XPEL, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
XPEL sells, distributes and installs automotive and architectural protective films and coatings, supported by proprietary software and installation services. This unaudited report covers the three months ended March 31, 2023, compared with the same quarter of 2022. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $85.8 million | $71.9 million | +19.5% |
| Gross profit / margin | $36.0 million / 41.9% | $27.7 million / 38.6% | Margin +3.3 percentage points |
| Operating income / margin | $14.9 million / 17.4% | $10.0 million / 14.0% | Income +48.8% |
| Net income | $11.4 million | $7.8 million | +46.5% |
| Diluted EPS | $0.41 | $0.28 | Up $0.13 |
| Operating cash flow | $0.7 million | $(4.3) million | Improved by $5.0 million |
| Investing cash flow | $(2.4) million | $(2.6) million | |
| Cash at quarter-end | $8.3 million | $10.6 million |
Product revenue rose 15.9% to $67.3 million; service revenue increased 34.6% to $18.5 million. Paint protection film revenue grew 12.7%, window film 29.9%, and installation labor 34.0%. The U.S., the largest region, grew 22.8%; China declined 25.0%. Gross-margin expansion reflected lower product costs, favorable mix and operating leverage, including in dealership services.
Operating expenses increased 18.9% to $21.0 million. Sales and marketing rose 5.8%; general and administrative expenses rose 26.2%, mainly from personnel, occupancy and professional fees. Interest expense increased to $0.5 million from $0.2 million. The effective tax rate was 20.7%, versus 20.5%. Management reported EBITDA, a non-GAAP measure, of $17.1 million versus $11.9 million.
At March 31, cash was $8.3 million, inventory $84.6 million, and total assets $207.7 million. The company had $28.0 million outstanding on its former revolving facility, up from $26.0 million at year-end; the facility’s stated interest rate was 7.25%. Total liabilities were $70.9 million. Management said it expected sufficient liquidity for at least the next 12 months and cited cash, operating cash flow and credit availability as sources. Cash generation remained modest relative to earnings, with working-capital movements affecting the quarter.
Material changes and subsequent events
- Revenue, gross profit and net income increased year over year, with improved gross and operating margins.
- Operating cash flow turned positive from an outflow in the prior-year quarter. Receivables increased $6.6 million and inventory increased $3.9 million during Q1.
- On April 6, 2023, XPEL replaced its former $75 million facility with a secured $125 million Wells Fargo revolving credit agreement maturing April 6, 2026. It borrowed $31 million to repay the former facility and related expenses. The filing states $94 million of availability under the new facility. Pricing is floating-rate and varies with leverage; the agreement also includes financial and other covenants.
- On May 1, 2023, the company completed the acquisition of a U.S. dealership-services business for approximately $5.3 million.
Outlook, commentary and risks
No specific revenue, earnings or cash-flow guidance is provided. Management described continued global expansion, channel development, acquisitions and growth in non-automotive products as strategic priorities. It noted that inflation, higher interest rates, currency movements, automotive-industry supply constraints and vehicle demand could affect results; some supply-chain and logistics pressures could continue through 2023. China sales remained affected by lingering regional COVID-19 impacts.
Key disclosed risks include dependence on automotive sales and production, reliance on one distributor in China, supply disruptions, competition, retaining personnel and installers, execution of acquisitions and rapid growth, multinational and currency exposure, and floating-rate debt. The company does not hedge foreign-currency translation or interest-rate exposure; it said a hypothetical 200-basis-point increase in variable rates could materially affect its financial statements. Management said ordinary-course litigation was not expected to have a material impact, while acknowledging that an adverse development could result in material charges. No material changes to the 10-K risk factors were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether revenue growth and margin gains persist, particularly given the decline in China and the contribution from services and dealership operations.
- Cash conversion and working-capital trends, including receivables, inventory and accrued liabilities.
- Actual borrowing costs, availability and covenant compliance under the new Wells Fargo facility. The filing text’s description of the financial covenant thresholds appears internally inconsistent (“to exceed” a 3.50-to-1.00 leverage ratio and “less than” a 3.00-to-1.00 interest coverage ratio); confirm the operative terms in the credit agreement.
- The acquired dealership-services business’s purchase accounting, integration and contribution to results, which are not quantified in this filing.
- Exposure to automotive demand, China, inflation, foreign exchange and floating interest rates, and the assumptions underlying management’s liquidity assessment.