XPEL, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. XPEL sells and distributes protective films and coatings and provides related installation and software services.
Financial highlights
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $71.9 million | $51.9 million | +38.6% |
| Gross profit / margin | $27.7 million / 38.6% | $18.3 million / 35.3% | +51.6%; +3.3 percentage points |
| Operating income / margin | $10.0 million / 14.0% | $8.5 million / 16.5% | +17.4%; margin down 2.5 points |
| Net income / net margin | $7.8 million / 10.9% | $6.8 million / 13.2% | +14.0%; margin down 2.3 points |
| Diluted EPS | $0.28 | $0.25 | Up $0.03 |
| EBITDA (non-GAAP) | $11.9 million | $9.2 million | Up 29.6% |
Product revenue grew 29.3% to $58.1 million; service revenue grew 98.5% to $13.8 million, primarily reflecting installation-business growth and 2021 acquisitions. Installation labor revenue rose 197.2%; excluding the impact of 2021 acquisitions, total installation revenue increased 40.0%. Paint protection film revenue rose 22.8% and window film revenue rose 61.1%. U.S. revenue increased 62.4%; China revenue declined 17.3%.
Product gross margin improved to 34.3% from 29.8%, attributed to lower product costs and improved operating leverage. Service gross margin declined to 56.8% from 70.7%, partly due to low new-car dealership inventories. Operating expenses increased 81.5% to $17.7 million, outpacing revenue growth; higher marketing, personnel, occupancy, professional-fee and acquisition-related costs contributed.
Cash flow, balance sheet and debt
- Operating cash flow was negative $4.3 million, versus positive $8.9 million a year earlier. Management attributed the decline mainly to an intentional inventory build to reduce supply-chain risk.
- Investing cash outflow was $2.6 million, including property and equipment purchases; financing cash inflow was $7.9 million, mainly from revolving-credit borrowings. Cash increased to $10.6 million from $9.6 million at year-end.
- Inventory rose to $74.5 million from $51.9 million at December 31, 2021. Total current assets were $104.0 million and current liabilities $47.1 million at quarter-end.
- Borrowings on the $75 million revolving facility were $33.0 million, up from $25.0 million at year-end; the facility matures July 5, 2024. The company reported compliance with debt covenants. A separate CAD $4.5 million Canadian facility had no balance outstanding.
- Management stated that cash, internally generated funds and committed borrowing capacity should meet funding needs, and that liquidity was sufficient for at least 12 months from the filing date.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management reported continued revenue growth in most major markets and ongoing recovery from COVID-19, while noting that future pandemic effects remain uncertain.
- Risks highlighted include supply disruptions, inflation, automotive-market cyclicality and semiconductor-related low dealership inventories, China-market exposure and reliance on one distributor there, foreign-currency exposure, and floating-rate debt. XPEL said it does not hedge currency-translation or interest-rate risk; a hypothetical 200-basis-point rate increase could materially affect its financial statements.
- Management said low dealership inventories affected dealership-services results. The company’s inventory build was deliberate, but increased working-capital needs contributed to negative operating cash flow.
- Contingent acquisition liabilities were $2.5 million at March 31, 2022. Management considered material effects from ordinary-course litigation unlikely, though it noted unforeseen adverse developments could result in material charges.
Important facts for investors to verify
- Whether the inventory build converts into sales and operating cash flow, and how supply-chain conditions evolve.
- How much reported growth reflects acquisitions versus organic demand, particularly in installation services.
- Whether improved product margins persist and service margins recover as dealership inventories change.
- The effect of higher revolving borrowings and floating interest rates on interest expense, covenant headroom and liquidity.
- China sales exposure, inflationary pressures, and the status and eventual cash cost of acquisition-related contingent liabilities.