XPEL, Inc. — Q3 2022 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are with the same 2021 periods. XPEL sells, distributes and installs protective films and coatings, and provides related software and services. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $89.8 million | $68.5 million | $245.5 million | $189.1 million |
| Gross profit / margin | $35.8 million / 39.8% | $24.5 million / 35.7% | $96.5 million / 39.3% | $68.0 million / 35.9% |
| Operating income / margin | $17.3 million / 19.3% | $10.4 million / 15.1% | $43.1 million / 17.6% | $31.6 million / 16.7% |
| Net income | $13.3 million | $8.3 million | $33.0 million | $25.4 million |
| Diluted EPS | $0.48 | $0.30 | $1.20 | $0.92 |
- Q3 revenue rose 31.0% year over year; nine-month revenue rose 29.8%. Q3 net income increased 59.9%; nine-month net income increased 30.2%.
- Q3 product revenue increased 27.4%, led by paint protection film (+25.5%) and window film (+35.0%). Service revenue grew 48.6%, including installation labor growth of 63.1%, primarily reflecting acquired dealership-installation businesses and ongoing demand.
- For nine months, service revenue increased 67.4%; installation labor revenue more than doubled. Product gross margin improved, while service gross margin percentage declined as lower-margin installation labor made up a larger share of service revenue.
- Operating expenses increased 31.0% in Q3 and 46.6% for nine months, reflecting personnel, occupancy, travel, marketing and acquisition-related costs, including amortization of acquired intangibles.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $9.7 million, down from $20.2 million. Management attributed the decline mainly to inventory and other working-capital increases, partly offset by higher earnings. Investing cash use was $9.8 million, versus $35.7 million, largely reflecting lower acquisition spending than in 2021.
- At September 30, cash was $10.2 million; inventory was $69.4 million, up from $51.9 million at year-end 2021. Current assets were $104.6 million and current liabilities were $31.8 million.
- Debt obligations were approximately $26.1 million, principally $26.0 million drawn on a $75.0 million revolving facility; the facility matures July 2024. Its stated rate was 5.50%, versus 2.50% at year-end 2021. The company reported compliance with its debt covenants. No balance was outstanding on its Canadian revolving facility.
- Management said cash, operating cash generation and committed borrowing capacity should support needs and that liquidity was sufficient for at least 12 months from filing. No dividend was reported.
Changes, outlook and risks
- Margins improved year over year, while operating cash flow weakened amid working-capital investment. The company also reported higher interest expense and foreign-exchange losses; nine-month foreign currency translation reduced comprehensive income by $2.8 million.
- The filing provides no numerical revenue or earnings guidance. Management described continued global expansion, acquisitions, growth in architectural film and other non-automotive offerings as strategic priorities.
- Management cited automotive-sales cyclicality, low vehicle inventories associated with semiconductor shortages, inflation, supply disruptions, foreign exchange and uncertainty related to COVID-19 as potential headwinds. China is an important market and the company relies on one distributor there; estimated China sales declined 18.1% in the first nine months.
- A new three-year supply agreement with entrotech became effective October 1, 2022, on terms described as commercially reasonable. The filing also refers to an October 2022 acquisition in Australia but provides no transaction detail in the supplied text.
- Q3 general and administrative expense included a $0.2 million reduction from remeasurement of acquisition-related contingent liabilities; the nine-month reduction was $0.5 million. Management considered ordinary-course litigation and claims unlikely to have a material impact, while acknowledging unforeseen adverse developments could result in material charges.
Important facts for investors to verify
- Whether inventory growth converts into sales and cash, given lower operating cash flow and the increase in inventory.
- Product and service margin trends, especially the profitability of installation labor as its revenue share rises.
- China exposure, the single-distributor relationship and the effect of market and trade conditions.
- Floating-rate borrowing costs, covenant headroom and liquidity needs for working capital, leases and possible acquisitions.
- Details and potential financial effects of the new entrotech supply agreement and the October 2022 Australian acquisition.
- Ongoing exposure to automotive production, inflation, supply constraints, currency movements and claims or warranty costs.