XPEL, Inc. — Form 10-Q Summary
Business context and period. XPEL sells, distributes and installs automotive aftermarket products, including paint-protection and window films, and provides related software and services. This unaudited report covers the quarter and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $30.1 million | $28.8 million | $54.8 million | $53.9 million |
| Gross profit / margin | $10.6 million / 35.3% | $8.6 million / 29.7% | $18.8 million / 34.3% | $16.2 million / 30.0% |
| Operating income / margin | $4.0 million / 13.2% | $3.5 million / 12.0% | $6.4 million / 11.8% | $6.2 million / 11.6% |
| Net income | $3.0 million | $2.6 million | $4.9 million | $4.6 million |
| Diluted EPS | $0.11 | $0.09 | $0.18 | $0.17 |
| EBITDA, non-GAAP | $4.4 million | $3.8 million | $7.2 million | $6.9 million |
Q2 revenue increased 4.5% and net income rose 17.8%; first-half revenue increased 1.7% and net income rose 4.9%. Gross-margin expansion reflected a lower share of sales to lower-margin distributors, particularly in China. Operating expenses increased 30.5% in Q2 and 24.2% year to date, faster than revenue.
Revenue mix and geography. Q2 product revenue grew 1.7%, while service revenue rose 22.8%. Paint-protection-film revenue declined 3.4% in Q2 and 6.0% year to date; window-film revenue increased 34.1% and 41.5%, respectively. Management attributed the paint-protection decline primarily to moderation after rapid growth in China and increased competition there. Estimated Q2 sales to China fell 66.8% year over year, while U.S. sales rose 55.5%. Geographic sales are estimates because some international orders ship through U.S. freight forwarders.
Cash flow and liquidity. First-half operating cash flow was $3.1 million, versus $1.6 million in 2018; investing cash use was $0.9 million and financing cash use was $0.7 million. Cash increased to $5.5 million from $4.0 million at year-end. Current assets were $29.6 million and current liabilities $13.5 million at June 30. Inventory increased to $15.3 million from $10.8 million; management cited planned higher inventory to support lower-cost ocean shipping. The company stated it had sufficient liquidity for at least 12 months after filing.
Debt and leases. Notes payable totaled $1.17 million, down from $1.82 million at December 31, 2018. There were no borrowings on the $8.5 million U.S. revolver or the CAD $4.5 million Canadian facility, and the company reported compliance with debt covenants. Adoption of the lease accounting standard in 2019 resulted in recognition of $4.0 million of right-of-use assets and $4.1 million of lease liabilities at June 30.
Changes, outlook and risks
- Q2 gross margin improved 5.6 percentage points year over year; first-half gross margin improved 4.3 points. Higher-margin product-channel mix supported product margins, while installation labor weighed on service margin percentages.
- Sales and marketing expense rose partly because the annual dealer conference occurred in Q2 2019 rather than Q1 as in 2018. General and administrative expense increased with personnel, occupancy, IT, research and development, and regulatory-filing costs.
- The company recorded $66,364 of impairment expense in the first half related to closing its Quebec City installation location and selling the territory to a new franchisee, including $30,480 of intangible-asset impairment and $35,884 of goodwill impairment.
- No specific numerical revenue or earnings guidance is provided. Management described ongoing priorities as international expansion, brand awareness, distribution and installation-channel development, acquisitions, and growth in non-automotive products.
- Management identified competition, supplier concentration, reliance on a single China distributor, China and other international-market risks, currency movements, rapid-growth demands, and financing availability among the business risks. Foreign-currency translation exposure is not hedged.
- The primary supplier agreement provides exclusive commercialization rights through March 21, 2020, with automatic two-year renewals unless terminated on notice; XPEL agreed to commercially reasonable efforts to purchase at least $5 million quarterly and $20 million annually. Management said ordinary-course claims are not expected to have a material impact, but litigation outcomes remain uncertain.
Important facts for investors to verify
- Whether the China sales decline and increased competition persist, and the extent of the company’s reliance on its China distributor.
- Whether growth in window film and services can offset declining paint-protection-film sales and support margins.
- How inventory growth, supplier payment timing and collection patterns affect operating cash flow and working-capital needs.
- Customer concentration: the largest customer represented 10.4% of Q2 sales and 13.9% of first-half sales, down from 32.8% and 31.6%, respectively, in 2018.
- Compliance with credit-facility covenants, the facilities’ availability and renewal terms, and the effect of lease obligations and the supplier purchase commitment on liquidity.