XPEL, Inc. — Q3 2019 Form 10-Q
Business context and period. Unaudited results for the three and nine months ended September 30, 2019, compared with the same 2018 periods. XPEL sells, distributes and installs protective films and coatings, and provides related software and services. It reports one operating segment.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $35.6 million (+21.9%) | $29.2 million | $90.4 million (+8.8%) | $83.1 million |
| Gross margin | $12.3 million; 34.5% | $8.9 million; 30.3% | $31.0 million; 34.3% | $25.0 million; 30.1% |
| Operating income | $5.7 million; 15.9% margin | $3.0 million; 10.2% margin | $12.1 million; 13.4% margin | $9.2 million; 11.1% margin |
| Net income | $4.5 million; 12.7% margin | $2.2 million; 7.5% margin | $9.4 million; 10.4% margin | $6.8 million; 8.2% margin |
| Diluted EPS | $0.16 | $0.08 | $0.34 | $0.25 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $5.6 million | $4.3 million |
- Revenue mix and growth: Q3 product revenue was $30.8 million (+21.2%) and service revenue $4.8 million (+26.4%). Paint protection film grew 17.7% in Q3 but 2.3% year to date; window film grew 65.7% and 50.6%, respectively. Nine-month service revenue rose 23.6%.
- Cash and liquidity: Cash was $7.3 million at September 30, up from $4.0 million at year-end. Current assets were $33.1 million and current liabilities $12.8 million. Nine-month investing cash outflow was $1.5 million and financing outflow $0.9 million.
- Debt and leases: Notes payable totaled $1.0 million, down from $1.8 million at year-end. Neither the $8.5 million U.S. revolver nor the CAD $4.5 million Canadian facility had a balance outstanding. Operating lease liabilities were $4.6 million after adoption of the new lease standard.
Changes, outlook and risks
- Gross margin improved substantially year over year, primarily from a lower share of sales to lower-margin distributors, product-cost improvements and operating leverage. Service gross margin percentage declined, which management attributed mainly to a greater share of lower-margin installation labor.
- Operating expenses increased 12.7% in Q3 and 19.9% year to date. Management cited personnel, occupancy, IT and research and development costs to support growth. Q3 sales and marketing expense declined due mainly to one-time marketing costs in the prior-year quarter.
- Nine-month revenue in China fell 32.8% to $17.0 million; U.S. revenue increased 35.0% to $44.7 million. Management notes reliance on a single China distributor; the largest customer represented 26.3% of Q3 sales and 18.8% of nine-month sales.
- Inventory increased to $16.4 million from $10.8 million at year-end. Management attributed the increase primarily to planned stock build to facilitate lower-cost ocean shipping. Operating cash flow also reflected substantial inventory and receivable investment, partly offset by increased payables.
- The company recorded $66,364 of impairment expense related to closing its Quebec City installation location and selling that franchise territory. It adopted lease accounting ASC 842 on January 1, 2019.
- Management stated it expected available cash, internally generated funds and committed facilities to meet needs for at least the next 12 months. No specific revenue or earnings guidance was provided. The primary supplier agreement includes a $20 million annual minimum purchase commitment; its stated term runs through March 21, 2020, with automatic two-year renewals unless terminated as specified.
- Risks identified include competition, reliance on a limited number of suppliers, China concentration, foreign-exchange exposure, rapid-growth demands, and execution of product, expansion and acquisition initiatives. Management reported compliance with debt covenants and effective disclosure controls. Ordinary-course claims and litigation remain possible; management considered a material impact unlikely, while acknowledging litigation uncertainty.
Investor verification points
- Confirm the drivers and sustainability of the Q3 margin expansion, particularly product margins and distributor mix.
- Monitor China sales, reliance on the single distributor and the largest customer’s share of revenue.
- Assess inventory growth, shipping plans, receivable collections and the extent to which operating cash flow depends on payment timing.
- Review the supplier minimum-purchase commitment and renewal or termination terms, as well as available revolver capacity and covenant requirements.
- Reconcile the U.S. revolver interest-rate disclosures: the notes report 6.00% at September 30, 2019 and 6.25% at December 31, 2018, while MD&A reports the reverse.