemic’s future financial impact. No material subsequent events were reported through filing.
Important facts for investors to verify
- Whether PPE demand, especially masks and shields, declines as management expects, and the resulting effect on revenue and margins.
- Whether raw-material, resin and freight cost increases can be offset by pricing, product mix or operating efficiencies.
- Execution, cost and timing of the approximately $4.0 million Building Supply capacity investment, and conversion of open orders into sales.
- The drivers of negative operating cash flow, including elevated inventory and prepaid expenses, and their subsequent reversal or ongoing funding needs.
- Performance and related-party transactions with Harmony Plastics, including $6.354 million of Q1 purchases and $0.322 million of equity income.
- Use of the remaining $2.119 million share-repurchase authorization and the impact of further repurchases on cash and share count.