XPEL, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with the three months ended March 31, 2020 unless otherwise noted. XPEL sells, distributes, and installs protective films and coatings, supported by proprietary pattern-design software. The interim financial statements are unaudited.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $51.9 million | $28.4 million | +82.7% |
| Gross profit / margin | $18.3 million / 35.3% | $10.3 million / 36.3% | Gross profit +77.6%; margin down 1.0 percentage point |
| Operating income / margin | $8.5 million / 16.5% | $2.5 million / 8.7% | Operating income +244.1% |
| Net income / diluted EPS | $6.8 million / $0.25 | $1.6 million / $0.06 | Net income +324.9% |
| Operating cash flow | $8.9 million | $0.3 million | Increased |
| EBITDA (non-GAAP) | $9.2 million | $2.6 million | Increased |
Product revenue rose 89.2% to $44.9 million; service revenue rose 49.5% to $6.9 million. Paint protection film revenue increased 81.0%, window film 131.7%, and installation labor 54.1%. China revenue increased 428.8% to $10.7 million, representing 20.6% of total revenue; management cited pandemic-affected comparisons in China and Asia Pacific in early 2020 and broader product demand. The largest customer contributed 20.6% of sales, versus 7.1% a year earlier.
Product gross margin improved to 29.8% from 29.4%, attributed to product-cost improvements and operating leverage. Service gross margin declined to 70.7% from 71.3%, reflecting a higher share of lower-margin installation labor. Overall gross margin fell as cost of sales increased to 64.7% of revenue from 63.7%. Operating expenses rose 24.7%, slower than revenue, and fell to 18.8% of revenue from 27.5%.
Cash, liquidity, and debt
At March 31, 2021, cash and cash equivalents were $35.6 million, up from $29.0 million at year-end 2020. Current assets were $72.5 million and current liabilities $26.1 million. Operating cash flow of $8.9 million included a $4.6 million increase in accounts payable and accrued liabilities and a $2.6 million inventory cash use. Investing activities used $1.5 million, primarily for $1.4 million of property and equipment purchases; financing activities used $0.7 million, mainly for debt repayments.
Notes payable were approximately $5.4 million on the balance sheet, including current and long-term portions. No amounts were drawn on the $8.5 million U.S. or CAD $4.5 million Canadian revolving facilities. The U.S. term loan bears 3.50% interest and matures in June 2023. XPEL reported compliance with debt covenants. Management said available cash, operating funds, and credit lines should meet requirements and that liquidity was sufficient for at least the next 12 months.
Material changes, outlook, and risks
- Management described a strong recovery from initial COVID-19 impacts and marked revenue increases across major regions, but said the pandemic’s continuing effects remained uncertain and not reasonably estimable.
- No specific revenue or earnings guidance was provided. Management expects cash needs for working capital, capital expenditures, acquisitions, and debt service.
- Management warned that automotive demand is cyclical and that a global semiconductor shortage affecting vehicle production could adversely affect results.
- Key disclosed risks include reliance on one principal paint-protection-film supplier and one China distributor, China market and trade uncertainty, customer concentration, foreign-currency exposure, competition, and the ability to manage rapid growth. The company does not hedge currency translation exposure.
- The supply agreement with the principal supplier includes minimum purchases of $5 million quarterly and $20 million annually. Its current term runs through March 21, 2022, with automatic two-year renewals unless terminated under the agreement.
- Two new warehouse leases were scheduled to commence in 2021: San Antonio base rent totaling $4.7 million over 88 months and Charlotte base rent totaling $0.95 million over 84 months.
- Acquisition-related contingent consideration was valued at $0.52 million at quarter-end; a $54,401 fair-value reduction was recorded in general and administrative expense. Management said ordinary-course litigation and claims were not expected to have a material impact, while noting outcomes remain uncertain.
Important facts for investors to verify
- Whether revenue growth, particularly in China, persists beyond pandemic-related comparison effects; monitor the 20.6% largest-customer sales concentration.
- Whether gross margin stabilizes as product costs, installation mix, and operating leverage change.
- How the semiconductor shortage, COVID-19, and automotive-market conditions affect demand and supply.
- Whether operating cash flow remains strong after considering inventory and other working-capital needs.
- Supplier minimum-purchase obligations, new lease commitments, debt repayment requirements, and future acquisition-related contingent payments.
- Management’s non-GAAP EBITDA reconciliation and limitations: EBITDA was $9.2 million, but the filing cautions it is not a substitute for GAAP measures.