ALPHA PRO TECH LTD 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to our unaudited condensed consolidated financial statements, which appear elsewhere in this report, as well as our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on March 12, 2025 (the “2024 Form 10-K”). Special Note Regarding Forward-Looking Statements Certain information set forth in this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions, including, without limitation, our expected orders, production levels and sales in 2025 and 2026, and other information that is not historical information. When used in this report, the words “estimates,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. We may make additional forward-looking statements from time to time. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise. All forward-looking statements, whether written or oral and whether made by us or on our behalf, are expressly qualified by this special note. The following are some of the risks that could affect our financial performance or that could cause actual results to differ materially from those expressed or implied in our forward-looking statements: ● We are exposed to foreign currency exchange risks related to our unconsolidated affiliate operations in India. ● We are subject to risks associated with our joint venture. ● The loss of any large customer or a reduction in orders from any large customer could reduce our net sales and harm our operating results. ● We rely on suppliers and contractors, and our business could be seriously harmed if these suppliers and contractors are not able to meet our requirements. ● Risks associated with international manufacturing could have a significant effect on our business. ● Our success depends in part on protection of our intellectual property, and our failure to protect our intellectual property could adversely affect our competitive advantage, our brand recognition and our business. ● Tariff policies and potential countermeasures could increase our costs and disrupt our global supply chain, which could negatively impact the results of our operations. ● Our industry is highly competitive, which may negatively affect our ability to grow our customer base and generate sales. ● The Company’s results are affected by competitive conditions and customer preferences. ● Environmental laws and regulations may subject us to significant liabilities. ● The Company’s growth objectives are largely dependent on the timing and market acceptance of our new product offerings, including our ability to continually renew our pipeline of new products and to bring those products to market. ● Global economic conditions could adversely affect the Company’s business and financial results. ● We are subject to risks related to climate change and natural disasters or other events beyond our control. ● Uncertainties with respect to the development, deployment, and use of artificial intelligence. ● Security breaches and other disruptions to the Company’s information technology infrastructure could interfere with the Company’s operations, compromise information belonging to the Company and our customers and suppliers and expose the Company to liability, which could adversely impact the Company’s business and reputation. ● The Company’s future results may be affected by various legal and regulatory proceedings and legal compliance risks. ● Our common stock price is volatile, which could result in substantial losses for individual shareholders. 14 Alpha Pro Tech, Ltd. The foregoing list of risks is not exclusive. For a more detailed discussion of the risk factors associated with our business, see the risks described in Part I, Item IA, “Risk Factors,” in the 2024 Form 10-K. These and many other factors could affect the Company’s future operating results and financial condition and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf. Special Note Regarding Smaller Reporting Company Status We are filing this report as a “smaller reporting company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended). As a result of being a smaller reporting company, we are allowed and have elected to omit certain information from this Management’s Discussion and Analysis of Financial Condition and Results of Operations; however, we have provided all information for the periods presented that we believe to be appropriate. Where to find more information about us. We make available, free of charge, on our website ( http://www.alphaprotech.com ) our most recent Annual Report on Form 10-K, any Current Reports on Form 8-K furnished or filed since our most recent Annual Report on Form 10-K, and any amendments to such reports, as soon as reasonably practicable following the electronic filing of such reports with the SEC. In addition, in accordance with SEC rules, we provide paper copies of our filings free of charge upon request. Critical Accounting Policies and Estimates The preparation of our financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the periods reported. We base estimates on past experience and on various other assumptions that are believed to be reasonable under the circumstances. The application of these accounting policies on a consistent basis enables us to provide timely and reliable financial information. Our significant accounting policies and estimates are more fully described in Note 2 – “Summary of Significant Accounting Policies” in the notes to our consolidated financial statements in Item 8 of the 2024 Form 10-K. Since December 31, 2024, there have been no material changes to our critical accounting policies and estimates as described in the 2024 Form 10-K. OVERVIEW Alpha Pro Tech is in the business of protecting people, products and environments. We accomplish this by developing, manufacturing and marketing a line of high-value, disposable protective apparel products for the cleanroom, industrial, pharmaceutical, medical and dental markets. We also manufacture a line of building supply construction weatherization products. Our products are sold under the “Alpha Pro Tech” brand name, as well as under private label. Our products are grouped into two business segments: (i) the Building Supply segment, consisting of construction weatherization products, such as housewrap, housewrap accessories, synthetic roof underlayment and synthetic roof underlayment accessories, as well as other woven material; and (ii) the Disposable Protective Apparel segment, consisting of disposable protective garments (including shoecovers, bouffant caps, coveralls, gowns, frocks and lab coats), face masks and face shields. Our target markets include construction companies and building supply and roofing distributors; companies in pharmaceutical manufacturing, bio-pharmaceutical manufacturing, medical device manufacturing, lab animal research, and high technology electronics manufacturing (which includes the semi-conductor market); and medical and dental distributors. Our products are used primarily in cleanrooms, industrial safety manufacturing environments, health care facilities, such as hospitals, laboratories and dental offices, and building and re-roofing sites. Our products are distributed principally in the United States through a network consisting of purchasing groups, national distributors, local distributors, independent sales representatives and our own sales and marketing force. 15 Alpha Pro Tech, Ltd. Recent developments in U.S. trade policy have introduced uncertainty regarding the future of global trade relations. Following the inauguration of the second Trump administration, there have been numerous announcements made and actions taken related to tariff increases and other trade restrictions regarding imports into the U.S. President Trump has indicated that his administration is likely to impose significant tariffs on imported goods, including a 145% tariff on Chinese imports, a tariff on goods from Mexico and up to 10% or 20% on all other U.S. imports, including tariffs of 10% on products we import from India. Given that we currently source very little from China, this may be a benefit in regards to our competition that does import from China, but any new or increased tariffs, quotas, embargoes, or other trade barriers affecting other countries from which we do source supplies or our global network of third-party suppliers could impact our supply chain and cost structure. Additionally, retaliatory measures by affected countries could further disrupt our operations or reduce our competitiveness in international markets. An escalation in trade tensions or the implementation of broader tariffs, trade restrictions or retaliatory measures on our products or components originating from countries outside the U.S. could adversely impact our ability to source necessary components, manufacture products at competitive cost, or sell our products at prices customers are willing to pay. Any such developments could materially and adversely affect our business operations, results of operations and cash flows. We continue to monitor these changing tariffs and trade restrictions. If new tariffs or trade restrictions are imposed, we may need to adjust our pricing, increase inventory levels, or seek alternative suppliers, any of which could materially affect our revenue, gross margins, and overall financial performance. RESULTS OF OPERATIONS The following table sets forth certain operational data as a percentage of net sales for the periods indicated: For the Three Months Ended March 31, 2025 2024 Net sales 100.0 % 100.0 % Gross profit 39.0 % 40.2 % Selling, general and administrative expenses 34.0 % 36.0 % Income from operations 3.3 % 2.4 % Income before provision for income taxes 5.6 % 5.4 % Net income 4.4 % 4.3 % For the three months ended March 31, 2025 compared to the three months ended March 31, 2024 Sales . Consolidated sales for the three months ended March 31, 2025, increased to $13,822,000, from $13,482,000 for the three months ended March 31, 2024, representing an increase of $340,000, or 2.5%. This increase consisted of increased sales in the Building Supply segment of $132,000 and increased sales in the Disposable Protective Apparel segment of $208,000. Building Supply Segment Building Supply segment sales for the three months ended March 31, 2025, increased by $132,000, or 1.6%, to $8,372,000 compared to $8,240,000 for the three months ended March 31, 2024. The Building Supply segment increase during the three months ended March 31, 2025, was primarily due to a 21.8% increase in sales of synthetic roof underlayment and an 89.3% increase in sales of other woven material, partially offset by a 20.9% decrease in sales of housewrap compared to the same period of 2024. The sales mix of the Building Supply segment for the three months ended March 31, 2025, was approximately 48% for synthetic roof underlayment, 45% for housewrap and 7% for other woven material. This compared to approximately 40% for synthetic roof underlayment, 56% for housewrap and 4% for other woven material for the three months ended March 31, 2024. Our synthetic roof underlayment product line primarily includes REX SynFelt®, REX TECHNOply® and TECHNO SB and our synthetic roof underlayment accessories consist of our new self-adhered TECHNOplus Ice & Water and REX Hi Temp. Our housewrap product line primarily consists of REX Wrap®, REX Wrap Plus® and REX™ Wrap Fortis. Housewrap accessories consist of REXTREME Window and Door Flashing and REX™ Premium Seam Tape. 16 Alpha Pro Tech, Ltd. The housing market continued to show weakness in the first quarter of 2025, continuing the weak trend of 2024, with single-family housing starts down 5.7% compared to the same quarter in 2024. During the first quarter of 2025, we outperformed the market as sales of the core building products (housewrap and synthetic roof underlayment) were down 3.6%. Excluding the decline in housewrap sales to two private-label distributors, which were beyond our control, the first quarter sales performance of our core building products would have increased compared to the prior year quarter. Sales of synthetic roof underlayment, which were up 21.8% in the first three months of 2025, have been robust due to national programs with builders and contractors as well as category expansion, which includes self-adhered products. As our relationships strengthen with downstream customers, we have successfully leveraged distribution to stock our full line. Housewrap sales in the first quarter of 2025 have been challenging due to lower single-family housing starts, a significant decline in sales to two private-label distributors (as mentioned above), economic uncertainty, and a period of colder temperatures and increased snowfall during the first quarter of 2025. Sales of other woven material increased by $317,000, or 89.3%, for the three months ended March 31, 2025 compared to the same period of 2024, primarily due to increased sales to our major customer. The Company is pursuing new opportunities for other woven material that could improve sales, and we hired a Director of Product and Business Development during the first quarter of 2025. Management expects growth in the Building Supply segment in the coming year and is encouraged by business in the pipeline. However, there continues to be uncertainty in housing starts and volatility and uncertainty in the economy in general could affect this segment. Disposable Protective Apparel Segment Sales for the Disposable Protective Apparel segment for the three months ended March 31, 2025, increased by $208,000, or 4.0%, to $5,450,000, compared to $5,242,000 for the three months ended March 31, 2024. This segment increase was due to a 12.0% increase in sales of disposable protective garments, partially offset by a 6.7% decrease in sales of face shields and a 50.5% decrease in sales of face masks. The sales mix of the Disposable Protective Apparel segment for the three months ended March 31, 2025, was approximately 90% for disposable protective garments, 6% for face masks and 4% for face shields. This sales mix is compared to approximately 84% for disposable protective garments, 11% for face masks and 5% for face shields for the three months ended March 31, 2024. Sales of disposable protective garments in the three months ended March 31, 2025 were up 12.0%, due in part to achieving an elevated status with our largest international channel partners, consummated in late 2024 and launched in early 2025. We expect this endeavor to result in steady organic growth with end-users in the cleanroom and controlled environment marketplace. Additionally, during the second half of 2024, we consummated new and evolved distribution agreements with other channel partners that set in motion mutual growth incentives for this year and for years to come. Also, we are working diligently to discover and work closely with new channel partners. Sales of face masks in the first quarter of 2025 were negatively affected by excessive purchases primarily by one of our channel partners in the later part of 2024 in preparation for the 2025 flu/COVID season. Thus, their on-hand inventory in the first quarter of 2025 was higher than historical levels. We anticipate demand to improve once inventory levels return to more normal levels. Our partnerships remain strong with a mutual desire to achieve organic growth in 2025. Lastly, there remains uncertainty and volatility in the economy due to tariffs. Management believes that the Company is well positioned, as a significant portion of our competition purchases disposable protective garments from China which currently have significantly higher tariff rates than the garments that we have source from India. This puts us in a favorable cost position in relation to those competitors. However, new tariffs on India may negatively affect our margins on products we produce there. 17 Alpha Pro Tech, Ltd. Gross Profit . Gross profit decreased by $25,000, or 0.5%, to $5,392,000 for the three months ended March 31, 2025, from $5,417,000 for the three months ended March 31, 2024. The gross profit margin was 39.0% for the three months ended March 31, 2025, compared to 40.2% for the three months ended March 31, 2024. The gross profit margin in the three months ended March 31, 2025 was negatively affected by a margin decrease in both the Disposable Protective Apparel and Building Supply segments. Gross profit margin was negatively affected primarily by the inventory received last year which incurred higher ocean freight rates. There was significant volatility in ocean freight rates in 2024, due to factors such as geopolitical tensions, labor disputes and market dynamics but we are now experiencing an easing of those freight rates. Selling, General and Administrative Expenses . Selling, general and administrative expenses decreased by $153,000, or 3.2%, to $4,694,000 for the three months ended March 31, 2025, from $4,847,000 for the three months ended March 31, 2024. As a percentage of net sales, selling, general and administrative expenses decreased to 34.0% for the three months ended March 31, 2025, from 36.0% for the same period of 2024. The change in expenses by segment for the three months ended March 31, 2025, was as follows: Building Supply expenses were down by $107,000, or 5.4%; Disposable Protective Apparel expenses were up by $87,000, or 6.4%; and corporate unallocated expenses were down by $133,000, or 8.9%. The decrease in the Building Supply segment expenses was primarily related to decreased employee compensation. The increase in the Disposable Protective Apparel segment expenses was primarily related to increased employee compensation, marketing and sales travel expenses. The decrease in corporate unallocated expenses was primarily due to decreased, professional fees, insurance expenses, general office expenses, and reorganization costs in 2024. The reorganization costs in 2024 were incurred in connection with moving our face mask manufacturing facility from Utah to Arizona. In accordance with the terms of his employment agreement, the Company’s current President and Chief Executive Officer is entitled to an annual bonus equal to 5% of the pre-tax profits of the Company, excluding bonus expense, up to a maximum of $1.0 million. A bonus amount of $41,000 was accrued for the three months ended March 31, 2025, compared to $38,000 for the three months ended March 31, 2024. Depreciation and Amortization . Depreciation and amortization expense decreased by $1,000, or 0.8%, to $243,000 for the three months ended March 31, 2025, from $244,000 for the three months ended March 31, 2024. Income from Operations. Income from operations increased by $129,000, or 39.6%, to $455,000 for the three months ended March 31, 2025, compared to $326,000 for the three months ended March 31, 2024. The increased income from operations was primarily due to a decrease in selling, general and administrative expenses of $153,000 and a decrease in depreciation and amortization expenses of $1,000, partially offset by a decrease in gross profit of $25,000. Income from operations as a percentage of net sales for the three months ended March 31, 2025, was 3.3%, compared to 2.4% for the three months ended March 31, 2024. Other Income . Other income decreased by $79,000 to income of $317,000 for the three months ended March 31, 2025, compared to $396,000 for the same period of 2024. The decrease was primarily due to a decrease in interest income of $82,000, partially offset by an increase in equity in income of unconsolidated affiliate of $3,000. Income before Provision for Income Taxes . Income before provision for income taxes for the three months ended March 31, 2025, was $772,000, compared to income before provision for income taxes of $722,000 for the same period of 2024, representing an increase of $50,000, or 6.9%. This increase in income before provision for income taxes was due to an increase in income from operations of $129,000, partially offset by a decrease in other income of $79,000. Provision for Income Taxes . The provision for income taxes for the three months ended March 31, 2025, was $159,000, compared to $146,000 for the same period of 2024. The estimated effective tax rate was 20.6% for the three months ended March 31, 2025, compared to 20.2% for the three months ended March 31, 2024. The Company does not record a tax provision on equity in income of unconsolidated affiliate, which reduces the effective tax rate. 18 Alpha Pro Tech, Ltd. Net Income . Net income for the three months ended March 31, 2025, was $613,000 compared to net income of $576,000 for the same period of 2024, representing an increase of $37,000, or 6.4%. The net income increase between the three months ended March 31, 2025 and the same period of 2024 was due to an increase in income before provision for income taxes of $50,000, partially offset by an increase in provision for income taxes of $13,000. Net income as a percentage of net sales was 4.4% for the three months ended March 31, 2025, compared to 4.3% for the same period of 2024. Basic and diluted earnings per common share for each of the three months ended March 31, 2025 and 2024, was $0.06 and $0.05, respectively. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2025, the Company had cash and cash equivalents (“cash”) of $13,352,000 and working capital of $47,035,000. As of March 31, 2025, the Company’s current ratio (current assets/current liabilities) was 21:1. Cash decreased by 28.4%, or $5,284,000, to $13,352,000 as of March 31, 2025, compared to $18,636,000 as of December 31, 2024, and working capital decreased by $481,000, to $47,035,000 from $47,516,000 as of December 31, 2024. The decrease in cash from December 31, 2024, was due to cash used in operating activities of $3,959,000, cash used in investing activities of $135,000, and cash used in financing activities of $1,190,000. Net cash used in operating activities of $3,959,000 for the three months ended March 31, 2025 was due to net income of $613,000, as adjusted primarily by the following: stock-based compensation expense of $136,000, depreciation and amortization expense of $243,000, equity in income of unconsolidated affiliate of $141,000, operating lease asset amortization of $229,000, an increase in accounts receivable of $2,778,000, an increase in prepaid expenses of $375,000, an increase in inventory of $832,000, a decrease in accounts payable and accrued liabilities of $841,000, and a decrease in lease liabilities of $213,000, all compared to December 31, 2024. Accounts receivable increased by $2,778,000, or 56.8%, to $7,672,000 as of March 31, 2025, from $4,894,000 as of December 31, 2024. The increase in accounts receivable was primarily related to increased sales in the latter part of the first quarter of 2025 compared to the latter part of 2024. The number of days that sales remained outstanding as of March 31, 2025, calculated by using an average of accounts receivable outstanding and annual revenue, was 41 days, compared to 36 days as of December 31, 2024. Inventory increased by $832,000, or 3.7%, to $23,565,000 as of March 31, 2025, from $22,733,000 as of December 31, 2024. The increase was due to an increase in inventory for the Building Supply segment of $904,000, or 8.3%, to $11,835,000, partially offset by a decrease in inventory for the Disposable Protective Apparel segment of $72,000, or 0.6%, to $11,730,000. Prepaid expenses increased by $375,000, or 8.6%, to $4,751,000 as of March 31, 2025, from $4,376,000 as of December 31, 2024. The increase was primarily due to prepaid inventory, partially offset by decreased prepaid tax payments. Right-of-use-assets as of March 31, 2025, decreased by $229,000 to $8,485,000 from $8,714,000 as of December 31, 2024, as a result of amortization of the right-of- use-assets. Lease liabilities as of March 31, 2025, decreased by $213,000 to $8,562,000 from $8,775,000 as of December 31, 2024. The decrease in the lease liabilities was the result of lease payments made during the period. Accounts payable and accrued liabilities as of March 31, 2025, decreased by $841,000, or 37.7%, to $1,389,000, from $2,230,000 as of December 31, 2024. The decrease was primarily due to decreases in accrued bonuses, accrued taxes and trade payables. Net cash used in investing activities was $135,000 for the three months ended March 31, 2025, compared to net cash used in investing activities of $83,000 for 2024. Investing activities for the three months ended March 31, 2025 and 2024 consisted primarily of the purchase of property and equipment. Net cash used in financing activities was $1,190,000 for the three months ended March 31, 2025, compared to net cash used in financing activities of $616,000 for the same period of 2024. Net cash used in financing activities for the three months ended March 31, 2025 resulted from the payment of $1,178,000 for the repurchase of common stock and $12,000 for treasury stock excise tax. Net cash used in financing activities for the three months ended March 31, 2024 resulted from the payment of $1,417,000 for the repurchase of common stock and $14,000 for treasury stock excise tax, partially offset by $815,000 in proceeds from the exercise of stock options. 19 Alpha Pro Tech, Ltd. As of March 31, 2025, we had $1,564,000 available for stock purchases under our stock repurchase program. During the three months ended March 31, 2025, we repurchased 221,413 shares of common stock at a cost of $1,178,000. As of March 31, 2025, we had repurchased a total of 21,464,040 shares of common stock at a cost of approximately $55,956,000 through our repurchase program which commenced in 1999. We retire all stock upon repurchase. Future repurchases are expected to be funded from cash on hand and cash flows from operating activities. We believe that our current cash balance and expected cash flow from operations will be sufficient to satisfy our projected working capital and planned capital expenditures for the foreseeable future. Recent Accounting Pronouncements In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. These amendments address investor requests for enhanced transparency regarding income tax information. Specifically, they improve income tax disclosures related to rate reconciliation and income taxes paid. ASU 2023-09 becomes effective for fiscal years beginning after December 15, 2024, with early adoption permitted. In November 2024, the FASB issued ASU 2024-03, Income Statement — Reporting Comprehensive Income — Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses (“ASU 2024-03”), which requires disclosure about the types of costs and expenses included in certain expense captions presented on the income statement. The new disclosure requirements are effective for the Company’s annual periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027, with early adoption permitted. The Company is currently in the process of evaluating the impact of this pronouncement on its related disclosures. Management periodically reviews new accounting standards that are issued. Management has not identified any other new standards that it believes merit further discussion at this time. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide the information otherwise required by this Item.