ALPHA PRO TECH LTD

The increase in face mask sales of 24.0% was primarily attributable to sales of our proprietary N-95 Particulate Respirator face mask resulting from customer demand associated with the COVID-19 pandemic. Although we showed face mask revenue growth in the first quarter of 2021, sales were materially lower than prior pandemic quarters. We are witnessing a softening in demand due various factors such as: (i) decreased demand from distributors and their customers in light of high levels of stockpiled inventory, resulting from a rush to obtain face masks in the early months of the pandemic, (ii) increased availability of N-95 face masks from manufacturers ramping up production capacity, (iii) increased competition as more manufacturers entered the market as well as Emergency Use Authorization in the U.S. that has allowed foreign manufactured, non-NIOSH approved KN-95 face masks, and (iv) the improvement in outlook with respect to the pandemic and the growing number of individuals being vaccinated to protect against COVID-19. Management expects sales of face mask will decline to be more in-line with pre-pandemic levels in future periods.

The increase in face shield sales of 93.6% was also attributable to the pandemic and resulted in demand primarily from one distributor. Management expect sales of face shields to decrease in the coming quarters and to be more in-line with pre-pandemic levels.

Open orders for our core building products, consisting of synthetic roof underlayment and housewrap, continue to be at unprecedented levels as the new home construction and residential re-roofing markets were strong in the first quarter of 2021 and optimism remains high going into the second quarter. Our line of synthetic roof underlayment enjoyed strong growth of 31.6% related to these two factors and our housewrap continued growth in the new home construction market. Management is optimistic about continued growth in this segment and has committed to increasing production capacity of this segment by investing approximately $4.0 million in new equipment, which is expected to be operational later in the year.

Management believes that gross profit margin will be negatively affected in 2021 as a result of changes in product mix as the need for face masks and face shields declines from the surge in customer demand in 2020 as a result of the COVID-19 pandemic. As discussed above, we expect increases in raw material costs, resin in particular, which is a base component material in our disposable protective garments and building products, as well as increases in ocean freight and other transportation costs. In the current environment, cost increases may rise more rapidly than our sales prices, which could decrease gross profit.

Net Income. Net income for the three months ended March 31, 2021 was $3,719,000, compared to net income of $5,342,000 for the three months ended March 31, 2020, representing a decrease of $1,623,000, or 30.4%. As mentioned above, a tax benefit from stock options exercised positively impacted net income by an estimated $2.0 million in the first quarter of 2020. Excluding the tax benefit in 2020, net income for the three months ended March 31, 2021 would have exceeded net income for the three months ended March 31, 2020. Net income as a percentage of net sales for the three months ended March 31, 2021 was 16.1%, and net income as a percentage of net sales for the same period of 2020 was 29.4%. Basic earnings per common share for the three months ended March 31, 2021, and 2020 were $0.28 and $0.41, respectively. Diluted earnings per common share for the three months ended March 31, 2021 and 2020 were $0.27 and $0.39, respectively. Excluding the estimated tax benefit in 2020, basic and diluted earnings per common share for the three months ended March 31, 2021 would have exceeded the basic and diluted earnings per common share for the same period of 2020.

As a result of the COVID-19 pandemic, in 2020 we experienced a significant increase in orders of our PPE products from both legacy and new customers. In 2021 we experienced a softening in demand due to various factors, including decreased demand from distributors and their customers in light of high levels of stockpiled inventory, and increased competition, among other factors. Because of the uncertainty associated with the pandemic, we may experience a further decrease in sales as conditions related to the virus change or improve and demand for these products subsides, which could impact our expectations of future orders and sales. COVID-19 has resulted in a downturn in the global financial markets and a slowdown in the global economy. This economic environment may impact some of our customers’ ability to pay or lead them to request extended payment terms, and we have experienced and may continue to experience cost increases from some of our suppliers. Additionally, increased uncertainty in the housing market could negatively impact demand for our Building Supply segment products.