XPEL Inc.

11/06/2026 | Press release | Distributed by Public on 11/06/2026 07:47

Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations
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 of XPEL, 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 the SEC'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:
Operational Risks
•A material disruption from our contract manufacturers or suppliers, or our inability to obtain a sufficient supply of products from alternate suppliers, could cause us to be unable to meet customer demands or increase our costs.
•Any continued reliance on contract manufacturers and suppliers exposes us to product quality and variable cost risks.
•Our results depend on the timely availability of raw materials, components, and commodities at acceptable prices.
•If we do not manage or control the quality of our products, we may be unable to meet customer demands and incur higher costs.
•Our investment in manufacturing and supply chain assets exposes us to regulatory and execution risks.
Risks Related to Our Business in China
•Failure to meet the PRC government's complex regulatory requirements on and significant oversight over our business operation could result in a material adverse change in our operations and the value of our securities.
•We may rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiary to make payments to us could have a material and adverse effect on our ability to conduct our business.
Risks Related to Our Business and Industry
•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.
•Our operating results can be adversely affected by inflation, changes in the cost or availability of raw materials, labor, energy, transportation and other necessary supplies and services.
•The after-market automotive product supply business is highly competitive. Competition presents an ongoing threat to the success of our Company.
Strategic Risks
•We depend on our relationships with independent installers and new car dealerships and their ability to sell and service our products. Any disruption in these relationships could harm our sales.
•We may not be able to identify, finance and complete suitable acquisitions and investments, and any completed acquisitions and investments could be unsuccessful or consume significant resources.
•If we are unable to maintain our network of sales and distribution channels, it could adversely affect our net sales, profitability and the implementation of our growth strategy.
Legal, Regulatory and Compliance Risks
•We may incur material losses and costs as a result of product liability and warranty claims.
•Violations of the U.S. Foreign Corrupt Practices Act and similar anti-corruption laws outside the U.S. could have a material adverse effect on us.
•Our failure to satisfy international trade compliance regulations, and changes in U.S. government sanctions, could have a material adverse effect on us.
•Changes in U.S. administrative policy, including changes to existing trade agreements and any resulting changes in international relations, could adversely affect our financial performance.
Liquidity Risks
•We may seek to incur substantial indebtedness in the future.
•We cannot be certain that additional financing will be available on reasonable terms when required, or at all.
•Our variable rate indebtedness exposes us to interest rate volatility, which could cause our debt service obligations to increase significantly.
Risks Relating to Common Stock
•If research analysts issue unfavorable commentary or downgrade our Common Stock, the price of our Common Stock and its trading volume could decline.
•Short sellers of our stock may be manipulative and may have driven down and may again drive down the market price of our Common Stock.
•Our stock price has been, and may continue to be, volatile.
•We may issue additional equity securities or engage in other transactions that could dilute our book value or affect the priority of our Common Stock, which may adversely affect the market price of our Common Stock.
General Risk Factors
•General global economic and business conditions affect demand for our products.
•A public health crisis could impact our business.
•Economic, political and market conditions can adversely affect our business, financial condition and results of operations.
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 the Annual Report as supplemented in this Report. These factors are not necessarily all of the factors that could affect us. Unpredictable or unanticipated factors that 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
We manufacture, sell, distribute, and install protective films, coatings and related services primarily to the automobile aftermarket, new car dealerships and automobile original equipment manufacturers, or 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.
The Company began as a software company designing vehicle patterns used to produce cut-to-fit protective film for headlights and painted surfaces of automobiles. In 2007, we began selling automotive paint protection film products to complement our software business. As paint protection film technology improved and became more durable, awareness and adoption of paint protection film has continued to increase, driving significant industry growth over the last several years. Initial adoption of paint protection film came primarily from luxury car enthusiasts in the United States and Canada. These enthusiasts were primarily served by a growing automotive aftermarket of independent installers of automotive paint protection and window films. Internationally, nascent demand began to build as awareness and adoption in the United States and Canada continued to increase. Over the last few years, new car dealership interest in the product has increased due to their exposure to the aftermarket installer network, while OEM interest in the product has increased through their exposure to the new car dealerships who sell the product.
In May 2026 we purchased a four-building site totaling 431,525 square feet in San Antonio, Texas (the "Properties") in which the Company was a substantial tenant for $60.4 million which will serve as the centerpiece of the Company's North American manufacturing and operations footprint. In addition, we acquired a manufacturing facility in China to augment the Company's growing presence in the region.
Strategic Overview
Our strategy initially centered on how best to serve and grow our network of independent installers in the US and Canada and to sell products internationally through independent distributors while simultaneously building and enhancing the XPEL brand. This "best-in-class" service strategy was then extended to new car dealerships and OEMs. Internationally, while our initial market entry has primarily been through indirect distribution, we desire to ultimately sell directly to the majority of the top 25 car markets in the world, which is an important element of our acquisition strategy. To that end, we have acquired distributors in several international markets including India, Thailand, Japan and, most recently, China.
To complement our channel network and distribution, we are investing in manufacturing and the supply chain with a goal to be a high quality, low cost producer for our products which we expect will significantly improve our operating margin and allow more control over the end-to-end manufacturing process.
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 September 30, 2026 and 2025 (in thousands):
(Unaudited) (Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2026 2025 % Change 2026 2025 % Change
Net Income $ 16,708 $ 13,135 27.2 % $ 45,514 $ 37,929 20.0 %
Interest 408 1 40700.0 % 674 83 712.0 %
Taxes 4,466 3,505 27.4 % 12,303 10,321 19.2 %
Depreciation 1,702 1,640 3.8 % 5,104 4,733 7.8 %
Amortization 2,299 1,663 38.2 % 6,519 4,722 38.1 %
EBITDA $ 25,583 $ 19,944 28.3 % $ 70,114 $ 57,788 21.3 %
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.
Results of Operations
The following tables summarize the Company's consolidated results of operations for the three and nine months ended September 30, 2026 and 2025 (dollars in thousands):
Three Months Ended September 30, 2026 %
of Total Revenue 		Three Months Ended September 30, 2025 %
of Total Revenue 		$
Change 		%
Change
Total revenue $ 137,809 100.0 % $ 125,415 100.0 % $ 12,394 9.9 %
Total cost of sales 76,300 55.4 % 72,991 58.2 % 3,309 4.5 %
Gross margin 61,509 44.6 % 52,424 41.8 % 9,085 17.3 %
Total operating expenses 40,431 29.3 % 35,673 28.4 % 4,758 13.3 %
Operating income 21,078 15.3 % 16,751 13.4 % 4,327 25.8 %
Other (income) expense, net (96) (0.1) % 111 0.1 % (207) (186.5) %
Income tax 4,466 3.2 % 3,505 2.8 % 961 27.4 %
Net income $ 16,708 12.1 % $ 13,135 10.5 % $ 3,573 27.2 %
Nine Months Ended September 30, 2026 %
of Total Revenue 		Nine Months Ended September 30, 2025 %
of Total Revenue 		$
Change 		%
Change
Total revenue $ 398,216 100.0 % $ 353,933 100.0 % $ 44,283 12.5 %
Total cost of sales 222,337 55.8 % 204,097 57.7 % 18,240 8.9 %
Gross margin 175,879 44.2 % 149,836 42.3 % 26,043 17.4 %
Total operating expenses 118,575 29.8 % 102,667 29.0 % 15,908 15.5 %
Operating income 57,304 14.4 % 47,169 13.3 % 10,135 21.5 %
Other (income) expense, net (513) (0.1) % (1,081) (0.3) % 568 (52.5) %
Income tax 12,303 3.1 % 10,321 2.9 % 1,982 19.2 %
Net income $ 45,514 11.4 % $ 37,929 10.7 % $ 7,585 20.0 %
The following tables summarize revenue results for the three and nine months ended September 30, 2026 and 2025 (dollars in thousands):
Three Months Ended
September 30, 		% % of Total Revenue
2026 2025 Inc (Dec) 2026 2025
Product Revenue
Paint protection film $ 73,536 $ 63,531 15.7 % 53.4 % 50.7 %
Window film 30,894 27,640 11.8 % 22.4 % 22.0 %
Other 4,285 4,288 (0.1) % 3.1 % 3.4 %
Total $ 108,715 $ 95,459 13.9 % 78.9 % 76.1 %
Service Revenue
Software $ 2,797 $ 2,208 26.7 % 2.0 % 1.8 %
Cutbank credits 957 4,257 (77.5) % 0.7 % 3.4 %
Installation labor 24,276 22,125 9.7 % 17.6 % 17.6 %
Training and other 1,064 1,366 (22.1) % 0.8 % 1.1 %
Total $ 29,094 $ 29,956 (2.9) % 21.1 % 23.9 %
Total $ 137,809 $ 125,415 9.9 % 100.0 % 100.0 %
Nine Months Ended September 30, % % of Total Revenue
2026 2025 Inc (Dec) 2026 2025
Product Revenue
Paint protection film $ 210,022 $ 182,637 15.0 % 52.7 % 51.6 %
Window film 86,610 74,234 16.7 % 21.7 % 21.0 %
Other 12,471 12,095 3.1 % 3.2 % 3.4 %
Total $ 309,103 $ 268,966 14.9 % 77.6 % 76.0 %
Service Revenue
Software $ 7,281 $ 6,507 11.9 % 1.8 % 1.8 %
Cutbank credits 4,970 12,453 (60.1) % 1.2 % 3.5 %
Installation labor 72,710 63,222 15.0 % 18.3 % 17.9 %
Training and other 4,152 2,785 49.1 % 1.1 % 0.8 %
Total $ 89,113 $ 84,967 4.9 % 22.4 % 24.0 %
Total $ 398,216 $ 353,933 12.5 % 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 table represents our estimate of sales by summarized 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, 2026 and 2025 (dollars in thousands):
Three Months Ended
September 30, 		% % of Total Revenue
2026 2025 Inc (Dec) 2026 2025
United States $ 76,719 $ 71,725 7.0 % 55.7 % 57.2 %
Canada 15,293 12,975 17.9 % 11.1 % 10.4 %
North America 92,012 84,700 8.6 % 66.8 % 67.6 %
China 15,351 10,074 52.4 % 11.1 % 8.0 %
Asia Other 6,308 5,545 13.8 % 4.6 % 4.3 %
Asia Pacific 21,659 15,619 38.7 % 15.7 % 12.3 %
EU, UK, and Africa 16,182 16,537 (2.1) % 11.7 % 13.2 %
India and Middle East 4,770 5,718 (16.6) % 3.5 % 4.6 %
Latin America 3,186 2,841 12.1 % 2.3 % 2.3 %
Total $ 137,809 $ 125,415 9.9 % 100.0 % 100.0 %
Nine Months Ended September 30, % % of Total Revenue
2026 2025 Inc (Dec) 2026 2025
United States $ 219,147 $ 200,185 9.5 % 55.0 % 56.7 %
Canada 39,488 36,656 7.7 % 9.9 % 10.4 %
North America 258,635 236,841 9.2 % 64.9 % 67.1 %
China 42,984 25,886 66.1 % 10.8 % 7.3 %
Asia Other 18,179 15,523 17.1 % 4.6 % 4.4 %
Asia Pacific 61,163 41,409 47.7 % 15.4 % 11.7 %
EU, UK, and Africa 51,000 48,899 4.3 % 12.8 % 13.8 %
India and Middle East 17,947 18,541 (3.2) % 4.5 % 5.2 %
Latin America 9,471 8,243 14.9 % 2.4 % 2.2 %
Total $ 398,216 $ 353,933 12.5 % 100.0 % 100.0 %
Product Revenue. Product revenue for the three months ended September 30, 2026 increased 13.9% over the three months ended September 30, 2025. Product revenue represented 78.9% of our total revenue compared to 76.1% in the three months ended September 30, 2025. Revenue from our paint protection film product line increased 15.7% over the three months ended September 30, 2025. Paint protection film sales represented 53.4% and 50.7% of our total consolidated revenues for the three months ended September 30, 2026 and 2025, respectively. The total increase in paint protection film sales was primarily due to increased paint protection film sales into China resulting from our increased direct presence in these regions and increased demand for our film products across the US and Canada.
Revenue from our window film product line grew 11.8% for the three months ended September 30, 2026 compared to the three months ended September 30, 2025. Window film sales represented 22.4% and 22.0% of our total consolidated revenues for the three months ended September 30, 2026 and 2025, respectively. This increase was driven by continued demand resulting from increased product adoption in multiple regions for automotive window film led by our China and APAC regions resulting primarily from increasing our direct presence in these regions.
Geographically, we experienced continued growth in most of our regions during the three months ended September 30, 2026 including 52.4% and 13.8% in China and Asia-Other, respectively. The increase in China revenue was driven primarily by higher customer demand and the recognition of incremental direct revenues following the acquisition of our China distributor, completed late in the third quarter of 2025. US, Canada, and Latin America revenues increased 7.0%, 17.9% and 12.1%, respectively, due primarily to increased demand. These increases were offset by a slight decrease in Europe revenue due primarily to timing of distributor sales and a 16.6% decrease in India/Middle East revenue due primarily to the on-going conflict in Iran.
Product Revenue. Product revenue for the nine months ended September 30, 2026 increased 14.9% over the nine months ended September 30, 2025. Product revenue represented 77.6% of our total revenue compared to 76.0% during the nine months ended September 30, 2025. Revenue from our paint protection film product line increased 15.0% over the nine months ended September 30, 2025. Paint protection film sales represented 52.7% and 51.6% of our total consolidated revenues for the nine months ended September 30, 2026 and 2025, respectively. The total increase in paint protection film sales was due to increased demand for our film products across multiple regions and the recognition of incremental direct revenues following the acquisition of our China distributor, completed late in the third quarter of 2025.
Revenue from our window film product line grew 16.7% for the nine months ended September 30, 2026 compared to the nine months ended September 30, 2025. Window film sales represented 21.7% and 21.0% of our total consolidated revenues for the nine months ended September 30, 2026 and 2025, respectively. This increase was driven by continued demand resulting from increased product adoption in multiple regions for automotive window film led by our China and APAC regions resulting primarily from our increased direct presence in these regions.
Geographically, we experienced continued growth in all of our regions during the nine months ended September 30, 2026 including 66.1%, 17.1%, 9.5%, and 7.7% in China, Asia-Other, the United States, and in Canada, respectively. The increase in China revenue was driven primarily by higher customer demand and the recognition of incremental direct revenues following the acquisition of our China distributor, completed late in the third quarter of 2025. The increases in Asia-Other, the United States, and Canada were driven primarily by increased product adoption and increased demand.
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, revenue from our dealership services business and revenue from training services provided to our customers.
Service revenue decreased 2.9% over the three months ended September 30, 2025. Installation labor revenue increased 9.7% over the three months ended September 30, 2025 due mainly to increased demand across our corporate owned stores and our OEM networks. In the same period, software revenue grew 26.7% over the three months ended September 30, 2025 due to growth in DAP software subscribers. The increase was offset by a decline in cutbank credit revenue due primarily to a reduction in the estimated fair value of a cutbank credit. Excluding cutbank credit revenue, total service revenue for the three months ended September 30, 2026 increased 9.5% over the three months ended September 30, 2025.
Service revenue for the nine months ended September 30, 2026 grew 4.9% over the nine months ended September 30, 2025. Within this category, software revenue grew 11.9% over the nine months ended September 30, 2025. This increase was due to an increase in total subscribers to our DAP software. Installation labor revenue increased 15.0% over the nine months ended September 30, 2025 due mainly to increased demand across our corporate owned stores, our dealership services and OEM networks. Excluding cutbank credit revenue, total service revenue for the nine months ended September 30, 2026 increased 16.0% over the nine months ended September 30, 2025.
Total installation revenue (labor and product combined) increased 4.5% over the three months ended September 30, 2025. This represented 20.8% and 21.9% of our total consolidated revenue for the three months ended September 30, 2026 and 2025, respectively. This increase was primarily due to increased demand in our corporate owned stores and across our OEM networks. Total installation revenue (labor and product combined) increased 12.5% over the nine months ended September 30, 2025. This represented 21.8% and 21.8% of our total consolidated revenue for the nine months ended September 30, 2026 and 2025, respectively. These increases were primarily due to increased demand in our corporate owned stores and across our dealership services and OEM networks. Adjusted product revenue, which combines the cutbank credit revenue service component with product revenue, increased 10.0% over the three months ended September 30, 2025. Adjusted product revenue increased 11.6% over the nine months ended September 30, 2025.
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 ended September 30, 2026 increased 3.9% over the three months ended September 30, 2025. Cost of product sales represented 45.1% and 47.7% of total revenue in the three months ended September 30, 2026 and 2025, respectively. Cost of service revenue grew 7.4% during the three months ended September 30, 2026. Refer to the Gross Margin section below for discussion of this cost relative to revenue. During the three months ended September 30, 2026, the Company received $4.6 million of cash recoveries related to previously paid import tariffs on inventory purchases. The total recovery was recorded as a reduction of cost of sales. In addition, the Company accelerated the discontinuation of certain older products pursuant to the Company's planned SKU rationalization in conjunction with its vertical integration plan. As a result, the Company recorded a charge to cost of sales of $4.6 million.
Product costs for the nine months ended September 30, 2026 increased 8.1% over the nine months ended September 30, 2025. Cost of product sales represented 45.2% and 47.0% of total revenue in the nine months ended September 30, 2026 and 2025, respectively. Cost of service revenue grew 12.5% during the nine months ended September 30, 2026. Refer to the Gross Margin section below for discussion of this cost relative to revenue.
Gross Margin
Gross margin for the three months ended September 30, 2026 grew approximately $9.1 million, or 17.3%, compared to the three months ended September 30, 2025. For the three months ended
September 30, 2026, gross margin represented 44.6% of revenue compared to 41.8% for the three months ended September 30, 2025.
Gross margin for the nine months ended September 30, 2026 grew approximately $26.0 million, or 17.4%, compared to the nine months ended September 30, 2025. For the nine months ended September 30, 2026, gross margin represented 44.2% of revenue compared to 42.3% for the nine months ended September 30, 2025.
The following tables summarize gross margin for product and services for the three and nine months ended September 30, 2026 and 2025 (dollars in thousands):
Three Months Ended September 30, % % of Category Revenue
2026 2025 Inc (Dec) 2026 2025
Product margin $ 46,540 $ 35,621 30.7 % 42.8 % 37.3 %
Service margin 14,969 16,803 -10.9 % 51.5 % 56.1 %
Total $ 61,509 $ 52,424 17.3 % 44.6 % 41.8 %
Nine Months Ended September 30, % % of Category Revenue
2026 2025 Inc (Dec) 2026 2025
Product margin $ 129,100 $ 102,498 26.0 % 41.8 % 38.1 %
Service margin 46,779 47,338 -1.2 % 52.5 % 55.7 %
Total $ 175,879 $ 149,836 17.4 % 44.2 % 42.3 %
Product gross margin for the three months ended September 30, 2026 increased approximately $10.9 million, or 30.7%, over the three months ended September 30, 2025 and represented 42.8% and 37.3% of total product revenue for the three months ended September 30, 2026 and 2025, respectively. The increase in gross margin percentage was due primarily to decreases in product costs, favorable changes in product mix improved operating leverage and the on-going sell through of higher cost inventory acquired in our China distributor acquisition in September 2025.
Product gross margin for the nine months ended September 30, 2026 increased approximately $26.6 million, or 26.0%, over the nine months ended September 30, 2025 and represented 41.8% and 38.1% of total product revenue for the nine months ended September 30, 2026 and 2025, respectively. The increase in gross margin percentage was due primarily to decreases in product costs, favorable changes in product mix, improved operating leverage and the on-going sell through of higher cost inventory acquired in our China distributor acquisition in September 2025.
Service gross margin declined 10.9% compared to the three months ended September 30, 2025. This represented 51.5% and 56.1% of total service revenue for the three months ended September 30, 2026 and 2025, respectively. Excluding cutbank revenue, service gross margin increased 11.7% and service gross margin percentage was 48.2% and 41.9% for the three months ended September 30, 2026 and 2025, respectively. This increase was due primarily to a more favorable mix of service channel revenue.
Service gross margin declined 1.2% compared to the nine months ended September 30, 2025. This represented 52.5% and 55.7% of total service revenue for the nine months ended September 30, 2026 and 2025, respectively. Excluding cutbank credit revenue, service gross margin increased 19.9% and service gross margin percentage was 46.9% and 41.1% for the nine months ended September 30, 2026 and 2025, respectively. This increase was due primarily to a more favorable mix of service channel revenue.
Operating Expenses
Sales and marketing expenses for the three months ended September 30, 2026 increased 8.7% compared to the same period in 2025. This increase was primarily due to increased personnel and marketing costs associated with ongoing growth in multiple markets as the Company increased the number of sponsorships and increased marketing efforts to dealerships as well as increased direct sales marketing costs in China. These expenses represented 10.9% and 11.0% of total consolidated revenue for the three months ended September 30, 2026 and 2025, respectively.
For the nine months ended September 30, 2026, sales and marketing expenses increased 21.4% compared to the same period in 2025. This increase was due to increased personnel and marketing costs incurred associated with ongoing growth in multiple markets as the Company increased its marketing efforts to dealerships as well as increased direct sales marketing costs in China. These expenses represented 11.4% and 10.6% of total consolidated revenue for the nine months ended September 30, 2026 and 2025, respectively.
General and administrative expenses grew approximately $3.6 million, or 16.3% over the three months ended September 30, 2025. This increase in cost was due primarily to increases in personnel, occupancy costs and other general expenses associated with new costs pursuant to our acquisition of our China distributor in September 2025 and a Chinese manufacturer in May 2026. Total General and Administrative expenses represented 18.5% and 17.4% of total consolidated revenue for the three months ended September 30, 2026 and 2025, respectively.
General and administrative expenses grew approximately $7.9 million, or 12.1% over the nine months ended September 30, 2025. This increase in cost was due primarily to increases in personnel, occupancy costs and professional fees including legal costs associated with the acquisition of a Chinese manufacturer. Total General and Administrative expenses represented 18.3% and 18.4% of total consolidated revenue for the nine months ended September 30, 2026 and 2025, respectively.
Interest Expense
Interest expense for the three months ended September 30, 2026 increased $0.4 million from the three months ended September 30, 2025. This increase resulted from interest expense associated with the new term loan agreement obtained in connection with the purchase of certain real estate assets. (See Note 9 in the Notes to Condensed Consolidated Financial Statements).
Interest expense for the nine months ended September 30, 2026 increased $0.6 million from the nine months ended September 30, 2025.
Income Tax Expense
Income tax expense for the three months ended September 30, 2026 increased $1.0 million from the three months ended September 30, 2025. Our effective tax rate was 21.1% for the three months ended September 30, 2026 compared with 21.1% for the three months ended September 30, 2025.
Income tax expense for the nine months ended September 30, 2026 increased $2.0 million from the nine months ended September 30, 2025. Our effective tax rate was 21.3% for the nine months ended September 30, 2026 compared with 21.4% for the nine months ended September 30, 2025.
Net Income
Net income for the three months ended September 30, 2026 increased 27.2% to $16.7 million.
Net income for the nine months ended September 30, 2026 increased 20.0% to $45.5 million.
Liquidity and Capital Resources
Our primary sources of liquidity are available cash and cash equivalents, cash flows provided by operations and borrowing capacity under our credit facilities. As of September 30, 2026, we had cash and cash equivalents of $45.7 million. For the nine months ended September 30, 2026, cash provided by operations was $59.3 million and as of September 30, 2026 we had $128.2 million in funds available under our credit facilities. We expect to continue to have sufficient access to cash to support working capital needs, pay for 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 borrowings 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 this quarterly report.
Operating activities. Cash provided by operations totaled $59.3 million for the nine months ended September 30, 2026, compared to $64.3 million during the nine months ended September 30, 2025. This decrease in cash flows from operating activities was mainly due to an increase in inventory partially offset by other changes in working capital.
Investing activities. Cash used in investing activities totaled approximately $90.6 million during the nine months ended September 30, 2026 compared to $20.8 million during the nine months ended September 30, 2025. This increase was due primarily to the purchase of the Properties (as defined below) totaling $60.4 million, deposits related to our supply chain initiatives and acquisition-related payments.
Financing activities. Cash provided by financing activities during the nine months ended September 30, 2026 totaled $26.7 million compared to $0.4 million used during the same period in the prior year. This change was due primarily to borrowings on the Term Loan (as defined below) in 2026 in connection with the purchase of the Properties.
Debt and contingent obligations as of September 30, 2026 and December 31, 2025 totaled approximately $58.1 million and $20.0 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 and borrowings under our credit facility. 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, for contingent liabilities, and for repayment of borrowings on the Term Loan and credit facilities. In addition, if an opportunity presents itself, we may increase our borrowing under available credit arrangements or sell debt or equity securities, although we may not be able to complete any such financing on terms acceptable to us or at all. 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 and Term Loan
The Company has U.S. and Canadian revolving credit facilities and Harvest Ventures Holding Company ("Harvest"), a wholly-owned subsidiary of the Company, has a term loan which it incurred in connection with the purchase of the Properties.
Credit Facilities
On September 11, 2025, XPEL entered into the Amendment to the Credit Agreement with Wells Fargo Bank, N.A., as Administrative Agent, and other lenders party thereto. The Amendment, among other things, extended the maturity of the Credit Agreement from April 6, 2026 to September 11, 2028. The Credit Agreement provides for secured revolving loans and letters of credit in an aggregate amount of up to $125 million, which is subject to the terms of the Credit Agreement. As of September 30, 2026 and December 31, 2025, the Company had no outstanding balances under the Credit Agreement. 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.
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 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 September 30, 2026, these rates were 7.0% and 4.8%, 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 September 11, 2028.
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, other than the assets which secure the Term Loan.
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 two 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
The Company also has a CAD $4.5 million (approximately $3.2 million USD as of September 30, 2026) revolving credit facility through a financial institution in Canada, and is maintained by XPEL Canada Corp., a wholly-owned subsidiary of XPEL. This Canadian facility is utilized to fund the Company's 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 September 30, 2026 and December 31, 2025, no balance was outstanding on this line of credit.
Term Loan
On May 15, 2026, Harvest entered into a $44.8 million term loan agreement (the "Term Loan") with PNC Bank, N.A. ("PNC"), secured by four commercial properties in San Antonio, Texas (the "Properties"), and a guarantee (the "Guaranty") by the Company.
Borrowings under the Term Loan bear interest at the sum of (a) the Term SOFR Rate in effect on each Reset Date (defined as the closing date or the last day of every month thereafter, unless the last day falls on a non-business day, upon which the Reset Date shall be the first business day after the last day of the month), plus (b) 125 basis points (1.25%), matures ten years from the closing date on May 15, 2036, and amortizes over a twenty-five year period. The interest rate at closing was 4.7% per annum. At September 30, 2026, the interest rate was 5.0%.
The Term Loan is secured by the assets owned by Harvest and is subject to customary representations, warranties, covenants, and events of default. Upon the occurrence of an event of default, PNC may, among other remedies, accelerate the outstanding principal balance and accrued interest, foreclose on the Properties, and exercise its rights under the Guaranty. As of September 30, 2026, $44.4 million in principal was outstanding, $1.8 million of which was classified as current and $42.6 million as long-term debt on the Condensed Consolidated Balance Sheets. Debt issuance costs incurred in connection with this Term Loan were not material to the condensed consolidated financial statements.
The Term Loan includes certain affirmative and negative covenants that require, among other things, Harvest to maintain its legal existence and good standing, comply with applicable laws, maintain accounting records, deliver financial statements and compliance certifications on a timely basis, pay taxes as required by law, maintain insurance coverage, and maintain its depository accounts with PNC Bank, as well as to forgo certain specified future activities, including incurring additional indebtedness other than indebtedness under the Credit Agreement or not otherwise permitted under the Credit Agreement, granting liens on its assets, guaranteeing third-party obligations, paying dividends except as permitted under the Credit Agreement, merging or transferring substantially all of its assets, or changing its ownership or management, and certain other customary covenants. The Term Loan provides for two financial covenants which become effective after the Credit Agreement with Wells Fargo and any refinancing of the Credit Agreement ceases to be in effect 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.
As of September 30, 2026 and December 31, 2025, the Company was in compliance with all debt covenants.
Critical Accounting Estimates
There have been no material changes to the Company's critical accounting estimates from the information provided in the Annual Report on Form 10-K.
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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