XPEL, Inc. — Q3 2020 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. Comparisons are with the corresponding 2019 periods. XPEL supplies protective films and coatings, installation services, and related software. Amounts are U.S. dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Revenue | $46.1 million | $35.6 million | +29.5% |
| Gross profit | $16.0 million | $12.3 million | +30.6% |
| Gross margin | 34.8% | 34.5% | +0.3 percentage points |
| Operating income | $8.4 million | $5.7 million | +48.4% |
| Net income | $6.6 million | $4.5 million | +46.5% |
| Diluted EPS | $0.24 | $0.16 | — |
For the nine months, revenue rose 22.0% to $110.3 million; operating income increased 32.4% to $16.0 million; and net income grew 30.0% to $12.2 million. Nine-month diluted EPS was $0.44 versus $0.34. Gross margin was 34.5%, compared with 34.3%.
Q3 product revenue increased 28.3%, led by window film (+78.9%) and paint protection film (+20.5%). Service revenue grew 37.3%, including a 77.3% increase in installation labor. Window film and installation growth reflect both demand and channel execution; installation revenue also benefited from acquisitions. The largest customer represented 20.4% of Q3 sales, versus 26.3% a year earlier; for the nine months, the figures were 19.4% and 18.8%.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $14.2 million, versus $5.6 million in 2019. Investing used $2.9 million, including the Protex Centre acquisition; financing provided $4.2 million.
- Cash and cash equivalents were $27.2 million at September 30, 2020, up from $11.5 million at December 31, 2019. Inventory was $19.0 million, versus $15.1 million.
- Total debt was $6.7 million, versus $0.8 million at year-end 2019. This included $5.5 million outstanding on a new three-year term loan bearing 3.5% interest. The $8.5 million U.S. and CAD $4.5 million Canadian revolving facilities had no quarter-end borrowings. The company reported covenant compliance.
- Current assets were $58.0 million and current liabilities $20.9 million at quarter-end. Total liabilities were $29.8 million and stockholders’ equity $46.4 million.
Material changes, outlook and risks
- Management said COVID-19 affected operations in the first half, but revenue recovered substantially in Q3, increasing across major regions except Latin America. It said the pandemic’s future effects remained uncertain and not reasonably estimable.
- Management stated that cash, operating cash generation, and borrowing capacity were sufficient for at least the 12 months following filing. The filing provides no specific revenue or earnings guidance.
- In February, XPEL acquired the remaining 15% of its UK subsidiary for approximately $762,000. It also acquired Protex Centre, a Canadian paint-protection installation shop, for a preliminary $2.4 million; the business contributed $2.6 million of revenue and $572,000 of net income during the reported nine months. On November 2, 2020, after quarter-end, XPEL acquired certain assets of France Auto Racing for a preliminary $353,000.
- Key disclosed risks include pandemic-related demand and operating disruption, dependence on a limited number of suppliers, reliance on a single distributor in China, customer concentration, foreign currency exposure, automotive-market cyclicality, and execution of growth and acquisition plans. The supply agreement requires commercially reasonable efforts to purchase at least $5 million quarterly and $20 million annually from the primary supplier.
- Management considered material litigation impact remote and said required provisions had been recorded; it also noted that unforeseen adverse litigation developments could have a material impact. No material change in contractual obligations or critical accounting policies was reported.
Important facts for investors to verify
- Whether the Q3 recovery in demand continued after September, particularly given ongoing COVID-19 uncertainty and automotive-market cyclicality.
- Whether window-film and installation growth can be sustained, and how their mix affects gross margins.
- Customer and supplier concentration, including the largest customer’s share of sales and reliance on the primary supplier and China distributor.
- Acquisition integration, final purchase-price adjustments for Protex Centre, and the results of the France Auto Racing asset acquisition.
- Debt repayment, covenant headroom, and working-capital needs, including increased inventory and accrued liabilities.