XPEL, Inc. (XPEL) FY 2021 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
Executive Summary
Set forth below is summary financial information for the years ended December 31, 2021, 2020, and 2019. 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.
| Year Ended December 31, | % Change | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | % of Total Revenue | 2020 | % of Total Revenue | 2019 | % of Total Revenue | 2021 vs 2020 | 2020 vs 2019 | ||||||||||||||||||
| Total revenue | $ | 259,263,077 | 100.0 | % | $ | 158,924,448 | 100.0 | % | $ | 129,932,881 | 100.0 | % | 63.1 | % | 22.3 | % | |||||||||
| Total cost of sales | 166,586,090 | 64.3 | % | 104,899,439 | 66.0 | % | 86,426,622 | 66.5 | % | 58.8 | % | 21.4 | % | ||||||||||||
| Gross margin | 92,676,987 | 35.7 | % | 54,025,009 | 34.0 | % | 43,506,259 | 33.5 | % | 71.5 | % | 24.2 | % | ||||||||||||
| Total operating expenses | 52,561,368 | 20.3 | % | 30,655,077 | 19.3 | % | 26,418,912 | 20.3 | % | 71.5 | % | 16.0 | % | ||||||||||||
| Operating income | 40,115,619 | 15.5 | % | 23,369,932 | 14.7 | % | 17,087,347 | 13.2 | % | 71.7 | % | 36.8 | % | ||||||||||||
| Other expenses | 675,648 | 0.3 | % | 565,573 | 0.4 | % | 136,919 | 0.1 | % | 19.5 | % | 313.1 | % | ||||||||||||
| Income tax | 7,873,109 | 3.0 | % | 4,522,668 | 2.8 | % | 2,955,356 | 2.3 | % | 74.1 | % | 53.0 | % | ||||||||||||
| Net income | $ | 31,566,862 | 12.2 | % | $ | 18,281,691 | 11.5 | % | $ | 13,995,072 | 10.8 | % | 72.7 | % | 30.6 | % |
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Company Overview
The Company is a leading provider of protective films and coatings, including automotive paint protection film, surface protection film, automotive and commercial/residential window films, and ceramic coatings. With a global footprint, a network of trained installers and proprietary DAP software. The Company is dedicated to exceeding customer expectations by providing high-quality products, leading customer service, expert technical support and world-class training.
Trends and Uncertainties
During 2021, we continued to see strong recovery from the initial impacts of COVID-19. Revenue continued to increase markedly in all major geographic areas. Despite recent positive trends, the long-term effects of the pandemic on our financial results in future periods could still be significant and cannot be reasonably estimated due to the volatility, uncertainty and economic disruption caused by the pandemic. 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 this Annual Report for further discussion of the potential impact of the COVID-19 pandemic on our business, results of operations and financial condition.
As we look ahead, we are unable to determine or predict the continuing impact that the COVID-19 pandemic will have on our customers, vendors and suppliers or our business, results of operations or financial condition. Despite the gradual reduction of restrictions related to the COVID-19 pandemic and the apparent recovery of our operations, significant uncertainty still exists concerning the overall magnitude of the impact and the duration of the COVID-19 pandemic. Additionally, automotive sales and production are highly cyclical, and the cyclical nature of the industry could be, and has been, compounded by the pandemic. As demand for automotive products fluctuates or decreased, the demand for our products may also fluctuate or decrease. Automotive manufacturers have experienced a global semiconductor shortage which has affected production of vehicles and, in turn, available inventory at dealerships. As long as this shortage persists, it could have a material adverse effect on our business, financial condition and results of operations. Please refer to 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 this Annual Report for additional consideration of the cyclical nature of the automotive industry. We will continue to closely monitor updates regarding the continuing impact of COVID-19 and automotive sales and adjust our operations according to guidelines form local, state and federal officials. In light of the foregoing, we may take actions that alter our business operations or that we determine are in the best interest of our employees, customers, suppliers and stockholders.
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
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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 years ended December 31,
| 2021 | %of Total Revenue | 2020 | %of Total Revenue | 2019 | %of Total Revenue | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Income | $ | 31,566,862 | 12.2 | % | $ | 18,281,691 | 11.5 | % | $ | 13,995,072 | 10.8 | % | ||||||||
| Interest | 302,674 | 0.1 | % | 249,480 | 0.2 | % | 96,646 | 0.1 | % | |||||||||||
| Taxes | 7,873,109 | 3.0 | % | 4,522,668 | 2.8 | % | 2,955,356 | 2.3 | % | |||||||||||
| Depreciation | 1,887,048 | 0.7 | % | 1,274,095 | 0.8 | % | 915,918 | 0.7 | % | |||||||||||
| Amortization | 2,500,620 | 1.0 | % | 955,937 | 0.6 | % | 781,105 | 0.5 | % | |||||||||||
| EBITDA | $ | 44,130,313 | 17.0 | % | $ | 25,283,871 | 15.9 | % | $ | 18,744,097 | 14.4 | % |
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, 2021 and 2020 and year-over-year comparisons between those years. Discussions of the periods prior to the year ended December 31, 2020 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, 2020 and the discussion therein for the year ended December 31, 2020 compared to the year ended December 31, 2019 is incorporated by reference into this Annual Report.
The following tables summarize revenue results for the years ended December 31, 2021, 2020 and 2019:
| Year Ended December 31, | % Change | % of Total Revenue | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | 2021 vs 2020 | 2020 vs 2019 | 2021 | 2020 | 2019 | ||||||||||||||||||
| Product Revenue | |||||||||||||||||||||||||
| Paint protection film | $ | 169,879,447 | $ | 110,786,164 | $ | 97,341,865 | 53.3 | % | 13.8 | % | 65.5 | % | 69.7 | % | 74.9 | % | |||||||||
| Window film | 38,363,432 | 20,950,591 | 11,384,437 | 83.1 | % | 84.0 | % | 14.8 | % | 13.2 | % | 8.8 | % | ||||||||||||
| Other | 9,039,652 | 4,525,312 | 3,478,437 | 99.8 | % | 30.1 | % | 3.5 | % | 2.8 | % | 2.7 | % | ||||||||||||
| Total | $ | 217,282,531 | $ | 136,262,067 | $ | 112,204,739 | 59.5 | % | 21.4 | % | 83.8 | % | 85.7 | % | 86.4 | % | |||||||||
| Service Revenue | |||||||||||||||||||||||||
| Software | $ | 4,373,083 | $ | 3,489,348 | $ | 3,263,391 | 25.3 | % | 6.9 | % | 1.7 | % | 2.2 | % | 2.5 | % | |||||||||
| Cutbank credits | 12,371,991 | 7,784,554 | 7,253,610 | 58.9 | % | 7.3 | % | 4.8 | % | 4.9 | % | 5.6 | % | ||||||||||||
| Installation labor | 24,252,774 | 10,925,525 | 6,620,527 | 122.0 | % | 65.0 | % | 9.4 | % | 6.9 | % | 5.1 | % | ||||||||||||
| Training | 982,698 | 462,954 | 590,614 | 112.3 | % | (21.6) | % | 0.3 | % | 0.3 | % | 0.4 | % | ||||||||||||
| Total | $ | 41,980,546 | $ | 22,662,381 | $ | 17,728,142 | 85.2 | % | 27.8 | % | 16.2 | % | 14.3 | % | 13.6 | % | |||||||||
| Total | $ | 259,263,077 | $ | 158,924,448 | $ | 129,932,881 | 63.1 | % | 22.3 | % | 100.0 | % | 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 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, 2021 and 2020:
| Year Ended December 31, | % | % of Total Revenue | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Increase | 2021 | 2020 | ||||||||||||
| United States | $ | 133,456,859 | $ | 75,078,562 | 77.8 | % | 51.5 | % | 47.2 | % | ||||||
| China | 46,305,121 | 32,807,976 | 41.1 | % | 17.9 | % | 20.6 | % | ||||||||
| Canada | 30,540,429 | 20,524,371 | 48.8 | % | 11.8 | % | 12.9 | % | ||||||||
| Continental Europe | 19,605,415 | 12,772,441 | 53.5 | % | 7.6 | % | 8.0 | % | ||||||||
| Middle East/Africa | 9,735,838 | 5,167,595 | 88.4 | % | 3.8 | % | 3.3 | % | ||||||||
| United Kingdom | 7,714,395 | 4,716,531 | 63.6 | % | 3.0 | % | 3.0 | % | ||||||||
| Asia Pacific | 7,706,344 | 5,262,733 | 46.4 | % | 2.9 | % | 3.3 | % | ||||||||
| Latin America | 3,787,555 | 2,274,341 | 66.5 | % | 1.4 | % | 1.4 | % | ||||||||
| Other | 411,121 | 319,898 | 28.5 | % | 0.1 | % | 0.3 | % | ||||||||
| Total | $ | 259,263,077 | $ | 158,924,448 | 63.1 | % | 100.0 | % | 100.0 | % |
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Revenue
Product Revenue. Product revenue increased 59.5% during the year ended December 31, 2021 as compared to 2020 and represented 83.8% of our consolidated annual 2021 revenue. Within this category, revenue from our paint protection film product line increased 53.3% as compared to 2020 and represented 65.5% of total revenue for the year ended December 31, 2021. This growth was due mainly to increases in demand for our film products across multiple regions. This increase in demand was driven by both an increase in the number of customers and increased revenue from our existing customers. Our paint protection film products experienced strong growth throughout the year in virtually all operating regions.
Revenue from our window film product line grew 83.1% in the year ended December 31, 2021 and represented 14.8% of our consolidated annual 2021 revenue. This increase was due mainly to increases in demand resulting from continuing channel focus and increased product adoption among our customer base.
Geographically, we experienced growth in all of our regions during the year. The US and Canadian markets are our most mature markets. Our continued strong growth in these markets is being driven primarily by increased paint protection film attachment rates. Outside of these more mature markets, our continued strong growth was driven by increased product awareness and adoption.
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 Company-owned installation centers as well as from our newly acquired PermaPlate Films and TintNet businesses and revenue from training services provided to our customers. During 2021, service revenue grew 85.2% over service revenue for the year ended December 31, 2020.
Within the service revenue category, software revenue increased 25.3% from the year ended December 31, 2020. This increase was due primarily to increases in customers subscribing to our software. Cutbank credit revenue grew 58.9% from the year ended December 31, 2020. This increase was due primarily to the aforementioned increases in demand for our products and services. Installation labor revenue increased 122.0% from the year ended December 31, 2020, due mainly to strong demand in our company-owned installation facilities and our newly acquired PermaPlate Films and TintNet businesses. Training revenue increased 112.3% from the year ended December 31, 2020. This increase was due primarily to heavily restricted training hours and classes in the year ended December 31, 2020 as a result of the COVID-19 pandemic.
Total installation revenue (labor and product combined) at our Company-owned installation centers for the year ended December 31, 2021 increased 122.0% over the year ended December 31, 2020. Excluding the impact from our 2021 acquisitions, total installation revenue grew 36.4%. Adjusted product revenue, which combines the cutbank credit revenue service component with product revenue, increased by 59.4% from the year ended December 31, 2020 due mainly to the same factors described previously.
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 Company-owned facilities, the labor cost associated with our new acquisitions, costs of labor associated with pattern design for our cutting software and the costs incurred to provide training for our customers. Product costs in the year ended December 31, 2021 increased 53.6% over the year ended December 31, 2020 commensurate with the growth in product revenue. Cost of service revenue grew 139.2% during the year ended December 31, 2021. The increase was due primarily to increased labor costs commensurate with increased installation revenue in our company-owned facilities, increased labor cost associated with our 2021 acquisitions and increased labor costs related to headcount growth required in our production facility to meet increased demand.
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Gross Margin
The following table summarizes gross margin for product and services for the years ended December 31, 2021, 2020 and 2019:
| Year Ended December 31, | % Change | % of Category Revenue | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | 2021 vs 2020 | 2020 vs 2019 | 2021 | 2020 | 2019 | ||||||||||||||||||
| Product | $ | 65,996,899 | $ | 37,759,788 | $ | 29,896,483 | 74.8 | % | 26.3 | % | 30.4 | % | 27.7 | % | 26.6 | % | |||||||||
| Service | 26,680,088 | 16,265,221 | 13,609,776 | 64.0 | % | 19.5 | % | 63.6 | % | 71.8 | % | 76.8 | % | ||||||||||||
| Total | $ | 92,676,987 | $ | 54,025,009 | $ | 43,506,259 | 71.5 | % | 24.2 | % | 35.7 | % | 34.0 | % | 33.5 | % |
Product gross margin for the year ended December 31, 2021 increased approximately $28.2 million, or 74.8%, over the year ended December 31, 2020 and represented 30.4% and 27.7% of total product revenue for the years ended December 31, 2021 and 2020, respectively. The increase in product gross margin percentages was primarily due to a lower percentage of sales to lower margin distributors (primarily our China Distributor), favorable changes in product mix and improvements in product costs and operating leverage.
Service gross margin increased approximately $10.4 million for the year ended December 31, 2021, and represented 63.6% and 71.8% of total service revenue for the years ended December 31, 2021 and 2020, respectively. This decrease in service gross margin percentage for was primarily due to an approximate $3.8 million impact from low new car dealership inventories that impacted our on-site business.
Operating Expenses
Sales and marketing expenses for the year ended December 31, 2021 increased 87.5% compared to 2020. These expenses represented 7.0% and 6.1% of consolidated revenue for the years ended December 31, 2021 and 2020, respectively. This increase was primarily attributable to increases in sales and marketing staff and other marketing related expenses incurred to support the ongoing growth of the business including the return to event related activities that were suspended in 2020 due to the pandemic.
General and administrative expenses grew approximately $13.4 million, or 64.0%, during the year ended December 31, 2021. These costs represented 13.2% and 13.2% of total consolidated revenue for the years ended December 31, 2021 and 2020, respectively. The increase was due mainly to increases in personnel, occupancy costs and information technology costs to support the ongoing growth of the business and acquisition related expenses including increased amortization associated with intangible assets acquired during 2021.
Other Expense
Other expense consists of interest expense and foreign currency gain/loss. Interest expense increased during the year in conjunction with increased borrowings on the Company’s credit facility. Foreign currency exchange loss increased during the year due to foreign currency fluctuations in response to various uncertainties in the macroeconomic environment.
Income Tax Expense
Income tax expense for the year ended December 31, 2021 grew 74.1% to $7.87 million. Our effective income tax rates for the years ended December 31, 2021 and 2020 were 20.0% and 19.8%, respectively. The increase in our effective rate was primarily due to an increase in our state effective rate. See Note 14 of the Notes to our Consolidated Financial Statements for further information.
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Net Income
Net income for the year ended December 31, 2021 increased by 72.7% to $31.6 million compared to the prior year due primarily to continued strong revenue growth and improved margins.
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Liquidity and Capital Resources
The primary source of liquidity for our business is cash and cash equivalents and cash flows provided by operations. As of December 31, 2021, we had cash and cash equivalents of $9.6 million. For the year ended December 31, 2021, cash flows provided by operations were $18.3 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 $18.3 million for the year ended December 31, 2021, compared to $18.5 million for the year ended December 31, 2020. The decrease in operating cash flows for the year ended December 31, 2021 was driven primarily by inventory purchases and other changes in working capital. Use of funds in those areas was significantly offset by increases in operating earnings.
Investing activities. Cash flows used in investing activities totaled approximately $56.8 million during the year ended December 31, 2021 compared to cash used of $4.7 million the year ended December 31, 2020. This increase in cash used was due mainly to increased cash outflows pursuant to several acquisitions completed during 2021 as the Company continues investing to support its ongoing growth. See Note 3, Acquisitions of Businesses, of the Notes to our Consolidated Financial Statements for further information with regard to our 2021 acquisitions.
Financing activities. Cash flows provided by financing activities during the year ended December 31, 2021 totaled approximately $19.2 million compared to cash outflows of $4.7 million in the prior year. This increase was due primarily to increases in net borrowings on our credit facilities. Debt obligations, including balances outstanding on committed credit facilities, as of December 31, 2021 and December 31, 2020 totaled approximately $25.5 million and $6.1 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, purchase paint protection film for a minimum of $5,000,000, 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 and for the above referenced unsecured non-interest bearing promissory notes payable and contingent liabilities, and for repayment of 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
As of December 31, 2021, we had a $75 million revolving line of credit agreement with Texas Partners Bank (which does business as the Bank of San Antonio) and a CAD $4.5 million revolving credit facility maintained through HSBC Bank Canada. The Texas Partners Bank facility was established on May 21, 2021 and amended on December 29, 2021 to increase the capacity on the line of credit from its old limit of $57 million to its current $75 million limit. This facility replaced an $8.5 million revolving facility and a $6 million term loan facility through that lender. The outstanding balances on the prior loan agreements were fully repaid by the Company and the agreements were terminated when we entered into the new facility. The facility is utilized to fund our working capital needs and other strategic initiatives and is secured by a
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security interest in substantially all of our current and future assets. Borrowings under the credit agreement bear interest on borrowed amounts at the Wall Street Journal U.S. Prime Rate less 0.75% per annum if the Company's EBITDA ratio (as defined in the facility) is equal to or less than 2.00 to 1.00 or the Wall Street Journal U.S. Prime rate less 0.25% if the Company's EBITDA ratio is greater than 2.00 to 1.00. The interest rate for this credit facility as of December 31, 2021 was 2.50%. The Company paid interest charges on borrowings under this facility of $154,549 during the year ended December 31, 2021. As of December 31, 2021, the Company had borrowed $25 million under this line of credit. This facility matures on July 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. The Company must maintain:
1.Senior Funded Debt divided (as defined in the Loan Agreement) 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.
XPEL Canada Corp., a wholly-owned subsidiary of XPEL, Inc., also has a CAD $4.5 million revolving credit facility through HSBC Bank Canada. This facility is utilized to fund our working capital needs in Canada. This facility bears interest at HSBC Canada Bank’s prime rate plus 0.25% per annum and is guaranteed by the parent company. As of December 31, 2021 and December 31, 2020, 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.
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 excess or obsolete inventories based on
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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.
Income Taxes
We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations , administrative practices, principles and interpretations in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain.
Our effective tax rates could be affected by numerous factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize related tax benefits, the applicability of special tax regimes, changes in foreign currency exchange rates, changes in our stock price, changes to our forecasts of income and loss and the mix of jurisdictions to which they relate, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions. In addition, a number of countries have enacted or are actively pursuing changes to their tax laws applicable to corporate multinationals.
Recently Adopted Accounting Pronouncements and Accounting Pronouncements Net 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.