XPEL, Inc. (XPEL) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Executive Summary
Set forth below is summary financial information for the years ended December 31, 2024, 2023, and 2022. This information is not necessarily indicative of results of future operations, and should be read in conjunction with Part I, Item 1A, “Risk Factors,” Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes thereto included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report to fully understand factors that may affect the comparability of the information presented below (dollars in thousands).
| Year Ended December 31, | % Change | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | % of Total Revenue | 2023 | % of Total Revenue | 2022 | % of Total Revenue | 2024 vs. 2023 | 2023 vs. 2022 | ||||||||||||||||||
| Total Revenue | $ | 420,400 | 100.0 | % | $ | 396,293 | 100.0 | % | $ | 323,993 | 100.0 | % | 6.1 | % | 22.3 | % | |||||||||
| Total Cost of Sales | 243,040 | 57.8 | % | 233,879 | 59.0 | % | 196,481 | 60.6 | % | 3.9 | % | 19.0 | % | ||||||||||||
| Gross Margin | 177,360 | 42.2 | % | 162,414 | 41.0 | % | 127,512 | 39.4 | % | 9.2 | % | 27.4 | % | ||||||||||||
| Total Operating Expenses | 118,213 | 28.1 | % | 95,442 | 24.1 | % | 73,575 | 22.7 | % | 23.9 | % | 29.7 | % | ||||||||||||
| Operating Income | 59,147 | 14.1 | % | 66,972 | 16.9 | % | 53,937 | 16.6 | % | (11.7) | % | 24.2 | % | ||||||||||||
| Other Expenses | 2,369 | 0.6 | % | 941 | 0.2 | % | 1,972 | 0.6 | % | 151.8 | % | (52.3) | % | ||||||||||||
| Income Tax | 11,289 | 2.7 | % | 13,231 | 3.3 | % | 10,584 | 3.3 | % | (14.7) | % | 25.0 | % | ||||||||||||
| Net Income | $ | 45,489 | 10.8 | % | $ | 52,800 | 13.3 | % | $ | 41,381 | 12.8 | % | (13.8) | % | 27.6 | % |
Company Overview
We are a supplier of protective films, coatings and related services primarily to the automobile aftermarket, new car dealerships and OEMs. The majority of our revenue is derived from the sale of our automotive products and related services while the remainder of our revenue is derived from non-automotive products including architectural window film and marine and flat surface protection films.
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 define EBITDA as net income plus (a) total depreciation and amortization, (b) interest expense, net, and (c) income tax expense.
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The following table is a reconciliation of Net Income to EBITDA for the years ended December 31, 2024, 2023, and 2022 (dollars in thousands):
| 2024 | % of Total Revenue | 2023 | % of Total Revenue | 2022 | % of Total Revenue | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Income | $ | 45,489 | 10.8 | % | $ | 52,800 | 13.3 | % | $ | 41,381 | 12.8 | % | ||||||||
| Interest | 996 | 0.2 | % | 1,248 | 0.3 | % | 1,410 | 0.4 | % | |||||||||||
| Taxes | 11,289 | 2.7 | % | 13,231 | 3.3 | % | 10,584 | 3.3 | % | |||||||||||
| Depreciation | 5,820 | 1.4 | % | 4,534 | 1.1 | % | 3,433 | 1.1 | % | |||||||||||
| Amortization | 5,877 | 1.4 | % | 5,059 | 1.3 | % | 4,401 | 1.4 | % | |||||||||||
| EBITDA | $ | 69,471 | 16.5 | % | $ | 76,872 | 19.4 | % | $ | 61,209 | 18.9 | % |
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 its usefulness as a comparative measure.
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Results of Operations
This section of this Annual Report on Form 10-K generally discusses the years ended December 31, 2024 and 2023 and year-over-year comparisons between those years. Discussions of the periods prior to the year ended December 31, 2023 that are not included in this Annual Report on Form 10-K are found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023 and the discussion therein for the year ended December 31, 2023 compared to the year ended December 31, 2022 is incorporated by reference into this Annual Report.
The following tables summarize revenue results for the years ended December 31, 2024, 2023 and 2022 (dollars in thousands):
| Year Ended December 31, | % Change | % of Total Revenue | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | 2024 vs 2023 | 2023 vs 2022 | 2024 | 2023 | 2022 | ||||||||||||||||||
| Product Revenue | |||||||||||||||||||||||||
| Paint protection film | $ | 226,710 | $ | 229,880 | $ | 192,374 | (1.4) | % | 19.5 | % | 53.9 | % | 58.0 | % | 59.4 | % | |||||||||
| Window film | 77,666 | 67,951 | 54,370 | 14.3 | % | 25.0 | % | 18.5 | % | 17.1 | % | 16.8 | % | ||||||||||||
| Other | 14,473 | 13,575 | 11,430 | 6.6 | % | 18.8 | % | 3.4 | % | 3.5 | % | 3.5 | % | ||||||||||||
| Total | $ | 318,849 | $ | 311,406 | $ | 258,174 | 2.4 | % | 20.6 | % | 75.8 | % | 78.6 | % | 79.7 | % | |||||||||
| Service Revenue | |||||||||||||||||||||||||
| Software | $ | 8,061 | $ | 6,518 | $ | 5,213 | 23.7 | % | 25.0 | % | 1.9 | % | 1.6 | % | 1.6 | % | |||||||||
| Cutbank credits | 17,015 | 17,626 | 16,317 | (3.5) | % | 8.0 | % | 4.0 | % | 4.4 | % | 5.0 | % | ||||||||||||
| Installation labor | 74,478 | 58,477 | 42,828 | 27.4 | % | 36.5 | % | 17.7 | % | 14.8 | % | 13.2 | % | ||||||||||||
| Training and other | 1,997 | 2,266 | 1,461 | (11.9) | % | 55.1 | % | 0.6 | % | 0.6 | % | 0.5 | % | ||||||||||||
| Total | $ | 101,551 | $ | 84,887 | $ | 65,819 | 19.6 | % | 29.0 | % | 24.2 | % | 21.4 | % | 20.3 | % | |||||||||
| Total | $ | 420,400 | $ | 396,293 | $ | 323,993 | 6.1 | % | 22.3 | % | 100.0 | % | 100.0 | % | 100.0 | % |
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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 years ended December 31, 2024 and 2023 (dollars in thousands):
| Year Ended December 31, | % | % of Total Revenue | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2024 vs 2023 | 2024 | 2023 | ||||||||||||
| United States | $ | 240,569 | $ | 224,839 | 7.0 | % | 57.2 | % | 56.7 | % | ||||||
| Canada | 52,139 | 43,506 | 19.8 | % | 12.4 | % | 11.0 | % | ||||||||
| China | 24,148 | 41,576 | (41.9) | % | 5.7 | % | 10.5 | % | ||||||||
| Continental Europe | 39,564 | 34,883 | 13.4 | % | 9.4 | % | 8.8 | % | ||||||||
| Middle East/Africa | 20,887 | 16,472 | 26.8 | % | 5.0 | % | 4.2 | % | ||||||||
| United Kingdom | 14,604 | 13,438 | 8.7 | % | 3.5 | % | 3.4 | % | ||||||||
| Asia Pacific | 16,825 | 11,943 | 40.9 | % | 4.0 | % | 3.0 | % | ||||||||
| Latin America | 11,664 | 8,737 | 33.5 | % | 2.8 | % | 2.2 | % | ||||||||
| Other | — | 899 | (100.0) | % | 0.0 | % | 0.2 | % | ||||||||
| Total | $ | 420,400 | $ | 396,293 | 6.1 | % | 100.0 | % | 100.0 | % |
Revenue
Product Revenue. Product revenue increased 2.4% during the year ended December 31, 2024 as compared to 2023 and represented 75.8% of our consolidated 2024 revenue. Within this category, revenue from our paint protection film product line decreased 1.4% as compared to the prior year and represented 53.9% of total consolidated revenue for the year ended December 31, 2024. This decrease was primarily the result of a decline in sales into China offset by increases in most other operating regions. Sales into China were negatively impacted as our distributor continued to sell through excess inventory levels during the year.
Revenue from our window film product line grew 14.3% during the year ended December 31, 2024 and represented 18.5% of our consolidated annual 2024 revenue. This product line includes both automotive and architectural window film. Automotive window film revenue grew 12.5% to $65.8 million for the year ended December 31, 2024 and represented 84.7% of total window film revenue and 15.7% of total consolidated revenue for the year ended December 31. 2024 . This increase was due to continued channel focus, increased product adoption in multiple regions and increased demand. Architectural window film revenue increased 9.4% to $10.4 million and represented 13.4% of total window film revenue and 2.5% of total consolidated revenue for the year ended December 31, 2024. This increase was due mainly to increased product awareness and adoption in most of our regions.
Other product revenue for the year ended December 31, 2024 grew 6.6% to $14.5 million and represented 3.4% of total consolidated 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 4.1% to $6.4 million. This increase was driven primarily by increased channel focus and increased demand for our ceramic coating products.
Geographically, we experienced continued growth in most of our regions including 7.0% growth in the US region, our most mature market. These increases were primarily due to increasing product awareness and adoption.
Service revenue. Service revenue consists of revenue from fees for DAP software access, 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, labor revenue from our dealership services business, and revenue from training services provided to our customers. During 2024, service revenue grew 19.6% over service revenue for the year ended December 31, 2023.
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Within the service revenue category, software revenue increased 23.7% from the year ended December 31, 2023. This increase was due primarily to increases in customers subscribing to our software. Cutbank credit revenue decreased 3.5% from the year ended December 31, 2023. This decrease was due primarily to the decrease in paint protection film revenue. Installation labor revenue increased 27.4% from the year ended December 31, 2023, due mainly to strong demand across our dealership service and OEM businesses.
Total installation revenue (labor and product combined) at our Company-owned installation centers for the year ended December 31, 2024 increased 27.4% over the year ended December 31, 2023. Adjusted product revenue, which combines the cutbank credit revenue service component with product revenue, increased by 2.1% from the year ended December 31, 2023 due mainly to the same factors described above.
Cost of Sales
Cost of sales consists of product costs and the costs to provide our services. Product costs consist of material costs, certain personnel costs, shipping costs, warranty costs and other costs related to providing products to our customers. Cost of service includes the labor costs associated with installation of product in our Company-owned facilities and across our dealer-service network, costs of labor associated with pattern design for our film-cutting software and the costs incurred to provide training for our customers. Product costs in the year ended December 31, 2024 increased 0.9% over the year ended December 31, 2023, commensurate with the growth in product revenue. Cost of service revenue grew 20.6% during the year ended December 31, 2024, commensurate with the related serviced revenue growth. Refer to the Gross Margin section below for discussion of this cost relative to revenue.
Gross Margin
The following table summarizes gross margin for product and services for the years ended December 31, 2024, 2023 and 2022 (dollars in thousands):
| Year Ended December 31, | % Change | % of Category Revenue | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | 2024 vs 2023 | 2023 vs 2022 | 2024 | 2023 | 2022 | ||||||||||||||||||
| Product | $ | 119,058 | $ | 113,398 | $ | 88,269 | 5.0 | % | 28.5 | % | 37.3 | % | 36.4 | % | 34.2 | % | |||||||||
| Service | 58,302 | 49,016 | 39,243 | 18.9 | % | 24.9 | % | 57.4 | % | 57.7 | % | 59.6 | % | ||||||||||||
| Total | $ | 177,360 | $ | 162,414 | $ | 127,512 | 9.2 | % | 27.4 | % | 42.2 | % | 41.0 | % | 39.4 | % |
Product gross margin for the year ended December 31, 2024 increased approximately $5.7 million, or 5.0%, over the year ended December 31, 2023 and represented 37.3% and 36.4% of total product revenue for the years ended December 31, 2024 and 2023, respectively. The increase in product gross margin percentages was primarily due to decreases in product costs, favorable changes in product mix and improved operating leverage.
Service gross margin increased approximately $9.3 million for the year ended December 31, 2024, and represented 57.4% and 57.7% of total service revenue for the years ended December 31, 2024 and 2023, respectively. The decrease in service gross margin percentage was primarily due to a higher percentage of lower margin installation labor revenue relative to other higher margin service revenue components.
Operating Expenses
Sales and marketing expenses for the year ended December 31, 2024 increased 34.7% compared to 2023. These expenses represented 10.2% and 8.0% of consolidated revenue for the years ended December 31, 2024 and 2023, respectively. This increase was due mainly to increased personnel, and additional marketing projects including sponsorships and increased marketing efforts to dealerships and end customers.
General and administrative expenses for the year ended December 31, 2024 increased 18.4% compared to 2023. These costs represented 17.9% and 16.1% of total consolidated revenue for the years ended December 31, 2024 and 2023, respectively. The increase was due mainly to increases in personnel,
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occupancy costs, depreciation and amortization, and information technology costs to support the ongoing growth of the business.
Interest Expense
Interest expense decreased 20.2% to $1.0 million in the year ended December 31. 2024 compared to the year ended December 31. 2023. This decrease was due to the reduction in the amount of our debt facility throughout the year.
Foreign Currency Exchange Loss
Foreign currency loss for the year ended December 31, 2024 was $1.4 million compared to a foreign currency gain of $.3 million for the year ended December 31, 2023. This increase in foreign currency loss was due to the significant strengthening of the U.S. dollar during the year.
Income Tax Expense
Our provision for income taxes was $11.3 million in the year ended December 31, 2024 as compared to $13.2 million in the year ended December 31, 2023. Our effective income tax rates for the years ended December 31, 2024 and 2023 were 19.9% and 20.0%, respectively. See Note 14 of the Notes to our Consolidated Financial Statements for further information.
Net Income
Net income for the year ended December 31, 2024 decreased by 13.8% to $45.5 million.
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Liquidity and Capital Resources
The primary sources of liquidity for our business are available cash and cash equivalents, cash flows provided by operations, and borrowings under our credit facilities. As of December 31, 2024, we had cash and cash equivalents of $22.1 million, and we had approximately $128.1 million in funds available under our credit facilities. For the year ended December 31, 2024, cash flows provided by operations were $47.8 million. We expect to continue to have sufficient access to cash to support working capital needs, 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 filing this Annual Report.
Operating activities. Cash flows provided by operations totaled approximately $47.8 million for the year ended December 31, 2024, compared to $37.4 million for the year ended December 31, 2023. The increase in operating cash flows for the year ended December 31, 2024 was driven primarily by a reduction in inventory purchases partially offset by a decline in net income and other changes in working capital.
Investing activities. Cash flows used in investing activities totaled approximately $18.4 million during the year ended December 31, 2024 compared to cash use of $26.4 million for the year ended December 31, 2023. This decrease in cash used was due to a reduction in expenditures for acquisitions in the year ended December 31, 2024.
Financing activities. Cash flows used in financing activities during the year ended December 31, 2024 totaled approximately $19.3 million compared to cash use of $7.3 million in the prior year. This use of cash was due primarily to net repayments on our credit facilities.
Debt obligations, including balances outstanding on committed credit facilities and contingent liabilities, as of December 31, 2024 and December 31, 2023 totaled approximately $2.1 million and $20.2 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. 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, pay contingent liabilities as they are earned, and repay 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 $125.0 million, which is subject to the terms of a credit agreement dated April 6, 2023 (the "Credit Agreement"). As of December 31, 2024, the Company had no outstanding balance under this agreement. As of December 31, 2023, the Company had an outstanding balance of $19.0 million under the Credit Agreement.
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
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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 December 31, 2024, these rates were 7.5% and 5.6%, 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 2 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.
XPEL Canada Corp., a wholly-owned subsidiary of XPEL, Inc., also has a CAD $4.5 million revolving credit facility. This facility can be utilized to fund our working capital needs in Canada. This facility bears interest at the Royal Bank of Canada’s prime rate plus 0.25% per annum and is guaranteed by the parent company. As of December 31, 2024 and December 31, 2023, no balance was outstanding on this facility.
Critical Accounting Estimates
We have adopted various accounting policies to prepare the consolidated financial statements in accordance with U.S. GAAP. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. We identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements.
Certain of the most critical estimates that require significant judgment are as follows:
Business Combinations
The accounting for a business combination requires the excess of the purchase price for the acquisition over the net book value of assets acquired to be allocated to the identifiable assets of the acquired entity. Any unallocated portion is recognized as goodwill. We engaged an independent third-party valuation specialist to assist with the fair value allocation of the purchase price paid for our various acquisitions to intangible assets. This required the use of several estimates and assumptions including the customer attrition rate, forecasted cash flows attributable to existing customers, the discount rate for the customer relationship intangible asset and future royalties, contributory asset charges, and forecasted revenue growth rates. Although we believe the assumptions and estimates made were reasonable and appropriate, these estimates require judgment and are based in part on historical experience and information obtained from the management of the acquired entities.
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Inventory Valuation
Inventories are stated at the lower of cost or net realizable value. Cost is determined on a weighted average cost basis. We record inventory write-downs for scrap and excess or obsolete inventories based on assumptions about historical demand calculations, forecasted usage, estimated customer requirements and product line updates. These assumptions are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.
Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted
Refer to Note 1 to the Consolidated Financial Statements for discussion of recently adopted accounting standards and accounting standards not yet adopted.
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.