Alpha Pro Tech, Ltd. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. The unaudited filing compares results with the three months ended March 31, 2023. Alpha Pro Tech develops and sells Building Supply products and Disposable Protective Apparel, predominantly in the United States.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $13.482 million | $13.800 million | Down 2.3% |
| Gross profit / margin | $5.417 million / 40.2% | $4.982 million / 36.1% | Gross profit up 8.7%; margin up 4.1 percentage points |
| Operating expenses | $5.091 million | $4.556 million | Up 11.7% |
| Operating income / margin | $326,000 / 2.4% | $426,000 / 3.1% | Down 23.5% |
| Income before taxes | $722,000 | $693,000 | Up 4.2% |
| Net income / margin | $576,000 / 4.3% | $552,000 / 4.0% | Up 4.3% |
| Basic and diluted EPS | $0.05 | $0.05 | Unchanged |
| Operating cash flow | $(1.169) million | $(1.697) million | Cash use reduced |
Building Supply sales were $8.240 million, down 4.5%; Disposable Protective Apparel sales were $5.242 million, up 1.4%. Building Supply segment income was $963,000 versus $956,000; Apparel segment income was $1.032 million versus $784,000. Segment income excludes unallocated corporate overhead and income taxes.
Financial position and liquidity
- Cash and cash equivalents were $18.510 million at March 31, down $1.868 million from year-end 2023. Working capital was $50.324 million, compared with $50.498 million at year-end; the current ratio was 25:1, versus 21:1.
- Total assets were $72.712 million and shareholders’ equity was $61.643 million. The filing reports no conventional borrowings; total liabilities were $11.069 million, including $9.465 million of operating lease liabilities.
- Operating cash use of $1.169 million reflected, among other items, increased receivables and inventory and lower accounts payable and accrued liabilities. Investing cash use was $83,000, primarily for property and equipment. Financing cash use was $616,000, including $1.417 million of share repurchases, partly offset by $815,000 from option exercises.
- Receivables, including related-party receivables, rose to $7.483 million from $6.545 million at year-end; reported days sales outstanding increased to 47 from 40. Inventory increased to $20.769 million from $20.131 million.
Material changes, outlook and risks
- Sales declined overall as Building Supply weakness, particularly other woven material, outweighed modest Apparel growth. Within Building Supply, core housewrap and synthetic underlayment sales together increased 7.6%; housewrap sales rose 24.3%, while synthetic underlayment fell 5.4% and other woven material fell 71.4%.
- Gross margin improved in both segments, but higher SG&A—up 12.4%—more than offset the gross-profit increase at the operating-income level. Management attributed higher corporate costs in part to compensation, stock-based compensation, professional fees and insurance.
- Management expects Building Supply growth, particularly in housewrap, and expects continued Apparel garment growth in 2024. It cites positive early acceptance of new self-adhered roofing products and expects stronger near-term orders from a major international Apparel supply-chain partner. These are management expectations, not quantified company-wide guidance.
- Management does not expect other woven material to be a growth driver in 2024. It remains cautious about housing and economic uncertainty, competition and pricing pressure in roofing, distributor excess inventory in masks and face shields, and potential freight-rate increases associated with geopolitical conflict.
- A new five-year Nogales, Arizona facility lease began March 1, 2024, with initial monthly rent of $75,968 and annual 3% increases after the first lease year. The new lease contributed to the increase in right-of-use assets and lease liabilities. The company also disclosed a ten-year Valdosta facility lease effective January 1, 2024.
- The company repurchased 270,000 shares for $1.417 million during the quarter; $777,000 remained available under the program at March 31, 2024, which expires December 15, 2024. Management says cash and expected operating cash flow should cover projected working capital and planned capital expenditures for the foreseeable future.
- The company is pursuing a lawsuit over $490,000 paid for undelivered equipment and also seeks lost profits. The deposit was written off in 2022; any recovery is uncertain and has not been recorded. Management says ordinary-course litigation is not expected to have a material effect. No material risk-factor changes were reported.
Important facts for investors to verify
- Whether cash conversion improves as receivables and inventory rise and operating cash flow remains negative.
- Whether the improved gross margin can be sustained while SG&A is elevated, and whether management’s segment growth expectations materialize.
- The economics and long-term commitments associated with the new facility leases, including the resulting lease liabilities.
- The timing and outcome of the undelivered-equipment lawsuit; the potential recovery is uncertain and excluded from reported assets and income.
- Share-count movements: the balance sheet reports 11,372,878 shares outstanding at March 31, while the cover reports 11,688,700 shares as of May 2, 2024; investors may wish to reconcile the different dates and intervening activity.