Perimeter Solutions(US:PRM)2024-02-22 15:56PART I Item 1. Business PSSA is a global provider of fire safety and specialty products, with operations worldwide and key market drivers including increasing wildfire severity and the industry shift to fluorine-free foams - PSSA is a global solutions provider for the fire safety and specialty products industries, with approximately 65% of annual revenues derived in the United States, 15% in Europe, and 14% in Canada24381 - The Fire Safety segment provides fire retardants, firefighting foams, specialized equipment, and services to combat various types of fires, serving government agencies and commercial customers globally2426283237382 - The Specialty Products segment produces Phosphorus Pentasulfide (P2S5) primarily for lubricant additives (ZDDP) and emerging electric battery technologies2440383 - Key market drivers for Fire Safety include increasing acres burned (10-year average from 3.3 million acres in 1997 to 7.0 million in 2023), longer fire seasons (105 days longer than in 1970), and Wildland-Urban Interface expansion424344 - The company is an innovation leader in fire retardants (Phos-Chek Fx, Fortify) and fluorine-free firefighting foam (FFF) formulations, aiding the industry transition away from PFAS303649 - As of December 31, 2023, the company had 219 full-time employees and 9 temporary/seasonal/part-time employees worldwide, maintaining satisfactory employee relations757677787981 Item 1A. Risk Factors The company faces significant risks including demand volatility, customer concentration, supply chain disruptions, product liability, environmental regulations, and substantial indebtedness - Demand for fire retardant products depends on seasonal fire activity, while Specialty Products (P2S5) demand may decline with electric vehicle adoption, impacting financial results84 - Sales to the USDA Forest Service and the state of California represent approximately 36% of the Fire Safety segment's revenue, indicating significant customer concentration risk8788 - The company is exposed to risks from increased raw material costs, supply shortages, and long lead times, particularly for phosphorus, which can reduce profit margins100101 - Heightened liability and reputational risks exist due to fire safety products used by emergency services and potential product liability claims related to adverse health consequences from some products, including PFAS135136137 - The company is a defendant in multi-district litigation (MDL) related to aqueous film-forming foam (AFFF) containing PFAS chemicals, with over 6,000 cases alleging various damages140 - Operating as a public company strains resources, diverts management attention, and incurs substantial compliance costs; material weaknesses in internal control were remediated as of December 31, 2023, but future failures could impact financial reporting167170171611 - Substantial indebtedness ($675.0 million in senior notes outstanding as of December 31, 2023) may adversely affect cash flow, limit operational flexibility, and increase vulnerability to adverse economic conditions126127 Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments219 Item 1C. Cybersecurity The company integrates cybersecurity risk management into its overall strategy, with Audit Committee oversight and CIO leadership, identifying no material threats in 2023 - The company has integrated processes for assessing, identifying, and managing material cybersecurity risks into its overall risk management strategy220 - The Audit Committee oversees cybersecurity risk management, and the Chief Information Officer (CIO) manages the information security program, providing periodic reports to the Board223224225 - In 2023, no cybersecurity threats were identified that materially affected or are reasonably likely to materially affect the company's business strategy, results of operations, or financial condition222 Item 2. Properties The company's principal manufacturing, distribution, and equipment service locations are across North America, Europe, and Australia, with most facilities leased and a few owned or operating as tolling facilities Principal Manufacturing, Distribution, and Equipment Service Locations | Location | Fire Safety | Specialty Products | | :-------------------------------- | :---------- | :----------------- | | Rancho Cucamonga, California | X | | | McClellan Park, California | X | | | Kamloops, British Columbia, Canada | X | | | Sturgeon County, Alberta, Canada | X | | | Aix-En-Provence, France | X | | | New South Wales, Australia | X | | | Green Bay, Wisconsin* | X | | | Mieres, Spain* | X | | | Post Falls, Idaho | X | | | Moreland, Idaho | X | | | Knapsack, Germany | | X | | Sauget, Illinois† | | X | | Clayton, Missouri (Corporate Headquarters) | | | | Luxembourg, Grand Duchy of Luxembourg (Executive Headquarters) | | | - Most facilities are leased, with Green Bay, Wisconsin, and Mieres, Spain, being owned, and Sauget, Illinois, operating as a tolling facility227 Item 3. Legal Proceedings The company is involved in various legal proceedings, including multi-district litigation related to AFFF, with potential material losses currently not considered probable or reasonably estimable - The company is involved in various claims, actions, and legal proceedings, including multi-district litigation related to aqueous film-forming foam (AFFF)228525 - The company's exposure to material losses from these legal proceedings is not considered probable or reasonably estimable at this time228525 Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable229 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Perimeter Solutions' Ordinary Shares trade on the NYSE under 'PRM', with no anticipated cash dividends, and the Board authorized a share repurchase plan, repurchasing 6,333,293 shares in Q4 2023 - Ordinary Shares are traded on the NYSE under the symbol 'PRM'; as of February 16, 2024, the closing price was $5.72 per share, with 32 shareholders of record5232 - The company does not expect to pay any cash dividends on its Ordinary Shares in the foreseeable future, retaining cash for operational and other needs233 Issuer Purchases of Equity Securities (Q4 2023) | Period | Total Shares Purchased | Average Price Paid per Share | Total Shares Purchased as Part of Publicly Announced Plans | Maximum Shares That May Yet Be Purchased Under the Plan | | :-------------------------------- | :--------------------- | :--------------------------- | :-------------------------------------------------------- | :------------------------------------------------------- | | October 1, 2023 - October 31, 2023 | — | $ — | — | 28,974,873 | | November 1, 2023 - November 30, 2023 | 2,772,903 | $ 4.06 | 2,772,903 | 26,201,970 | | December 1, 2023 - December 31, 2023 | 3,560,390 | $ 4.34 | 3,560,390 | 22,641,580 | | Total | 6,333,293 | $ 4.21 | 6,333,293 | | - The Board re-established the limit for Ordinary Share repurchases at $100.0 million on February 21, 2024, within the 25% outstanding shares limit approved by shareholders on July 21, 2022237533 Item 6. Reserved This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations PSSA reported an 11% net sales decrease to $322.1 million and a 26% net income decrease to $67.5 million in 2023, while maintaining liquidity and remediating internal control weaknesses - PSSA is a global solutions provider of high-quality firefighting products and lubricant additives, with operations across the globe and organized into Fire Safety and Specialty Products segments242243244 - The Fire Safety segment benefits from secular growth drivers like increasing fire severity, longer fire seasons, and a growing wildland urban interface, leading to increased demand for fire retardant products246 - The global economy and labor markets have experienced significant inflationary pressures, which the company mitigates through purchase aggregation, cost-reduction negotiations, and identifying cost-competitive suppliers250 - The company performs annual goodwill impairment tests, with an interim quantitative test as of September 30, 2023, showing fair value exceeding carrying value for both Fire Safety (5.9%) and Specialty Products (15.3%) reporting units, resulting in no goodwill impairment259260261 - An impairment of $40.7 million was recorded in 2023 for a technology asset related to a contingent earn-out eligible fire retardant product due to a downward revision in its revenue forecast266 - The company's existing cash and cash equivalents ($47.3 million as of December 31, 2023), net cash flows from operations, and available Revolving Credit Facility are expected to be sufficient for current capital expenditures, working capital, founder advisory fee payments, and debt service for at least 12 months301 Results of Operations (Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022) Consolidated results for 2023 show an 11% decrease in net sales to $322.1 million and a 26% decrease in net income to $67.5 million, driven by lower sales and increased intangible impairment Consolidated Results of Operations (in thousands) | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | Change ($) | Change (%) | | :-------------------------------------- | :---------------------- | :---------------------- | :--------- | :--------- | | Net sales | $322,108 | $360,505 | $(38,397) | (11%) | | Cost of goods sold | $183,253 | $217,853 | $(34,600) | (16%) | | Gross profit | $138,855 | $142,652 | $(3,797) | (3%) | | Total operating expenses | $44,405 | $12,587 | $31,818 | 253% | | Operating income | $94,450 | $130,065 | $(35,615) | (27%) | | Total other expense, net | $32,867 | $32,838 | $29 | —% | | Income before income taxes | $61,583 | $97,227 | $(35,644) | (37%) | | Income tax benefit (expense) | $5,903 | $(5,469) | $11,372 | (208%) | | Net income | $67,486 | $91,758 | $(24,272) | (26%) | - Net sales decreased by $38.4 million (11%) YoY, driven by a $1.0 million decrease in Fire Safety (lower fire retardant sales offset by increased fire suppressant sales) and a $37.4 million decrease in Specialty Products due to inventory destocking267 - Cost of goods sold decreased by $34.6 million (16%) YoY, primarily due to a $24.8 million decrease in amortization of inventory step-up in Fire Safety and a $9.9 million decrease in raw material and manufacturing costs in Specialty Products268270 - Selling, general and administrative expense decreased by $17.2 million (23%) YoY, mainly due to an $11.8 million decrease in personnel-related and share-based compensation expenses271 - Founder advisory fees (related party) decreased by $108.5 million in 2023, primarily due to a reduction in the average price per Ordinary Share from $8.86 (2022) to $4.51 (2023)272 - Intangible impairment increased by $40.7 million in 2023 due to an impairment on the technology underlying a contingent earn-out eligible fire retardant product273 - Income tax shifted from an expense of $5.5 million in 2022 to a benefit of $5.9 million in 2023, an increase of $11.4 million, primarily due to changes in earnings in jurisdictions not covered by a valuation allowance277 Business Segments (Net Sales and Adjusted EBITDA) Fire Safety net sales remained stable at $225.6 million, while Specialty Products net sales decreased to $96.6 million, leading to a significant $27.5 million decrease in Specialty Products Adjusted EBITDA Segment Net Sales (in thousands) | Segment | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :-------------- | :---------------------- | :---------------------- | | Fire Safety | $225,554 | $226,583 | | Specialty Products | $96,554 | $133,922 | Segment Adjusted EBITDA (in thousands) | Segment | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :-------------- | :---------------------- | :---------------------- | | Fire Safety | $76,214 | $77,365 | | Specialty Products | $20,573 | $48,026 | - Fire Safety Adjusted EBITDA decreased by $1.2 million, while Specialty Products Adjusted EBITDA decreased significantly by $27.5 million, both primarily due to lower sales, partially offset by lower cost of goods sold and operating expenses279280 Liquidity and Capital Resources The company's liquidity is primarily funded by cash flows, a $100.0 million revolving credit facility, and $675.0 million in senior notes, with $64.1 million used for share repurchases in 2023 - The company's liquidity is primarily funded by cash flows from operations, a $100.0 million revolving credit facility (maturing November 9, 2026), and $675.0 million in 5.00% senior notes due October 30, 2029282284289 - As of December 31, 2023, there were no outstanding borrowings under the Revolving Credit Facility, and the company was in compliance with all covenants288501 - The company repurchased 12,178,454 Ordinary Shares for $64.1 million in 2023 under its Share Repurchase Plan, which has a re-established limit of $100.0 million294533534 - Founder advisory fees payable to EverArc Founder Entity amounted to $113.8 million as of December 31, 2023, with $10.6 million (2,357,061 Ordinary Shares) for the Fixed Annual Advisory Amount in 2023, settled 74.6% in shares and 25.4% in cash298299575576 Sources and Uses of Cash (in thousands) | Activity | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :------------------------------------ | :---------------------- | :---------------------- | | Operating activities | $193 | $(40,172) | | Investing activities | $(14,894) | $(10,251) | | Financing activities | $(64,453) | $(48,812) | | Effect of foreign currency on cash | $(320) | $431 | | Net change in cash and cash equivalents | $(79,474) | $(98,804) | - Cash provided by operating activities improved from $(40.2) million in 2022 to $0.2 million in 2023, primarily due to a $48.9 million reduction in founder advisory fee payments and a $50.7 million reduction in inventory, accounts receivable, and other current assets303 - Cash used in investing activities increased to $14.9 million in 2023, including $9.4 million for property and equipment and $5.5 million in short-term certificate of deposits305 - Cash used in financing activities increased to $64.5 million in 2023, mainly due to $64.1 million for Ordinary Share repurchases306 Critical Accounting Estimates and Policies Critical accounting estimates involve fair value assessments for business combinations, goodwill impairment, inventory, stock options, and deferred tax assets, requiring significant judgment in valuation and recoverability - Critical accounting estimates include the fair value of business combination assets/liabilities, useful lives of long-lived assets, inventory valuations, goodwill impairment, stock options, founder advisory fees, contingent earn-out liability, and realizability of deferred tax assets308 - Goodwill is assessed for impairment annually or more frequently if triggering events occur, using qualitative or quantitative approaches involving significant judgment in estimating future cash flows, discount rates, and market multiples309310311313314315316317318 - Long-lived assets are evaluated for impairment when circumstances indicate carrying amounts may not be recoverable, comparing carrying value to undiscounted future cash flows320321 - Income taxes are computed using the asset-and-liability method, recognizing deferred tax assets/liabilities for temporary differences and establishing valuation allowances if realization is not probable322323 - Share-based compensation for performance-based non-qualified stock options (PBNQSO) is recognized based on estimated fair value using Black-Scholes or Hull-White models, with assumptions about volatility, risk-free rates, and expected term325327328 - Business combinations are accounted for using the acquisition method, recognizing acquired assets and assumed liabilities at fair value, requiring significant estimates for inventory, property, intangible assets, and contingent consideration332333 Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency, interest rate, and commodity price fluctuations, mitigating inflationary pressures through contractual clauses and negotiations - The company is exposed to market risk from changes in foreign currency exchange rates, short-term interest rates, and price fluctuations of certain material commodities336 - Foreign currency exchange risks arise from sales to foreign customers, purchases from foreign suppliers, foreign plant operations, and intercompany indebtedness, with exposures to Euro, Canadian dollar, Norwegian krone, and Australian dollar337 - Interest rate risk primarily relates to borrowings under the Revolving Credit Facility, which bear variable interest rates, though no borrowings were outstanding as of December 31, 2023338 - The 6.50% Redeemable Preferred Shares are mandatorily redeemable and their dividend rate increases if not redeemed timely, exposing the company to interest rate risk339 - Commodity price risk impacts realized margins, especially for raw materials like phosphorus, where price increases may not be fully or immediately passed on to customers340 - Inflationary pressures on raw materials, labor, and transportation are mitigated through contractual price escalation clauses, negotiated customer recoveries, and supplier negotiations341 Item 8. Financial Statements and Supplementary Data This section presents audited consolidated financial statements, with BDO USA, P.C. issuing an unqualified opinion on both financial statements and internal controls, highlighting critical audit matters like option vesting and goodwill impairment - BDO USA, P.C. issued an unqualified opinion on the consolidated financial statements for December 31, 2023 and 2022, and the periods in 2021, in conformity with U.S. GAAP346 - BDO USA, P.C. also expressed an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023347360 - Critical audit matters included the assessment of the probability of achieving vesting performance criteria for option awards and the goodwill impairment assessment for the Fire Safety and Specialty Products reporting units, due to significant judgment involved in evaluating assumptions352354355356 Consolidated Balance Sheets (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :-------------------------------------- | :----------- | :----------- | | Total current assets | $251,014 | $308,522 | | Property, plant and equipment, net | $59,402 | $58,846 | | Goodwill | $1,036,279 | $1,031,460 | | Customer lists, net | $674,786 | $710,329 | | Technology and patents, net | $180,653 | $232,818 | | Tradenames, net | $89,568 | $94,293 | | Total assets | $2,315,422 | $2,456,616 | | Total current liabilities | $55,051 | $74,154 | | Long-term debt, net | $666,494 | $665,280 | | Deferred income taxes | $253,454 | $278,270 | | Founders advisory fees payable - related party (non-current) | $56,917 | $170,718 | | Redeemable preferred shares | $105,799 | $101,279 | | Total liabilities | $1,163,127 | $1,317,716 | | Total shareholders' equity | $1,152,295 | $1,138,900 | Consolidated Statements of Operations and Comprehensive Income (Loss) (in thousands) | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | Nov 9 - Dec 31, 2021 (Successor) | Jan 1 - Nov 8, 2021 (Predecessor) | | :-------------------------------------- | :---------------------- | :---------------------- | :------------------------------- | :-------------------------------- | | Net sales | $322,108 | $360,505 | $21,023 | $341,315 | | Gross profit | $138,855 | $142,652 | $(2,687) | $169,179 | | Operating income (loss) | $94,450 | $130,065 | $(680,755) | $80,621 | | Net income (loss) | $67,486 | $91,758 | $(682,149) | $20,629 | | Basic EPS | $0.44 | $0.57 | $(4.34) | $0.39 | | Diluted EPS | $0.41 | $0.52 | $(4.34) | $0.39 | Consolidated Statements of Cash Flows (in thousands) | Activity | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | Nov 9 - Dec 31, 2021 (Successor) | Jan 1 - Nov 8, 2021 (Predecessor) | | :------------------------------------ | :---------------------- | :---------------------- | :------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $193 | $(40,172) | $4,359 | $67,991 | | Net cash used in investing activities | $(14,894) | $(10,251) | $(1,210,623) | $(15,746) | | Net cash used in financing activities | $(64,453) | $(48,812) | $(697,221) | $(64,210) | | Net change in cash and cash equivalents | $(79,474) | $(98,804) | $(1,904,223) | $(11,530) | | Cash and cash equivalents, end of period | $47,276 | $126,750 | $225,554 | $10,948 | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There are no changes in or disagreements with accountants on accounting and financial disclosure to report - No changes in or disagreements with accountants on accounting and financial disclosure607 Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with previously reported material weaknesses now remediated - The company's disclosure controls and procedures were effective as of December 31, 2023608 - Management concluded that internal control over financial reporting was effective as of December 31, 2023609 - Previously identified material weaknesses in internal control over financial reporting, related to review controls over performance-based stock accounting, complex accounting areas (business combinations, goodwill impairment), and cash flow statement presentation, have been remediated as of December 31, 2023611 Item 9B. Other Information CEO Haitham Khouri entered into a 10b5-1 sales plan on June 9, 2023, to sell up to 600,000 Ordinary Shares by March 24, 2024 - Haitham Khouri, CEO and Director, entered into a 10b5-1 sales plan on June 9, 2023, to sell up to 600,000 Ordinary Shares by March 24, 2024613 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable614 PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance will be provided in the company's definitive proxy statement for its 2024 annual meeting of shareholders - Information on directors, executive officers, and corporate governance will be incorporated by reference from the 2024 annual meeting proxy statement617 Item 11. Executive Compensation Details on executive compensation will be disclosed in the company's definitive proxy statement for its 2024 annual meeting of shareholders - Executive compensation information will be incorporated by reference from the 2024 annual meeting proxy statement618 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning security ownership of beneficial owners, management, and related stockholder matters will be provided in the company's definitive proxy statement for its 2024 annual meeting of shareholders - Security ownership information will be incorporated by reference from the 2024 annual meeting proxy statement619 Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence will be disclosed in the company's definitive proxy statement for its 2024 annual meeting of shareholders - Information on certain relationships, related transactions, and director independence will be incorporated by reference from the 2024 annual meeting proxy statement620 Item 14. Principal Accounting Fees and Services Details on principal accounting fees and services will be provided in the company's definitive proxy statement for its 2024 annual meeting of shareholders - Principal accounting fees and services information will be incorporated by reference from the 2024 annual meeting proxy statement621 PART IV Item 15. Exhibits, Financial Statement Schedules This section lists all exhibits and financial statement schedules filed as part of the 10-K report, including consolidated financial statements, auditor's reports, and a detailed index of incorporated exhibits - The consolidated financial statements and related notes, along with the independent auditor's report, are included in Part II, Item 8626 - Financial statement schedules are omitted as they are either not required, not applicable, or the information is already included in the consolidated financial statements and notes626 - A detailed index of exhibits is provided, including the Business Combination Agreement, Articles of Association, Warrant Instrument, Indenture, Advisory Services Agreement, Employment Agreements, Equity Incentive Plan, Credit Agreement, and various certifications628630 Item 16. Form 10-K Summary This item indicates that no Form 10-K Summary is provided - No Form 10-K Summary is provided625