Alpha Pro Tech, Ltd. — Q2 2022 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2022. Alpha Pro Tech manufactures building weatherization products and disposable protective apparel, including masks and face shields. Results compare with the corresponding 2021 periods.
Financial performance and position
- Revenue: Q2 net sales were $17.37 million, down 2.4% year over year. First-half sales were $35.03 million, down 14.5%.
- Profit and margins: Q2 gross profit was $5.61 million (32.3% margin, versus 35.0%); operating income was $1.32 million (7.6% margin, versus 10.3%); net income was $693,000, down 58.5%, with diluted EPS of $0.05. First-half net income was $2.22 million, down 58.9%, with diluted EPS of $0.17; gross margin was 34.4% versus 37.6% and operating margin was 9.3% versus 15.2%.
- Cash flow: First-half operating cash flow was $943,000, compared with $2.97 million used in the prior-year period. Capital expenditures were $222,000; share repurchases used $1.72 million. Cash declined $965,000 to $15.34 million.
- Liquidity and debt: Working capital was $51.06 million and the current ratio was 21:1 at June 30. Total liabilities were $4.75 million; the filing reports no borrowings, but operating lease liabilities totaled $2.24 million. Cash and cash equivalents were $15.34 million.
- Other balance-sheet items: Receivables, including related-party receivables, totaled $8.05 million, up from $4.78 million at year-end; days sales outstanding rose to 44 from 24. Inventory fell 7.3% to $23.16 million. Shareholders’ equity was $63.24 million.
Changes versus the prior comparable periods
- Building Supply revenue increased 10.4% in Q2 to a record $10.82 million and rose 16.1% in the first half to $21.05 million. Growth included housewrap and other woven material.
- Disposable Protective Apparel revenue fell 18.1% in Q2 to $6.56 million and 38.8% in the first half to $13.98 million, primarily as pandemic-related demand moderated. First-half decreases included garments, masks and shields.
- Lower apparel sales outweighed Building Supply growth. Lower gross profit and reduced income from the unconsolidated affiliate also pressured earnings. A $490,000 write-off for undelivered equipment further reduced Q2 and first-half results.
- First-half share repurchases totaled $1.72 million; 395,500 shares were repurchased during the first half. The company reported $2.36 million remaining under its repurchase program at June 30.
Outlook, commentary and risks
- Management anticipates continued Building Supply growth for the remainder of 2022, while noting uncertainty from interest rates, possible recession, weaker housing activity and excess retail inventory in economy roof underlayment.
- Management expects pandemic-related mask and face-shield demand to decline, with mask sales potentially at or below pre-pandemic levels. Apparel sales remained above pre-pandemic levels but were below the elevated 2021 comparison.
- Management cited higher freight, raw-material and labor costs as pressures on margins and expected to raise prices in the latter part of Q3 2022. It also noted that cost increases may outpace pricing adjustments.
- Approximately $4.0 million was committed for Building Supply capacity equipment. The delayed, most expensive item has an approximately $1.0 million balance due upon delivery; it was expected in late Q3 and to be operational in Q4 2022. Management expects to fund it from operating cash flow and believes cash and expected operating cash flow are sufficient for foreseeable needs.
- The company sued equipment vendors over machines paid for but not delivered, seeking at least $490,000 plus lost profits and other relief. The deposit was written off; any recovery is uncertain and was not recorded. No counterclaims had been asserted as of the filing.
- Other disclosed risks include supply-chain disruption and inflation, customer concentration, competition, international manufacturing and joint-venture risks, cybersecurity, and uncertainty surrounding COVID-19 and its economic effects. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Building Supply growth and the delayed capacity equipment delivery materialize as management expects, and whether housing-market weakness affects demand.
- Whether price increases offset freight, material and labor inflation without materially reducing sales or margins.
- The pace of normalization in protective-apparel demand, particularly face masks, and the effect on earnings and inventory.
- Receivable collection trends given the increase in receivables and days sales outstanding.
- The status and possible recovery from the equipment lawsuit; any recovery was not recognized in the reported results.
- Reported figures are interim and unaudited; management states that results for the six-month period are not necessarily indicative of full-year results. No quantified full-year revenue or earnings guidance is provided.