Perimeter Solutions(PRM) - 2022 Q4 - Annual Report

Explanatory Note — Restatement of Financial Information The company restated Q2 and Q3 2022 financials due to material accounting errors, identifying internal control weaknesses - The company identified two key accounting errors: one related to stock option compensation (Stock Options Error) and another concerning inventory amortization (Inventory Amortization Error)[12] - These errors were deemed material to the Q2 and Q3 2022 financial statements, necessitating a restatement; the errors were immaterial to Q1 2022 and the 2021 period, which will be revised rather than fully restated[12] - Due to the restatement, investors are advised not to rely on previously issued financial statements for the affected periods; this annual report contains the corrected financial information[11] - As a result of these errors, management identified material weaknesses in internal control over financial reporting, concluding that both internal controls and disclosure controls were not effective as of December 31, 2022[12] PART I Business Perimeter Solutions provides fire safety and specialty chemicals, with US-centric revenue and customer concentration - The company operates through two reporting segments: Fire Safety (fire retardants and foams) and Specialty Products (primarily Phosphorus Pentasulfide for lubricant additives)[32] Revenue by Geography (Annual) | Region | Percentage of Revenue (%) | | :--- | :--- | | United States | ~74 | | Europe | ~15 | | Canada | ~5 | | Mexico | ~2 | | Other | ~4 | - The company has significant customer concentration; in fiscal year 2022, the USDA Forest Service and Afton Chemical accounted for 27% and 12% of consolidated revenues, respectively[70] - The Fire Safety segment experiences significant seasonality, with the majority of sales occurring in the second and third quarters, corresponding to the North American fire season[74] - Key market drivers for the Fire Safety business include an increase in acres burned by wildfires, longer fire seasons, and the expansion of the Wildland-Urban Interface (WUI)[48][49] - As of December 31, 2022, the company had 226 full-time employees and 14 temporary, seasonal, or part-time employees; none are represented by a labor union[78] Risk Factors The company faces risks from customer concentration, seasonal demand, PFAS litigation, debt, and internal control weaknesses - A small number of customers represent a significant portion of revenue; sales to the USDA Forest Service and the state of California accounted for approximately 54% of the Fire Safety segment's revenue in fiscal year 2022[89][91][92] - The company is a defendant in a multi-district litigation (MDL) related to Aqueous Film Forming Foam (AFFF) and alleged contamination from PFAS chemicals, facing over 2,000 pending cases[141] - Management has identified material weaknesses in internal control over financial reporting, which could prevent the company from accurately or timely reporting its financial condition[173] - The company has substantial indebtedness, with $675.0 million in Senior Notes outstanding as of December 31, 2022, which may adversely affect cash flow and operational flexibility[127] - The Founder Advisory Agreement requires significant fee payments to the EverArc Founder Entity, which could reduce cash available for operations and dilute existing shareholders through share-based payments[186][188] - Demand for fire retardant products is highly seasonal and dependent on environmental factors outside of the company's control, such as the severity and duration of fire seasons[88] Unresolved Staff Comments None - The company reports no unresolved staff comments[224] Properties The company's principal manufacturing, distribution, and headquarters are across North America, Europe, and Australia, mostly leased - The company's principal manufacturing and service locations are spread across the U.S., Canada, Europe, and Australia; most facilities are leased[226] Key Property Locations by Segment | Location | Segment | Ownership Status | | :--- | :--- | :--- | | Rancho Cucamonga, CA | Fire Safety | Leased | | Green Bay, WI | Fire Safety | Owned | | Mieres, Spain | Fire Safety | Owned | | Knapsack, Germany | Specialty Products | Leased | | Sauget, IL | Specialty Products | Tolling Facility | | Clayton, MO | Corporate HQ | Leased | Legal Proceedings The company is involved in various legal proceedings, including AFFF multi-district litigation, with losses not yet probable or estimable - The company is involved in legal proceedings arising in the ordinary course of business, including the multi-district litigation related to aqueous film forming foam (AFFF)[228] - Management has determined that the exposure to losses from these legal proceedings is not considered probable or reasonably estimable at this time[228] Mine Safety Disclosures Not applicable - This item is not applicable to the company[229] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's ordinary shares trade on the NYSE under 'PRM', with no anticipated cash dividends and a $100.0 million share repurchase plan - The company's Ordinary Shares are traded on the New York Stock Exchange (NYSE) under the symbol "PRM"[232] - The company does not anticipate paying any cash dividends on its Ordinary Shares in the foreseeable future[233] - The Board authorized a Share Repurchase Plan allowing for the repurchase of up to $100.0 million of its Ordinary Shares, with shareholders approving a plan to repurchase up to 25% of outstanding shares over five years[238][302] Share Repurchases for Q4 2022 | Period | Total Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | Oct 2022 | 4,934,376 | $7.55 | | Nov 2022 | 584,144 | $7.58 | | Dec 2022 | — | $— | | Total | 5,518,520 | $7.55 | Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales decreased 1% to $360.5 million in 2022, with net income improving to $91.8 million due to reduced Founder Advisory Fees liability and strong liquidity - The report includes restated and revised financial information for prior periods due to material errors in accounting for stock options and inventory amortization, stemming from material weaknesses in internal controls[256][259] Consolidated Results of Operations (2022 vs. 2021 S/P Combined) | Metric (in thousands) | 2022 | 2021 (S/P Combined) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $360,505 | $362,338 | $(1,833) | (1%) | | Gross profit | $142,652 | $166,492 | $(23,840) | (14%) | | Operating income (loss) | $130,065 | $(600,134) | $730,199 | (122%) | | Net income (loss) | $91,758 | $(661,520) | $753,278 | (114%) | - The significant improvement in operating and net income was primarily driven by a $770.3 million decrease in the fair value liability of the Founder Advisory Fees[274] - Fire Safety segment Adjusted EBITDA decreased by $40.5 million in 2022 due to a mild fire season, while Specialty Products segment Adjusted EBITDA increased by $24.5 million due to higher sales[279][280] - As of Dec 31, 2022, liquidity sources include $126.8 million in cash, an undrawn $100.0 million Revolving Credit Facility, and $675.0 million in Senior Notes[293][298][311] - Critical accounting policies include goodwill impairment (no impairment found in the Oct 1, 2022 test), business combinations, income taxes, and share-based compensation[322][330][335][338] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency, interest rate changes on its variable-rate credit facility, and commodity price volatility - The company is exposed to foreign currency exchange risk from sales and operations in Europe, Canada, and Australia[345] - Interest rate risk is primarily associated with the variable-rate Revolving Credit Facility, while the $675.0 million Senior Notes have a fixed 5.00% interest rate[346][347] - The company faces commodity price risk, as fluctuations in raw material costs may not be immediately passable to customers, potentially compressing margins[349] - The business is subject to inflationary pressures on raw materials, labor, and transportation, which it attempts to mitigate through contractual clauses and supplier negotiations[351] Financial Statements and Supplementary Data This section presents audited consolidated financial statements, with an unqualified opinion on financials but an adverse opinion on internal controls due to material weaknesses - The independent auditor, BDO USA, LLP, issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2022, due to material weaknesses[356][369] Key Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $126,750 | $225,554 | | Total Assets | $2,456,616 | $2,578,383 | | Long-term debt | $665,280 | $664,128 | | Total Liabilities | $1,317,716 | $1,496,765 | | Total Shareholders' Equity | $1,138,900 | $1,081,618 | Key Consolidated Statement of Operations Data (in thousands) | Account | Year Ended Dec 31, 2022 | | :--- | :--- | | Net sales | $360,505 | | Gross profit | $142,652 | | Operating income | $130,065 | | Net income | $91,758 | | Diluted EPS | $0.52 | - Note 18 provides a detailed breakdown of the restatement's impact on quarterly financial statements for June and September 2022, and revisions to March 2022 and the 2021 period, resulting from accounting errors for stock options and inventory[597][598] - As of December 31, 2022, goodwill was $1.03 billion, with $860.3 million allocated to the Fire Safety segment and $171.1 million to the Specialty Products segment[479] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None - The company reports no changes in or disagreements with its accountants on accounting and financial disclosure[625] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were ineffective due to material weaknesses - Management concluded that the company's disclosure controls and procedures were ineffective as of December 31, 2022[626] - A material weakness was identified related to the failure to design and implement precise review controls for accounting for performance-based stock options (ASC 718)[629] - Material weaknesses previously reported in the 2021 Annual Report related to complex accounting areas (business combinations, goodwill impairment) and cash flow statement presentation continue to exist[630] - Remediation efforts include enhancing the precision of review controls, improving oversight, and engaging outside resources to help design and implement a system of risk-based internal controls[631] Other Information None - The company reports no other information under this item[633] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable - This item is not applicable to the company[634] PART III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's 2023 Proxy Statement - Information regarding directors, executive officers, and corporate governance will be provided in the forthcoming 2023 Proxy Statement[636] Executive Compensation Information for this item is incorporated by reference from the company's 2023 Proxy Statement - Information regarding executive compensation will be provided in the forthcoming 2023 Proxy Statement[637] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's 2023 Proxy Statement - Information regarding security ownership will be provided in the forthcoming 2023 Proxy Statement[638] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's 2023 Proxy Statement - Information regarding certain relationships, related transactions, and director independence will be provided in the forthcoming 2023 Proxy Statement[639] Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's 2023 Proxy Statement - Information regarding principal accounting fees and services will be provided in the forthcoming 2023 Proxy Statement[640] PART IV Exhibits, Financial Statement Schedules This section lists the financial statements and various exhibits filed with the report, noting the omission of schedules as not applicable - This item lists the financial statements, schedules, and exhibits filed with the Form 10-K[643] Form 10-K Summary None - The company has not provided a summary under this item[644]