XPEL, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; unaudited results compared with the corresponding 2020 periods. XPEL sells, distributes and installs protective films and coatings, supported by proprietary software and installation services.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $68.5 million | $46.1 million | $189.1 million | $110.3 million |
| Gross profit / margin | $24.5 million / 35.7% | $16.0 million / 34.8% | $68.0 million / 35.9% | $38.1 million / 34.5% |
| Operating income / margin | $10.4 million / 15.1% | $8.4 million / 18.2% | $31.6 million / 16.7% | $16.0 million / 14.5% |
| Net income / margin | $8.3 million / 12.2% | $6.6 million / 14.3% | $25.4 million / 13.4% | $12.2 million / 11.1% |
| Diluted EPS | $0.30 | $0.24 | $0.92 | $0.44 |
| EBITDA, non-GAAP | $11.4 million | $9.0 million | $34.1 million | $17.2 million |
Revenue increased 48.6% in Q3 and 71.4% year to date; net income rose 26.1% and 108.0%, respectively. Product revenue grew 44.2% in Q3, led by paint protection film (+35.2%) and window film (+80.9%). Service revenue increased 74.9%, including installation labor growth of 107.6%; management attributed part of installation growth to the PermaPlate acquisition. For the nine months, product and service revenue increased 70.4% and 77.5%, respectively.
Q3 gross margin improved year over year, but operating and net income margins declined as operating expenses grew faster than revenue in the quarter. Nine-month operating and net income margins improved. Management attributed product margin improvement to revenue mix, product cost improvements and operating leverage. Service margin was lower, in part because PermaPlate was operating at about 70% capacity amid low new-car inventories.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $20.2 million, versus $14.2 million in 2020. Inventory increased $16.4 million and accounts payable and accrued liabilities increased $13.8 million, among other working-capital movements.
- Investing cash outflow was $35.7 million, including $30.0 million for PermaPlate and $5.1 million of property and equipment purchases. Financing cash outflow was $5.6 million, primarily reflecting term-loan repayments. Cash declined from $29.0 million at year-end 2020 to $7.8 million at September 30, 2021.
- Current assets were $66.0 million and current liabilities $35.0 million, for working capital of approximately $31.0 million and a current ratio of about 1.9. Inventory was $39.6 million, up from $22.4 million at year-end.
- Total liabilities were $46.0 million and equity $78.4 million. Notes payable totaled approximately $0.6 million; no balance was drawn on the $57.0 million U.S. revolving facility or the Canadian CAD $4.5 million facility. Lease liabilities totaled approximately $12.0 million.
- The U.S. credit facility matures in July 2024, is secured by substantially all company assets, and has financial covenants. The company reported covenant compliance at September 30, 2021.
Material developments, outlook and risks
- PermaPlate Film was acquired on May 25, 2021 for $30.0 million in cash, expanding U.S. window-film distribution and installation. It contributed $5.3 million revenue and $0.4 million net income in Q3. Purchase accounting remained preliminary.
- After quarter-end, XPEL acquired five U.S. and Canadian businesses on October 1 for a preliminary combined price of approximately $20.1 million, financed with cash and revolver borrowings. It also acquired U.K.-based invisiFRAME on November 1; purchase accounting was not complete.
- Management said operations had not experienced major negative effects from COVID-19 or global supply-chain issues through Q3, but warned that future impacts remain uncertain. Semiconductor shortages and low dealer vehicle inventories affected PermaPlate; persistent shortages could affect the broader business.
- The filing notes inflationary increases in raw-material, labor and transportation costs and expects these pressures to continue for some time. XPEL depends on one main source for paint protection film and one distributor for sales in China; China exposure, automotive cyclicality, competition, acquisition execution and rapid growth are also identified risks.
- Management expected sufficient liquidity for at least 12 months from filing, supported by cash, operating cash generation and committed credit facilities. The filing provides no specific revenue or earnings guidance. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- A $237,203 reduction in the fair value of contingent consideration from a 2020 acquisition was recorded in general and administrative expense for the nine months. Management said ordinary-course litigation was not expected to have a material effect, while acknowledging litigation outcomes are uncertain.
Important facts for investors to verify
- Whether inventory growth and the build in trade payables reflect sustainable demand and purchasing needs, and how they affect future operating cash flow.
- Whether supply, transportation and inflationary cost pressures affect product availability, margins or customer demand.
- PermaPlate’s recovery from reduced operating capacity and low dealership inventories, and the performance and funding needs of the subsequent acquisitions.
- Revenue exposure to the largest customer, which represented 15.4% of Q3 sales and 17.9% of nine-month sales; verify also reliance on a primary paint-protection-film supplier and a single China distributor.
- Compliance with credit-facility covenants and the cash and borrowing impact of post-quarter acquisitions. The U.S. facility is secured by substantially all current and future assets.
- Whether reported growth and margins persist, noting that interim results may not indicate full-year performance and that the filing provides no formal financial forecast.