XPEL, Inc. — Q2 2020 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2020; filed August 12, 2020. XPEL provides protective films and coatings, installation services, and related software. Results are unaudited.
Financial results
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Revenue | $35.8 million | $30.1 million | +19.0% |
| Gross profit / margin | $11.7 million / 32.8% | $10.6 million / 35.3% | Profit +10.5%; margin down 2.5 percentage points |
| Operating income / margin | $5.1 million / 14.4% | $4.0 million / 13.2% | +29.4% |
| Net income | $4.0 million | $3.0 million | +32.1% |
| Diluted EPS | $0.14 | $0.11 | Up $0.03 |
| EBITDA (non-GAAP) | $5.7 million | $4.4 million | +29.2% |
For the six months, revenue was $64.2 million (+17.1%), gross profit $22.0 million (34.3% margin, unchanged), operating income $7.6 million (+18.3%), and net income $5.6 million (+14.7%). Six-month EPS was $0.20 versus $0.18; EBITDA was $8.2 million (+14.0%).
Cash flow and liquidity: Six-month operating cash flow was $11.8 million versus $3.1 million a year earlier. Cash and equivalents were $25.8 million at June 30, up from $11.5 million at year-end. Investing used $2.4 million, including the acquisition and capital expenditures. Financing provided $4.8 million. Management said available cash, operating cash generation, and committed facilities were sufficient for at least 12 months from filing.
Debt: Total debt was $7.4 million, compared with $0.8 million at December 31, 2019. This included a new $6.0 million, three-year term loan at 3.5%; no balance was outstanding on either revolving facility at quarter-end. The $8.5 million U.S. revolver was renewed through June 2022. The company reported covenant compliance. Cash exceeded reported debt by approximately $18.4 million.
Changes and operating drivers
- Q2 product revenue rose 21.8%; paint protection film increased 14.6% and window film 87.8%. Service revenue increased 3.8%, with installation labor up 45.1% and training down 83.0%.
- China sales rose 219.3% year over year to $10.0 million, while U.S. sales declined 2.3% and Canada declined 24.1%. Management attributed the regional divergence to COVID-19 impacts and a recovery in China.
- Q2 product gross margin improved slightly, but service gross margin fell to 68.8% from 80.4%. Management cited a greater mix of lower-margin installation labor and retaining installation staff during demand reductions. Consolidated gross margin contracted to 32.8% from 35.3%.
- In February, XPEL acquired Protex Centre, a Canadian paint-protection installation shop, for preliminary consideration of $2.4 million. It contributed $1.2 million of revenue and $189,000 of net income during the reported six months. XPEL also purchased the remaining 15% interest in its U.K. subsidiary for about $762,000, eliminating the reported non-controlling interest.
- The largest customer represented 27.9% of Q2 sales, versus 10.4% in Q2 2019; for the six months, the shares were 18.7% and 13.9%, respectively.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management said the future effects of COVID-19 could be significant but could not be reasonably estimated; it planned to monitor conditions and adapt operations.
- Management cited ongoing COVID-19 disruption, automotive-industry cyclicality, competition, reliance on limited suppliers and a single China distributor, foreign-exchange exposure, and risks around growth, acquisitions, and financing. Work-from-home measures also create operational and cybersecurity risks.
- Six-month foreign-exchange loss was approximately $420,000, compared with about $15,000 in the prior-year period. XPEL does not currently hedge currency translation exposure.
- The company has an exclusive supply agreement through March 2022, automatically renewable, and agreed to minimum purchases of $5 million quarterly and $20 million annually from its principal supplier.
- Management considered material impact from ordinary-course litigation and claims remote; it cautioned that unforeseen developments could still result in material charges. No material off-balance-sheet arrangements were reported.
Key facts investors should verify
- Whether China’s sharp Q2 growth and the company’s unusually high largest-customer sales concentration persist.
- Whether COVID-19-related weakness in the U.S., Canada, and other markets continues and how it affects demand and installation margins.
- Gross-margin trends, especially service margins, and the balance between product growth and lower-margin installation activity.
- Acquisition integration, final purchase-price adjustments for Protex Centre, and the returns generated by acquisition spending.
- Debt repayment, covenant headroom, the principal-supplier minimum-purchase commitment, and foreign-exchange exposure.