XPEL, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are to the corresponding 2022 periods. XPEL sells, distributes and installs protective films and coatings, including automotive paint protection and window films, architectural films and ceramic coatings. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $102.7 | $89.8 | $290.8 | $245.5 |
| Gross profit / margin | $41.5 / 40.4% | $35.8 / 39.8% | $121.5 / 41.8% | $96.5 / 39.3% |
| Operating income / margin | $17.6 / 17.2% | $17.3 / 19.3% | $52.7 / 18.1% | $43.1 / 17.6% |
| Net income / net margin | $13.7 / 13.3% | $13.3 / 14.8% | $40.8 / 14.0% | $33.0 / 13.5% |
| Diluted EPS | $0.49 | $0.48 | $1.48 | $1.20 |
| EBITDA (non-GAAP) | $19.7 | $18.9 | $59.2 | $48.0 |
Q3 revenue increased 14.4% and net income 2.5% year over year; nine-month revenue increased 18.4% and net income 23.6%. EBITDA is management’s non-GAAP measure and should not be viewed as a substitute for GAAP results.
Revenue trends and material changes
- Q3 product revenue rose 11.7%; service revenue rose 25.7%. For the first nine months, product revenue rose 16.0% and service revenue 28.6%.
- Paint protection film grew 8.8% in Q3 and 12.7% year to date. Window film grew 21.9% and 26.6%, respectively. Installation labor revenue increased 34.2% in Q3 and 33.2% year to date.
- Management attributed growth to demand across regions, increased product awareness and adoption, higher attach rates, and expansion in company-owned installation, dealership and OEM channels. Architectural window film and FUSION ceramic coatings also grew, though from smaller revenue bases.
- China revenue declined 7.0% in Q3 and 10.0% year to date; the filing cites lingering pandemic effects in discussing Q3 paint protection film sales. U.S. revenue grew 14.5% in Q3 and 18.9% year to date.
- Gross margin improved year to date, with management citing lower product costs and improved operating leverage. Q3 operating income rose only 1.9% as operating expenses increased 29.5%; Q3 operating margin fell to 17.2% from 19.3%. Service gross margin percentage also declined, attributed to revenue mix.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $38.5 million, versus $9.7 million in 2022. The 2023 figure included a $7.4 million escrow deposit for acquisitions completed in October; management stated operating cash flow would have been $45.9 million excluding that payment. Working-capital movements included higher accounts payable and accrued liabilities.
- Investing cash outflow was $10.2 million, including $4.7 million of acquisition spending and $4.7 million of property and equipment purchases. Financing cash outflow was $26.2 million, primarily repayment of revolving credit borrowings. Cash increased $2.3 million to $10.4 million.
- At September 30, current assets were $138.0 million and current liabilities $46.5 million. Inventory was $92.5 million, up from $80.6 million at year-end 2022; accounts receivable was $24.1 million, up from $14.7 million. Total assets were $226.8 million and stockholders’ equity $166.6 million.
- No balance was outstanding on the $125 million U.S. revolving facility or the Canadian CAD $4.5 million facility. The U.S. facility matures April 6, 2026; the company reported compliance with debt covenants. The U.S. facility is secured by a lien on material assets. Management reported approximately $128.3 million of committed borrowing capacity and believes liquidity is sufficient for at least 12 months from filing.
- Lease liabilities totaled approximately $15.2 million. Recurring fair-value contingent liabilities were $1.1 million. The company reported warranty liabilities of $0.4 million.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or margin guidance. Management expects cash, operating cash generation and committed facilities to support working capital, capital expenditures, acquisitions and debt service; interim results may vary with customer purchasing patterns and seasonality.
- Management cited inflation, rising interest rates, currency movements, potential supply-chain and logistics constraints, and uncertainty in vehicle sales and production. The UAW strike that began in September could affect dealership inventories if work stoppages continue. Russia’s invasion of Ukraine had no material direct impact to date, but future effects remain uncertain.
- Key disclosed exposures include dependence on automotive sales and production, reliance on one distributor in China, competition, supply disruptions, international operating and trade risks, and the ability to manage rapid growth and acquisitions. XPEL does not hedge foreign currency translation or floating-rate borrowing exposure; it stated a hypothetical 200-basis-point rate increase could materially affect its financial statements.
- XPEL acquired Protective Solutions, Inc. in May for $5.5 million, contributing $1.6 million of revenue and $0.3 million of net income in the nine-month period. On October 1 and 4, it completed two additional acquisitions for approximately $13.4 million total; $7.4 million was deposited in escrow by quarter-end and recorded in prepaid expenses.
- Management said ordinary-course litigation and claims are not expected to have a material impact, while acknowledging that an unforeseen adverse development could result in material charges. No material changes to previously disclosed risk factors were reported.
- A director adopted a Rule 10b5-1 plan to sell up to 316,912 shares from December 1, 2023 through December 31, 2024.
Important facts for investors to verify
- Whether product and service growth, particularly installation and architectural film demand, persists and translates into operating profit as expenses rise.
- Whether inventory and receivables convert to cash, and how much operating cash flow reflects payment timing versus recurring earnings.
- Performance and integration of recent acquisitions, including the expected contribution and purchase accounting for the two October transactions.
- Developments in China, automotive production and dealership inventories, including any lasting effects from labor disruptions or macroeconomic conditions.
- Exposure to currency and interest-rate movements, borrowing capacity and covenant compliance, and any material litigation or warranty developments.