XPEL(XPEL) - 2022 Q4 - Annual Report

Part I Business XPEL, Inc. is a global provider of aftermarket automotive products, specializing in protective films and coatings, complemented by proprietary design software Company Overview XPEL evolved from a software design company into a global aftermarket automotive product provider, strategically expanding its market presence through acquisitions and international growth - XPEL transitioned from an automotive product design software company to a global provider of aftermarket products, including automotive surface/paint protection, window films, and architectural films[32] - The company's strategic philosophy focuses on being closer to the end customer, leading to international expansion into the UK (2014), Canada (2015), Europe (2016), Mexico (2017), and Asia (2018), alongside several acquisitions to bolster its presence[34][35][37] Products and Services XPEL's product portfolio is led by Surface and Paint Protection Films (62% of 2022 revenue), with significant contributions from Automotive Window Films (15%) and Installation Services (16%), supported by its proprietary DAP software Revenue Breakdown by Product/Service (FY 2022) | Product/Service Category | Percentage of Consolidated Revenue | | :--- | :--- | | Surface and Paint Protection Film | ~62% | | Installation and Dealership Services | ~16% | | Automotive Window Film | ~15% | | Architectural Window Film | ~2% | | DAP Software Subscriptions | <2% | - The flagship product lines include XPEL ULTIMATE PLUS and FUSION for paint protection, XPEL PRIME for automotive window tint, and VISION for architectural window film[43][49][52] - The Design Access Program (DAP) is a proprietary SAAS platform with a database of over 80,000 vehicle applications, which increases installer efficiency and reduces waste[54][55] Strategic Overview The company's growth strategy focuses on global expansion, increasing brand awareness, expanding delivery channels through acquisitions, and growing its non-automotive product portfolio - 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[61][62][63][64] Sales and Distribution XPEL utilizes a diversified sales and distribution model, primarily direct sales to independent installers and new car dealerships (65% of 2022 revenue), with third-party distributors accounting for 17% Sales Channel Revenue Breakdown (FY 2022) | Sales Channel | Percentage of Consolidated Revenue | | :--- | :--- | | Independent Installers/New Car Dealerships | ~65% | | Distributors | ~17% | | Company-Owned Installation Centers/Dealership Services | ~15% | | Automobile OEMs | ~3% | | Online and Catalog Sales | <1% | - The company operates through a sole distributor in China, which accounted for approximately 10% of consolidated revenue in FY 2022[71] Competition XPEL competes with other manufacturers and distributors of automotive protective films, primarily Eastman Chemical Company, differentiating itself through product quality and a comprehensive suite of services - The principal competitor in the surface and paint protection film market is Eastman Chemical Company (LLumar and Suntek brands)[80] - The company differentiates itself from competitors through its suite of services, including proprietary software (DAP), marketing, lead generation, and customer service[80] Suppliers XPEL operates an "asset-light" manufacturing model, sourcing products from various third-party contract manufacturers and suppliers rather than owning manufacturing facilities - The company utilizes an "asset-light" manufacturing model, relying on third-party suppliers and contract manufacturers for the majority of its products[81] Government Regulation and Legislation The company's global operations are subject to a wide range of laws and regulations, including U.S. and international trade laws, anti-corruption laws, and data privacy regulations - Operations must comply with extensive federal, state, and foreign laws, including export controls, anti-corruption laws (e.g., U.S. FCPA), and data privacy regulations (e.g., GDPR, CCPA)[85][88][89] Environmental Matters XPEL is ISO 14001:2015 registered and actively engages in recycling efforts for materials related to its conversion operations, such as plastic cores and film waste - The company is ISO 14001:2015 registered and actively recycles materials from its conversion operations, including plastic cores, film waste, and corrugated boxes[90][91] Human Capital Resources As of December 31, 2022, XPEL employed approximately 818 full-time equivalent people globally, emphasizing a total compensation package to attract and retain its workforce - As of December 31, 2022, the Company employed approximately 818 people, with 567 in the U.S. and 251 internationally[94] Risk Factors XPEL faces operational, strategic, legal, and financial risks, including reliance on a single distributor in China, automotive industry dependence, intense competition, and potential future indebtedness Operational Risks The company's operations are subject to significant risks, including high dependency on a single distributor in China, political and economic uncertainties in the Chinese market, and potential supply chain disruptions - The company relies on a single distributor for all its sales in China, which represented approximately 10.5% of consolidated revenue for the year ended December 31, 2022[99] - Business in China is subject to risks including political and economic uncertainties, unpredictable trade policy, limited legal recourse, and the Chinese government's management of COVID-19[102][103][104][110] - The company depends on the continued services of its key executive officers and faces risks related to attracting and retaining qualified personnel[111] - A material disruption from contract manufacturers or suppliers could lead to an inability to meet customer demand or increased costs, a risk heightened by the company's asset-light business model[112][115] Risks Related to Our Business and Industry XPEL's business is highly dependent on the automotive industry, making it vulnerable to contractions in vehicle sales and production, intense competition, and potential technological advancements that could render its products obsolete - The business is highly dependent on the automotive industry; a contraction in auto sales or production, potentially caused by factors like the global semiconductor shortage, could adversely affect results[120][121] - The aftermarket automotive product supply business is highly competitive, with rivals that may have greater financial and marketing resources[123] - A dramatic change in the North American vehicle sales model, such as a move away from traditional dealerships, or a rise in ride-sharing could negatively impact revenue[129][130] - Technological advancements, such as improved automotive paint that doesn't chip or scratch, could render the company's core paint protection film products obsolete[131] Strategic Risks Strategic risks include the potential failure of new products, dependence on independent installers, challenges in integrating acquisitions, and exposure to multinational risks from global operations - The company's business strategy includes frequent acquisitions, which involve risks such as diversion of management attention, integration difficulties, and potential loss of key employees or customers[139] - Sales outside of the U.S. accounted for approximately 41% of consolidated revenue in FY 2022, exposing the company to multinational risks like currency fluctuations, trade protection measures, and political instability[145] - Rapid growth has placed significant demands on processes, systems, and personnel, and failure to manage this growth effectively could harm the business[148] Legal, Regulatory and Compliance Risks The company faces inherent legal and regulatory risks, including product liability claims, compliance with anti-corruption and international trade laws, intellectual property infringement, and IT system failures or data breaches - The company faces exposure to product liability and warranty claims. The liability reserve for warranties was $0.2 million as of December 31, 2022[150][153] - Operating in many parts of the world exposes the company to risks of violating anti-corruption laws such as the U.S. Foreign Corrupt Practices Act (FCPA)[154] - Failure, inadequacy, or breach of IT systems and violations of data protection laws (e.g., GDPR, CCPA) could result in material harm to the business and reputation[162][164] Liquidity Risks XPEL may incur more debt in the future, increasing financial vulnerability, and its variable-rate indebtedness exposes it to interest rate volatility that could raise debt service obligations - The company may incur substantial indebtedness in the future, which could increase vulnerability to economic conditions and dedicate a significant portion of cash flow to debt service[167] - Borrowings under credit facilities are at variable interest rates, exposing the company to interest rate volatility that could increase debt service costs[171] Risks Relating to Common Stock The company's common stock price may be volatile, stockholders face dilution from future equity issuances, and significant control is held by directors and officers (19.0% as of Feb 28, 2023) - The trading price of the company's common stock has been and could continue to be volatile[174] - The company has not paid cash dividends in the past and has no plans to do so in the foreseeable future[178] - As of February 28, 2023, directors and executive officers beneficially owned approximately 19.0% of the outstanding Common Stock, giving them substantial control[184] General Risk Factors The company's financial condition and operations are subject to general risks, including the negative impact of pandemics and the effect of global economic conditions on discretionary product demand - Pandemics, like COVID-19, have impacted and may in the future impact the company's workforce, operations, and customer demand through measures like travel bans, quarantines, and shutdowns[186] - Demand for the company's products, which are often discretionary purchases, is affected by general global economic conditions, consumer confidence, and unemployment rates[188] Unresolved Staff Comments There are no unresolved staff comments - None[189] Properties The company's principal office is in a leased facility in San Antonio, Texas, with various leased locations globally for production, distribution, installation, sales, and administration - The company's principal office is in San Antonio, Texas, with operations conducted in leased facilities throughout North America, Europe, and Asia[190] Leased Square Footage by Region (as of Dec 31, 2022) | Region | Leased Square Footage | | :--- | :--- | | United States | 273,342 | | Continental Europe | 85,360 | | Canada | 42,379 | | Mexico | 13,659 | | United Kingdom | 14,835 | | Taiwan | 6,381 | Legal Proceedings The company is periodically involved in legal actions and claims arising from the ordinary course of business, but management believes a material financial impact is unlikely - The company is subject to legal actions in the ordinary course of business, but management believes a material impact on its financial position is unlikely[192][193] Mine Safety Disclosures This item is not applicable to the company - Not applicable[195] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities XPEL's common stock trades on Nasdaq under "XPEL", with 11 stockholders of record as of February 28, 2023; the company has never paid and does not anticipate paying cash dividends - The Company's Common Stock trades on The Nasdaq Stock Market under the symbol "XPEL"[197] - No dividends have been paid on Common Stock, and none are anticipated in the foreseeable future[198] - The company did not repurchase any shares of its Common Stock in the year ended December 31, 2022[202] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2022, XPEL's revenue grew 25.0% to $324.0 million, with gross margin improving to 39.4% and net income rising 31.1% to $41.4 million, despite a 26.6% revenue decline in China Executive Summary In 2022, total revenue grew 25.0% to $324.0 million, gross margin increased to 39.4%, and net income rose 31.1% to $41.4 million compared to 2021 Financial Highlights (in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenue | $323,993 | $259,263 | $158,924 | | Gross margin | $127,512 | $92,677 | $54,025 | | Gross margin % | 39.4% | 35.7% | 34.0% | | Operating income | $53,937 | $40,116 | $23,370 | | Net income | $41,381 | $31,567 | $18,282 | Results of Operations For 2022, total revenue grew 25.0% to $324.0 million, driven by strong product and service revenue growth, while U.S. revenue increased 42.3% and China revenue fell 26.6% Revenue by Product/Service (in thousands) | Category | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Product Revenue | | | | | Paint protection film | $192,374 | $169,880 | 13.2% | | Window film | $54,370 | $38,363 | 41.7% | | Service Revenue | | | | | Installation labor | $42,828 | $24,253 | 76.6% | | Total Revenue | $323,993 | $259,263 | 25.0% | Revenue by Geographic Region (in thousands) | Region | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | United States | $189,890 | $133,457 | 42.3% | | China | $33,993 | $46,305 | (26.6)% | | Canada | $38,997 | $30,540 | 27.7% | | Continental Europe | $24,713 | $19,605 | 26.1% | | Total | $323,993 | $259,263 | 25.0% | - Product gross margin percentage increased from 30.4% in 2021 to 34.2% in 2022, primarily due to improved product costs and a lower percentage of sales to lower-margin distributors[224] - Net income for 2022 increased by 31.1% to $41.4 million compared to the prior year[231] Liquidity and Capital Resources Cash from operations decreased to $12.1 million in 2022, primarily due to increased inventory, with $8.1 million in cash and $26.0 million outstanding on a $75.0 million revolving line of credit - Cash flows from operations decreased from $18.3 million in 2021 to $12.1 million in 2022, primarily driven by changes in working capital and increased inventory purchases[234] - As of December 31, 2022, the company had a $75.0 million revolving line of credit with $26.0 million borrowed[238] - The company believes it has sufficient liquidity to operate for at least the next 12 months[233] Critical Accounting Estimates Management identifies Business Combinations and Inventory Valuation as critical accounting estimates requiring significant judgment, involving estimates for purchase price allocation and obsolete stock reserves - Critical accounting estimates requiring significant management judgment include Business Combinations (allocating purchase price to assets and goodwill) and Inventory Valuation (estimating reserves for obsolete inventory)[243][244] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to currency risk from international operations in various currencies, interest rate risk from floating-rate credit facilities, and inflation risk from rising costs - The company is exposed to currency risk from operations in the British Pound, Canadian Dollar, Euro, Mexican Peso, New Taiwanese Dollar, and Australian Dollar[247] - Borrowings under revolving credit facilities subject the company to market risk from changes in floating interest rates[248] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for FY2022 and FY2021, including balance sheets, income statements, and detailed notes, with key data for FY2022 showing $324.0 million revenue and $41.4 million net income Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting for the years ended December 31, 2022 and 2021 - Deloitte & Touche LLP provided an unqualified opinion on the financial statements for the years ended Dec 31, 2022 and 2021, and on the effectiveness of internal control over financial reporting as of Dec 31, 2022[253][254] Consolidated Financial Statements The consolidated financial statements show total assets of $193.4 million and total stockholders' equity of $124.7 million as of December 31, 2022, with $324.0 million in revenue and $41.4 million in net income for the year Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total current assets | $106,821 | $79,028 | | Total assets | $193,362 | $161,015 | | Total current liabilities | $27,402 | $36,268 | | Total liabilities | $68,640 | $76,553 | | Total stockholders' equity | $124,722 | $84,462 | Consolidated Income Statement Highlights (in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenue | $323,993 | $259,263 | $158,924 | | Gross Margin | $127,512 | $92,677 | $54,025 | | Operating Income | $53,937 | $40,116 | $23,370 | | Net income | $41,381 | $31,567 | $18,282 | | Diluted EPS | $1.50 | $1.14 | $0.66 | Notes to Consolidated Financial Statements The notes provide detailed financial disclosures, including revenue recognition, business acquisitions, asset composition, debt facilities, lease obligations, stock-based compensation, and income tax provisions - The company's largest customer accounted for 10.5%, 17.9%, and 20.6% of net sales for the years ended December 31, 2022, 2021, and 2020, respectively[311] - In 2022, the company acquired the paint protection film business of Car Care Products Australia for $2.2 million. In 2021, it completed three acquisitions for a total purchase price of $57.6 million[313][315] - As of Dec 31, 2022, the company had total operating lease liabilities of $16.0 million with a weighted-average remaining lease term of 5.3 years[355][356] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On July 13, 2021, the company dismissed Baker Tilly US, LLP and appointed Deloitte & Touche LLP as its independent registered public accounting firm, with no reported disagreements - On July 13, 2021, the company dismissed Baker Tilly US, LLP and appointed Deloitte & Touche LLP as its independent registered public accounting firm[359] - There were no disagreements with the former auditor, Baker Tilly, on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures[361] Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2022, a conclusion affirmed by the independent auditor - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[366] - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2022, based on the COSO framework[367] - The independent registered public accounting firm, Deloitte & Touche LLP, issued an unqualified opinion on the company's internal control over financial reporting as of December 31, 2022[369][372] Other Information This item is not applicable - Not applicable[380] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - Not applicable[381] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2023 Proxy Statement - Information is incorporated by reference from the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders[383] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2023 Proxy Statement - Information is incorporated by reference from the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders[384] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and equity compensation plans is incorporated by reference from the company's 2023 Proxy Statement - Information is incorporated by reference from the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders[385] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's 2023 Proxy Statement - Information is incorporated by reference from the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders[386] Principal Accounting Fees and Services Information regarding fees paid to the independent auditor and pre-approval policies is incorporated by reference from the company's 2023 Proxy Statement - Information is incorporated by reference from the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders[387] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, found in Item 8, and all exhibits filed with or furnished as part of the Annual Report, including corporate governance documents and material contracts - This section provides an index of all financial statements, schedules, and exhibits filed with the Form 10-K[389][390] Form 10-K Summary No summary is provided under this item - None[392]