XPEL, INC. This Management's Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess the financial condition and results of operations ofXPEL, Inc. ("XPEL" or the "Company"). Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the heading "Forward-Looking Statements" in this report and under "Business," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements and Supplementary Data" in the Annual Report which is available on theSEC's website at www.sec.gov.
Forward-Looking Statements
This quarterly report on Form 10-Q contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to the safe harbor created by those sections. In addition, the Company or others on the Company's behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on the Company's internet web site, or otherwise. All statements other than statements of historical facts included in this report or expressed by the Company orally from time to time that address activities, events, or developments that the Company expects, believes, or anticipates will or may occur in the future are forward-looking statements, including, in particular, the statements about the Company's plans, objectives, strategies, and prospects regarding, among other things, the Company's financial condition, results of operations and business, and the outcome of contingencies, such as legal proceedings. The Company has identified some of these forward-looking statements in this report with words like "believe," "can," "may," "could," "would," "might," "forecast," "possible," "potential," "project," "will," "should," "expect," "intend," "plan," "predict," "anticipate," "estimate," "approximate," "outlook," or "continue" or the negative of these words or other words and terms of similar meaning. The use of future dates is also an indication of a forward-looking statement. Forward-looking statements may be contained in the notes to the Company's condensed consolidated financial statements and elsewhere in this report, including under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements are based on current expectations about future events affecting the Company and are subject to uncertainties and factors that affect all businesses operating in a global market as well as matters specific to the Company. These uncertainties and factors are difficult to predict, and many of them are beyond the Company's control. Factors to consider when evaluating these forward-looking statements include, but are not limited to:
•Our business is highly dependent on automotive sales and production volumes.
•We currently rely on one distributor for sales of our products in
•A material portion of our business is in
•We must continue to attract, retain and develop key personnel.
•We could be impacted by disruptions in supply.
•Our accounting estimates and risk management processes rely on assumptions or models that may prove inaccurate.
•We must maintain an effective system of internal control over financial reporting to keep stockholder confidence.
•Our industry is highly competitive.
•Our North American market is currently designed for the public's use of car dealerships to purchase automobiles which may dramatically change.
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--------------------------------------------------------------------------------•Our revenue could be impacted by growing use of ride-sharing or other alternate forms of car ownership.
•We must be effective in developing new lines of business and new products to maintain growth.
•Any disruptions in our relationships with independent installers and new car dealerships could harm our sales.
•Our strategy related to acquisitions and investments could be unsuccessful or consume significant resources.
•We must maintain and grow our network of sales, distribution channels and customer base to be successful.
•We are exposed to a wide range of risks due to the multinational nature of our business.
•We must continue to manage our rapid growth effectively.
•We are subject to claims and litigation in the ordinary course of our business, including product liability and warranty claims.
•We must comply with a broad and complicated regime of domestic and international trade compliance, anti-corruption, economic, intellectual property, cybersecurity, data protection and other regulatory regimes.
•We may seek to incur substantial indebtedness in the future.
•Our growth may be dependent on the availability of capital and funding.
•Our Common Stock could decline or be downgraded at any time.
•Our stock price has been, and may continue to be, volatile.
•We may issue additional equity securities that may affect the priority of our Common Stock.
•We do not currently pay dividends on our Common Stock.
•Shares eligible for future sale may depress our stock price.
•Anti-takeover provisions could make a third party acquisition of our Company difficult.
•Our directors and officers have substantial control over us.
•Our bylaws may limit investors' ability to obtain a favorable judicial forum for disputes.
•The COVID-19 pandemic could materially affect our business.
•Our business faces unpredictable global, economic and business conditions, including the risk of inflation in various markets.
We believe the items we have outlined above are important factors that could cause estimates included in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed these factors in more detail in in the Annual Report. These factors are not necessarily all of the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this report could also have material adverse effects on actual results. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our shareholders that they should (1) be aware that factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution when considering our forward-looking statements.
Company Overview
Founded in 1997 and incorporated inNevada in 2003, XPEL has grown from an automotive product design software company to a global provider of after-market automotive products, including automotive surface and paint protection, headlight protection, and automotive window films, as well as a provider of complementary proprietary software. In 2018, we expanded our product offerings to include architectural 17
-------------------------------------------------------------------------------- window film (both commercial and residential) and security film protection for commercial and residential uses, and in 2019 we further expanded our product line to include automotive ceramic coatings. XPEL began as a software company designing vehicle patterns used to produce cut-to-fit protective film for the painted surfaces of automobiles. In 2007, we began selling automotive surface and paint protection film products to complement our software business. In 2011, we introduced our ULTIMATE protective film product line which, at the time, was the industry's first protective film with self-healing properties. The ULTIMATE technology allows the protective film to better absorb the impacts from rocks or other road debris, thereby fully protecting the painted surface of a vehicle. The film is described as "self-healing" due to its ability to return to its original state after damage from surface scratches. The launch of the ULTIMATE product catapulted XPEL into several years of strong revenue growth. Our over-arching strategic philosophy centers around our view that being closer to the end customer in terms of our channel strategy affords us a better opportunity to efficiently introduce new products and deliver tremendous value which, in turn, drives more revenue growth for the Company. Since 2014, we have executed on several strategic initiatives including:
•2014 - We began our international expansion by establishing an office in the
•2015 - We acquired Parasol Canada, a distributor of our products in
•2016 - We opened our XPEL Netherlands office and established our European headquarters
•2017
•We continued our international expansion with the acquisition of
•We opened our XPEL Mexico office.
•2018
•We launched our first product offering outside of the automotive industry, a window and security film protection for commercial and residential uses.
•We introduced the next generation of our highly successful ULTIMATE line, ULTIMATE PLUS.
•We acquired
•2019
•We were approved for the listing of our stock on Nasdaq trading under the symbol "XPEL".
•2020
•We acquired Protex Centre, a wholesale-focused paint protection installation
business based in
•We expanded our presence in
•We expanded our architectural window film presence with the acquisition ofHouston based Veloce Innovation, a leading provider of architectural films for use in residential, commercial, marine and industrial settings.
•2021
•We expanded our presence into numerous automotive dealerships throughout
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automotive window film installation and distribution business based in
•We acquired five businesses inthe United States andCanada from two sellers as a continuation of our acquisition strategy. These acquisitions allowed us to continue to increase our penetration into mid-range dealerships in the US and solidify our presence inWestern Canada .
•We acquired invisiFRAME, Ltd, a designer and manufacturer of paint protection film patterns for bicycles, thus further expanding our non-automotive offerings.
Strategic Overview XPEL is currently pursuing several key strategic initiatives to drive continued growth. Our global expansion strategy includes establishing a local presence where possible, allowing us to better control the delivery of our products and services. We will continue to add locally based regional sales personnel, leveraging local knowledge and relationships to expand the markets in which we operate. We seek to increase global brand awareness in strategically important areas, including pursuing high visibility at premium events such as major car shows and high value placement in advertising media consumed by car enthusiasts, to help further expand the Company's premium brand. XPEL also continues to expand its delivery channels by acquiring select installation facilities in key markets and acquiring international partners to enhance our global reach. As we expand globally, we strive to tailor our distribution model to adapt to target markets. We believe this flexibility allows us to penetrate and grow market share more efficiently. Our acquisition strategy centers on our belief that the closer the Company is to its end customers, the greater its ability to drive increased product sales. In our last fiscal year, we acquired several businesses serving multiple markets inthe United States ,Canada , and theUnited Kingdom , in furtherance of this objective, and we have continued this trend with anOctober 2022 acquisition inAustralia . We continue to drive expansion of our non-automotive product portfolio. Our architectural window film segment continues to gain traction. We believe there are multiple uses for protective films and we continue to explore those adjacent market opportunities. Trends and Uncertainties Broad uncertainty remains as to the lingering global business impact of the COVID-19 pandemic. While our revenue has continued to increase in most of our major markets, market disruptions in future periods could have a material impact on our business. See the risk factor "The COVID-19 pandemic could materially adversely affect our financial condition and results of operations" included in Part I, Item 1A "Risk Factors" in the Annual Report for further discussion of the potential impact of the COVID-19 pandemic on our business, results of operations and financial condition. Automotive sales and production are highly cyclical, and the cyclical nature of the industry has been, and could continue to be, compounded by the on-going low inventories of new vehicles resulting primarily from the global semiconductor shortage. As long as the semiconductor shortage persists and leads to low dealership inventories, there could be a material adverse effect on our business, financial condition and results of operations. Refer to the risk factor 'We are highly dependent on the automotive industry. A prolonged or material contraction in automotive sales and production volumes could adversely affect our business, results of operations and financial condition" in the Annual Report for additional discussion of 19 --------------------------------------------------------------------------------
the cyclical nature of the automotive industry. We will continue to closely monitor updates regarding the continuing impact of the foregoing matters and adjust our operations accordingly.
Various geographies in which we operate, includingthe United States , are experiencing an increasing inflationary environment. We are actively monitoring the broader economic impact of inflation on the demand for our products and services. See risk factor "General global economic and business conditions affect demand for our products" included in Part I, Item 1A-Risk Factors, in the Annual Report on Form 10-K. As more fully described in Part I, Item 1A-Risk Factors, in the Annual Report on Form 10-K, the entrotech agreement terminated onMarch 21, 2022 . EffectiveOctober 1, 2022 , the Company entered into a new three-year supply agreement with entrotech under commercially reasonable terms.
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.
The following table is a reconciliation of Net Income to EBITDA for the three
and nine months ended
(Unaudited) (Unaudited)
Three Months Ended September Nine Months Ended September
30, 30,
2022 2021 % Change 2022 2021 % Change
Net Income $ 13,318 $ 8,331 59.9 % $ 33,024 $ 25,364 30.2 %
Interest 391 46 750.0 % 933 143 552.4 %
Taxes 3,226 1,841 75.2 % 8,302 5,959 39.3 %
Depreciation 890 456 95.2 % 2,486 1,258 97.6 %
Amortization 1,117 735 52.0 % 3,248 1,420 128.7 %
EBITDA $ 18,942 $ 11,409 66.0 % $ 47,993 $ 34,144 40.6 %
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
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--------------------------------------------------------------------------------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 their usefulness as comparative measures.
Results of Operations
The following tables summarize the Company's consolidated results of operations for the three and nine months endedSeptember 30, 2022 and 2021 (dollars in thousands): Three Months % Three Months % Ended September of Total Ended September of Total % 30, 2022 Revenue 30, 2021 Revenue Change Total revenue$ 89,758 100.0 %$ 68,529 100.0 % 31.0 % Total cost of sales 53,992 60.2 % 44,075 64.3 % 22.5 % Gross margin 35,766 39.8 % 24,454 35.7 % 46.3 % Total operating expenses 18,459 20.6 % 14,087 20.6 % 31.0 % Operating income 17,307 19.3 % 10,367 15.1 % 66.9 % Other expenses 763 0.9 % 195 0.3 % 291.3 % Income tax 3,226 3.6 % 1,841 2.7 % 75.2 % Net income$ 13,318 14.8 %$ 8,331 12.2 % 59.9 % Nine Months % Nine Months % Ended September of Total Ended September of Total % 30, 2022 Revenue 30, 2021 Revenue Change Total revenue$ 245,512 100.0 %$ 189,131 100.0 % 29.8 % Total cost of sales 149,046 60.7 % 121,142 64.1 % 23.0 % Gross margin 96,466 39.3 % 67,989 35.9 % 41.9 % Total operating expenses 53,374 21.7 % 36,401 19.2 % 46.6 % Operating income 43,092 17.6 % 31,588 16.7 % 36.4 % Other expenses 1,766 0.7 % 265 0.1 % 566.4 % Income tax 8,302 3.4 % 5,959 3.2 % 39.3 % Net income$ 33,024 13.5 %$ 25,364 13.4 % 30.2 %
The following tables summarize revenue results for the three and nine months
ended
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Three Months Ended September 30, % % of Total Revenue
2022 2021 Inc (Dec) 2022 2021
Product Revenue
Paint protection film $ 54,230 $ 43,221 25.5 % 60.4 % 63.1 %
Window film 15,391 11,401 35.0 % 17.1 % 16.6 %
Other 2,995 2,374 26.2 % 3.4 % 3.5 %
Total $ 72,616 $ 56,996 27.4 % 80.9 % 83.2 %
Service Revenue
Software $ 1,351 $ 1,125 20.1 % 1.5 % 1.6 %
Cutbank credits 4,352 3,362 29.4 % 4.8 % 4.9 %
Installation labor 11,067 6,784 63.1 % 12.3 % 9.9 %
Training and other 372 262 42.0 % 0.5 % 0.4 %
Total $ 17,142 $ 11,533 48.6 % 19.1 % 16.8 %
Total $ 89,758 $ 68,529 31.0 % 100.0 % 100.0 %
Nine Months Ended September 30, % % of Total Revenue
2022 2021 Inc (Dec) 2022 2021
Product Revenue
Paint protection film $ 146,465 $ 124,250 17.9 % 59.7 % 65.7 %
Window film $ 42,711 $ 29,645 44.1 % 17.4 % 15.7 %
Other $ 8,577 $ 6,700 28.0 % 3.4 % 3.5 %
Total $ 197,753 $ 160,595 23.1 % 80.5 % 84.9 %
Service Revenue
Software $ 3,804 $ 3,158 20.5 % 1.5 % 1.7 %
Cutbank credits $ 11,459 $ 9,384 22.1 % 4.7 % 5.0 %
Installation labor $ 31,371 $ 15,257 105.6 % 12.8 % 8.1 %
Training and other $ 1,125 737 52.6 % 0.5 % 0.3 %
Total $ 47,759 $ 28,536 67.4 % 19.5 % 15.1 %
Total $ 245,512 $ 189,131 29.8 % 100.0 % 100.0 %
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 tables represent 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 three and nine months ended September 30, 2022 and 2021 (dollars in
thousands):
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Three Months Ended
September 30, % % of Total Revenue
2022 2021 Inc (Dec) 2022 2021
United States $ 51,522 $ 37,363 37.9 % 57.4 % 54.5 %
China 11,009 10,571 4.1 % 12.3 % 15.4 %
Canada 11,046 8,715 26.7 % 12.3 % 12.7 %
Continental Europe 6,065 4,747 27.8 % 6.8 % 6.9 %
United Kingdom 2,482 1,987 24.9 % 2.8 % 2.9 %
Middle East/Africa 3,322 2,090 58.9 % 3.7 % 3.0 %
Asia Pacific 2,540 1,973 28.7 % 2.8 % 2.9 %
Latin America 1,468 945 55.3 % 1.6 % 1.4 %
Other 304 138 120.3 % 0.2 % 0.2 %
Total $ 89,758 $ 68,529 31.0 % 100.0 % 100.0 %
Nine Months Ended September 30, % % of Total Revenue
2022 2021 Inc (Dec) 2022 2021
United States $ 142,275 $ 97,263 46.3 % 58.0 % 51.4 %
China 27,772 33,902 (18.1) % 11.3 % 17.9 %
Canada 29,773 22,538 32.1 % 12.1 % 11.9 %
Continental Europe 18,671 14,286 30.7 % 7.6 % 7.6 %
United Kingdom 7,505 5,906 27.1 % 3.1 % 3.1 %
Middle East/Africa 8,025 6,466 24.1 % 3.3 % 3.4 %
Asia Pacific 6,549 5,621 16.5 % 2.7 % 3.0 %
Latin America 4,033 2,891 39.5 % 1.6 % 1.5 %
Other 909 258 252.3 % 0.4 % 0.2 %
Total $ 245,512 $ 189,131 29.8 % 100.0 % 100.0 %
Product Revenue. Product revenue for the three months ended September 30, 2022
increased 27.4% over the three months ended September 30, 2021 . Product revenue
represented 80.9% of our total revenue compared to 83.2% in the three months
ended September 30, 2021 . Revenue from our paint protection film product line
increased 25.5% over the three months ended September 30, 2021 . Paint protection
film sales represented 60.4% and 63.1% of our total consolidated revenues for
the three months ended September 30, 2022 and 2021, respectively. The growth in
our paint protection film revenue is due mainly to continued demand for our
various film product lines in most markets. Revenue from our window film product
line grew 35.0% for the three months ended September 30, 2022 compared to the
three months ended September 30, 2021 . Window film sales represented 17.1% and
16.6% of our total consolidated revenues for the three months ended September
30, 2022 and 2021, respectively. Growth in window film sales was due mainly to
the continued broad-based increases in demand for our window film products
throughout the world. Other product revenue for the three months ended September
30, 2022 increased 26.2% due mainly to continued demand for non-film related
products such as ceramic coating, plotters, chemicals, and other film
installation tools and accessories.
Product revenue for the nine months ended September 30, 2022 increased 23.1%
over the nine months ended September 30, 2021 . Product revenue represented 80.5%
of our total revenue compared to 84.9% in the nine months ended September 30,
2021 . Revenue from our paint protection film product line increased 17.9%
compared to the nine months ended September 30, 2021 . The growth in our paint
protection film revenue is due mainly to continued demand for our various film
product lines in most markets. Revenue from our window film grew 44.1% compared
to the nine months ended September 30 ,
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2021. This increase was due mainly to continued broad-based increases in demand
for our window film products throughout the world. Other product revenue for the
nine months ended September 30, 2022 increased 28.0% due mainly to continued
demand for non-film related products such as ceramic coating, plotters,
chemicals, and other film installation tools and accessories.
Service revenue. Service revenue consists of revenue from fees for DAP software
access, cutbank credit revenue which represents per-cut fees sold for pattern
access or the value of pattern access provided with eligible product revenue,
revenue from the labor portion of installation sales in our installation centers
and revenue from training services provided to our customers.
Service revenue grew 48.6% over the three months ended September 30, 2021 .
Within this category, software revenue increased 20.1% over the three months
ended September 30, 2021 . This increase was due to an increase in total
subscribers to our DAP software. Cutbank credit revenue increased 29.4% from the
three months ended September 30, 2021 due to substantial growth in our North
American operations. Installation labor revenue increased 63.1% over the three
months ended September 30, 2021 due to a substantial increase in our
installation presence following our 2021 acquisitions of dealership services
businesses.
Service revenue for the nine months ended September 30, 2022 grew 67.4% over the
nine months ended September 30, 2021 . Within this category, software revenue
grew 20.5% over the nine months ended September 30, 2021 . This increase was due
to an increase in total subscribers to our DAP software. Cutbank credit revenue
increased 22.1% over the nine months ended September 30, 2021 due to substantial
growth in our North American operations. Installation labor increased 105.6%
over the nine months ended September 30, 2021 due to a substantial increase in
our installation presence following our 2021 acquisitions of dealership services
businesses.
Total installation revenue (labor and product combined) increased 63.1% over the
three months ended September 30, 2021 . This represented 14.7% and 11.8% of our
total consolidated revenue for the three months ended September 30, 2022 and
2021, respectively. This increase was due primarily to acquired dealership
services businesses in 2021 and on-going increases in demand in our
company-owned installation facilities. Total installation revenue increased
105.6% over the nine months ended September 30, 2021 . This represented 15.2% and
9.6% of our total consolidated revenue for the nine months ended September 30,
2022 and 2021, respectively. This increase was due primarily to acquired
dealership services businesses in 2021 and on-going increases in demand in our
company-owned installation facilities.
Adjusted product revenue, which combines the cutbank credit revenue service
component with product revenue, increased 27.5% over the three months ended
September 30, 2021 . Adjusted product revenue increased 23.1% versus the nine
months ended September 30, 2021 . For both the three and nine month periods, this
growth was due to sustained demand for our various product lines.
Cost of Sales
Cost of sales consists of product costs and the costs to provide our services. Product costs consist of material costs, personnel costs related to warehouse personnel, shipping costs, warranty costs and other related costs to provide products to our customers. Cost of service includes the labor costs associated with installation of product in our installation facilities, costs of labor associated with pattern design for our cutting software and the costs incurred to provide training for our customers. Product costs for the three months endedSeptember 30, 2022 increased 19.0% over the three months endedSeptember 30, 2021 . Cost of product sales represented 52.6% and 57.9% of total revenue in the three months endedSeptember 30, 2022 and 2021, respectively. Cost of service revenue grew 54.7% during the three months endedSeptember 30, 2022 due mainly to the increased installation labor costs associated with our dealership services businesses acquired in 2021. 24 -------------------------------------------------------------------------------- Product costs for the nine months endedSeptember 30, 2022 increased 15.9% over the nine months endedSeptember 30, 2021 . Cost of product sales represented 52.8% and 59.1% of total revenue in the nine months endedSeptember 30, 2022 and 2021, respectively. Cost of service revenue grew 108.5% during the nine months endedSeptember 30, 2022 due mainly to the increased installation labor costs associated with our dealership services businesses acquired in 2021.
Gross Margin
Gross margin for the three months endedSeptember 30, 2022 grew approximately$11.3 million , or 46.3%, from the three months endedSeptember 30, 2021 . For the three months endedSeptember 30, 2022 , gross margin represented 39.8% of revenue compared to 35.7% for the three months endedSeptember 30, 2021 Gross margin for the nine months endedSeptember 30, 2022 grew approximately$28.5 million , or 41.9%, from the nine months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , gross margin represented 39.3% of revenue compared to 35.9% for the nine months endedSeptember 30, 2021 . The following tables summarize gross margin for product and services for the three and nine months endedSeptember 30, 2022 and 2021 (dollars in thousands): Three Months Ended September 30, % % of Category Revenue 2022 2021 Inc (Dec) 2022 2021 Product $ 25,391$ 17,295 46.8 % 35.0 % 30.3 % Service 10,375 7,159 44.9 % 60.5 % 62.1 % Total $ 35,766$ 24,454 46.3 % 39.8 % 35.7 % Nine Months Ended September 30, % % of Category Revenue 2022 2021 Inc (Dec) 2022 2021 Product $ 68,107$ 48,756 39.7 % 34.4 % 30.4 % Service $ 28,359$ 19,233 47.4 % 59.4 % 67.4 % Total $ 96,466$ 67,989 41.9 % 39.3 % 35.9 % Product gross margin for the three months endedSeptember 30, 2022 increased approximately$8.1 million , or 46.8%, over the three months endedSeptember 30, 2021 and represented 35.0% and 30.3% of total product revenue for the three months endedSeptember 30, 2022 and 2021, respectively. This increase was due primarily to decreases in product costs and improved operating leverage. Product gross margin for the nine months endedSeptember 30, 2022 increased approximately$19.4 million , or 39.7%, over the nine months endedSeptember 30, 2021 and represented 34.4% and 30.4% of total product revenue for the nine months endedSeptember 30, 2022 and 2021, respectively. This increase was due primarily to decreases in product costs and improved operating leverage. Service gross margin increased approximately$3.2 million , or 44.9%, over the three months endedSeptember 30, 2021 . This represented 60.5% and 62.1% of total service revenue for the three months endedSeptember 30, 2022 and 2021, respectively. The decrease in service gross margin percentage for the three months endedSeptember 30, 2022 was primarily due to a higher percentage of lower margin installation labor work relative to other higher margin service revenue components. 25
-------------------------------------------------------------------------------- Service gross margin increased approximately$9.1 million , or 47.5%, over the nine months endedSeptember 30, 2021 . This represented 59.4% and 67.4% of total service revenue for the nine months endedSeptember 30, 2022 and 2021, respectively. The decrease in service gross margin percentage for the nine months endedSeptember 30, 2022 was primarily due to a higher percentage of lower margin installation labor work relative to other higher margin service revenue components. Operating Expenses Sales and marketing expenses for the three months endedSeptember 30, 2022 increased 28.4% compared to the same period in 2021. This increase was due to increased personnel and travel related expenses related to support the ongoing growth of the business. These expenses represented 7.0% and 7.2% of total consolidated revenue for the three months endedSeptember 30, 2022 and 2021, respectively. For the nine months endedSeptember 30, 2022 , sales and marketing expenses increased 42.7% compared to the same period in 2021. This increase was due mainly to increased personnel, increased expenses related to marketing events that were suspended in 2021 due to COVID-19, and travel related expenses to support the ongoing growth of the business. These expenses represented 7.5% and 6.9% of total consolidated revenue for the nine months endedSeptember 30, 2022 and 2021, respectively. General and administrative expenses grew approximately$3.0 million , or 32.4% over the three months endedSeptember 30, 2021 . This increase in cost was due primarily to increases in personnel, occupancy costs and professional fees to support ongoing growth and acquisition related expenses including amortization associated with intangible assets acquired in 2021. These costs represented 13.6% and 13.4% of total consolidated revenue for the three months endedSeptember 30, 2022 and 2021, respectively. General and administrative expenses grew approximately$11.4 million , or 48.8% over the nine months endedSeptember 30, 2021 . This increase in cost was due primarily to increases in personnel, occupancy costs and professional fees to support ongoing growth and acquisition related expenses including amortization associated with intangible assets acquired in 2021. These costs represented 14.2% and 12.4% of total consolidated revenue for the nine months endedSeptember 30, 2022 and 2021, respectively.
Other Expenses
Other expenses consist of interest expense and foreign currency exchange gain/loss. Interest expense increased during the three and nine months endedSeptember 30, 2022 due to borrowings on our line of credit and recent interest rate increases. Foreign currency losses during the three and nine months endedSeptember 30, 2022 increased over the respective prior year periods due to fluctuations in the various currencies in which we conduct business.
Income Tax Expense
Income tax expense for the three months endedSeptember 30, 2022 increased$1.4 million from the three months endedSeptember 30, 2021 . Our effective tax rate was 19.5% for the three months endedSeptember 30, 2022 compared with 18.1% for the three months endedSeptember 30, 2021 . The increase in our effective tax rate was primarily due to the impact of international operations. Income tax expense for the nine months endedSeptember 30, 2022 increased$2.3 million from the same period in 2021. Our effective tax rate was 20.1% for the nine months endedSeptember 30, 2022 compared with 19.0% for the nine months endedSeptember 30, 2021 . The increase in our effective tax rate was primarily due to an increase in our state effective rate and the impact of international operations. 26
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Net income for the three months ended
Net income for the nine months ended
Liquidity and Capital Resources
Our primary sources of liquidity are available cash and cash equivalents and cash flows provided by operations. As ofSeptember 30, 2022 , we had cash and cash equivalents of$10.2 million . For the nine months endedSeptember 30, 2022 , cash provided by operations was$9.7 million . We expect available cash, internally generated funds, and borrowings from our committed credit facility to be sufficient to support working capital needs, capital expenditures (including acquisitions), and our debt service obligations. 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 report. Operating activities. Cash provided by operations for the nine months endedSeptember 30, 2022 was$9.7 million compared to$20.2 million during the nine months endedSeptember 30, 2021 . This decrease was due mainly to increases in inventory and other working capital items partially offset by an increase in net income. Investing activities. Cash used in investing activities totaled approximately$9.8 million during the nine months endedSeptember 30, 2022 compared to$35.7 million during the nine months endedSeptember 30, 2021 . This change was due mainly to payments related to our 2021 acquisitions. Financing activities. Cash flows provided by financing activities during the nine months endedSeptember 30, 2022 totaled approximately$0.7 million compared to cash use in the prior year of$5.6 million . This change was due primarily to new borrowings on our revolving credit facility during the nine months endedSeptember 30, 2022 and the prior year repayment of a term loan.
Debt obligations as of
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 unsecured non-interest bearing promissory notes payable and 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 and borrowing capacity to cover our estimated short-term and long-term funding needs. Credit Facilities The Company has a$75.0 million revolving line of credit with a financial institution. The facility is utilized to fund the Company's working capital needs and other strategic initiatives, and is secured by a security interest in substantially all of the Company's current and future assets. Borrowings under the credit agreement bear interest at the Wall Street JournalU.S. Prime Rate less 0.75% per annum if the Company's EBITDA ratio (as defined in the Loan Agreement governing the facility) is equal to or less than 2.00 to 1.00 or the Wall Street JournalU.S. Prime rate less 0.25% if the Company's EBITDA ratio is greater than 2.00 to 1.00. The facility also includes a fee of 0.25% of the unused capacity on the facility. The interest rate for this credit facility as ofSeptember 30, 2022 andDecember 31, 2021 was 5.50% and 27 -------------------------------------------------------------------------------- 2.50%, respectively. The Company paid interest charges on borrowings under this facility of$0.4 million and$0.9 million during the three and nine months endedSeptember 30, 2022 , respectively, and had a balance of$26.0 million and$25.0 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. This facility matures onJuly 5, 2024 .
The Loan Agreement governing the facility contains customary covenants relating to maintaining legal existence and good standing, complying with applicable laws, delivery of financial statements, payment of taxes and maintaining insurance. The Loan Agreement contains two financial covenants:
(1) Senior Funded Debt (as defined in the Loan Agreement) divided by EBITDA (as defined in the Loan Agreement) at or below 3.50 : 1.00 when tested at the end of each fiscal quarter on a rolling four-quarter basis, and
(2) A minimum Debt Service Coverage Ratio (as defined in the Loan Agreement) of 1.25 : 1.00 at the end of each fiscal quarter when measured on a rolling four-quarter basis.
The Company also has a CAD$4.5 million revolving credit facility through a financial institution inCanada , and is maintained byXPEL Canada Corp. , a wholly-owned subsidiary of XPEL. This Canadian facility is utilized to fund the Company's working capital needs inCanada . This facility bears interest atHSBC Canada Bank's prime rate plus 0.25% per annum and is guaranteed by the parent company. As ofSeptember 30, 2022 andDecember 31, 2021 , no balance was outstanding on this line of credit.
As of
Critical Accounting Policies
There have been no material changes to the Company's critical accounting estimates from the information provided in the Annual Report.
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.
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