UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2024
OR
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: 001-38858
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
(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 | ||||||
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 Web 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” in Rule 12b-2 of the Exchange Act.:
☒ | 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 27,633,935 shares of common stock outstanding as of May 9, 2024.
TABLE OF CONTENTS
| Page | |||||
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, 2024 | December 31, 2023 | ||||||||||
Assets | |||||||||||
| Current | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventory, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Income tax receivable | |||||||||||
Total current assets | |||||||||||
Property and equipment, net | |||||||||||
| Right-of-use lease assets | |||||||||||
| Intangible assets, net | |||||||||||
| Other non-current assets | |||||||||||
| Goodwill | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities | |||||||||||
| Current | |||||||||||
| Current portion of notes payable | $ | $ | |||||||||
| Current portion lease liabilities | |||||||||||
| Accounts payable and accrued liabilities | |||||||||||
| Income tax payable | |||||||||||
| Total current liabilities | |||||||||||
| Deferred tax liability, net | |||||||||||
| Other long-term liabilities | |||||||||||
| Borrowings on line of credit | |||||||||||
| Non-current portion of lease liabilities | |||||||||||
| Non-current portion of notes payable | |||||||||||
| Total liabilities | |||||||||||
| Commitments and Contingencies (Note 11) | |||||||||||
| Stockholders’ equity | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in-capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See notes to condensed consolidated financial statements.
1
XPEL, INC.
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenue | |||||||||||
| Product revenue | $ | $ | |||||||||
| Service revenue | |||||||||||
| Total revenue | |||||||||||
| Cost of Sales | |||||||||||
| Cost of product sales | |||||||||||
| Cost of service | |||||||||||
| Total cost of sales | |||||||||||
| Gross Margin | |||||||||||
| Operating Expenses | |||||||||||
| Sales and marketing | |||||||||||
| General and administrative | |||||||||||
| Total operating expenses | |||||||||||
| Operating Income | |||||||||||
| Interest expense | |||||||||||
| Foreign currency exchange loss (gain) | ( | ||||||||||
| Income before income taxes | |||||||||||
| Income tax expense | |||||||||||
| Net income | $ | $ | |||||||||
| Earnings per share | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
| Weighted Average Number of Common Shares | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
See notes to condensed consolidated financial statements.
2
XPEL, INC.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
Other comprehensive income | |||||||||||
Net income | $ | $ | |||||||||
| Foreign currency translation | ( | ||||||||||
| Total comprehensive income | $ | $ | |||||||||
See notes to condensed consolidated financial statements.
3
XPEL, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(In thousands)
| Stockholders' Equity - Three Months Ended March 31 | |||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in-Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
Balance as of December 31, 2022 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | ( | ||||||||||||||||||||||||||||||||||
Balance as of December 31, 2023 | ( | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | ||||||||||||||||||||||||||||||||
| Balance as of March 31, 2024 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
4
XPEL, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||||||
| Depreciation of property, plant and equipment | |||||||||||
| Amortization of intangible assets | |||||||||||
| Gain on sale of property and equipment | ( | ( | |||||||||
| Stock compensation | |||||||||||
| Provision for credit losses | |||||||||||
| Deferred income tax | ( | ( | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventory, net | ( | ( | |||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Income taxes receivable and payable | |||||||||||
| Accounts payable and accrued liabilities | ( | ( | |||||||||
| Net cash (used in) provided by operating activities | ( | ||||||||||
| Cash flows used in investing activities | |||||||||||
| Purchase of property, plant and equipment | ( | ( | |||||||||
| Proceeds from sale of property and equipment | |||||||||||
| Acquisition of a business, net of cash acquired | ( | ||||||||||
| Development of intangible assets | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Net borrowings on revolving credit agreement | |||||||||||
| Repayments of notes payable | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Net change in cash and cash equivalents | ( | ||||||||||
| Foreign exchange impact on cash and cash equivalents | |||||||||||
| (Decrease)/Increase in cash and cash equivalents during the period | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental schedule of non-cash activities | |||||||||||
| Non-cash lease financing | $ | $ | |||||||||
| Issuance of common stock for vested restricted stock units | |||||||||||
| Supplemental cash flow information | |||||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Cash paid for interest | $ | $ | |||||||||
See notes to condensed consolidated financial statements.
5
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. INTERIM FINANCIAL INFORMATION
The accompanying (a) condensed consolidated balance sheet as of December 31, 2023, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of and for the three months ended March 31, 2024 and 2023 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, 2023 as filed with the SEC on February 28, 2024 (the "Annual Report") and with the Management's Discussion and Analysis of Financial Condition and Results of Operations section appearing elsewhere in this 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.A in October 2003.
Segment Reporting - Management has concluded that our chief operating decision maker (“CODM”) is our chief executive officer. The Company’s CODM reviews the entire organization’s consolidated results 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 with U.S. GAAP requires management to make judgments and estimates and form assumptions that affect the reported amounts of assets and liabilities as of 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.
Accounts Receivable - Accounts receivable are shown net of allowances for expected credit losses of $0.2 million and $0.2 million as of March 31, 2024 and December 31, 2023, 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 other economic and industry
6
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| 2024 | |||||
| Warranty liability, January 1 | $ | ||||
| Warranties assumed in period | |||||
| Payments | ( | ||||
| Warranty liability, March 31 | $ | ||||
| 2023 | |||||
| Warranty liability, January 1 | $ | ||||
| Warranties assumed in period | |||||
| Payments | ( | ||||
| Warranty liability, December 31 | $ | ||||
Recent Accounting Pronouncements Issued and Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, “Improvements to Reportable Segment Disclosures” which makes certain updates to segment reporting. This standard will become effective for our annual reporting for the year beginning January 1, 2024 and for our interim reporting for interim periods beginning January 1, 2025. We do not anticipate implementation of this standard will have a material impact on our financial statements.
In December 2023, the FASB issued ASU 2023-09, “Improvements to Income Tax Disclosures”, which makes certain updates to income tax disclosures. This standard becomes effective for our fiscal year beginning January 1, 2025. We do not anticipate implementation of this standard will have a material impact on our financial statements.
7
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
•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.
Revenue from product and services sales is recognized when control of the goods, or benefit of the service, is furnished to the customer. This 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 present are immaterial. Discounts provided by the Company to customers at the time of sale are recognized as a reduction in sales as the products are sold.
Warranty obligations associated with the sale of our 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 be one year or less.
Under its contracts with customers, the Company stands ready to deliver product upon receipt of a 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 require 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 Topic 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
8
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 months ended March 31, 2024 (in thousands):
| Balance, December 31, 2023 | $ | ||||
| Revenue recognized related to payments included in the December 31, 2023 balance | ( | ||||
| Payments received for which performance obligations have not been satisfied | |||||
| Effect of foreign currency translation | ( | ||||
| Balance, March 31, 2024 | $ | ||||
The table below sets forth the disaggregation of revenue by product category for the periods indicated below (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Product Revenue | |||||||||||
| Paint protection film | $ | $ | |||||||||
| Window film | |||||||||||
| Other | |||||||||||
Total | $ | $ | |||||||||
| Service Revenue | |||||||||||
| Software | $ | $ | |||||||||
| Cutbank credits | |||||||||||
| Installation labor | |||||||||||
| Training and other | |||||||||||
| Total | $ | $ | |||||||||
| Total | $ | $ | |||||||||
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 represents our estimate of sales by geographic regions based on our understanding of
9
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 March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
United States | $ | $ | |||||||||
| China | |||||||||||
| Canada | |||||||||||
| Continental Europe | |||||||||||
| United Kingdom | |||||||||||
| Middle East/Africa | |||||||||||
| Asia Pacific | |||||||||||
| Latin America | |||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following (in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
Furniture and fixtures | $ | $ | |||||||||
| Computer equipment | |||||||||||
| Vehicles | |||||||||||
| Equipment | |||||||||||
| Leasehold improvements | |||||||||||
| Plotters | |||||||||||
| Construction in Progress | |||||||||||
| Total property and equipment | |||||||||||
| Less: accumulated depreciation | |||||||||||
| Property and equipment, net | $ | $ | |||||||||
10
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. INTANGIBLE ASSETS, NET
Intangible assets consists of the following (in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
Trademarks | $ | $ | |||||||||
Software | |||||||||||
Trade name | |||||||||||
Contractual and customer relationships | |||||||||||
Non-compete | |||||||||||
Other | |||||||||||
| Total at cost | |||||||||||
| Less: Accumulated amortization | |||||||||||
| Intangible assets, net | $ | $ | |||||||||
6. GOODWILL
The following table summarizes goodwill transactions for the three months ended March 31, 2024 and the twelve months ended December 31, 2023 (in thousands):
| 2023 | |||||
| Balance at December 31, 2022 | $ | ||||
| Additions and purchase price allocation adjustments | |||||
| Foreign exchange | |||||
| Balance at December 31, 2023 | $ | ||||
| 2024 | |||||
| Balance at December 31, 2023 | $ | ||||
| Additions and purchase price allocation adjustments | |||||
| Foreign exchange | ( | ||||
| Balance at March 31, 2024 | $ | ||||
11
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. INVENTORIES
The components of inventory are summarized as follows (in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work in process | |||||||||||
| Finished goods | |||||||||||
| $ | $ | ||||||||||
8. DEBT
REVOLVING FACILITIES
The Company has a revolving credit facility providing for secured revolving loans and letters of credit in an aggregate amount of up to $125 million, which is subject to the terms of a credit agreement dated April 6, 2023 (the "Credit Agreement"). As of March 31, 2024 and December 31, 2023, the Company had outstanding balances of $24 million and $19 million under this agreement, respectively.
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 March 31, 2024, these rates were 8.5 % and 6.4 %, 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 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 provides for two financial covenants, as follows.
As of the last day of each fiscal quarter:
1.XPEL shall not allow its Consolidated Total Leverage Ratio to exceed 3.50 to 1.00, and
2.XPEL shall not allow its Consolidated Interest Coverage Ratio to be less than 3.00 to 1.00
The Company also has a CAD $4.5 million revolving credit facility through HSBC Bank Canada, and is 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, 2024 and December 31, 2023, no
12
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of March 31, 2024 and December 31, 2023, the Company was in compliance with all debt covenants.
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following table presents significant accounts payable and accrued liability balances as of the periods ending (in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
| Trade payables | $ | $ | |||||||||
| Payroll liabilities | |||||||||||
| Contract liabilities | |||||||||||
| Acquisition holdback payments | |||||||||||
| Other liabilities | |||||||||||
| $ | $ | ||||||||||
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 timing of certain future payments under these arrangements. These liabilities are accounted for as Level 3 liabilities within the fair value hierarchy.
13
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Liabilities measured at fair value on a recurring basis as of the dates noted below are as follows (in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
| Level 3: | |||||||||||
| Contingent Liabilities | $ | $ | |||||||||
Decreases 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 months ended March 31, 2024.
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):
| Three Months Ended March 31, | |||||||||||
| Numerator | 2024 | 2023 | |||||||||
| Net income | $ | $ | |||||||||
| Denominator | |||||||||||
| Weighted average basic shares | |||||||||||
| Dilutive effect of restricted stock units | |||||||||||
| Weighted average diluted shares | |||||||||||
| Earnings per share | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
14
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” 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:
•We are highly dependent on the automotive industry. A prolonged or material contraction in automotive sales and production volumes could adversely affect our business, results of operations and financial condition.
•We currently rely on one distributor for our products in China.
•A significant percentage of our revenue is generated from our business in China, a market that is associated with certain risks.
•The loss of one or more of our key personnel or our failure to attract and retain other highly qualified personnel in the future, could harm our business.
•A material disruption from our contract manufacturers or suppliers or our inability to obtain a sufficient supply from alternate suppliers could cause us to be unable to meet customer demands or increase our costs.
•Our asset-light business model exposes us to product quality and variable cost risks.
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•Our accounting estimates and risk management processes rely on assumptions or models that may prove inaccurate.
•Fluctuations in the cost and availability of raw materials, equipment, labor and transportation could cause manufacturing delays, increase our costs and/or impact our ability to meet customer demand.
•Our industry is highly competitive.
•Harm to our reputation or the reputation of one or more of our products could have an adverse effect on our business.
•Our revenue and operating results may fluctuate, which may make our results difficult to predict and could cause our results to fall short of expectations.
•Technology could render the need for some of our products obsolete.
•Infringement of our intellectual property could impact our ability to compete effectively.
•If changes to our existing products or introduction of new products or services do not meet our customers’ expectations or fail to generate revenue, we could lose our customers or fail to generate any revenue from such products or services and our business may be harmed.
•We depend on our relationships with independent installers and new car dealerships and their ability to sell and service our products. Any disruption in these relationships could harm our sales.
•We may not be able to identify, finance and complete suitable acquisitions and investments, and any completed acquisitions and investments could be unsuccessful or consume significant resources.
•We may incur material losses and costs as a result of product liability and warranty claims.
•Our failure to satisfy international trade compliance regulations, and changes in U.S. government sanctions, could have a material adverse effect on us.
•We may seek to incur substantial indebtedness in the future.
•We cannot be certain that additional financing will be available on reasonable terms when required, or at all.
•Our variable rate indebtedness exposes us to interest rate volatility, which could cause our debt service obligations to increase significantly.
•General global economic and business conditions affect demand for our products.
•A public health crisis could impact our business
•Economic, political and market conditions can adversely affect our business, financial condition and results of operations.
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 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 shareholders 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
The Company is a leading provider of protective films and coatings, including automotive paint protection film, surface protection film, automotive and commercial/residential window films, and ceramic coatings with a global footprint, a network of trained installers and proprietary DAP software. The Company is dedicated to exceeding customer expectations by providing high-quality products, leading customer service, expert technical support and world-class training.
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The Company 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 and other road debris, thereby fully protecting the 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 the Company 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.
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 2023, we completed four acquisitions in furtherance of this objective. We believe our channel strategy uniquely positions us to be wherever the demand takes us and is a key part of our ability to drive sustained growth.
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.
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
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define EBITDA as net income plus (a) total depreciation and amortization, (b) interest expense, net, and (c) income tax expense.
The following table is a reconciliation of Net income to EBITDA for the three months ended March 31, 2024 and 2023 (in thousands):
| (Unaudited) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net Income | $ | 6,666 | $ | 11,433 | |||||||
| Interest | 473 | 523 | |||||||||
| Taxes | 1,818 | 2,984 | |||||||||
| Depreciation | 1,333 | 972 | |||||||||
| Amortization | 1,410 | 1,161 | |||||||||
| EBITDA | $ | 11,700 | $ | 17,073 | |||||||
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 their usefulness as comparative measures.
Results of Operations
The following table summarizes the Company’s consolidated results of operations for the three months ended March 31, 2024 and 2023 (in thousands):
| Three Months Ended March 31, 2024 | % of Total Revenue | Three Months Ended March 31, 2023 | % of Total Revenue | $ Change | % Change | ||||||||||||||||||||||||||||||
| Total revenue | $ | 90,104 | 100.0 | % | $ | 85,842 | 100.0 | % | $ | 4,262 | 5.0 | % | |||||||||||||||||||||||
| Total cost of sales | 52,228 | 58.0 | % | 49,882 | 58.1 | % | 2,346 | 4.7 | % | ||||||||||||||||||||||||||
| Gross margin | 37,876 | 42.0 | % | 35,960 | 41.9 | % | 1,916 | 5.3 | % | ||||||||||||||||||||||||||
| Total operating expenses | 28,647 | 31.8 | % | 21,029 | 24.5 | % | 7,618 | 36.2 | % | ||||||||||||||||||||||||||
| Operating income | 9,229 | 10.2 | % | 14,931 | 17.4 | % | (5,702) | (38.2) | % | ||||||||||||||||||||||||||
| Other expenses | 745 | 0.8 | % | 514 | 0.6 | % | 231 | 44.9 | % | ||||||||||||||||||||||||||
| Income tax | 1,818 | 2.0 | % | 2,984 | 3.5 | % | (1,166) | (39.1) | % | ||||||||||||||||||||||||||
| Net income | $ | 6,666 | 7.4 | % | $ | 11,433 | 13.3 | % | $ | (4,767) | (41.7) | % | |||||||||||||||||||||||
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The following table summarizes revenue results for the three months ended March 31, 2024 and 2023 (in thousands):
| Three Months Ended March 31, | % | % of Total Revenue | |||||||||||||||||||||||||||
| 2024 | 2023 | Inc (Dec) | 2024 | 2023 | |||||||||||||||||||||||||
| Product Revenue | |||||||||||||||||||||||||||||
| Paint protection film | $ | 49,011 | $ | 49,548 | (1.1) | % | 54.4 | % | 57.7 | % | |||||||||||||||||||
| Window film | 14,549 | 14,982 | (2.9) | % | 16.1 | % | 17.5 | % | |||||||||||||||||||||
| Other | 3,292 | 2,778 | 18.5 | % | 3.7 | % | 3.2 | % | |||||||||||||||||||||
| Total | $ | 66,852 | $ | 67,308 | (0.7) | % | 74.2 | % | 78.4 | % | |||||||||||||||||||
| Service Revenue | |||||||||||||||||||||||||||||
| Software | $ | 1,928 | $ | 1,458 | 32.2 | % | 2.1 | % | 1.7 | % | |||||||||||||||||||
| Cutbank credits | 4,018 | 4,030 | (0.3) | % | 4.5 | % | 4.7 | % | |||||||||||||||||||||
| Installation labor | 16,706 | 12,399 | 34.7 | % | 18.5 | % | 14.4 | % | |||||||||||||||||||||
| Training and other | 600 | 647 | (7.3) | % | 0.7 | % | 0.8 | % | |||||||||||||||||||||
| Total | $ | 23,252 | $ | 18,534 | 25.5 | % | 25.8 | % | 21.6 | % | |||||||||||||||||||
| Total | $ | 90,104 | $ | 85,842 | 5.0 | % | 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 represents 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 months ended March 31, 2024 and 2023 (in thousands):
| Three Months Ended March 31, | % | % of Total Revenue | |||||||||||||||||||||||||||
| 2024 | 2023 | Inc (Dec) | 2024 | 2023 | |||||||||||||||||||||||||
| United States | $ | 52,048 | $ | 51,077 | 1.9 | % | 57.8 | % | 59.5 | % | |||||||||||||||||||
| China | 1,450 | 6,647 | (78.2) | % | 1.6 | % | 7.7 | % | |||||||||||||||||||||
| Canada | 11,080 | 8,592 | 29.0 | % | 12.3 | % | 10.0 | % | |||||||||||||||||||||
| Continental Europe | 10,216 | 7,960 | 28.3 | % | 11.3 | % | 9.3 | % | |||||||||||||||||||||
| United Kingdom | 3,486 | 3,091 | 12.8 | % | 3.9 | % | 3.6 | % | |||||||||||||||||||||
| Middle East/Africa | 5,143 | 3,496 | 47.1 | % | 5.7 | % | 4.1 | % | |||||||||||||||||||||
| Asia Pacific | 3,750 | 2,645 | 41.8 | % | 4.2 | % | 3.1 | % | |||||||||||||||||||||
| Latin America | 2,931 | 2,173 | 34.9 | % | 3.2 | % | 2.5 | % | |||||||||||||||||||||
| Other | — | 161 | (100.0) | % | 0.0 | % | 0.2 | % | |||||||||||||||||||||
| Total | $ | 90,104 | $ | 85,842 | 5.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||
Product Revenue. Product revenue decreased 0.7% over the three months ended March 31, 2023. Product revenue represented 74.2% of our total revenue for the three months ended March 31, 2024 and 78.4% for the three months ended March 31, 2023. Revenue from our paint protection film product line decreased 1.1% for the three months ended March 31, 2024. Paint protection film sales represented 54.4% and 57.7% of our consolidated revenues for the three months ended March 31, 2024 and 2023,
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respectively. This decrease was due to lower demand in the U.S., primarily in the after-market channel, and lower sales to XPEL's China distributor. Sales to China reached a record high in the fourth quarter of 2023. Consequently, first quarter 2024 China sales were negatively impacted as our distributor sold through the inventory purchased at the end of last year.
Revenue from our window film product line declined 2.9% for the three months ended March 31, 2024. Window film sales represented 16.1% and 17.5% of our consolidated revenues for the three months ended March 31, 2024 and 2023, respectively. This decline was due mainly to lower revenue into China. Excluding China, total window film revenue grew 10.3%. Architectural window film revenue increased 33.1% to $1.8 million. This increase was due mainly to increased product awareness and demand in most of our regions.
Other product revenue for the three months ended March 31, 2024 grew 18.5% to $3.3 million and represented 3.7% of revenue. This increase was driven by an increase in demand for our non-film related products such as ceramic coating, plotters, chemicals and other film installation tools and accessories. Our FUSION ceramic coating product revenue grew 24.4% to $1.4 million. This increase was due mainly to increased demand for our ceramic coating products.
Geographically, outside of the U.S. and China, we experienced solid growth in most operating regions during the three months ended March 31, 2024, due mainly to increased product awareness and adoption.
Service revenue consists of 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 businesses and revenue from training services provided to our customers. Due mainly to increases in the Company's dealership services business resulting from increased car counts, increased content per vehicle and from our OEM business, service revenue grew 25.5% over service revenue for the three months ended March 31, 2023. Service revenue represented 25.8% and 21.6% of our consolidated revenue from the three months ended March 31, 2024 and 2023, respectively.
Software revenue increased 32.2% from the three months ended March 31, 2023. The increase was due primarily to increases in total subscribers to our software. Software revenue represented 2.1% and 1.7% of consolidated revenue for the three months ended March 31, 2024 and 2023, respectively. Installation labor revenue increased 34.7% due mainly to increased labor revenue in our dealership services business resulting from increased car counts associated with improving U.S. new car dealership inventories.
Total installation revenue (labor and product combined) for the three months ended March 31, 2024 increased 34.7% over the three months ended March 31, 2023. This represented 22.1% and 17.2% of our consolidated revenue for the three months ended March 31, 2024 and 2023, respectively. Adjusted product revenue, which combines the cutbank credit revenue service component with product revenue, decreased 0.7% in the three months ended March 31, 2024 versus the three months ended March 31, 2023.
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-run facilities, costs of labor associated with pattern design for our cutting software and the costs incurred to provide training for our customers. Product costs in the three months ended March 31, 2024 decreased 0.1% over the three months ended March 31, 2023 commensurate with our decrease in product sales. Cost of product sales represented 46.8% and 49.1%
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of total revenue in the three months ended March 31, 2024 and 2023, respectively. Cost of services grew 31.0% during the three months ended March 31, 2024 and represented 11.2% and 9.0% of total revenue for the three months ended March 31, 2024 and 2023, respectively. This increase was due primarily to increased installation labor costs commensurate with the growth in installation labor revenue.
Gross Margin
The following table summarizes gross margin for product and services for the three months ended March 31, 2024 and 2023 (in thousands):
| Three Months Ended March 31, | % | % of Category Revenue | |||||||||||||||||||||||||||
| 2024 | 2023 | Inc (Dec) | 2024 | 2023 | |||||||||||||||||||||||||
| Product margin | $ | 24,717 | $ | 25,128 | -1.6 | % | 37.0 | % | 37.3 | % | |||||||||||||||||||
| Service margin | 13,159 | 10,832 | 21.5 | % | 56.6 | % | 58.4 | % | |||||||||||||||||||||
| Total | $ | 37,876 | $ | 35,960 | 5.3 | % | 42.0 | % | 41.9 | % | |||||||||||||||||||
Product gross margin for the three months ended March 31, 2024 decreased $0.4 million, 1.6% compared to the same period in the prior year. The decrease in product gross margin percentages was primarily due to lower product revenue and increases in non bill of material costs contained within product cost of goods sold.
Service gross margin increased approximately $2.3 million, or 21.5%, over the three months ended March 31, 2023. This represented 56.6% and 58.4% of total service revenue for the three months ended March 31, 2024 and 2023, respectively. The decrease in service gross margin percentage was primarily due to a higher percentage mix of lower margin installation labor revenue and cost inefficiencies associated with lower revenue in our company-owned installation centers.
Operating Expenses
Sales and marketing expenses for the three months ended March 31, 2024 increased $3.7 million, or 55.7%, compared to the same period in 2023. These expenses represented 11.5% and 7.8% of consolidated revenue for the three months ended March 31, 2024 and 2023, respectively. This increase was primarily due to expenses incurred during the period for our annual dealer conference which occurred in the second quarter of the prior year.
General and administrative expenses grew approximately $3.9 million, or 27.2%, during the three months ended March 31, 2024 over the three months ended March 31, 2023. These costs represented 20.3% and 16.7% of consolidated revenue for the three months ended March 31, 2024 and 2023, respectively. The increase was due mainly to increases in personnel, occupancy costs, and professional fees to support the ongoing growth of the business.
Income Tax Expense
Income tax expense for the three months ended March 31, 2024 decreased $1.2 million from the three months ended March 31, 2023. Our effective tax rate was 21.4% for the three months ended March 31, 2024 compared with 20.7% for the three months ended March 31, 2023.
Net Income
Net income for the three months ended March 31, 2024 decreased by $4.8 million, or 41.7%, to $6.7 million.
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Liquidity and Capital Resources
The primary source of liquidity for our business is available cash and cash equivalents, cash flows provided by operations and borrowing capacity under our credit facility. As of March 31, 2024, we had cash and cash equivalents of $8.6 million. For the three months ended March 31, 2024, cash used in operations was $5.0 million, and as of March 31, 2024 we had approximately $104.3 million in funds available under our credit facilities. We expect to continue to have sufficient access to cash to support working capital needs, pay for capital expenditures (including acquisitions), and to pay interest and service debt. We believe we have the ability and sufficient resources to meet these cash requirements by using available cash, internally generated funds and borrowing under committed credit facilities. 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 this quarterly report.
Operating Activities. Cash used in operations totaled approximately $5.0 million for the three months ended March 31, 2024, compared to operating cash inflows of $0.7 million for the three months ended March 31, 2023. This decrease was driven by a decline in net income and a net increase in working capital.
Investing Activities. Cash flows used in investing activities totaled approximately $3.1 million during the three months ended March 31, 2024 compared to $2.4 million during the three months ended March 31, 2023.
Financing Activities. Cash flows provided by financing activities during the three months ended March 31, 2024 totaled approximately $5.0 million compared to $1.9 million in the prior year. This increase was due to an increase in borrowings under our credit facility during the 2024 quarter.
Debt obligations, including balances outstanding on committed credit facilities and contingent liabilities as of March 31, 2024 and December 31, 2023 totaled approximately $25.0 million and $19.9 million, respectively.
Future Liquidity and Capital 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. In the short-term, we are contractually obligated to make lease payments and make payments on contingent liabilities related to certain completed acquisitions. In the long-term, we are contractually obligated to make lease payments, for contingent liabilities, and for repayment 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
The Company has a revolving credit facility providing for secured revolving loans and letters of credit in an aggregate amount of up to $125 million, which is subject to the terms of a credit agreement dated April 6, 2023 (the "Credit Agreement"). As of March 31, 2024 and December 31, 2023, the Company had outstanding balances of $24 million and $19 million under this agreement, respectively.
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
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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 March 31, 2023, these rates were 8.5% and 6.4%, 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 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 provides for two financial covenants, as follows.
As of the last day of each fiscal quarter:
1.XPEL shall not allow its Consolidated Total Leverage Ratio to exceed 3.50 to 1.00, and
2.XPEL shall not allow its Consolidated Interest Coverage Ratio to be less than 3.00 to 1.00
The Company also has a CAD $4.5 million revolving credit facility through HSBC Bank Canada, and is 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, 2024 and December 31, 2023, no balance was outstanding on this line of credit.
Critical Accounting Estimates
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.
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.
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Borrowings under our revolving lines of credit or our Credit Agreement (see Note 8) 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.
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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.
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.
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Item 6. Exhibits
The following exhibits are being filed or furnished with this quarterly report on Form 10-Q:
| Exhibit No. | Description | Method of Filing | ||||||
| 31.1 | Filed herewith | |||||||
| 31.2 | Filed herewith | |||||||
| 32.1 | Furnished herewith | |||||||
| 32.2 | Furnished herewith | |||||||
| 101 | The following materials from XPEL’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020, 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.
| XPEL, Inc. (Registrant) | ||||||||
| By: | /s/ Barry R. Wood | |||||||
| Barry R. Wood | ||||||||
| Senior Vice President and Chief Financial Officer | ||||||||
| May 9, 2024 | (Authorized Officer and Principal Financial and Accounting Officer) | |||||||
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