ALPHA PRO TECH LTD quarterly report, Q2 FY2023

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

MetricQ2 2023Q2 2022Six months 2023Six 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.