XPEL, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results; dollar amounts below are in millions except per-share data. XPEL sells, distributes, and installs protective films and coatings, including automotive paint protection and window films, and provides related software and installation services.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $102.2 (+21.9%) | $83.9 | $188.1 (+20.8%) | $155.8 |
| Gross margin | $44.0; 43.0% | $33.0; 39.3% | $80.0; 42.5% | $60.7; 39.0% |
| Operating income | $20.2; 19.7% margin | $15.7; 18.8% margin | $35.1; 18.7% margin | $25.8; 16.6% margin |
| Net income | $15.7 (+32.3%) | $11.9 | $27.2 (+37.9%) | $19.7 |
| Diluted EPS | $0.57 | $0.43 | $0.98 | $0.71 |
- Q2 product revenue rose 20.7% and service revenue 26.6%. Installation labor, window film, and paint protection film were notable growth contributors. Management attributed product growth to demand across markets, more customers and sales to existing customers; service growth reflected installation demand and increased software subscribers.
- For the first half, product revenue grew 18.4% and service revenue 30.2%. China revenue declined 12.0%, while U.S. revenue grew 21.5%; several other regions recorded growth.
- Product gross margin improved to 38.7% in Q2 from 34.0%, which management attributed primarily to lower product costs and improved operating leverage. Q2 service gross margin declined to 59.3% from 60.4% due to revenue mix.
- Operating expenses increased 38.1% in Q2, faster than revenue. Sales and marketing included $1.5 million of annual dealer conference costs; G&A increases reflected personnel, occupancy, and professional fees. First-half EBITDA, a non-GAAP measure, was $39.5 million versus $29.1 million, up 36.0%.
Cash, debt, and liquidity
- First-half operating cash flow was $27.4 million, compared with a $2.5 million outflow in the prior-year period. Management cited higher net income and reduced inventory purchases. Cash and cash equivalents were $14.3 million at June 30, up from $8.1 million at year-end.
- Investing cash use was $8.3 million, including $4.5 million for a business acquisition and $3.3 million for property and equipment. Financing cash use was $13.1 million, primarily from $13.0 million of net revolving-credit repayments.
- Outstanding revolving-credit borrowings were $13.0 million, versus $26.0 million at December 31, 2022. The new secured facility has a $125 million commitment, matures April 2026, and carried a 6.20% weighted-average rate at quarter-end. The Canadian facility had no balance outstanding. XPEL reported compliance with debt covenants.
- Management reported $115.4 million available under committed credit facilities and believes cash, operating funds, and borrowing capacity will meet expected needs, including for at least 12 months from filing. The main facility is secured by material assets and includes leverage and interest-coverage covenants.
Material changes, outlook, and risks
- On May 1, XPEL acquired Protective Solutions, Inc., a dealership-focused installation business in Massachusetts, for stated consideration of $5.3 million. The preliminary purchase-price allocation included $1.6 million of goodwill and $2.9 million of customer relationships; accounting remained subject to finalization. The acquired business contributed $0.6 million of revenue through June 30.
- The filing provides no quantified financial guidance. Management’s stated strategy includes global expansion, strengthening distribution and installation channels through selective acquisitions, and growing non-automotive and architectural film offerings.
- Management cited ongoing uncertainty from inflation, higher interest rates, currency movements, and possible automotive supply-chain constraints. Results are exposed to automotive sales and production, competition, China-market and distributor concentration, supply disruptions, international operations, and execution of rapid growth and acquisitions. A hypothetical 200-basis-point increase in floating rates could materially affect the financial statements; XPEL does not hedge interest-rate or foreign-currency exposure.
- Ordinary-course claims and litigation may result in future charges, although management considered a material impact unlikely. Acquisition-related contingent liabilities measured at fair value were $1.2 million. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and product-margin improvement continue, particularly amid the automotive-cycle and macroeconomic risks identified by management.
- Whether elevated operating expenses and the mix of installation and other services affect future operating margins.
- China performance and exposure: China represented 7.8% of first-half revenue, and XPEL relied on one distributor for sales there; the largest customer represented 7.8% of first-half sales.
- Final purchase accounting and performance of Protective Solutions, and the potential payment of acquisition-related contingent liabilities.
- Credit-facility utilization, variable-rate expense, and compliance with financial covenants as borrowing needs and rates change.
- Management’s non-GAAP EBITDA reconciliation and definition; EBITDA should not be treated as a substitute for GAAP results or cash flow.