XPEL(XPEL) - 2022 Q2 - Quarterly Report

Part I - Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited) Unaudited financial statements for Q2 2022 show significant revenue and net income growth, increased assets and liabilities, and decreased operating cash flow due to inventory build-up Condensed Consolidated Balance Sheets Total assets reached $189.1 million by June 30, 2022, driven by inventory growth, while liabilities increased to $86.0 million due to higher borrowings Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $189,056 | $161,015 | | Cash and cash equivalents | $9,321 | $9,644 | | Inventory, net | $74,142 | $51,936 | | Goodwill | $25,071 | $25,655 | | Total Liabilities | $85,979 | $76,553 | | Borrowings on line of credit | $32,000 | $25,000 | | Accounts payable and accrued liabilities | $36,587 | $32,915 | | Total Stockholders' Equity | $103,077 | $84,462 | Condensed Consolidated Statements of Income Q2 2022 revenue grew 22.0% to $83.9 million, with net income up 16.8% to $11.9 million, and diluted EPS at $0.43 Statement of Income Summary (in thousands, except EPS) | Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $83,890 | $68,736 | $155,754 | $120,602 | | Gross Margin | $32,983 | $25,247 | $60,700 | $43,534 | | Operating Income | $15,749 | $12,672 | $25,786 | $21,219 | | Net Income | $11,902 | $10,186 | $19,706 | $17,033 | | Diluted EPS | $0.43 | $0.37 | $0.71 | $0.62 | Condensed Consolidated Statements of Cash Flows Operating cash flow for H1 2022 was a $2.5 million outflow, a significant decrease from the prior year, mainly due to a $22.7 million inventory increase Six Months Ended June 30, Cash Flow Summary (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(2,525) | $19,073 | | Net cash used in investing activities | $(4,595) | $(33,638) | | Net cash provided by (used in) financing activities | $6,706 | $(5,423) | | Decrease in cash and cash equivalents | $(323) | $(20,293) | - The significant decrease in operating cash flow was mainly caused by a $22.7 million increase in inventory and a $6.6 million increase in accounts receivable[25] Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, revenue disaggregation, debt structure, and acquisition activities, highlighting paint protection film revenue and a $75.0 million revolving credit facility - The company operates as a single operating segment, with the CEO acting as the Chief Operating Decision Maker (CODM)[31] Revenue by Product Category - Six Months Ended June 30 (in thousands) | Category | 2022 | 2021 | | :--- | :--- | :--- | | Paint protection film | $92,236 | $81,030 | | Window film | $27,320 | $18,243 | | Installation labor | $20,303 | $8,473 | | Total Revenue | $155,754 | $120,602 | - The company has a $75.0 million revolving line of credit, with a balance of $32.0 million as of June 30, 2022. The interest rate was 4.00%[49] - Purchase price accounting for five acquisitions completed on October 1, 2021, remains preliminary and will be finalized within one year of completion[47][65] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q2 2022 performance to high demand, with revenue up 22.0% to $83.9 million and improved gross margin, while managing supply chain risks and maintaining liquidity Company Overview and Strategy XPEL, a global provider of automotive protective products, strategically focuses on customer proximity, global expansion, acquisitions, brand awareness, and non-automotive portfolio growth - The company's core strategic philosophy is that being closer to the end customer drives revenue growth by enabling efficient new product introductions and value delivery[75] - Key strategic initiatives include global expansion with a local presence, increasing brand awareness at premium events, acquiring installation facilities and international partners, and expanding the non-automotive product portfolio[76][77][78][79] Results of Operations Q2 2022 revenue increased 22.0% to $83.9 million, driven by strong U.S. growth and service revenue, while China declined, and gross margin improved to 39.3% Q2 2022 vs Q2 2021 Performance (in thousands) | Metric | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $83,890 | $68,736 | 22.0% | | Gross Margin | $32,983 | $25,247 | 30.6% | | Gross Margin % | 39.3% | 36.7% | +2.6 p.p. | | Operating Income | $15,749 | $12,672 | 24.3% | | Net Income | $11,902 | $10,186 | 16.8% | Q2 Revenue by Geography (in thousands) | Region | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | United States | $49,166 | $34,296 | 43.4% | | China | $7,904 | $12,626 | (37.4)% | | Canada | $10,877 | $8,877 | 22.5% | | Continental Europe | $6,944 | $5,215 | 33.2% | - Service revenue grew 67.3% in Q2 2022, driven by a 106.2% increase in installation labor revenue following the 2021 acquisitions of dealership services businesses[93][98] - Product gross margin percentage increased from 30.8% to 34.0% in Q2 2022 vs Q2 2021, due to lower product costs and improved operating leverage[107] Liquidity and Capital Resources As of June 30, 2022, cash was $9.3 million, with $2.5 million used in operations for H1 2022 due to strategic inventory build-up, and total debt at $32.2 million - Primary liquidity sources are cash on hand ($9.3 million at June 30, 2022) and cash from operations[121] - Cash used in operations for the first six months of 2022 was $2.5 million, a decrease from $19.1 million in cash provided in the prior year, mainly due to a strategic inventory build-up[122] - Total debt obligations increased to $32.2 million as of June 30, 2022, from $25.5 million at year-end 2021, reflecting increased use of the revolving credit facility[124] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces unhedged foreign currency risk from international operations and interest rate risk from floating-rate credit facility borrowings - The company has exposure to currency risk in the British Pound Sterling, Canadian Dollar, Euro, Mexican Peso, and New Taiwanese Dollar, but does not currently hedge this exposure[131] - Floating rate bank credit facilities expose the company to interest rate risk. A hypothetical 200 basis point increase in variable rates could have a material impact[132] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting - The CEO and CFO concluded that as of the end of the period, the company's disclosure controls and procedures were effective at a reasonable assurance level[134] - No changes occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[136] Part II - Other Information Item 1. Legal Proceedings The company is involved in ordinary course legal actions, with management deeming a material financial impact unlikely - The company is party to actions and potential claims related to the ordinary conduct of its business, including commercial disputes, product liability, and employment matters[138] - Management believes the likelihood of any litigation having a material impact on the company's financial position is remote[139] Item 1A. Risk Factors No material changes to risk factors, except for the addition of increasing inflation risk impacting product demand - No material changes to risk factors were reported, except for the addition of inflation risk. Economic conditions in several markets are experiencing increasing inflation, which could impact product demand and future financial results[141] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - None[142] Item 3. Defaults Upon Senior Securities This item is not applicable for the reporting period - Not applicable[143] Item 4. Mine Safety Disclosures This item is not applicable for the reporting period - Not applicable[144] Item 5. Other Information No other information was reported for the period - None[145] Item 6. Exhibits This section lists filed exhibits, including CEO and CFO certifications and XBRL financial data - Exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Act Sections 302 and 906, and financial statements formatted in XBRL[147]