XPEL, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. XPEL sells, distributes and installs automotive paint-protection and window films, architectural films, coatings and related products and services. This unaudited filing covers the quarter and six months ended June 30, 2022; results are consolidated and managed as one operating segment. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $83.9 (+22.0%) | $68.7 | $155.8 (+29.1%) | $120.6 |
| Gross profit / margin | $33.0 / 39.3% | $25.2 / 36.7% | $60.7 / 39.0% | $43.5 / 36.1% |
| Operating income / margin | $15.7 / 18.8% | $12.7 / 18.4% | $25.8 / 16.6% | $21.2 / 17.6% |
| Net income / margin | $11.9 / 14.2% | $10.2 / 14.8% | $19.7 / 12.7% | $17.0 / 14.1% |
| Diluted EPS | $0.43 | $0.37 | $0.71 | $0.62 |
| EBITDA (non-GAAP) | $17.2 (+26.6%) | $13.6 | $29.1 (+27.8%) | $22.7 |
Product revenue rose 14.3% in Q2 and 20.8% year to date; service revenue grew 67.3% and 80.1%, respectively. Window-film revenue increased 42.4% in Q2 and 49.8% year to date. Installation labor revenue more than doubled in Q2, primarily reflecting dealership-services acquisitions completed in 2021. Paint-protection-film revenue increased 6.7% in Q2. The United States accounted for 58.6% of Q2 revenue; China revenue fell 37.4% year over year and represented 9.4% of revenue.
Cash, debt and liquidity
- Cash was $9.3 at June 30, 2022, versus $9.6 at December 31, 2021. Operating cash flow was negative $2.5 for the first six months, compared with positive $19.1 in the prior-year period; management attributed the change mainly to an intentional inventory build to mitigate supply risk. Inventory increased to $74.1 from $51.9.
- Investing cash use was $4.6, versus $33.6 a year earlier, when the company completed the PermaPlate acquisition. Financing provided $6.7, primarily from additional revolving-credit borrowings.
- Total debt obligations were approximately $32.2, including $32.0 drawn on a $75.0 revolving facility. The facility’s rate was 4.00% at quarter-end, up from 2.50% at year-end, and it matures July 5, 2024. The company reported compliance with its debt covenants. A separate Canadian facility had no outstanding balance.
- Management stated available cash, operating funds and committed borrowing capacity should cover needs and that liquidity was sufficient for at least 12 months from the filing date. Current assets were $107.6 and current liabilities $40.4.
Material changes, outlook and risks
- Revenue and gross profit expanded, and gross margin improved year over year. Product margin benefited from lower product costs and operating leverage. Service margin declined as lower-margin installation labor became a larger share of service revenue; low new-car-dealership inventories also affected dealership business by $0.3 in Q2 and $0.6 year to date.
- Operating expenses grew faster than revenue year to date, up 56.5%, with higher personnel, occupancy, travel, professional-fee and acquisition-related costs, including acquired-intangible amortization. Interest expense and foreign-exchange losses also increased.
- No quantified financial guidance is provided. Management described continued demand growth in most major markets and ongoing global expansion, channel development, acquisitions and non-automotive product opportunities. It cautioned that future pandemic-related disruption is difficult to forecast.
- Risks highlighted include supply-chain disruption, automotive cyclicality and semiconductor-related low dealership inventories, inflation, foreign-currency exposure, competition, reliance on a distributor for China sales, and acquisition execution. XPEL does not hedge foreign-currency translation or floating-rate debt exposure; it said a hypothetical 200-basis-point rate increase could materially affect financial statements.
- The entrotech supply agreement terminated March 21, 2022. XPEL said it continues purchasing from the supplier and expects to continue the relationship, while seeking a new agreement; it cannot assure that negotiations will succeed.
- Contingent acquisition liabilities were $1.1 at June 30, down from $2.7 at year-end; a $0.3 fair-value reduction was recorded in general and administrative expense during the six-month period. Several 2021 acquisition valuations remained preliminary, with finalization expected by September 30, 2022. Management said ordinary-course litigation was not expected to have a material impact, while noting outcomes remain uncertain.
Important facts for investors to verify
- Whether the inventory build converts to sales and operating cash flow, and whether supply-chain risks ease.
- How dealership vehicle inventories and automotive production affect installation revenue and service margins.
- Whether the elevated revolving-credit balance, rising floating rates and covenant headroom remain manageable.
- Progress on the entrotech supply agreement and the effect of any change in supply terms.
- Final acquisition purchase-price allocations and contingent consideration, including whether subsequent adjustments affect amortization, earnings or cash needs.
- Whether China sales concentration, currency movements, inflation and other global-market risks materially change results.