Alpha Pro Tech, Ltd. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparison is with Q1 2022 unless noted. Alpha Pro Tech sells building weatherization products and disposable protective apparel, predominantly in the United States. The interim statements are unaudited.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $13.800 million | $17.661 million | Down 21.9% |
| Gross profit / margin | $4.982 million / 36.1% | $6.442 million / 36.5% | Profit down 22.7% |
| Operating income / margin | $426,000 / 3.1% | $1.924 million / 10.9% | Down 77.9% |
| Net income / margin | $552,000 / 4.0% | $1.522 million / 8.6% | Down 63.7% |
| Basic and diluted EPS | $0.05 | $0.12 | Down $0.07 |
| Operating cash flow | $(1.697) million | $(1.179) million | More cash used |
| Cash and cash equivalents | $13.821 million at March 31 | $16.290 million at Dec. 31, 2022 | Down $2.469 million |
Sales declined in both segments: Building Supply fell 15.7% to $8.631 million, and Disposable Protective Apparel fell 30.4% to $5.169 million. Segment income was $956,000 for Building Supply and $784,000 for Apparel, versus $1.667 million and $1.701 million, respectively, a year earlier.
Gross margin was nearly flat year over year, but operating and net margins contracted sharply as lower sales reduced operating leverage. SG&A was essentially unchanged at $4.313 million, but rose to 31.3% of sales from 24.4%. Other income increased to $267,000, including $158,000 of net interest income and $109,000 of equity income from the unconsolidated affiliate.
Cash, liquidity and capital
- Working capital was $50.086 million; the reported current ratio was 31:1. Current liabilities were $1.673 million.
- Cash used in investing was $289,000, primarily property and equipment purchases. Financing used $483,000 net, including $833,000 of share repurchases partly offset by $350,000 of option-exercise proceeds.
- Total liabilities were $3.069 million, including $1.535 million of lease liabilities and $764,000 of deferred tax liabilities. The filing reports no borrowings or other debt balance.
- Accounts receivable, including related-party receivables, totaled $9.132 million, up from $6.973 million at year-end; days sales outstanding increased to 40 from 35. Inventory was $24.094 million, slightly lower than year-end.
- The company repurchased 200,000 shares for $833,000 during the quarter, with $1.362 million remaining under the program at March 31. Management says cash and expected operating cash flow should fund foreseeable working-capital needs and planned capital expenditures.
Business trends, outlook and risks
- Building Supply: Housewrap sales declined 6.9%; synthetic roof underlayment declined 28.7%, partly amid distributor inventory and selling-price pressure. Management cited weaker housing starts, higher interest rates and economic uncertainty. It expects a possible rebound as channel inventories normalize, sees opportunities in premium and commercial/multifamily housewrap and accessories, and is preparing to launch self-adhered roofing products.
- Apparel: Protective garment sales increased 10.6%, while face-mask and face-shield sales fell 75.2% and 81.0%, respectively, reflecting excess post-pandemic distributor inventory and comparison with elevated Q1 2022 demand. Management reported renewed customer engagement and a new agreement with a larger channel partner.
- Management expects gross margin to improve during 2023 as higher-cost freight inventory sells through and lower-cost inventory is sold; persistent inflation could limit improvement. No quantified earnings or revenue guidance is provided, and management cautions that Q1 results are not necessarily indicative of full-year results.
- Risk factors include supply-chain availability and logistics costs, inflation, housing-market weakness, customer concentration and order reductions, competition, international manufacturing and joint-venture exposure, foreign currency, cybersecurity, and the pandemic’s continuing effects. The company also lists failure to remediate a material weakness in internal control as a risk. Separately, management concluded disclosure controls were effective at a reasonable-assurance level as of March 31 and reported no material change in internal control during the quarter.
- The company’s unresolved Utah lawsuit seeks at least $490,000 for equipment paid for but not delivered, plus lost profits and other relief. The $490,000 deposit was written off; any recovery is uncertain and has not been recorded. Management does not expect ordinary-course litigation to have a material effect.
Key facts for investors to verify
- Whether sales and demand recover in both segments, especially underlayment and post-pandemic masks and shields.
- Whether lower freight costs translate into improved gross margins, and how pricing and inflation affect profitability.
- Whether receivables, payment terms and operating cash flow improve; receivables growth drove a major working-capital cash outflow.
- Progress on the Utah equipment lawsuit and any recovery, which is not reflected in reported assets or income.
- The status of the material-weakness risk referenced in the filing, alongside the reported effective disclosure controls.
- Whether share repurchases continue and how they affect cash and shares outstanding.