XPEL, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. XPEL sells, distributes and installs protective films and coatings, and provides related software and services. The filing was signed May 14, 2020.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $28.39 million | $24.73 million | +14.8% |
| Gross profit / margin | $10.30 million / 36.3% | $8.15 million / 33.0% | Margin +3.3 percentage points |
| Operating income / margin | $2.48 million / 8.7% | $2.47 million / 10.0% | +0.4% |
| Net income | $1.61 million | $1.86 million | -13.4% |
| Diluted EPS | $0.06 | $0.07 | Lower |
| EBITDA, non-GAAP | $2.57 million | $2.84 million | Lower |
| Operating cash flow | $0.27 million | $1.01 million | Lower |
Product revenue rose 12.8%; service revenue rose 26.4%. Window-film revenue increased 68.6%, installation labor 55.7%, and paint-protection-film revenue 7.1%. The U.S. was the largest reported region, up 24.3%; China revenue fell 55.2%. Management attributed product gross-margin improvement to a lower share of sales to lower-margin distributors, product-cost improvements and operating leverage. Higher installation labor costs reduced the service gross-margin rate.
Liquidity, cash flow and debt
Cash and cash equivalents were $14.79 million at March 31, versus $11.50 million at December 31, 2019. Operating cash flow was $0.27 million; inventory increased by approximately $3.93 million and was a principal cash-flow headwind. Investing cash outflow was $2.11 million, including the Protex Centre acquisition and capital expenditures. Financing provided $5.07 million, mainly from a $6.0 million revolver draw, partly offset by the minority-interest purchase and note repayments.
Quarter-end debt obligations were approximately $7.6 million: $6.0 million drawn on the Bank of San Antonio revolver and $1.55 million of acquisition notes. The company reported compliance with its debt covenants. It had an $8.5 million U.S. revolver and an undrawn CAD $4.5 million Canadian facility at quarter-end. Subsequent to quarter-end, it borrowed CAD $4.0 million under the Canadian facility and, on May 11, borrowed $6.0 million under a three-year term loan at 3.5%; it also renewed the U.S. revolver through June 5, 2022. Management stated it expected sufficient liquidity for at least 12 months from the filing date.
Material changes and notable items
- Sales growth and improved gross margin did not translate into higher net income: operating expenses rose 37.6%, and foreign-currency exchange losses increased to $0.42 million from $0.02 million. Operating income was nearly flat.
- On February 1, XPEL acquired Protex Centre, a paint-protection installation shop in Quebec, for a preliminary $2.38 million, funded with cash and promissory notes. The acquisition contributed $0.28 million of revenue and $0.03 million of net income in the quarter; purchase-price adjustments were not final.
- XPEL purchased the remaining 15% of its UK subsidiary for £600,000, eliminating the reported non-controlling interest.
- Inventory rose to $18.79 million from $15.14 million at year-end. The company’s supply agreement requires commercially reasonable efforts to buy at least $5 million quarterly and $20 million annually from its principal supplier.
Outlook, risks and contingencies
Management said COVID-19 had not materially affected Q1 results except in China, but warned that effects on Q2 and later periods could be significant and could not then be reasonably estimated. It cited global vehicle-sales declines and uncertainty in customer demand, suppliers and operations. Responses included remote work where feasible, safety measures, cost management, salary and director-compensation deferrals, and face-shield production. The filing provides no numerical earnings or revenue guidance.
Key risks include pandemic-related demand and operating disruption, automotive-market exposure, reliance on a limited supplier and a single China distributor, currency volatility, acquisition execution, and access to financing. XPEL does not hedge foreign-currency translation exposure. Management considered ordinary-course claims unlikely to have a material impact; it also noted unforeseen litigation developments could result in material charges. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Subsequent-period demand, particularly in China and other markets affected by COVID-19, and the impact on Q2 results.
- Cash conversion and inventory levels, given the sharp inventory build and lower operating cash flow.
- Terms, covenant headroom and repayment burden of the $6.0 million term loan, U.S. revolver and Canadian borrowing.
- Final Protex Centre purchase-price allocation and the acquired business’s ongoing contribution.
- Dependence on the principal supplier, including compliance with quarterly and annual purchase commitments.