UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,September 30, 2023
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:file number 001-38858
XPEL, INC.
(Exact name of registrant as specified in its charter)
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Nevada | 20-1117381 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| |
711 Broadway St., Suite 320 | San Antonio | Texas | 78215 | |
(Address of Principal Executive Offices) | | | (Zip Code) | |
Registrant's telephone number, including area code: (210) 678-3700
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
| | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | XPEL | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Webweb site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The registrant had 27,618,08427,628,953 shares of common stock outstanding as of May 9,November 8, 2023.
Part I. Financial Information
Item 1. Financial Statements
XPEL, INC.
Condensed Consolidated Balance Sheets
(In thousands except share and per share data)
| | | | | | | | | | | |
| (Unaudited) | | (Audited) |
| March 31, 2023 | | December 31, 2022 |
Assets | | | |
Current | | | |
Cash and cash equivalents | $ | 8,330 | | | $ | 8,056 | |
Accounts receivable, net | 21,353 | | | 14,726 | |
Inventory, net | 84,594 | | | 80,575 | |
Prepaid expenses and other current assets | 6,035 | | | 3,464 | |
Total current assets | 120,312 | | | 106,821 | |
Property and equipment, net | 15,311 | | | 14,203 | |
Right-of-use lease assets | 15,624 | | | 15,309 | |
Intangible assets, net | 28,485 | | | 29,294 | |
Other non-current assets | 1,116 | | | 972 | |
Goodwill | 26,819 | | | 26,763 | |
Total assets | $ | 207,667 | | | $ | 193,362 | |
Liabilities | | | |
Current | | | |
Current portion of notes payable | $ | — | | | $ | 77 | |
Current portion lease liabilities | 4,261 | | | 3,885 | |
Accounts payable and accrued liabilities | 20,541 | | | 22,970 | |
Income tax payable | 2,828 | | | 470 | |
Total current liabilities | 27,630 | | | 27,402 | |
Deferred tax liability, net | 1,935 | | | 2,049 | |
Other long-term liabilities | 1,105 | | | 1,070 | |
Borrowings on line of credit | 28,000 | | | 26,000 | |
Non-current portion of lease liabilities | 12,240 | | | 12,119 | |
Total liabilities | 70,910 | | | 68,640 | |
Commitments and Contingencies (Note 11) | | | |
Stockholders’ equity | | | |
Preferred stock, $0.001 par value; authorized 10,000,000; none issued and outstanding | — | | | — | |
Common stock, $0.001 par value; 100,000,000 shares authorized; 27,616,064 issued and outstanding | 28 | | | 28 | |
Additional paid-in-capital | 11,376 | | | 11,073 | |
Accumulated other comprehensive loss | (1,904) | | | (2,203) | |
Retained earnings | 127,257 | | | 115,824 | |
Total stockholders’ equity | 136,757 | | | 124,722 | |
Total liabilities and stockholders’ equity | $ | 207,667 | | | $ | 193,362 | |
| | | | | | | | | | | |
| (Unaudited) | | (Audited) |
| September 30, 2023 | | December 31, 2022 |
Assets | | | |
Current | | | |
Cash and cash equivalents | $ | 10,374 | | | $ | 8,056 | |
Accounts receivable, net | 24,115 | | | 14,726 | |
Inventories | 92,458 | | | 80,575 | |
Prepaid expenses and other current assets | 11,091 | | | 3,464 |
| | | |
Total current assets | 138,038 | | | 106,821 | |
Property and equipment, net | 15,690 | | | 14,203 | |
Right-of-use lease assets | 14,014 | | | 15,309 | |
Intangible assets, net | 29,461 | | | 29,294 | |
Other non-current assets | 971 | | | 972 | |
Goodwill | 28,602 | | | 26,763 | |
Total assets | $ | 226,776 | | | $ | 193,362 | |
Liabilities | | | |
Current | | | |
Current portion of notes payable | $ | — | | | $ | 77 | |
Current portion of lease liabilities | 3,650 | | 3,885 |
Accounts payable and accrued liabilities | 42,059 | | 22,970 |
Income tax payable | 836 | | 470 |
Total current liabilities | 46,545 | | 27,402 |
Deferred tax liability, net | 1,205 | | | 2,049 |
Other long-term liabilities | 950 | | | 1,070 |
Borrowings on line of credit | — | | | 26,000 |
Non-current portion of lease liabilities | 11,523 | | | 12,119 |
| | | |
Total liabilities | 60,223 | | | 68,640 | |
Commitments and Contingencies (Note 11) | | | |
Stockholders’ equity | | | |
Preferred stock, $0.001 par value; authorized 10,000,000; none issued and outstanding | — | | | — | |
Common stock, $0.001 par value; 100,000,000 shares authorized; 27,628,953 and 27,616,064 issued and outstanding, respectively | 28 | | | 28 | |
Additional paid-in-capital | 12,050 | | | 11,073 | |
Accumulated other comprehensive loss | (2,179) | | | (2,203) | |
Retained earnings | 156,654 | | | 115,824 | |
Total stockholders’ equity | 166,553 | | | 124,722 | |
Total liabilities and stockholders’ equity | $ | 226,776 | | | $ | 193,362 | |
See notes to condensed consolidated financial statements.
XPEL, INC.
Condensed Consolidated Statements of Income (Unaudited)
(In thousands except per share data)
| | | | Three Months Ended March 31, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
Revenue | Revenue | | | | | Revenue | | | | | | | |
Product revenue | Product revenue | | $ | 67,308 | | | $ | 58,098 | | Product revenue | $ | 81,125 | | | $ | 72,616 | | | $ | 229,339 | | | $ | 197,753 | |
Service revenue | Service revenue | | 18,534 | | | 13,766 | | Service revenue | 21,552 | | | 17,142 | | | 61,416 | | | 47,759 | |
Total revenue | Total revenue | | 85,842 | | | 71,864 | | Total revenue | 102,677 | | | 89,758 | | | 290,755 | | | 245,512 | |
| Cost of Sales | Cost of Sales | | | Cost of Sales | |
Cost of product sales | Cost of product sales | | 42,180 | | | 38,194 | | Cost of product sales | 51,876 | | | 47,225 | | | 143,613 | | | 129,646 | |
Cost of service | Cost of service | | 7,702 | | | 5,953 | | Cost of service | 9,272 | | | 6,767 | | | 25,660 | | | 19,400 | |
Total cost of sales | Total cost of sales | | 49,882 | | | 44,147 | | Total cost of sales | 61,148 | | | 53,992 | | | 169,273 | | | 149,046 | |
Gross Margin | Gross Margin | | 35,960 | | | 27,717 | | Gross Margin | 41,529 | | | 35,766 | | | 121,482 | | | 96,466 | |
| Operating Expenses | Operating Expenses | | | Operating Expenses | |
Sales and marketing | Sales and marketing | | 6,675 | | | 6,311 | | Sales and marketing | 7,730 | | | 6,297 | | | 22,554 | | | 18,515 | |
General and administrative | General and administrative | | 14,354 | | | 11,369 | | General and administrative | 16,170 | | | 12,162 | | | 46,180 | | | 34,859 | |
Total operating expenses | Total operating expenses | | 21,029 | | | 17,680 | | Total operating expenses | 23,900 | | | 18,459 | | | 68,734 | | | 53,374 | |
| Operating Income | Operating Income | | 14,931 | | | 10,037 | | Operating Income | 17,629 | | | 17,307 | | | 52,748 | | | 43,092 | |
| Interest expense | Interest expense | | 523 | | | 220 | | Interest expense | 85 | | | 391 | | | 946 | | | 933 | |
Foreign currency exchange (gain) loss | | (9) | | | 5 | | |
Foreign currency exchange loss | | Foreign currency exchange loss | 398 | | | 372 | | | 419 | | | 833 | |
| Income before income taxes | Income before income taxes | | 14,417 | | | 9,812 | | Income before income taxes | 17,146 | | | 16,544 | | | 51,383 | | | 41,326 | |
Income tax expense | Income tax expense | | 2,984 | | | 2,009 | | Income tax expense | 3,490 | | | 3,226 | | | 10,553 | | | 8,302 | |
Net income | Net income | | $ | 11,433 | | | $ | 7,803 | | Net income | $ | 13,656 | | | $ | 13,318 | | | $ | 40,830 | | | $ | 33,024 | |
| Earnings per share | Earnings per share | | | Earnings per share | |
Basic | Basic | | $ | 0.41 | | | $ | 0.28 | | Basic | $ | 0.49 | | | $ | 0.48 | | | $ | 1.48 | | | $ | 1.20 | |
Diluted | Diluted | | $ | 0.41 | | | $ | 0.28 | | Diluted | $ | 0.49 | | | $ | 0.48 | | | $ | 1.48 | | | $ | 1.20 | |
Weighted Average Number of Common Shares | Weighted Average Number of Common Shares | | | | | Weighted Average Number of Common Shares | | | | | | | |
Basic | Basic | | 27,616 | | | 27,613 | | Basic | 27,623 | | | 27,616 | | | 27,620 | | | 27,614 | |
Diluted | Diluted | | 27,626 | | | 27,613 | | Diluted | 27,644 | | | 27,620 | | | 27,634 | | | 27,615 | |
See notes to condensed consolidated financial statements.
XPEL, INC.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
| | | | Three Months Ended March 31, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
Other comprehensive income | Other comprehensive income | | | | | Other comprehensive income | | | | | | | |
Net income | Net income | | $ | 11,433 | | | $ | 7,803 | | Net income | $ | 13,656 | | | $ | 13,318 | | | $ | 40,830 | | | $ | 33,024 | |
Foreign currency translation | Foreign currency translation | | 299 | | | (95) | | Foreign currency translation | (731) | | | (1,551) | | | 24 | | | (2,821) | |
Total comprehensive income | Total comprehensive income | | $ | 11,732 | | | $ | 7,708 | | Total comprehensive income | $ | 12,926 | | | $ | 11,767 | | | $ | 40,854 | | | $ | 30,203 | |
See notes to condensed consolidated financial statements.
XPEL, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(In thousands)
| Stockholders' Equity - Three Months Ended March 31 | |
Stockholders' Equity - Three Months Ended September 30 | | Stockholders' Equity - Three Months Ended September 30 |
| | Common Stock | | Additional Paid-in-Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity | | Common Stock | | Additional Paid-in-Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
| | Shares | | Amount | | | Shares | | Amount | |
Balance as of December 31, 2021 | 27,613 | | | $ | 28 | | | $ | 10,581 | | | $ | 74,443 | | | $ | (589) | | | $ | 84,463 | | |
Balance as of June 30, 2022 | | Balance as of June 30, 2022 | 27,613 | | | $ | 28 | | | $ | 10,760 | | | $ | 94,149 | | | $ | (1,860) | | | $ | 103,077 | |
Net income | Net income | — | | | — | | | — | | | 7,803 | | | — | | | 7,803 | | Net income | — | | | — | | | — | | | 13,318 | | | — | | | 13,318 | |
Foreign currency translation | Foreign currency translation | — | | | — | | | — | | | — | | | (95) | | | (95) | | Foreign currency translation | — | | | — | | | — | | | — | | | (1,551) | | | (1,551) | |
Stock-based compensation | Stock-based compensation | — | | | — | | | 70 | | | — | | | — | | | 70 | | Stock-based compensation | 3 | | | — | | | 109 | | | — | | | — | | | 109 | |
Balance as of March 31, 2022 | 27,613 | | | 28 | | | 10,651 | | | 82,246 | | | (684) | | | 92,241 | | |
Balance as of September 30, 2022 | | Balance as of September 30, 2022 | 27,616 | | | 28 | | | 10,869 | | | 107,467 | | | (3,411) | | | 114,953 | |
| Balance as of December 31, 2022 | 27,616 | | | 28 | | | 11,073 | | | 115,824 | | | (2,203) | | | 124,722 | | |
Balance as of June 30, 2023 | | Balance as of June 30, 2023 | 27,620 | | | 28 | | | 11,730 | | | 142,998 | | | (1,448) | | | 153,308 | |
Net income | Net income | — | | | — | | | — | | | 11,433 | | | — | | | 11,433 | | Net income | — | | | — | | | — | | | 13,656 | | | — | | | 13,656 | |
Foreign currency translation | Foreign currency translation | — | | | — | | | — | | | — | | | 299 | | | 299 | | Foreign currency translation | — | | | — | | | — | | | — | | | (731) | | | (731) | |
Stock-based compensation | Stock-based compensation | — | | | — | | | 303 | | | — | | | — | | | 303 | | Stock-based compensation | 9 | | | — | | | 320 | | | — | | | — | | | 320 | |
Balance as of March 31, 2023 | 27,616 | | | $ | 28 | | | $ | 11,376 | | | $ | 127,257 | | | $ | (1,904) | | | $ | 136,757 | | |
Balance as of September 30, 2023 | | Balance as of September 30, 2023 | 27,629 | | | $ | 28 | | | $ | 12,050 | | | $ | 156,654 | | | $ | (2,179) | | | $ | 166,553 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholders' Equity - Nine Months Ended September 30 |
| Common Stock | | Additional Paid-in-Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
| Shares | | Amount | | | | |
Balance as of December 31, 2021 | 27,613 | | | $ | 28 | | | $ | 10,581 | | | $ | 74,443 | | | $ | (590) | | | $ | 84,462 | |
Net income | — | | | — | | | — | | | 33,024 | | | — | | | 33,024 | |
Foreign currency translation | — | | | — | | | — | | | — | | | (2,821) | | | (2,821) | |
Stock-based compensation | 3 | | | — | | | 288 | | | — | | | — | | | 288 | |
Balance as of September 30, 2022 | 27,616 | | | 28 | | | 10,869 | | | 107,467 | | | (3,411) | | | 114,953 | |
| | | | | | | | | | | |
Balance as of December 31, 2022 | 27,616 | | | 28 | | | 11,073 | | | 115,824 | | | (2,203) | | | 124,722 | |
Net income | — | | | — | | | — | | | 40,830 | | | — | | | 40,830 | |
Foreign currency translation | — | | | — | | | — | | | — | | | 24 | | | 24 | |
Stock-based compensation | 13 | | | — | | | 977 | | | — | | | — | | | 977 | |
Balance as of September 30, 2023 | 27,629 | | | $ | 28 | | | $ | 12,050 | | | $ | 156,654 | | | $ | (2,179) | | | $ | 166,553 | |
See notes to condensed consolidated financial statements.
XPEL, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
| | | Three Months Ended March 31, | | Nine Months Ended September 30, 2023 |
| | 2023 | | 2022 | | 2023 | | 2022 |
Cash flows from operating activities | Cash flows from operating activities | | | | Cash flows from operating activities | | | |
Net income | Net income | $ | 11,433 | | | $ | 7,803 | | Net income | $ | 40,830 | | | $ | 33,024 | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation of property, plant and equipment | Depreciation of property, plant and equipment | 972 | | | 756 | | Depreciation of property, plant and equipment | 3,229 | | | 2,486 | |
Amortization of intangible assets | Amortization of intangible assets | 1,161 | | | 1,076 | | Amortization of intangible assets | 3,660 | | | 3,248 | |
Gain on sale of property and equipment | (9) | | | (14) | | |
Stock compensation | 303 | | | 70 | | |
Gain on sale of property and equipment, net | | Gain on sale of property and equipment, net | (11) | | | (10) | |
Stock-based compensation | | Stock-based compensation | 1,144 | | | 317 | |
Bad debt expense | Bad debt expense | 74 | | | 66 | | Bad debt expense | 216 | | | 350 | |
Deferred income tax | (115) | | | (38) | | |
Deferred income taxes | | Deferred income taxes | (844) | | | 7 | |
Accretion on notes payable | Accretion on notes payable | — | | | 3 | | Accretion on notes payable | — | | | 6 | |
| Changes in assets and liabilities: | Changes in assets and liabilities: | | Changes in assets and liabilities: | |
Accounts receivable | Accounts receivable | (6,606) | | | (2,125) | | Accounts receivable | (9,483) | | | (5,899) | |
Inventory, net | Inventory, net | (3,886) | | | (22,584) | | Inventory, net | (11,583) | | | (18,423) | |
Prepaid expenses and other current assets | (2,512) | | | (78) | | |
Income taxes receivable and payable | 2,360 | | | 1,281 | | |
Other assets | — | | | 74 | | |
Prepaid expenses and other assets | | Prepaid expenses and other assets | (7,288) | | | (3,982) | |
Income tax receivable and payable | | Income tax receivable and payable | 320 | | | 1,077 | |
Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | (2,480) | | | 9,401 | | Accounts payable and accrued liabilities | 18,311 | | | (2,505) | |
| Net cash provided by (used in) operating activities | 695 | | | (4,309) | | |
Net cash provided by operating activities | | Net cash provided by operating activities | 38,501 | | | 9,696 | |
Cash flows used in investing activities | Cash flows used in investing activities | | Cash flows used in investing activities | |
Purchase of property, plant and equipment | Purchase of property, plant and equipment | (2,055) | | | (2,271) | | Purchase of property, plant and equipment | (4,741) | | | (5,534) | |
Proceeds from sale of property and equipment | Proceeds from sale of property and equipment | 12 | | | 42 | | Proceeds from sale of property and equipment | 20 | | | 66 | |
| Business acquisitions, net of cash acquired | | Business acquisitions, net of cash acquired | (4,697) | | | (2,993) | |
Development of intangible assets | Development of intangible assets | (321) | | | (364) | | Development of intangible assets | (798) | | | (1,368) | |
Net cash used in investing activities | Net cash used in investing activities | (2,364) | | | (2,593) | | Net cash used in investing activities | (10,216) | | | (9,829) | |
Cash flows from financing activities | Cash flows from financing activities | | | | Cash flows from financing activities | | | |
Net borrowings on revolving credit agreement | 2,000 | | | 8,000 | | |
Net (repayments of) borrowings on revolving credit agreement | | Net (repayments of) borrowings on revolving credit agreement | (26,000) | | | 1,000 | |
Restricted stock withholding taxes paid in lieu of issued shares | | Restricted stock withholding taxes paid in lieu of issued shares | (167) | | | (30) | |
Repayments of notes payable | Repayments of notes payable | (77) | | | (108) | | Repayments of notes payable | (77) | | | (304) | |
| Net cash provided by financing activities | 1,923 | | | 7,892 | | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (26,244) | | | 666 | |
Net change in cash and cash equivalents | Net change in cash and cash equivalents | 254 | | | 990 | | Net change in cash and cash equivalents | 2,041 | | | 533 | |
Foreign exchange impact on cash and cash equivalents | Foreign exchange impact on cash and cash equivalents | 20 | | | (38) | | Foreign exchange impact on cash and cash equivalents | 277 | | | 68 | |
Increase in cash and cash equivalents during the period | Increase in cash and cash equivalents during the period | 274 | | | 952 | | Increase in cash and cash equivalents during the period | 2,318 | | | 601 | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 8,056 | | | 9,644 | | Cash and cash equivalents at beginning of period | 8,056 | | | 9,644 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 8,330 | | | $ | 10,596 | | Cash and cash equivalents at end of period | $ | 10,374 | | | $ | 10,245 | |
| Supplemental schedule of non-cash activities | Supplemental schedule of non-cash activities | | Supplemental schedule of non-cash activities | |
Non-cash lease financing | Non-cash lease financing | $ | 1,237 | | | $ | 2,389 | | Non-cash lease financing | $ | 1,847 | | | $ | 5,209 | |
Issuance of common stock for vested restricted stock units | | Issuance of common stock for vested restricted stock units | $ | 874 | | | $ | 222 | |
| Supplemental cash flow information | Supplemental cash flow information | | Supplemental cash flow information | |
Cash paid for income taxes | Cash paid for income taxes | $ | 748 | | | $ | 770 | | Cash paid for income taxes | $ | 11,144 | | | $ | 7,305 | |
Cash paid for interest | Cash paid for interest | $ | 517 | | | $ | 216 | | Cash paid for interest | $ | 1,000 | | | $ | 900 | |
See notes to condensed consolidated financial statements.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. INTERIM FINANCIAL INFORMATION
The accompanying (a) condensed consolidated balance sheet as of December 31, 2022, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of and for the three and nine months ended March 31,September 30, 2023 and 2022 have been prepared by XPEL, Inc. (“XPEL” or the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Pursuant to these rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. However, in the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations and cash flows of the interim periods presented. Operating results for the interim periods presented are not necessarily indicative of results to be expected for the full year or for any other interim period due to variability in customer purchasing patterns and seasonal, operating and other factors.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on February 28, 2023 (the "Annual Report"). These condensed consolidated financial statements also should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section appearing in this Report.report.
2. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - The Company is based in San Antonio, Texas and sells, distributes, and installs protective films and coatings, including automotive paint protection film, surface protection film, automotive and architectural window films and ceramic coatings. The Company was incorporated in the state of Nevada, U.S.AU.S.A. in October 2003.
Basis of Presentation - - The condensed consolidated financial statements are prepared in conformity with United States Generally Accepted Accounting Principles ("U.S. GAAP") and include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated. The functional currency for the Company is the United States ("U.S.") Dollar.dollar. The assets and liabilities of each of its wholly-owned foreign subsidiaries are translated into U.S dollars using the exchange rate at the end of the balance sheet date. Revenues and expenses are translated at the average exchange rates for the period. Gains and losses from translations are recognized in foreign currency translation included in accumulated other comprehensive loss in the accompanying consolidated balance sheets.
Segment Reporting - Management has concluded that our chief operating decision makerXPEL's Chief Operating Decision Maker (“CODM”) is our chief executive officer.the Company's Chief Executive Officer. The Company’s CODM reviews the entire organization’s consolidated results as a whole on a monthly basis to evaluate performance and make resource allocation decisions. Management views the Company’s operations and manages its business as one operating segment.
Use of Estimates - The preparation of these condensed consolidated financial statements in conformity towith U.S. GAAP requires management to make judgments and estimates and form assumptions that affect the reported amounts of assets and liabilities as ofat the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and underlying assumptions are reviewed on an ongoing basis. Actual outcomes may differ from these estimates under different assumptions and conditions.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Accounts Receivable - Accounts receivable are shown net of allowancesan allowance for expected credit losses and doubtful accounts of $0.2 million and $0.2 million as of March 31,September 30, 2023 and December 31, 2022, respectively. The Company evaluates the adequacy of its allowances by analyzing the aging of receivables, customer financial condition, historical collection experience, the value of any collateral and
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
other economic and industry factors. Actual collections may differ from historical experience, and if economic, business or customer conditions deteriorate significantly, adjustments to these reserves may be required. When the Company becomes aware of factors that indicate a change in a specific customer’s ability to meet its financial obligations, the Company records a specific reserve for credit losses. The Company had no significant accounts receivable concentration as of March 31,September 30, 2023 or December 31, 2022.
Provisions and Warranties - We provide a warranty on ourthe Company's products. Liability under the warranty policy is based on a review of historical warranty claims. Adjustments are made to the accruals asbased on actual claims and data experience warrant. Ourdata. The Company's liability for warranties as of March 31,September 30, 2023 and December 31, 2022 was $0.2$0.4 million and $0.2 million, respectively. The following tables present a summary of ourthe Company's accrued warranty liabilities for the threenine months ended March 31,September 30, 2023 and the twelve months ended December 31, 2021 (in2022 (dollars in thousands):
| | | | | |
| 2023 |
Warranty liability, January 1 | $ | 234 | |
Warranties assumed in period | $ | 22446 | |
Payments | $ | (7)(306) | |
Warranty liability, March 31September 30 | $ | 249374 | |
| | | | | |
| 2022 |
Warranty liability, January 1 | $ | 75 | |
Warranties assumed in period | $ | 624 | |
Payments | $ | (465) | |
Warranty liability, December 31 | $ | 234 | |
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Measurement of Credit Losses on Financial Instruments”, which requires measurement and recognition of expected credit losses for financial assets held. We adopted this pronouncement effective January 1, 2023 without material impact to our financial statements.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. REVENUE
Revenue recognition
The Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods and services to a customer, in an amount that reflects the consideration that it expects to receive in exchange for those goods or services. This is achieved through applying the following five-step model:
•Identification of the contract, or contracts, with a customer
•Identification of the performance obligations in the contract
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, the Company satisfies a performance obligation
The Company generates substantially all of its revenue from contracts with customers, whether formal or implied. Sales taxes collected from customers are remitted to the appropriate taxing jurisdictions and are excluded from sales revenue as the Company considers itself a pass-through conduit for collecting and remitting sales taxes, with the exception of taxes assessed during the procurement process of select inventories. Shipping and handling costs are included in cost of sales.
RevenueRevenues from product and services sales isare recognized when control of the goods or benefit of the service,and services is furnishedtransferred to the customer. Thiscustomer, which occurs at a point in time, typically upon shipment to the customer or completion of the service. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.
Based upon the nature of the products the Company sells, its customers have limited rights of return, and those presentthese rights are immaterial. Discounts provided by the Company to customers at the time of sale are recognized as a reduction in sales asat the products are sold.time of the sale.
Warranty obligations associated with the sale of ourthe Company's products are assurance-type warranties that are a guarantee of the product’s intended functionality and, therefore, do not represent a distinct performance obligation within the context of the contract. Warranty expense is included in cost of sales.
We apply a practical expedient to expense direct costs of obtaining a contract when incurred because the amortization period would behave been one year or less.
Under its contracts with customers, the Company stands ready to deliver product upon receipt of a customer's purchase order. Accordingly, the Company has no performance obligations under its contracts until its customers submit a purchase order. The Company does not enter into commitments to provide goods or services that have terms greater than one year. In limited cases, the Company does requirerequires payment in advance of shipping product. Typically, product is shipped within a few days after prepayment is received. These prepayments are recorded as contract liabilities on the condensed consolidated balance sheet and are included in accounts payable and accrued liabilities (Note 9). As the performance obligation is part of a contract that has an original expected duration of less than one year, the Company has applied the practical expedient under the Accounting Standards Codification TopicASC 606 ("ASC 606") to omit disclosures regarding remaining performance obligations.
When the Company transfers goods or provides services to a customer, payment is due, subject to normal terms, and is not conditional on anything other than the passage of time. Typical payment terms range from due upon receipt to due within 30 days, depending on the type of customer and relationship. At contract inception, the Company expects that the period of time between the transfer of goods to the
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
customer and when the customer pays for those goods will be less than one year, which is consistent with the Company’s standard payment terms. Accordingly, the Company has elected the practical expedient under ASC 606 to not adjust for the effects of a significant financing component. As such, these amounts are recorded as receivables and not contract assets.
The following table summarizes transactions within contract liabilities for the three and nine months ended March 31,September 30, 2023 (in(dollars in thousands):
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | |
Balance, December 31, 2022 | $ | 261 | |
Revenue recognized related to payments included in the December 31, 2022 balance | (206) | |
Payments received for which performance obligations have not been satisfied | 2,791 | |
Effect of foreign currency translation | 1 | |
Balance, March 31, 2023 | $ | 2,847 | |
Revenue recognized related to payments included in the March 31, 2023 balance | (2,771) | |
Payments received for which performance obligations have not been satisfied | 3,955 | |
Effect of foreign currency translation | (4) | |
Balance, June 30, 2023 | 4,027 | |
Revenue recognized related to payments included in the June 30, 2023 balance | (3,973) | |
Payments received for which performance obligations have not been satisfied | 5,575 | |
Effect of foreign currency translation | (4) | |
Balance, September 30, 2023 | $ | 5,625 | |
The table below sets forth the disaggregation of revenue by product category for the periods indicated below (in(dollars in thousands):
| | | | Three Months Ended March 31, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | | 2023 | | 2022 | | | 2023 | | 2022 | | 2023 | | 2022 | |
Product Revenue | Product Revenue | | | | | | Product Revenue | | | | | | | | |
Paint protection film | Paint protection film | | $ | 49,548 | | | $ | 43,961 | | | Paint protection film | $ | 58,977 | | | $ | 54,230 | | | $ | 165,016 | | | $ | 146,465 | | |
Window film | Window film | | 14,982 | | | 11,534 | | | Window film | 18,762 | | | 15,391 | | | 54,055 | | | 42,711 | | |
Other | Other | | 2,778 | | | 2,603 | | | Other | 3,386 | | | 2,995 | | | 10,268 | | | 8,577 | | |
Total | Total | | $ | 67,308 | | | $ | 58,098 | | | Total | $ | 81,125 | | | $ | 72,616 | | | $ | 229,339 | | | $ | 197,753 | | |
| Service Revenue | Service Revenue | | | | Service Revenue | | |
Software | Software | | $ | 1,458 | | | $ | 1,207 | | | Software | $ | 1,652 | | | $ | 1,351 | | | $ | 4,656 | | | $ | 3,804 | | |
Cutbank credits | Cutbank credits | | 4,030 | | | 2,930 | | | Cutbank credits | 4,524 | | | 4,352 | | | 13,253 | | | 11,459 | | |
Installation labor | Installation labor | | 12,399 | | | 9,256 | | | Installation labor | 14,852 | | | 11,067 | | | 41,781 | | | 31,371 | | |
Training and other | Training and other | | 647 | | | 373 | | | Training and other | 524 | | | 372 | | | 1,726 | | | 1,125 | | |
Total | Total | | $ | 18,534 | | | $ | 13,766 | | | Total | $ | 21,552 | | | $ | 17,142 | | | $ | 61,416 | | | $ | 47,759 | | |
| Total | Total | | $ | 85,842 | | | $ | 71,864 | | | Total | $ | 102,677 | | | $ | 89,758 | | | $ | 290,755 | | | $ | 245,512 | | |
Because many of ourthe Company's international customers require us to ship their orders to freight forwarders located in the United States, we cannot be certain about the ultimate destination of the product. The following table represents ourthe Company's estimate of sales by geographic regions based on ourthe Company's understanding of ultimate product destination based on customer interactions, customer locations and other factors (dollars in thousands):
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
ultimate product destination based on customer interactions, customer locations and other factors (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | | | |
| 2023 | | 2022 | | 2023 | | 2022 | | | | | | |
United States | $ | 59,002 | | | $ | 51,522 | | | $ | 169,228 | | | $ | 142,275 | | | | | | | |
Canada | 11,471 | | | 11,046 | | | 31,914 | | | 29,773 | | | | | | | |
China | 10,242 | | | 11,009 | | | 24,992 | | | 27,772 | | | | | | | |
Continental Europe | 8,705 | | | 6,065 | | | 26,354 | | | 18,671 | | | | | | | |
Middle East/Africa | 3,909 | | | 3,322 | | | 11,514 | | | 8,025 | | | | | | | |
United Kingdom | 3,499 | | | 2,482 | | | 10,220 | | | 7,505 | | | | | | | |
Asia Pacific | 3,233 | | | 2,540 | | | 9,192 | | | 6,549 | | | | | | | |
Latin America | 2,325 | | | 1,468 | | | 6,617 | | | 4,033 | | | | | | | |
Other | 291 | | | 304 | | | 724 | | | 909 | | | | | | | |
Total | $ | 102,677 | | | $ | 89,758 | | | $ | 290,755 | | | $ | 245,512 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | | | |
| | | | | 2023 | | 2022 | | | | | | |
United States | | | | | $ | 51,077 | | | $ | 41,587 | | | | | | | |
China | | | | | 6,647 | | | 8,859 | | | | | | | |
Canada | | | | | 8,592 | | | 7,850 | | | | | | | |
Continental Europe | | | | | 7,960 | | | 5,663 | | | | | | | |
United Kingdom | | | | | 3,091 | | | 2,428 | | | | | | | |
Middle East/Africa | | | | | 3,496 | | | 2,049 | | | | | | | |
Asia Pacific | | | | | 2,645 | | | 2,033 | | | | | | | |
Latin America | | | | | 2,173 | | | 1,206 | | | | | | | |
Other | | | | | 161 | | | 189 | | | | | | | |
Total | | | | | $ | 85,842 | | | $ | 71,864 | | | | | | | |
OurXPEL's largest customer accounted for 7.7%10.0% and 12.3% of ourthe Company's net sales during the three months ended March 31,September 30, 2023 and 2022, respectively and 8.6% and 11.3% of the Company's net sales during the nine months ended September 30, 2023 and 2022, respectively.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following (in(dollars in thousands):
| | | March 31, 2023 | | December 31, 2022 | | September 30, 2023 | | December 31, 2022 |
Furniture and fixtures | Furniture and fixtures | $ | 2,831 | | | | $ | 2,667 | | | Furniture and fixtures | $ | 3,189 | | | | $ | 2,667 | | |
Computer equipment | Computer equipment | 3,685 | | | | 3,455 | | | Computer equipment | 4,392 | | | | 3,455 | | |
Vehicles | Vehicles | 851 | | | | 838 | | | Vehicles | 903 | | | | 838 | | |
Equipment | Equipment | 4,977 | | | | 4,728 | | | Equipment | 5,279 | | | | 4,728 | | |
Leasehold improvements | Leasehold improvements | 7,349 | | | | 7,081 | | | Leasehold improvements | 10,276 | | | | 7,081 | | |
Plotters | Plotters | 3,266 | | | | 2,980 | | | Plotters | 3,750 | | | | 2,980 | | |
Construction in Progress | Construction in Progress | 2,624 | | | | 1,745 | | | Construction in Progress | 351 | | | | 1,745 | | |
Total property and equipment | Total property and equipment | 25,583 | | | | 23,494 | | | Total property and equipment | 28,140 | | | | 23,494 | | |
Less: accumulated depreciation | Less: accumulated depreciation | 10,272 | | | | 9,291 | | | Less: accumulated depreciation | 12,450 | | | | 9,291 | | |
Property and equipment, net | Property and equipment, net | $ | 15,311 | | | | $ | 14,203 | | | Property and equipment, net | $ | 15,690 | | | | $ | 14,203 | | |
Depreciation expense for the three months ended March 31,September 30, 2023 and 2022 was $1.0$1.2 million and $0.8$0.9 million, respectively. For the nine months ended September 30, 2023 and 2022, depreciation expense was $3.2 million and $2.5 million, respectively.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. INTANGIBLE ASSETS, NET
Intangible assets consistsconsist of the following (in(dollars in thousands):
| | | | March 31, 2023 | | December 31, 2022 | | | September 30, 2023 | | December 31, 2022 |
Trademarks | Trademarks | | $ | 742 | | | $ | 686 | | Trademarks | | $ | 823 | | | $ | 686 | |
Software | Software | | 5,084 | | | 4,822 | | Software | | 5,472 | | | 4,822 | |
Trade name | | 1,473 | | | 1,451 | | |
Trade names | | Trade names | | 1,609 | | | 1,451 | |
Contractual and customer relationships | Contractual and customer relationships | | 31,891 | | | 31,871 | | Contractual and customer relationships | | 34,724 | | | 31,871 | |
Non-compete | Non-compete | | 440 | | | 440 | | Non-compete | | 439 | | | 440 | |
Other | Other | | 499 | | | 497 | | Other | | 498 | | | 497 | |
Total at cost | | 40,129 | | | 39,767 | | |
Total cost | | Total cost | | 43,565 | | | 39,767 | |
Less: Accumulated amortization | Less: Accumulated amortization | | 11,644 | | | 10,473 | | Less: Accumulated amortization | | 14,104 | | | 10,473 | |
Intangible assets, net | Intangible assets, net | | $ | 28,485 | | | $ | 29,294 | | Intangible assets, net | | $ | 29,461 | | | $ | 29,294 | |
Amortization expense for the three months ended March 31,September 30, 2023 and 2022 was $1.2$1.3 million and $1.1 million, respectively. For the nine months ended September 30, 2023 and 2022, amortization expense was $3.7 million and $3.2 million, respectively.
6. GOODWILL
The following table summarizes goodwill transactions for the threenine months ended March 31,September 30, 2023 and the twelve months ended December 31, 2021 (in2022 (dollars in thousands):
| | | | | |
| 2023 |
Balance at December 31, 2022 | $ | 26,763 | |
Additions and purchase price allocation adjustments | 1,875 | |
Foreign Exchange | (36) | |
Balance at September 30, 2023 | $ | 28,602 | |
| |
| 2022 |
Balance at December 31, 2021 | $ | 25,655 | |
Additions and purchase price allocation adjustments | 1,826 | |
Foreign exchange | $Exchange | (718) | |
Balance at December 31, 2022 | $ | 26,763 | |
| |
| 2023 |
Balance at December 31, 2022 | $ | 26,763 | |
Foreign exchange | 56 | |
Balance at March 31, 2023 | $ | 26,819 | |
The Company completed one acquisition in the nine months ended September 30, 2023. Refer to Note 13 for discussion of this acquisition.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. INVENTORIES
The components of inventory are summarized as follows (in(dollars in thousands):
| | | March 31, 2023 | | December 31, 2022 | | September 30, 2023 | | December 31, 2022 |
Raw materials | Raw materials | $ | 12,873 | | | $ | 10,416 | | Raw materials | $ | 18,741 | | | $ | 10,416 | |
Work in process | Work in process | 4,638 | | | 6,756 | | Work in process | 3,617 | | | 6,756 | |
Finished goods | Finished goods | 67,083 | | | 63,403 | | Finished goods | 70,100 | | | 63,403 | |
| | $ | 84,594 | | | $ | 80,575 | | | $ | 92,458 | | | $ | 80,575 | |
8. DEBT
REVOLVING FACILITIES
ThroughoutThe Company has a revolving credit facility providing for secured revolving loans and letters of credit in an aggregate amount of up to $125.0 million, which is subject to the three months ended Marchterms of a credit agreement dated April 6, 2023 (the "Credit Agreement"). As of September 30, 2023, no balance was outstanding under this agreement. As of December 31, 2023,2022, the Company had an outstanding balance of $26.0 million under a $75.0 million revolving lineprior credit agreement which was subsequently repaid and terminated.
Borrowings under the Credit Agreement bear interest, at XPEL’s option, at a rate equal to either (a) Base Rate or (b) Adjusted Term SOFR. In addition to the applicable interest rate, the Credit Agreement includes a commitment fee ranging from 0.20% to 0.25% per annum for the unused portion of the aggregate commitment and an applicable margin ranging from 0.00% to 0.50% for Base Rate Loans and 1.00% to 1.50% for Adjusted Term SOFR Loans. At September 30, 2023, these rates were 8.5% and 6.3%, respectively. Both the margin applicable to the interest rate and the commitment fee are dependent on XPEL’s Consolidated Total Leverage Ratio. The Credit Agreement's maturity date is April 6, 2026. All capitalized terms in this description of the credit with a financial institution. The facility was utilizedthat are not otherwise defined in this report have the meaning assigned to fundthem in the Company's working capital needs and other strategic initiatives, and wasCredit Agreement.
Obligations under the Credit Agreement are secured by a first priority perfected security interest, subject to certain permitted encumbrances, in substantially all of XPEL’s material property and assets.
The terms of the Company's currentCredit Agreement include certain affirmative and negative covenants that require, among other things, XPEL to maintain legal existence and remain in good standing, comply with applicable laws, maintain accounting records, deliver financial statements and certifications on a timely basis, pay taxes as required by law, and maintain insurance coverage, as well as to forgo certain specified future assets. Borrowings underactivities that might otherwise encumber XPEL and certain customary covenants. The Credit Agreement provides for two financial covenants, as follows.
As of the credit agreement bore interest on at the last day of each fiscal quarter:
1.Wall Street JournalXPEL shall not allow its Consolidated Total Leverage Ratio to exceed 3.50 to 1.00, and
2. U.S. Prime Rate less 0.75% per annum if the Company's EBITDA ratio (as defined in the Loan Agreement governing the facility) was equalXPEL shall not allow its Consolidated Interest Coverage Ratio to orbe less than 2.003.00 to 1.00 or the Wall Street Journal U.S. Prime rate less 0.25% if the Company's EBITDA ratio was greater than 2.00 to 1.00. The facility also included a fee of 0.25% of the unused capacity on the facility. The interest rate for this credit facility as of March 31, 2023 and December 31, 2022 was 7.25% and 6.75%, respectively. The Company paid interest charges on borrowings under this facility of $0.5 million during the three months ended March 31, 2023 and had a balance of $28.0 million and $26.0 million as of March 31, 2023 and December 31, 2022, respectively. The maturity date of this facility was July 5, 2024.
On April 6, 2023, this facility was terminated and a new $125.0 million Credit Agreement was established with Wells Fargo Bank, N.A. Refer to Note 13 for details on this new Credit Agreement.
The Company also has a CAD $4.5 million (approximately $3.3 million as of September 30, 2023) revolving credit facility through HSBC Banka financial institution in Canada, and isas maintained by XPEL Canada Corp., a wholly-owned subsidiary of XPEL. This Canadian facility is utilized to fund the Company's working capital needs in Canada. This facility bears interest at HSBC Canada Bank’s prime rate plus 0.25% per annum
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
and is guaranteed by the parent company. As of March 31,September 30, 2023 and December 31, 2022, no balance was outstanding on this line of credit.
As of March 31,September 30, 2023 and December 31, 2022, the Company was in compliance with all debt covenants.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following table presents significant accounts payable and accrued liability balances as of the periods ending (in(dollars in thousands):
| | | March 31, 2023 | | December 31, 2022 | | September 30, 2023 | | December 31, 2022 |
Trade payables | Trade payables | $ | 13,453 | | | $ | 16,689 | | Trade payables | $ | 30,419 | | | $ | 16,689 | |
Payroll liabilities | Payroll liabilities | 1,941 | | | 3,596 | | Payroll liabilities | 3,236 | | | 3,596 | |
Contract liabilities | Contract liabilities | 2,847 | | | 261 | | Contract liabilities | 5,625 | | | 261 | |
Acquisition holdback payments | Acquisition holdback payments | — | | | 191 | | Acquisition holdback payments | 394 | | | 191 | |
Other liabilities | Other liabilities | 2,300 | | | 2,233 | | Other liabilities | 2,385 | | | 2,233 | |
| | $ | 20,541 | | | $ | 22,970 | | | $ | 42,059 | | | $ | 22,970 | |
10. FAIR VALUE MEASUREMENTS
ASC 820 prioritizes the inputs to valuation techniques used to measure fair value into the following hierarchy:
Level 1 – Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – Inputs other than the quoted prices in active markets that are observable either directly or indirectly, including: quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market data and require the reporting entity to develop its own assumptions.
Financial instruments include cash and cash equivalents, accounts receivable, accounts payable, our line of credit, and long-term debt. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, our line of credit, and short-term borrowings approximate fair value because of the near-term maturities of these financial instruments. The carrying value of the Company’s notes payable approximates fair value due to the relatively short-term nature and interest rates of the notes. The carrying value of the Company's long-term debt approximates fair value due to the interest rates being market rates.
The estimated fair value of debt is based on market quotes for instruments with similar terms and remaining maturities.
The Company has contingent liabilities related to future internal performance milestones. The fair value of these liabilities was determined using a Monte Carlo Simulation based on the probability and
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
timing of certain future payments under these arrangements. These liabilities are accounted for as Level 3 liabilities within the fair value hierarchy.
Liabilities measured at fair value on a recurring basis as of the dates noted below are as follows (in(dollars in thousands):
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | March 31, 2023 | | December 31, 2022 | | September 30, 2023 | | December 31, 2022 |
Level 3: | Level 3: | | | | Level 3: | | | |
Contingent Liabilities | Contingent Liabilities | $ | 1,006 | | | $ | 955 | | Contingent Liabilities | $ | 1,085 | | | $ | 955 | |
Increases in the fair value of level 3 contingent liabilities are reflected in general and administrative expenses in the Consolidated Statements of Income for the three and nine months ended March 31,September 30, 2023.
11. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business activities, the Company may be contingently liable for litigation and claims with customers, suppliers and former employees. Management believes that adequate provisions have been recorded in the accounts where required. Management also has determined that the likelihood of any litigation and claims having a material impact on our results of operations, cash flows or financial position is remote.
12. EARNINGS PER SHARE
We compute basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes effect of granted incremental restricted stock units.
The following table reconciles basic and diluted weighted average shares used in the computation of earnings per share (in thousands except per share values)(dollars in thousands):
| | | Three Months Ended March 31, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
Numerator | Numerator | 2023 | | 2022 | Numerator | 2023 | | 2022 | | 2023 | | 2022 |
Net income | Net income | $ | 11,433 | | | $ | 7,803 | | Net income | $ | 13,656 | | | $ | 13,318 | | | $ | 40,830 | | | $ | 33,024 | |
Denominator | Denominator | | | | Denominator | | | | | | | |
Weighted average basic shares | Weighted average basic shares | 27,616 | | | 27,613 | | Weighted average basic shares | 27,623 | | | 27,616 | | | 27,620 | | | 27,614 | |
Dilutive effect of restricted stock units | Dilutive effect of restricted stock units | 10 | | | — | | Dilutive effect of restricted stock units | 21 | | | 4 | | | 14 | | | 1 | |
Weighted average diluted shares | Weighted average diluted shares | 27,626 | | | 27,613 | | Weighted average diluted shares | 27,644 | | | 27,620 | | | 27,634 | | | 27,615 | |
Earnings per share | Earnings per share | | | | Earnings per share | | | | | | | |
Basic | Basic | $ | 0.41 | | | $ | 0.28 | | Basic | $ | 0.49 | | | $ | 0.48 | | | $ | 1.48 | | | $ | 1.20 | |
Diluted | Diluted | $ | 0.41 | | | $ | 0.28 | | Diluted | $ | 0.49 | | | $ | 0.48 | | | $ | 1.48 | | | $ | 1.20 | |
13. SUBSEQUENT EVENTS
New credit agreement
On April 6, 2023, the Company entered into a Credit Agreement with Wells Fargo Bank, N.A., as Administrative Agent, and other lenders party thereto. The Credit Agreement provides for secured revolving loans and letters of credit in an aggregate amount of up to $125 million. Simultaneously with entering into the Credit Agreement, XPEL borrowed $31 million to repay all outstanding indebtedness under its Loan Agreement with Texas Partners Bank and to pay expenses incurred in connection with the Credit Agreement.BUSINESS ACQUISITIONS
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Borrowings underThe Company completed the Credit Agreement bear interest, at XPEL’s option, atfollowing acquisition during the nine months ended September 30, 2023 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
Acquisition Date | | Name and Location | | Purchase Price | Acquisition Type | | Acquisition Purpose |
May 1, 2023 | | Protective Solutions, Inc. Holliston, Massachusetts, United States | | $ | 5,502 | | Share Purchase | | Market Expansion |
The following table presents the purchase price allocation for this transaction (dollars in thousands).
| | | | | | | | | | | |
| | (Unaudited)
Protective Solutions, Inc. | |
Purchase Price | | | |
Cash | | $ | 5,502 | | * |
| | | |
Allocation | | | |
Cash | | $ | 411 | | |
Accounts receivable | | 206 | | |
Inventory | | 267 | | |
Prepaid and other assets | | 10 | | |
Fixed assets | | 14 | | |
Trade name | | 150 | | |
Customer relationships | | 2,900 | | |
Goodwill | | 1,875 | | |
Accounts payable and accrued liabilities | | (331) | | |
| | $ | 5,502 | | |
* Of this cash consideration, $0.4 million was held back for settlement six months after the acquisition date, pending the completion of certain contractual obligations. | | | |
Acquired intangible assets have a rate equal to either (a) Base Rate or (b) Adjusted Term SOFR. In addition toweighted average useful life of 9 years. These intangible assets will be amortized on a straight line basis over that period.
Goodwill from this acquisition is deductible for tax purposes. The goodwill represents the applicable interest rate, the Credit Agreement includes a commitment fee ranging from 0.20% to 0.25% per annum for the unused portionacquired employee knowledge of the aggregate commitment and an applicable margin ranging from 0.00% to 0.50% for Base Rate Loans and 1.00% to 1.50% for Adjusted Term SOFR Loans. Bothvarious markets, distribution knowledge by the margin applicable to the interest rate and the commitment fee are dependent on XPEL’s Consolidated Total Leverage Ratio.
Obligations under the Credit Agreement are secured by a first priority perfected security interest, subject to certain permitted encumbrances, in all of XPEL’s material property and assets.
The termsemployees of the Credit Agreement include certain affirmative and negative covenants that require, among other things, XPEL to maintain legal existence and remain in good standing, comply with applicable laws, maintain accounting records, deliver financial statements and certifications on a timely basis, pay taxes as required by law, and maintain insurance coverage,acquired business, as well as the expected synergies resulting from the acquisition.
Acquisition costs incurred related to forgo certain specified future activities that might otherwise encumber XPELthis acquisition were immaterial and certain customary covenants. The Credit Agreement provides for two financial covenants:
1.Its Consolidated Total Leverage Ratio to exceed 3.50 to 1.00,were included in selling, general and
2.Its Consolidated Interest Coverage Ratio to be less than 3.00 to 1.00.
administrative expenses.
The Credit Agreement's maturity date is April 6, 2026.
Underacquired company was consolidated into the Credit Agreement:
“Adjusted Term SOFR” means, for purposesCompany's financial statements on its acquisition date. Revenue of any calculation,$1.0 million and $1.6 million from this acquisition has been consolidated into the rate per annum equal to (a) Term SOFR for such calculation plus (b) the Term SOFR Adjustment; (as defined in the Credit Agreement) provided that if Adjusted Term SOFR as so determined shall ever be less than 0%, then the Adjusted Term SOFR shall be deemed to be 0%.
“Base Rate” is defined as the highest of (a) the Administrative Agent’s prime rate, (b) the Federal funds rate plus 0.50%, or (c) Adjusted Term SOFR for a one-month tenor in effect on such day plus 1.00%.
“Consolidated Total Leverage Ratio” is defined as the ratio of consolidated funded indebtedness on such date to Consolidated EBITDACompany's financial statements for the most recently completed Reference Period.
“Consolidated Interest Coverage Ratio” is defined asthree and nine months ended September 30, 2023, respectively. Net income of $0.3 million and $0.3 million from this acquisition has been consolidated into the ratio of Consolidated EBITDACompany's financial statements for the most recently completed Reference Period to XPEL’sthree and nine months ended September 30, 2023, respectively.
The following unaudited consolidated interest expense forpro forma combined financial information presents the most recently completed Reference Period.
“Consolidated EBITDA” is defined as consolidated net income (i) plus allCompany's results of operations, including the following: (a) consolidated interest expense; (b) tax expense measured by net income, profits or capital (or any similar measures), paid or accrued, including federal and state and local income taxes, foreign income taxes and franchise taxes; (c) depreciation, amortization and other non-cash charges orestimated expenses (including stock based compensation and write-downs of goodwill), excluding any non-cash charge or expense that represents an accrual for a cash expense to be taken in a future period; (d) all transaction fees, charges and other amounts (including any financing fees, merger and acquisition fees, legal fees and expenses, due diligence fees or any other fees and expenses in connection therewith) in connection with any Credit Agreement permitted acquisition, investment, disposition, issuance or repurchase of equity interests, or the incurrence, amendment or waiver of indebtedness permitted hereunder (other than those relatedrelating to the certain transactions or with respect to any amendment or modificationamortization of the Loan Documents), in each case, whether or not consummated, in each case to the extent paid within six months of the closing or effectiveness of such event or the termination or abandonment of such transaction, as the case may be; provided that (1) the aggregate amount added back pursuant to this provision with respect to any one
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
transaction shallintangibles purchased, as if this acquisition had occurred on January 1, 2023 and 2022 (dollars in thousands):
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2023 (unaudited) | | 2022 (unaudited) |
Revenue | | $ | 291,983 | | | $ | 248,899 | |
Net income | | $ | 40,863 | | | $ | 33,179 | |
The unaudited consolidated pro forma combined financial information does not exceed $2,000,000 for the applicable period and (2) any amounts added back for such applicable period shallpurport to be set forth in reasonable detail on XPEL’s compliance certification for such period; (e) non-cash charges and losses (excluding any such non-cash charges or losses to the extent (1) there were cash charges with respect to such charges and losses in past accounting periods or (2) there is a reasonable expectation that there will be cash charges with respect to such charges and losses in future accounting periods); and (f) unusual and non-recurring expenses, charges or losses (excluding losses from discontinued operations); and (ii) less the sumindicative of the following, without duplication,results which would have been obtained had the acquisition been completed as of the beginning of the earliest period presented or of results that may be obtained in the future. In addition, they do not include any benefits that may result from the acquisition due to synergies that may be derived from the extent included in determining consolidated net income for such period: (a) interest income; (b) federal, state, local and foreign income tax credits of XPEL and its subsidiaries for such period (to the extent not netted from income tax expense); (c) any unusual and non-recurring gains; (d) non-cash gains (excluding any such non-cash gains to the extent (A) there were cash gains with respect to such gains in past accounting periods or (B) there is a reasonable expectation that there will be cash gains with respect to such gains in future accounting periods); and (e) any cash expense made during such period which represents the reversalelimination of any non-cash expense that was added in a prior period pursuant to clause (i)(c) above subsequent to the fiscal quarter in which the relevant non-cash expenses, charges or losses were incurred.duplicative costs.
“Reference Period” is defined at any date
14. SUBSEQUENT EVENTS
Acquisitions of determination as, the period of four consecutive fiscal quarters ended on or immediately prior to such date for which financial statements of XPEL have been delivered to the Administrative Agent.
“SOFR” means a rate equal to the secured overnight financing rate as administered by the SOFR Administrator.
“SOFR Administrator” means the Federal Reserve Bank of New York (or a successor administrator of the secured overnight financing rate).
Acquisition of a businessbusinesses
On MayOctober 1, 2023, we completed the acquisition of a U.S.-based dealership services business.Canadian-based automotive film distribution and installation business serving primarily automotive dealerships. On October 4, 2023, we completed the acquisition of a European-based automotive paint protection film installation company serving two OEMs. The total purchase price of this businessfor these transactions was approximately $5.3$13.4 million. In connection with these acquisitions, we deposited $7.4 million into an escrow account as of September 30, 2023. This deposit is included in prepaid expenses in our September 30, 2023 Condensed Consolidated Balance Sheet.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess the financial condition and results of operations of XPEL, Inc. (“XPEL”("we", "our", "us", “XPEL” or the “Company”). Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the heading “Forward-Looking Statements” in this report and under “Business," "Risk Factors,” "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements and Supplementary Data" in the Annual Report which is available on the SEC’s website at www.sec.gov.
Forward-Looking Statements
This quarterly report on Form 10-Q contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to the safe harbor created by those sections. In addition, the Company or others on the Company’s behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on the Company’s internet web site, or otherwise. All statements other than statements of historical facts included in this report or expressed by the Company orally from time to time that address activities, events, or developments that
the Company expects, believes, or anticipates will or may occur in the future are forward-looking statements, including, in particular, the statements about the Company’s plans, objectives, strategies, and
prospects regarding, among other things, the Company’s financial condition, results of operations and business, and the outcome of contingencies, such as legal proceedings. The Company has identified some of these forward-looking statements in this report with words like “believe,” “can,” “may,” “could,” “would,” “might,” “forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate,” “outlook,” or “continue” or the negative of these words or other words and terms of similar meaning. The use of future dates is also an indication of a forward-looking statement. Forward-looking statements may be contained in the notes to the Company’s condensed consolidated financial statements and elsewhere in this report, including under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Forward-looking statements are based on current expectations about future events affecting the Company and are subject to uncertainties and factors that affect all businesses operating in a global market as well as matters specific to the Company. These uncertainties and factors are difficult to predict, and many of them are beyond the Company’s control. Factors to consider when evaluating these forward-looking statements include, but are not limited to:
•Our business is highly dependent on automotive sales and production volumes.
•We currently rely on one distributor for sales of our products in China.
•A material portion of our business is in China, which may be an unpredictable market and is currently suffering trade tensions with the U.S.
•We must continue to attract, retain and develop key personnel.
•We could be impacted by disruptions in supply.
•Our accounting estimates and risk management processes rely on assumptions or models that may prove inaccurate.
•We must maintain an effective system of internal control over financial reporting to keep stockholder confidence.
•Our industry is highly competitive.
•Our North American market is currently designed for the public’s use of car dealerships to purchase automobiles which may dramatically change.
•Our revenue could be impacted by growing use of ride-sharing or other alternate forms of car ownership.
•We must be effective in developing new lines of business and new products to maintain growth.
•Any disruptions in our relationships with independent installers and new car dealerships could harm our sales.
•Our strategy related to acquisitions and investments could be unsuccessful or consume significant resources.
•We must maintain and grow our network of sales, distribution channels and customer base to be successful.
•We are exposed to a wide range of risks due to the multinational nature of our business.
•We must continue to manage our rapid growth effectively.
•We are subject to claims and litigation in the ordinary course of our business, including product liability and warranty claims.
•We must comply with a broad and complicated regime of domestic and international trade compliance, anti-corruption, economic, intellectual property, cybersecurity, data protection and other regulatory regimes.
•We may seek to incur substantial indebtedness in the future.
•Our growth may be dependent on the availability of capital and funding.
•Our Common Stock could decline or be downgraded at any time.
•Our stock price has been, and may continue to be, volatile.
•We may issue additional equity securities that may affect the priority of our Common Stock.
•We do not currently pay dividends on our Common Stock.
•Shares eligible for future sale may depress our stock price.
•Anti-takeover provisions could make a third party acquisition of our Company difficult.
•Our directors and officers have substantial control over us.
•Our bylaws may limit investors’ ability to obtain a favorable judicial forum for disputes.
•The COVID-19 pandemic could materially affect our business.
•Our business faces unpredictable global, economic and business conditions, including the risk of inflation in various markets.
We believe the items we have outlined above are important factors that could cause estimates included in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed these factors in more detail in in the Annual Report. These factors are not necessarily all of the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this report could also have material adverse effects on actual results. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our shareholdersstockholders that they should (1) be aware that factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution when considering our forward-looking statements.
Company Overview
Founded in 1997 and incorporated in Nevada in 2003, XPEL has grown from an automotive product design software company to a global provider of after-market automotive products, including automotive surface and paint protection, headlight protection, and automotive window films, as well as a provider of complementary proprietary software. In 2018, we expanded our product offerings to include architectural window film (both commercial and residential) and security film protection for commercial and residential uses, and in 2019 we further expanded our product line to include automotive ceramic coatings.
XPEL began as a software company designing vehicle patterns used to produce cut-to-fit protective film for the painted surfaces of automobiles. In 2007, we began selling automotive surface and paint protection film products to complement our software business. In 2011, we introduced our ULTIMATE protective film product line which, at the time, was the industry’s first protective film with self-healing properties. The ULTIMATE technology allows the protective film to better absorb the impacts from rocks or other road debris, thereby fully protecting the painted surface of a vehicle. The film is described as “self-healing” due to its ability to return to its original state after damage from surface scratches. The launch of the ULTIMATE product catapulted XPEL into several years of strong revenue growth.
Our over-arching strategic philosophy stems from our view that being closer to the end customer in terms of our channel strategy affords us a better opportunity to efficiently introduce new products and deliver tremendous value which, in turn, drives more revenue growth for the Company. Consistent with this philosophy, we have executed on several strategic initiatives including:
2014
•We began our international expansion by establishing an office in the United Kingdom.
2015
•We acquired Parasol Canada, a distributor of our products in Canada.
2016
•We opened our XPEL Netherlands office and established our European headquarters
2017
•We continued our international expansion with the acquisition of Protex Canada Corp., or Protex Canada, a leading franchisor of automotive protective film franchises serving Canada and
•We opened our XPEL Mexico office.
2018
•We launched our first product offering outside of the automotive industry, a window and security film protection for commercial and residential uses.
•We introduced the next generation of our highly successful ULTIMATE line, ULTIMATE PLUS.
•We acquired Apogee Corporation which led to formation of XPEL Asia based in Taiwan.
2019
•We were approved for the listing of our stock on Nasdaq trading under the symbol “XPEL”.
2020
•We acquired Protex Centre, a wholesale-focused paint protection installation business based in Montreal, Canada.
•We expanded our presence in France with the acquisition of certain assets of France Auto Racing.
•We expanded our architectural window film presence with the acquisition of Houston-based Veloce Innovation, a leading provider of architectural films for use in residential, commercial, marine and industrial settings.
2021
•We expanded our presence into numerous automotive dealerships throughout the United States with the acquisition of PermaPlate Film, LLC, a wholesale-focused automotive window film installation and distribution business based in Salt Lake City, Utah.
•We acquired five businesses in the United States and Canada from two sellers as a continuation of our acquisition strategy. These acquisitions allowed us to continue to increase our penetration into mid-range dealerships in the US and solidify our presence in Western Canada.
•We acquired invisiFRAME, Ltd, a designer and manufacturer of paint protection film patterns for bicycles, thus further expanding our non-automotive offerings.
2022
•We expanded our presence in Australia with the purchase of the paint protection film business of our Australian distributor.
Strategic Overview
XPEL continues to pursue several key strategic initiatives to drive continued growth. Our global expansion strategy includes establishing a local presence where possible, allowing us to better control the
delivery of our products and services. We also add locally-based regional sales personnel, leveraging local knowledge and relationships to expand the markets in which we operate.
We seek to increase global brand awareness in strategically important areas, including pursuing high visibility at premium events such as major car shows and high value placement in advertising media consumed by car enthusiasts, to help further expand the Company’s premium brand.
XPEL also continues to expand its delivery channels by acquiring select installation facilities in key markets and acquiring international partners to enhance our global reach. As we expand globally, we strive to tailor our distribution model to adapt to target markets. We believe this flexibility allows us to penetrate and grow market share more efficiently. Our acquisition strategy centers on our belief that the closer the Company is to its end customers, the greater its ability to drive increased product sales. During 2022, we acquired the paint protection film business of our Australian distributor and in May 2023, we acquired a dealership-focused installation business in the greater Boston area in furtherance of this objective.
We also continue to drive expansion of our non-automotive product portfolio. Our architectural window film segment continues to gain traction. We believe there are multiple uses for protective films and we continue to explore those adjacent market opportunities.
Trends and Uncertainties
Macroeconomic uncertainties persist in the U.S. and other parts of the world as inflation, rising interest rates and the changes in value of the U.S. Dollar relative to other major currencies have recently affected the economic environment and consumer behaviors. Additionally, while we have not experienced any material supply chain disruptions directly, the automobile industry has experienced component shortages, increased lead times, cost fluctuations and logistic constraints. Some or all of these could continue throughout the remainder of 2023. This economic uncertainty could impact vehicle sales in the U.S. or other parts of the world, which could adversely affect our business, results of operations and financial condition. See Risk Factors - “We are highly dependent on the automotive industry. A prolonged or material contraction in the automotive sales and production volumes could adversely affect our business, results of operations and financial condition” included in Part I, Item 1A - Risk Factors, in the Annual ReportReport.
On September 15, 2023, the United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) initiated a strike at certain U.S. facilities causing work stoppages to some vehicle production and parts distribution activities. UAW reached a tentative settlement with each targeted automaker that still needs to be ratified by its members. If UAW members fail to ratify the new contract and a pro-longed strike or further work stoppages may continue which could have a material adverse impact on Form 10-K.inventories at car dealerships which could, in turn, adversely affect our business, results of operations and financial condition. See Risk Factors - “We are highly dependent on the automotive industry. A prolonged or material contraction in the automotive sales and production volumes could adversely affect our business, results of operations and financial condition” included in Part I, Item 1A - Risk Factors, in the Annual Report.
While Russia’s invasion of Ukraine has not had a material direct impact on our business, the nature and degree of the effects of that conflict, as well as the other effects of the current business environment over time remain uncertain. See Risk Factors- “We are exposed to political, regulatory, economic and other risks that arise from operating a multinational business” included in Part I, Item 1A - Risk Factors, in the Annual Report on Form 10-K.Report.
Key Business Metric - Non-GAAP Financial Measures
Our management regularly monitors certain financial measures to track the progress of our business against internal goals and targets. We believe that the most important measure to the Company is Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”).
EBITDA is a non-GAAP financial measure. We believe EBITDA provides helpful information with respect to our operating performance as viewed by management, including a view of our business that is not dependent on (i) the impact of our capitalization structure and (ii) items that are not part of our day-to-day operations. Management uses EBITDA (1) to compare our operating performance on a consistent basis, (2) to calculate incentive compensation for our employees, (3) for planning purposes including the preparation of our internal annual operating budget, (4) to evaluate the performance and effectiveness of our operational strategies, and (5) to assess compliance with various metrics associated with the agreements governing our indebtedness. Accordingly, we believe that EBITDA provides useful information in understanding and evaluating our operating performance in the same manner as management. We define EBITDA as net income plus (a) totalconsolidated depreciation and amortization, (b) interest expense, net, and (c) income tax expense.
The following table is a reconciliation of Net incomeIncome to EBITDA for the three and nine months ended March 31,September 30, 2023 and 2022 (in(dollars in thousands):
| | | (Unaudited) | | | (Unaudited) | | (Unaudited) | |
| | Three Months Ended March 31, | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2023 | | 2022 | | | 2023 | | 2022 | | % Change | | 2023 | | 2022 | | % Change | |
Net Income | Net Income | $ | 11,433 | | | $ | 7,803 | | | Net Income | $ | 13,656 | | | $ | 13,318 | | | 2.5 | % | | $ | 40,830 | | | $ | 33,024 | | | 23.6 | % | |
Interest | Interest | 523 | | | 220 | | | Interest | 85 | | | 391 | | | (78.3) | % | | 946 | | | 933 | | | 1.4 | % | |
Taxes | Taxes | 2,984 | | | 2,009 | | | Taxes | 3,490 | | | 3,226 | | | 8.2 | % | | 10,553 | | | 8,302 | | | 27.1 | % | |
Depreciation | Depreciation | 972 | | | 756 | | | Depreciation | 1,199 | | | 890 | | | 34.7 | % | | 3,229 | | | 2,486 | | | 29.9 | % | |
Amortization | Amortization | 1,161 | | | 1,076 | | | Amortization | 1,288 | | | 1,117 | | | 15.3 | % | | 3,660 | | | 3,248 | | | 12.7 | % | |
EBITDA | EBITDA | $ | 17,073 | | | $ | 11,864 | | | EBITDA | $ | 19,718 | | | $ | 18,942 | | | 4.1 | % | | $ | 59,218 | | | $ | 47,993 | | | 23.4 | % | |
Use of Non-GAAP Financial Measures
EBITDA should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. It is not a measurement of our financial performance under GAAP and should not be considered as alternatives to revenue or net income, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP.
EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of ongoing operations; and other companies in our industry may calculate EBITDA differently than we do, limiting theirits usefulness as a comparative measures.measure.
Results of Operations
The following table summarizestables summarize the Company’s consolidated results of operations for the three and nine months ended March 31,September 30, 2023 and 2022 (in(dollars in thousands):
| | | Three Months Ended March 31, 2023 | | % of Total Revenue | | Three Months Ended March 31, 2022 | | % of Total Revenue | | $ Change | | % Change | | Three Months Ended September 30, 2023 | | % of Total Revenue | | Three Months Ended September 30, 2022 | | % of Total Revenue | | $ Change | | % Change |
Total revenue | Total revenue | $ | 85,842 | | | 100.0 | % | | $ | 71,864 | | | 100.0 | % | | $ | 13,978 | | | 19.5 | % | Total revenue | $ | 102,677 | | | 100.0 | % | | $ | 89,758 | | | 100.0 | % | | $ | 12,919 | | | 14.4 | % |
Total cost of sales | Total cost of sales | 49,882 | | | 58.1 | % | | 44,147 | | | 61.4 | % | | 5,735 | | | 13.0 | % | Total cost of sales | 61,148 | | | 59.6 | % | | 53,992 | | | 60.2 | % | | 7,156 | | | 13.3 | % |
Gross margin | Gross margin | 35,960 | | | 41.9 | % | | 27,717 | | | 38.6 | % | | 8,243 | | | 29.7 | % | Gross margin | 41,529 | | | 40.4 | % | | 35,766 | | | 39.8 | % | | 5,763 | | | 16.1 | % |
Total operating expenses | Total operating expenses | 21,029 | | | 24.5 | % | | 17,680 | | | 24.6 | % | | 3,349 | | | 18.9 | % | Total operating expenses | 23,900 | | | 23.3 | % | | 18,459 | | | 20.6 | % | | 5,441 | | | 29.5 | % |
Operating income | Operating income | 14,931 | | | 17.4 | % | | 10,037 | | | 14.0 | % | | 4,894 | | | 48.8 | % | Operating income | 17,629 | | | 17.2 | % | | 17,307 | | | 19.3 | % | | 322 | | | 1.9 | % |
Other expenses | Other expenses | 514 | | | 0.6 | % | | 225 | | | 0.3 | % | | 289 | | | 128.4 | % | Other expenses | 483 | | | 0.5 | % | | 763 | | | 0.9 | % | | (280) | | | (36.7) | % |
Income tax | Income tax | 2,984 | | | 3.5 | % | | 2,009 | | | 2.8 | % | | 975 | | | 48.5 | % | Income tax | 3,490 | | | 3.4 | % | | 3,226 | | | 3.6 | % | | 264 | | | 8.2 | % |
Net income | Net income | $ | 11,433 | | | 13.3 | % | | $ | 7,803 | | | 10.9 | % | | $ | 3,630 | | | 46.5 | % | Net income | $ | 13,656 | | | 13.3 | % | | $ | 13,318 | | | 14.8 | % | | $ | 338 | | | 2.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2023 | | % of Total Revenue | | Nine Months Ended September 30, 2022 | | % of Total Revenue | | $ Change | | % Change |
Total revenue | $ | 290,755 | | | 100.0 | % | | $ | 245,512 | | | 100.0 | % | | $ | 45,243 | | | 18.4 | % |
Total cost of sales | 169,273 | | | 58.2 | % | | 149,046 | | | 60.7 | % | | 20,227 | | | 13.6 | % |
Gross margin | 121,482 | | | 41.8 | % | | 96,466 | | | 39.3 | % | | 25,016 | | | 25.9 | % |
Total operating expenses | 68,734 | | | 23.6 | % | | 53,374 | | | 21.7 | % | | 15,360 | | | 28.8 | % |
Operating income | 52,748 | | | 18.1 | % | | 43,092 | | | 17.6 | % | | 9,656 | | | 22.4 | % |
Other expenses | 1,365 | | | 0.5 | % | | 1,766 | | | 0.7 | % | | (401) | | | (22.7) | % |
Income tax | 10,553 | | | 3.6 | % | | 8,302 | | | 3.4 | % | | 2,251 | | | 27.1 | % |
Net income | $ | 40,830 | | | 14.0 | % | | $ | 33,024 | | | 13.5 | % | | $ | 7,806 | | | 23.6 | % |
The following table summarizestables summarize consolidated revenue results for the three and nine months ended March 31,September 30, 2023 and 2022 (in(dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | % | | % of Total Revenue |
| 2023 | | 2022 | | Inc (Dec) | | 2023 | | 2022 |
Product Revenue | | | | | | | | | |
Paint protection film | $ | 49,548 | | | $ | 43,961 | | | 12.7 | % | | 57.7 | % | | 61.2 | % |
Window film | 14,982 | | | 11,534 | | | 29.9 | % | | 17.5 | % | | 16.0 | % |
Other | 2,778 | | | 2,603 | | | 6.7 | % | | 3.1 | % | | 3.6 | % |
Total | $ | 67,308 | | | $ | 58,098 | | | 15.9 | % | | 78.4 | % | | 80.8 | % |
| | | | | | | | | |
Service Revenue | | | | | | | | | |
Software | $ | 1,458 | | | $ | 1,207 | | | 20.8 | % | | 1.7 | % | | 1.7 | % |
Cutbank credits | 4,030 | | | 2,930 | | | 37.5 | % | | 4.7 | % | | 4.1 | % |
Installation labor | 12,399 | | | 9,256 | | | 34.0 | % | | 14.4 | % | | 12.9 | % |
Training and other | 647 | | | 373 | | | 73.5 | % | | 0.8 | % | | 0.5 | % |
Total | $ | 18,534 | | | $ | 13,766 | | | 34.6 | % | | 21.6 | % | | 19.2 | % |
| | | | | | | | | |
Total | $ | 85,842 | | | $ | 71,864 | | | 19.5 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | % | | % of Total Revenue |
| 2023 | | 2022 | | Inc (Dec) | | 2023 | | 2022 |
Product Revenue | | | | | | | | | |
Paint protection film | $ | 58,977 | | | $ | 54,230 | | | 8.8 | % | | 57.4 | % | | 60.4 | % |
Window film | 18,762 | | | 15,391 | | | 21.9 | % | | 18.3 | % | | 17.1 | % |
Other | 3,386 | | | 2,995 | | | 13.1 | % | | 3.3 | % | | 3.4 | % |
Total | $ | 81,125 | | | $ | 72,616 | | | 11.7 | % | | 79.0 | % | | 80.9 | % |
| | | | | | | | | |
Service Revenue | | | | | | | | | |
Software | $ | 1,652 | | | $ | 1,351 | | | 22.3 | % | | 1.6 | % | | 1.5 | % |
Cutbank credits | 4,524 | | | 4,352 | | | 4.0 | % | | 4.4 | % | | 4.8 | % |
Installation labor | 14,852 | | | 11,067 | | | 34.2 | % | | 14.5 | % | | 12.3 | % |
Training and other | 524 | | | 372 | | | 40.9 | % | | 0.5 | % | | 0.5 | % |
Total | $ | 21,552 | | | $ | 17,142 | | | 25.7 | % | | 21.0 | % | | 19.1 | % |
| | | | | | | | | |
Total | $ | 102,677 | | | $ | 89,758 | | | 14.4 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | % | | % of Total Revenue |
| 2023 | | 2022 | | Inc (Dec) | | 2023 | | 2022 |
Product Revenue | | | | | | | | | |
Paint protection film | $ | 165,016 | | | $ | 146,465 | | | 12.7 | % | | 56.8 | % | | 59.7 | % |
Window film | 54,055 | | | 42,711 | | | 26.6 | % | | 18.6 | % | | 17.4 | % |
Other | 10,268 | | | 8,577 | | | 19.7 | % | | 3.5 | % | | 3.4 | % |
Total | $ | 229,339 | | | $ | 197,753 | | | 16.0 | % | | 78.9 | % | | 80.5 | % |
| | | | | | | | | |
Service Revenue | | | | | | | | | |
Software | $ | 4,656 | | | $ | 3,804 | | | 22.4 | % | | 1.6 | % | | 1.5 | % |
Cutbank credits | 13,253 | | | 11,459 | | | 15.7 | % | | 4.6 | % | | 4.7 | % |
Installation labor | 41,781 | | | 31,371 | | | 33.2 | % | | 14.4 | % | | 12.8 | % |
Training and other | 1,726 | | | 1,125 | | | 53.4 | % | | 0.5 | % | | 0.5 | % |
Total | $ | 61,416 | | | $ | 47,759 | | | 28.6 | % | | 21.1 | % | | 19.5 | % |
| | | | | | | | | |
Total | $ | 290,755 | | | $ | 245,512 | | | 18.4 | % | | 100.0 | % | | 100.0 | % |
Because many of our international customers require us to ship their orders to freight forwarders located in the United States, we cannot be certain about the ultimate destination of the product. The following table representstables represent our estimate of sales by geographic regions based on our understanding of ultimate product destination based on customer interactions, customer locations and other factors for the three and nine months ended March 31,September 30, 2023 and 2022 (in(dollars in thousands):
| | | Three Months Ended March 31, | | % | | % of Total Revenue | | Three Months Ended September 30, | | % | | % of Total Revenue |
| | 2023 | | 2022 | | Inc (Dec) | | 2023 | | 2022 | | 2023 | | 2022 | | Inc (Dec) | | 2023 | | 2022 |
United States | United States | $ | 51,077 | | | $ | 41,587 | | | 22.8 | % | | 59.5 | % | | 57.9 | % | United States | $ | 59,002 | | | $ | 51,522 | | | 14.5 | % | | 57.5 | % | | 57.4 | % |
Canada | | Canada | 11,471 | | | 11,046 | | | 3.8 | % | | 11.2 | % | | 12.3 | % |
China | China | 6,647 | | | 8,859 | | | (25.0) | % | | 7.7 | % | | 12.3 | % | China | 10,242 | | | 11,009 | | | (7.0) | % | | 10.0 | % | | 12.3 | % |
Canada | 8,592 | | | 7,850 | | | 9.5 | % | | 10.0 | % | | 10.9 | % | |
Continental Europe | Continental Europe | 7,960 | | | 5,663 | | | 40.6 | % | | 9.3 | % | | 7.9 | % | Continental Europe | 8,705 | | | 6,065 | | | 43.5 | % | | 8.5 | % | | 6.8 | % |
Middle East/Africa | | Middle East/Africa | 3,909 | | | 3,322 | | | 17.7 | % | | 3.8 | % | | 3.7 | % |
United Kingdom | United Kingdom | 3,091 | | | 2,428 | | | 27.3 | % | | 3.6 | % | | 3.4 | % | United Kingdom | 3,499 | | | 2,482 | | | 41.0 | % | | 3.4 | % | | 2.8 | % |
Middle East/Africa | 3,496 | | | 2,049 | | | 70.6 | % | | 4.1 | % | | 2.9 | % | |
Asia Pacific | Asia Pacific | 2,645 | | | 2,033 | | | 30.1 | % | | 3.1 | % | | 2.8 | % | Asia Pacific | 3,233 | | | 2,540 | | | 27.3 | % | | 3.1 | % | | 2.8 | % |
Latin America | Latin America | 2,173 | | | 1,206 | | | 80.2 | % | | 2.5 | % | | 1.7 | % | Latin America | 2,325 | | | 1,468 | | | 58.4 | % | | 2.3 | % | | 1.6 | % |
Other | Other | 161 | | | 189 | | | (14.8) | % | | 0.2 | % | | 0.2 | % | Other | 291 | | | 304 | | | (4.3) | % | | 0.2 | % | | 0.3 | % |
Total | Total | $ | 85,842 | | | $ | 71,864 | | | 19.5 | % | | 100.0 | % | | 100.0 | % | Total | $ | 102,677 | | | $ | 89,758 | | | 14.4 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | % | | % of Total Revenue |
| 2023 | | 2022 | | Inc (Dec) | | 2023 | | 2022 |
United States | $ | 169,228 | | | $ | 142,275 | | | 18.9 | % | | 58.2 | % | | 58.0 | % |
Canada | 31,914 | | | 29,773 | | | 7.2 | % | | 11.0 | % | | 12.1 | % |
China | 24,992 | | | 27,772 | | | (10.0) | % | | 8.6 | % | | 11.3 | % |
Continental Europe | 26,354 | | | 18,671 | | | 41.1 | % | | 9.1 | % | | 7.6 | % |
Middle East/Africa | 11,514 | | | 8,025 | | | 43.5 | % | | 4.0 | % | | 3.3 | % |
United Kingdom | 10,220 | | | 7,505 | | | 36.2 | % | | 3.5 | % | | 3.1 | % |
Asia Pacific | 9,192 | | | 6,549 | | | 40.4 | % | | 3.2 | % | | 2.7 | % |
Latin America | 6,617 | | | 4,033 | | | 64.1 | % | | 2.3 | % | | 1.6 | % |
Other | 724 | | | 909 | | | (20.4) | % | | 0.2 | % | | 0.3 | % |
Total | $ | 290,755 | | | $ | 245,512 | | | 18.4 | % | | 100.0 | % | | 100.0 | % |
Product Revenue. Product revenue for the three months ended September 30, 2023 increased 15.9%11.7% over the three months ended March 31, 2022September 30, 2022. Product revenue represented 78.4%79.0% of our total revenue forcompared to 80.9% in the three months ended March 31, 2023 and 80.8% for the three months ended March 31,September 30, 2022. Revenue from our paint protection film product line increased 12.7% for8.8% over the three months ended March 31, 2023.September 30, 2022. Paint protection film sales represented 57.7%57.4% and 61.2%60.4% of our total consolidated revenues for the three months ended March 31,September 30, 2023 and 2022, respectively. The total increase in the total amount of paint protection film sales was primarily due to increased demand for our film products inacross multiple regions partially offset by a decrease in sales to China resulting from lingering regional impacts of the COVID-19 pandemic. This net increase in demand was driven primarily by an increase in the overall number of our customers together with increased sales to existing customers.
Revenue from our window film product line grew 29.9%21.9% for the three months ended March 31, 2023.September 30, 2023 compared to the three months ended September 30, 2022. Window film sales represented 17.5%18.3% and 16.0%17.1% of our total consolidated revenues for the three months ended March 31,September 30, 2023 and 2022, respectively. This increase was due to continueddriven by increased demand resulting from increased channel focus and increased product adoption in multiple regions and increased demand.regions. Architectural window film revenue increased 6.4%49.9% compared to $1.2the three months ended September 30, 2022, to $2.7 million, and represented 14.4% of total window film revenue and 2.6% of total revenue for the three months ended September 30, 2023. This increase was driven by demand for our architectural window films as we continue to pursue this large addressable market.
Other product revenue for the three months ended September 30, 2023 increased 13.1% compared to the three months ended September 30, 2022 due mainly to continued demand for non-film related
products such as ceramic coating, plotters, chemicals, and other film installation tools and accessories. Our FUSION ceramic coating product revenue grew 34.6% compared to the three months ended September 30, 2022 to $1.5 million. This increase was due mainly todriven primarily by increased product awarenesschannel focus and increased demand in most offor our regions.ceramic coating products.
Geographically, we experiencedsaw revenue growth in manymost regions during the three months ended March 31,September 30, 2023. The U.S. region, our largest, region, grew 22.8%14.5%, over the three months ended September 30, 2022, due primarily to increasing attach rates. Outside the U.S., severalmost regions saw strong growth due primarily to increased product awareness and attach rates. Our China region
Product revenue declined 25.0%for the nine months ended September 30, 2023 increased 16.0% over the nine months ended September 30, 2022. Product revenue represented 78.9% of our consolidated revenue compared to 80.5% in the nine months ended September 30, 2022. Revenue from our paint protection film product line increased 12.7% over the nine months ended September 30, 2022. Paint protection film sales represented 56.8% and 59.7% of our consolidated revenues for the nine months ended September 30, 2023 and 2022, respectively. The increase in paint protection film sales was due to additional sales to both new and existing customers across multiple geographical markets.
Revenue from our window film grew 26.6% compared to the threenine months ended March 31,September 30, 2022. Window film sales represented 18.6% and 17.4% of our total consolidated revenues for the nine months ended September 30, 2023 and 2022, respectively. This increase was driven by increased demand resulting from increased channel focus and increased product adoption in multiple regions. Architectural window film revenue increased 42.2% compared to the nine months ended September 30, 2022 to $6.4 million and represented 11.9% of total window film revenue and 2.2% of total revenue. This increase was driven by increased demand for our architectural window films.
Other product revenue for the nine months ended September 30, 2023 increased 19.7% compared to the nine months ended September 30, 2022 due mainly to continued demand for non-film related products such as ceramic coating, plotters, chemicals, and other film installation tools and accessories. Our FUSION ceramic coating product revenue grew 53.6% compared to the lingering regional impacts ofnine months ended September 30, 2022 to $4.5 million. This increase was driven primarily by increased channel focus and increased demand for our ceramic coating products.
Geographically, we saw revenue growth in most regions during the COVID-19 pandemic.nine months ended September 30, 2023. The U.S. region, our largest region, grew 18.9% due primarily to increasing attach rates. Outside the U.S., most regions saw strong growth due primarily to increased product awareness and attach rates.
Service revenue. Service revenue consists of revenue from fees for DAP software access, and cutbank credit revenue, which represents the value of pattern access provided with eligible product revenue, revenue from the labor portion of installation sales in our Company-owned installation centers, revenue from our dealership services businessesbusiness and revenue from training services provided to our customers.
Service revenue grew 34.6%25.7% over service revenue for the three months ended March 31,September 30, 2022. ServiceWithin this category, software revenue represented 21.6% and 19.2% ofincreased 22.3% over the three months ended September 30, 2022. This increase was due to an increase in total subscribers to our consolidatedDAP software. Cutbank credit revenue increased 4.0% from the three months ended March 31, 2023 andSeptember 30, 2022 respectively.
Softwaredue to associated product revenue growth. Installation labor revenue increased 20.8% from34.2% over the three months ended March 31,September 30, 2022 due mainly to increased demand in our Company-owned installation facilities and across our dealership service and OEM networks.
Service revenue for the nine months ended September 30, 2023 grew 28.6% over the nine months ended September 30, 2022. TheWithin this category, software revenue grew 22.4% over the nine months ended September 30, 2022. This increase was due primarily to increasesan increase in total subscribers to our software. Software revenue represented 1.7% of consolidated revenue for both the three months ended March 31, 2023 and the three months ended March 31, 2022. Cutbank credit revenue grew 37.5% from the three months ended March 31, 2022. This increase was due mainly to increased demand for our products and services. Cutbank sales represented 4.7% and 4.1% of our consolidated revenue for the three months ended March 31, 2023 and 2022,DAP
respectively.software. Cutbank credit revenue increased 15.7% over the nine months ended September 30, 2022 due to associated product revenue growth. Installation labor revenue increased 14.4%33.2% over the nine months ended September 30, 2022 due mainly to increased demand in our Company-owned installation facilities and across our dealership service and OEM networks.
Total installation revenue (labor and product combined) at our Company-owned installation centers for the three months ended March 31, 2023 increased 34.0%34.2% over the three months ended March 31,September 30, 2022. This represented 17.2% and 15.3%14.7% of our total consolidated revenue for the three months ended March 31,September 30, 2023 and 2022, respectively. This increase was primarily due mainly to increased demand in our Company-owned installation facilitiescenters and across our dealership services businessesservice and OEM networks. Total installation revenue increased 33.2% over the nine months ended September 30, 2022. This represented 17.1% and 15.2% of our total consolidated revenue for the nine months ended September 30, 2023 and 2022, respectively. This increase was primarily due to increased demand in our Company-owned installation centers and across our dealership service and OEM networks. Adjusted product revenue, which combines the cutbank credit revenue service component with product revenue, increased 16.9% in11.3% over the three months ended March 31, 2023September 30, 2022. Adjusted product revenue increased 16.0% versus the threenine months ended March 31, 2022September 30, 2022. For both the three and nine month periods, this growth was due mainly to the same factors described previously.
sustained demand for our various product lines.
Cost of Sales
Cost of sales consists of product costs and the costs to provide our services. Product costs consist of material costs, personnel costs related to warehouse personnel, shipping costs, warranty costs and other related costs to provide products to our customers. Cost of service includes the labor costs associated with installation of product in our Company-ownedinstallation facilities, costs of labor associated with pattern design for our cutting software and the costs incurred to provide training for our customers.
Product costs infor the three months ended March 31,September 30, 2023 increased 10.4%9.9% over the three months ended March 31, 2022 commensurate with our growth in product sales.September 30, 2022. Cost of product sales represented 49.1%50.5% and 53.1%52.6% of total revenue in the three months ended March 31,September 30, 2023 and 2022, respectively. Cost of servicesservice revenue grew 29.4%37.0% during the three months ended March 31,September 30, 2023. For both product and service, cost of sales increased commensurate with the related growth in revenue. Refer to the Gross Margin section below for discussion of this cost relative to revenue.
Product costs for the nine months ended September 30, 2023 increased 10.8% over the nine months ended September 30, 2022. Cost of product sales represented 49.4% and 52.8% of total revenue in the nine months ended September 30, 2023 and represented 9.0%2022, respectively. Cost of service revenue grew 32.3% during the nine months ended September 30, 2023. For both product and 8.3%service, cost of total revenuesales increased commensurate with the related growth in revenue. Refer to the Gross Margin section below for discussion of this cost relative to revenue.
Gross Margin
Gross margin for the three months ended March 31,September 30, 2023 andgrew approximately $5.8 million, or 16.1%, compared to the three months ended September 30, 2022. For the three months ended September 30, 2023, gross margin represented 40.4% of revenue compared to 39.8% for the three months ended September 30, 2022 respectively. This increase was due primarily to increased installation labor costs commensurate with the growth in installation labor revenue.
Gross Marginmargin for the nine months ended September 30, 2023 grew approximately $25.0 million, or 25.9%, compared to the nine months ended September 30, 2022. For the nine months ended September 30, 2023, gross margin represented 41.8% of revenue compared to 39.3% for the nine months ended September 30, 2022.
The following table summarizestables summarize gross margin for productproducts and services for the three and nine months ended March 31,September 30, 2023 and 2022 (in(dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | % | | % of Category Revenue |
| 2023 | | 2022 | | Inc (Dec) | | 2023 | | 2022 |
Product margin | $ | 25,128 | | | $ | 19,904 | | | 26.2 | % | | 37.3 | % | | 34.3 | % |
Service margin | 10,832 | | | 7,813 | | | 38.6 | % | | 58.4 | % | | 56.8 | % |
Total | $ | 35,960 | | | $ | 27,717 | | | 29.7 | % | | 41.9 | % | | 38.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | % | | % of Category Revenue |
| 2023 | | 2022 | | Inc (Dec) | | 2023 | | 2022 |
Product | $ | 29,249 | | | $ | 25,391 | | | 15.2 | % | | 36.1 | % | | 35.0 | % |
Service | 12,280 | | | 10,375 | | | 18.4 | % | | 57.0 | % | | 60.5 | % |
Total | $ | 41,529 | | | $ | 35,766 | | | 16.1 | % | | 40.4 | % | | 39.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | % | | % of Category Revenue |
| 2023 | | 2022 | | Inc (Dec) | | 2023 | | 2022 |
Product | $ | 85,726 | | | $ | 68,107 | | | 25.9 | % | | 37.4 | % | | 34.4 | % |
Service | 35,756 | | | 28,359 | | | 26.1 | % | | 58.2 | % | | 59.4 | % |
Total | $ | 121,482 | | | $ | 96,466 | | | 25.9 | % | | 41.8 | % | | 39.3 | % |
Product gross margin for the three months ended March 31,September 30, 2023 increased approximately $5.2$3.9 million, or 26.2%15.2%, over the three months ended March 31,September 30, 2022 and represented 37.3%36.1% and 34.3%35.0% of total product revenue for the three months ended March 31,September 30, 2023 and 2022, respectively. TheThis increase in product gross margin percentages werewas due primarily due to decreases in product costs favorable changesand improved operating leverage.
Product gross margin for the nine months ended September 30, 2023 increased approximately $17.6 million, or 25.9%, over the nine months ended September 30, 2022 and represented 37.4% and 34.4% of total product revenue for the nine months ended September 30, 2023 and 2022, respectively. This increase in margin was due primarily to decreases in product mixcosts and improved operating leverage.
Service gross margin increased approximately $3.0$1.9 million, or 38.6%18.4%, over the three months ended March 31,September 30, 2022. This represented 58.4%57.0% and 56.8%60.5% of total service revenue for the three months ended March 31,September 30, 2023 and 2022, respectively. The increasedecrease in service gross margin percentage for the three months ended September 30, 2022 was primarily due to improved operating leveragea higher percentage of lower margin service revenue mix relative to other higher margin service revenue components in our dealership services business commensurate with the improvementprior year period.
Service gross margin increased approximately $7.4 million, or 26.1%, over the nine months ended September 30, 2022. This represented 58.2% and 59.4% of inventory levels at new car dealerships.
total service revenue for the nine months ended September 30, 2023 and 2022, respectively. This was primarily due to a higher percentage of lower margin service revenue mix relative to other higher margin service revenue components in the prior year period.Operating Expenses
Sales and marketing expenses for the three months ended March 31,September 30, 2023 increased $0.4 million, or 5.8%,22.8% compared to the same period in 2022. This increase was due to increased personnel and marketing costs incurred to support the ongoing growth of the business. These expenses represented 7.8%7.5% and 8.8%7.0% of total consolidated revenue for the three months ended March 31,September 30, 2023 and 2022, respectively.
For the nine months ended September 30, 2023, sales and marketing expenses increased 21.8% compared to the same period in 2022. This increase was due to continued investment in our salesincreased personnel and marketing efforts partially offset by timingcosts incurred to support the ongoing growth of our annual dealer conference which was held in the second quarterbusiness. These expenses represented 7.8% and 7.5% of this year compared tototal consolidated revenue for the first quarter of 2022.nine months ended September 30, 2023 and 2022, respectively.
General and administrative expenses grew approximately $3.0$4.0 million, or 26.2%, during the three months ended March 31, 202333.0% over the three months ended March 31,September 30, 2022. These costs represented 16.7% and 15.8% of consolidated revenue for the three months ended March 31, 2023 and 2022, respectively. TheThis increase in cost was due mainlyprimarily to increases in personnel, occupancy costs and professional fees to support our ongoing growth. These costs represented 15.7%
and 13.6% of total consolidated revenue for the three months ended September 30, 2023 and 2022, respectively.
General and administrative expenses grew approximately $11.3 million, or 32.5% over the nine months ended September 30, 2022. This increase in cost was due primarily to increases in personnel, occupancy costs and professional fees to support our ongoing growthgrowth. These costs represented 15.9% and 14.2% of total consolidated revenue for the business.nine months ended September 30, 2023 and 2022, respectively.
Income Tax Expense
Income tax expense for the three months ended March 31,September 30, 2023 increased $1.0$0.3 million from the three months ended March 31,September 30, 2022. Our effective tax rate was 20.7%20.4% for the three months ended March 31,September 30, 2023 compared with 20.5%19.5% for the three months ended March 31,September 30, 2022.
Net Income tax expense for the nine months ended September 30, 2023 increased $2.3 million from the same period in 2022, Our effective tax rate was 20.5% for the nine months ended September 30, 2023 compared with 20.1% for the nine months ended September 30, 2022.
Net income for the three months ended March 31,September 30, 2023 increased by $3.6 million, or 46.5%,2.5% to $11.4$13.7 million.
Net income for the nine months ended September 30, 2023 increased 23.6% to $40.8 million.
Liquidity and Capital Resources
TheOur primary sourcesources of liquidity for our business isare available cash and cash equivalents, cash flows provided by operations and borrowing capacityborrowings under our credit facility.facilities. As of March 31,September 30, 2023, we had cash and cash equivalents of $8.3$10.4 million. For the threenine months ended March 31,September 30, 2023, cash provided by operations was $0.7$38.5 million. We currently have $94$128.3 million of availabilitycredit available ($125.0 million under the Credit Agreement and CAD $4.5 ($3.3 million) under our newCanadian credit facility with Wells Fargo.facility) to us under our committed credit facilities. We expect available cash, internally generated funds, and borrowings from our committed credit facilities to havebe sufficient access to cash to support working capital needs, capital expenditures (including acquisitions), and to pay interest andour debt service debt.obligations. We are focused on continuing to generate positive operating cash to fund our operational and capital investment initiatives. We believe we have sufficient liquidity to operate for at least the next 12 months from the date of filing this report.
Operating Activitiesactivities
. Cash provided by operations totaled approximately $0.7for the nine months ended September 30, 2023 was $38.5 million compared to $9.7 million during the nine months ended September 30, 2022. Included in cash provided from operating activities for the nine months ended September 30, 2023 was a one-time payment of $7.4 million related to an acquisition that closed in October (see Note 14). Excluding that payment, cash provided from operations would have been $45.9 million for the three months ended March 31, 2023 compared to operating cash outflows of $4.3 million for the three months ended March 31, 2022. Thisperiod. The increase was driven by an increasedue mainly to growth in net income and a reductionchanges in other working capital items including reductions in inventory purchases partially offset by other changesand increases in working capital.accounts payable due to payment cycle timing.
Investing Activitiesactivities
. Cash flows used in investing activities totaled approximately $2.4$10.2 million during the threenine months ended March 31,September 30, 2023 compared to $2.6$9.8 million during the threenine months ended March 31,September 30, 2022. This was due primarily to higher acquisition-related payments made during 2023.
Financing Activitiesactivities.
Cash flows used in financing activities during the nine months ended September 30, 2023 totaled $26.2 million compared to cash flows provided by financing activities during the three months ended March 31, 2023 totaled approximately $1.9 million compared to $7.9 millionsame period in the prior year.year of $0.7 million. This decreasechange was due primarily to a decrease in borrowings underrepayments on our committed credit facility duringin 2023 as compared to borrowings in the 2023 quarter.prior year.
Debt obligations, including balances outstanding on committed credit facilities and contingent liabilitiesobligations as of March 31,September 30, 2023 and December 31, 2022 totaled approximately $29.0$1.1 million and $27.0 million, respectively.
Future Liquidityliquidity and Capital Resource Requirementscapital resource requirements
We expect to fund ongoing operating expenses, capital expenditures, acquisitions, interest payments, tax payments, credit facility maturities, future lease obligations, and payments for other long-term liabilities with cash flow from operations and borrowings under our credit facility.facilities. In the short-term, we are contractually obligated to make lease payments and make payments on contingent liabilities related to certain completed acquisitions.acquisitions in the event they are earned. In the long-term, we are contractually obligated to make lease payments, payments for contingent liabilities, and for repaymentrepayments of borrowings on our line of credit. We believe that we have sufficient cash and cash equivalents, as well as borrowing capacity, to cover our estimated short-term and long-term funding needs.
Credit Facilities
Throughout the three months ended March 31, 2023, theThe Company hadhas a $75.0 million revolving linecredit facility providing for secured revolving loans and letters of credit with a financial institution. The facilityin an aggregate amount of up to $125.0 million. As of September 30, 2023, no balance was utilized to fund the Company's working capital needs and other strategic initiatives, and was secured by a security interest in substantially all of the Company's current and future assets.outstanding under this agreement. Borrowings under the credit agreement bore interest on at the Wall Street Journal U.S. Prime Rate less 0.75% per annum if the Company's EBITDA ratio (as defined in the Loan Agreement governing the facility) was equal to or less than 2.00 to 1.00 or the Wall Street Journal U.S. Prime rate less 0.25% if the Company's EBITDA ratio was greater than 2.00 to 1.00. The facility also included a fee of 0.25% of the unused capacity on the facility. The interest rate for this credit facility as of March 31, 2023 and December 31, 2022 was 7.25% and 6.75%, respectively. The Company paid interest charges on borrowings under this facility are subject to the terms of $0.5 million during the three months ended March 31, 2023, and had a balance of $28.0 million and $26.0 million as of March 31, 2023 and December 31, 2022, respectively. The maturity date of this facility was July 5, 2024.Credit Agreement.
On April 6, 2023, this facility was terminated and a new $125.0 million Credit Agreement was established with Wells Fargo Bank, N.A. Borrowings under this newthe Credit Agreement bear interest, at XPEL’s option, at a rate equal to either (a) Base Rate or (b) Adjusted Term SOFR. In addition to the applicable interest rate, the Credit Agreement includes a commitment fee ranging from 0.20% to 0.25% per annum for the unused portion of the aggregate commitment and an applicable margin ranging from 0.00% to 0.50% for Base Rate Loans and 1.00% to 1.50% for Adjusted Term SOFR Loans. At September 30, 2023, these rates were 8.5% and 6.3%, respectively. Both the margin applicable to the interest rate and the commitment fee are dependent on XPEL’s Consolidated Total Leverage Ratio. The Credit Agreement's maturity date is April 6, 2026. All capitalized terms in this description of the credit facility that are not otherwise defined in this report have the meaning assigned to them in the Credit Agreement.
Obligations under the Credit Agreement are secured by a first priority perfected security interest, subject to certain permitted encumbrances, in all of XPEL’s material property and assets.
The terms of the Credit Agreement include certain affirmative and negative covenants that require, among other things, XPEL to maintain legal existence and to remain in good standing, comply with applicable laws, maintain accounting records, deliver financial statements and certifications on a timely basis, pay taxes as required by law, and maintain insurance coverage, as well as to forgo certain specified future activities that might otherwise encumber XPEL and certain customary covenants.
The Credit Agreement also provides for two financial covenants:covenants, as follows.
As of the last day of each fiscal quarter:
1.ItsXPEL shall not allow its Consolidated Total Leverage Ratio to exceed 3.50 to 1.00, and
2.ItsXPEL shall not allow its Consolidated Interest Coverage Ratio to be less than 3.00 to 1.00.
The Credit Agreement's maturity date is April 6, 2026.
Under the Credit Agreement:
“Adjusted Term SOFR” means, for purposes of any calculation, the rate per annum equal to (a) Term SOFR for such calculation plus (b) the Term SOFR Adjustment; (as defined in the Credit Agreement) provided that if Adjusted Term SOFR as so determined shall ever be less than 0%, then Adjusted Term SOFR shall be deemed to be 0%.
“Base Rate” is defined as the highest of (a) the Administrative Agent’s prime rate, (b) the Federal funds rate plus 0.50%, or (c) Adjusted Term SOFR for a one-month tenor in effect on such day plus 1.00%.
“Consolidated Total Leverage Ratio” is defined as the ratio of consolidated funded indebtedness on such date to Consolidated EBITDA for the most recently completed Reference Period.
“Consolidated Interest Coverage Ratio” is defined as the ratio of Consolidated EBITDA for the most recently completed Reference Period to XPEL’s consolidated interest expense for the most recently completed Reference Period.
“Consolidated EBITDA” is defined as consolidated net income (i) plus all of the following: (a) consolidated interest expense; (b) tax expense measured by net income, profits or capital (or any similar measures), paid or accrued, including federal and state and local income taxes, foreign income taxes and franchise taxes; (c) depreciation, amortization and other non-cash charges or expenses (including stock based compensation and write-downs of goodwill), excluding any non-cash charge or expense that represents an accrual for a cash expense to be taken in a future period; (d) all transaction fees, charges and other amounts (including any financing fees, merger and acquisition fees, legal fees and expenses, due diligence fees or any other fees and expenses in connection therewith) in connection with any Credit Agreement permitted acquisition, investment, disposition, issuance or repurchase of equity interests, or the incurrence, amendment or waiver of indebtedness permitted hereunder (other than those related to the certain transactions or with respect to any amendment or modification of the Loan Documents), in each case, whether or not consummated, in each case to the extent paid within six months of the closing or effectiveness of such event or the termination or abandonment of such transaction, as the case may be; provided that (1) the aggregate amount added back pursuant to this provision with respect to any one transaction shall not exceed $2,000,000 for the applicable period and (2) any amounts added back for such applicable period shall be set forth in reasonable detail on XPEL’s compliance certification for such period; (e) non-cash charges and losses (excluding any such non-cash charges or losses to the extent (1) there were cash charges with respect to such charges and losses in past accounting periods or (2) there is a reasonable expectation that there will be cash charges with respect to such charges and losses in future accounting periods); and (f) unusual and non-recurring expenses, charges or losses (excluding losses from discontinued operations); and (ii) less the sum of the following, without duplication, to the extent included in determining consolidated net income for such period: (a) interest income; (b) federal, state, local and foreign income tax credits of XPEL and its subsidiaries for such period (to the extent not netted from income tax expense); (c) any unusual and non-recurring gains; (d) non-cash gains (excluding any such non-cash gains to the extent (A) there were cash gains with respect to such gains in past accounting periods or (B) there is a reasonable expectation that there will be cash gains with respect to such gains in future accounting periods); and (e) any cash expense made during such period which represents the reversal of any non-cash expense that was added in a prior period pursuant to clause (i)(c)
above subsequent to the fiscal quarter in which the relevant non-cash expenses, charges or losses were incurred.
“Reference Period” is defined at any date of determination as, the period of four consecutive fiscal quarters ended on or immediately prior to such date for which financial statements of XPEL have been delivered to the Administrative Agent.
“SOFR” means a rate equal to the secured overnight financing rate as administered by the SOFR Administrator.
“SOFR Administrator” means the Federal Reserve Bank of New York (or a successor administrator of the secured overnight financing rate).
The Credit Agreement contains representations and warranties by XPEL, which were made only for purposes of the Credit Agreement and as of specified dates. The representations, warranties and covenants in the Credit Agreement were made solely for the benefit of the parties to the Credit Agreement, are subject to limitations agreed upon by such parties, including being qualified by schedules, may have been made for the purposes of allocating contractual risk between the parties instead of establishing these matters as facts, and are subject to standards of materiality applicable to the parties that may differ from those applicable to others. Others should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of XPEL or any of its subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Credit Agreement, which subsequent information may or may not be fully reflected in XPEL’s public disclosures.
The Company also has a CAD $4.5 million revolving credit facility through HSBC Banka financial institution in Canada, and isas maintained by XPEL Canada Corp., a wholly-owned subsidiary of XPEL. This Canadian facility is utilized to fund the Company's working capital needs in Canada. This facility bears interest at HSBC Canada Bank’s prime rate plus 0.25% per annum and is guaranteed by the parent company. As of March 31,September 30, 2023 and December 31, 2022, no balance was outstanding on this line of credit.
Critical Accounting EstimatesPolicies
There have been no material changes to the Company’s critical accounting estimates from the information provided in the Annual Report on Form 10-K.Report.
Related Party Relationships
There are no family relationships between or among any of our directors or executive officers. There are no arrangements or understandings between any two or more of our directors or executive officers, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current Board. There are also no arrangements, agreements or understandings between non-management stockholders that may directly or indirectly participate in or influence the management of our affairs.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have operations that expose us to currency risk in the British Pound Sterling, the Canadian Dollar, the Euro, the Mexican Peso, the New Taiwanese Dollar, and the Australian Dollar. Amounts invested in our foreign operations are translated into U.S. Dollars at the exchange rates in effect at the balance sheet
date. The resulting translation adjustments are recorded as accumulated other comprehensive loss, a component of stockholders’ equity in our condensed consolidated balance sheets. We do not currently hedge our exposure to potential foreign currency translation adjustments.
Borrowings under our revolving lines of credit or our Credit Agreement (see Note 13) are subject to market risk resulting from changes in interest rates related to our floating rate bank credit facilities. For such borrowings, a hypothetical 200 basis point increase in variable interest rates may result in a material impact to our financial statements. We do not currently have any derivative contracts to hedge our exposure to interest rate risk. During each of the periods presented, we have not experienced a significant effect on our business due to changes in interest rates.
If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established and maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended ("Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures.
Management, with the participation of our CEO and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on such
evaluation, our CEO and CFO have each concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
From time to time, we are made parties to actions filed or have been given notice of potential claims relating to the ordinary conduct of our business, including those pertaining to commercial disputes, product liability, patent infringement and employment matters.
While we believe that a material impact on our financial position, results of operations or cash flows from any such future claims or potential claims is unlikely, given the inherent uncertainty of litigation, it is possible that an unforeseen future adverse ruling or unfavorable development could result in future charges that could have a material adverse impact. We do and will continue to periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our financial position, results of operations and cash flows for the proceedings and claims described in the notes to our consolidated financial statements could change in the future.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in Part I, Item IA of the Annual Report on Form 10-K.Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.On August 31, 2023, Richard Crumly, Director of the Company, adopted a 10b5-1 plan. This plan allows for Mr. Crumly's orderly disposition of 316,912 shares of the Company's Common Stock during the period from December 1, 2023 to December 31, 2024.
Item 6. Exhibits
The following exhibits are being filed or furnished with this quarterly report on Form 10-Q:
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Exhibit No. | Description | Method of Filing |
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10.1 | | |
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31.1 | | Filed herewith |
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31.2 | | Filed herewith |
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32.1 | | Furnished herewith |
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32.2 | | Furnished herewith |
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101 | The following materials from XPEL’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020,June 30, 2021, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Consolidated Balance Sheets, (ii) the unaudited Consolidated Statements of Operations, (iii) the unaudited Consolidated Statements of Comprehensive Income, (iv) the unaudited Consolidated Statements of Equity, (v) the unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements | Filed herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | XPEL, Inc. (Registrant) |
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| By: | /s/ Barry R. Wood | |
| | Barry R. Wood | |
| | Senior Vice President and Chief Financial Officer | |
May 9,November 8, 2023 | | (Authorized Officer and Principal Financial and Accounting Officer) | |