The following discussion and analysis should be read in conjunction with the
audited consolidated financial statements and notes thereto included in this
Annual Report. This Annual Report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of
the Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, such statements are subject to the "safe harbor"
created by those sections and involve risks and uncertainties. Forward-looking
statements are based on our management's beliefs and assumptions and on
information available to our management as of the date hereof. As a result of
many factors, such as those set forth under Part I, Item 1A "Risk Factors" in
this Annual Report, our actual results may differ materially from those
anticipated in these forward-looking statements, accordingly, you should not
place undue reliance on these forward-looking statements. Except as required by
law, we assume no obligation to update these forward-looking statements
publicly, or to update the reasons actual results could differ materially from
those anticipated in these forward-looking statements, even if new information
becomes available in the future.
Overview
PSSA, a public company limited by shares (société anonyme) was incorporated on
June 21, 2021 under the laws of the Grand Duchy of Luxembourg for the purpose of
effecting a business combination. PSSA is headquartered in the Grand Duchy of
Luxembourg with global operations in North America, Europe, and Asia Pacific.On November 8, 2019, EverArc was formed for the purpose of undertaking an
acquisition of one target company or business. EverArc completed its initial
public offering on December 17, 2019 by placing 34,000,000 EverArc Ordinary
Shares and accompanying EverArc Warrants and completed an additional offering on
January 15, 2020 by issuing 6,800,000 EverArc Ordinary Shares with no
accompanying EverArc Warrants, generating net proceeds of $401.0 million. The
net proceeds were not placed in any trust or escrow account but were instead
held in U.S. Treasuries or money market fund instruments to be used to fund an
initial business combination. EverArc Ordinary Shares and EverArc Warrants were
listed for trading on the London Stock Exchange under the symbols "EVRA," and
"EVWA," respectively.Merger Sub was also formed solely in contemplation of a business combination.
Neither EverArc nor Merger Sub had commenced any operations, had only nominal
assets and had no liabilities or contingent liabilities, nor any outstanding
commitments other than those in connection with contemplated business
combination.
On the Closing Date, PSSA completed the operations contemplated by the
Business combination with EverArc, SK Holdings, Perimeter Solutions and Merger
Pursuant to the business combination agreement dated June 15, 2021.
Pursuant to the business combination agreement,
• November 8, 2021:
• Merger Sub merged with and into EverArc, and EverArc survived the Merger as a
direct wholly owned subsidiary of PSSA;
•pursuant to the Merger, 155,832,600 EverArc common shares outstanding
immediately prior to the Merger were exchanged for common shares; i
•34,020,000 outstanding EverArc warrants, in each case, with each warrant in full
entitling its holder to purchase one quarter of an EverArc Ordinary
Stock at an exercise price of $12.00 per share of EverArc common stock
converted into the right to purchase warrants; i
On November 8, 2021, EverArc Ordinary Shares and EverArc Warrants were formally
delisted from the London Stock Exchange and pursuant to the Subscription
Agreements the EverArc Subscribers purchased an aggregate of 115,000,000 EverArc
Ordinary Shares at $10.00 per share that were converted into Ordinary Shares
pursuant to the Merger.•On November 9, 2021:
•SK Holdings (i) along with officers and certain key employees of SK
Intermediate contributed a portion of their ordinary shares in SK Intermediate
to PSSA in exchange for 10 million 6.50% Redeemable Preferred Shares of PSSA
("Redeemable Preferred Shares"), nominal value of $10.00 per share, valued at
$100.0 million and (ii) sold its remaining ordinary shares in SK Intermediate
for approximately $1,900.0 million in cash subject to certain customary
adjustments for working capital, transaction expenses, cash and indebtedness;
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•the Common Shares were listed and began trading on the NYSE under the symbol
“PRM”;
•the Management Subscribers have been granted a total of 1,104,810 Ordinary Shares
Stock at $10.00 per share as consideration and the directors’ subscribers
purchased a total of 200,000 shares of common stock at $10.00 per share; i
•$675.0 million Senior Notes issued by EverArc Escrow S.à r.l. ("Escrow
Issuer"), a newly-formed limited liability company governed by the laws of the
Grand Duchy of Luxembourg and a wholly owned subsidiary of EverArc under an
indenture dated as of October 22, 2021 was assumed by SK Invictus Intermediate
II S.à r.l., a société à responsabilité limitée (limited liability company)
governed by the laws of the Grand Duchy of Luxembourg ("SK Intermediate II.")The cash consideration for the Business Combination was funded through cash on
hand, proceeds from the sale of the EverArc Ordinary Shares to the EverArc
Subscribers, proceeds from the issuance of Senior Notes and borrowings under our
revolving credit facility.In connection with the Business Combination, the Merger was accounted for as a
common control transaction, where substantially all of the net assets of PSSA
will be those previously held by EverArc. Upon the acquisition of SK
Intermediate, PSSA was determined to be the Successor and SK Intermediate was
deemed to be the Predecessor. The business combination with SK Intermediate was
accounted for using the acquisition method of accounting and the Successor
financial statements reflect a new basis of accounting based on the fair value
of the net assets acquired. As a result of the application of the acquisition
method of accounting, our consolidated financial statements and certain
presentations are separated into two distinct periods to indicate the different
ownership and accounting basis between the periods presented, the period before
the consummation of the Business Combination, which includes the period from
January 1, 2021 to November 8, 2021 (the "2021 Predecessor Period") and the year
ended December 31, 2020 (the "2020 Predecessor Period"); and the period on and
after the consummation of the Business Combination, from the Closing Date to
December 31, 2021 (the "2021 Successor Period").
SK Intermediate was formed by SK Capital Partners IV-A, LP and SK Capital
Partners IV-A, LP (collectively, the “Sponsor”) on February 12, 2018 and
started operations on the same date.
We are a global solutions provider, producing high-quality firefighting products
and lubricant additives. Approximately 74% of our annual revenues is derived in
the United States, approximately 15% in Europe, approximately 5% in Canada and
approximately 2% in Mexico, respectively, and remaining approximately 4% across
various other countries.
Our business is organized and managed in two reporting segments: Fire Safety and
Special products (formerly Oil Additives).
The Fire Safety business is a formulator and manufacturer of fire management
products that help our customers combat various types of fires, including
wildland, structural, flammable liquids and other types of fires. Our Fire
Safety business also offers specialized equipment and services, typically in
conjunction with our fire management products to support firefighting
operations. Our specialized equipment includes air base retardant storage,
mixing, and delivery equipment; mobile retardant bases; retardant ground
application units; mobile foam equipment; and equipment that we custom design
and manufacture to meet specific customer needs. Our service network can meet
the emergency resupply needs of over 150 air tanker bases in North America, as
well as many other customer locations globally. The segment is built on the
premise of superior technology, exceptional responsiveness to our customers'
needs, and a "never-fail" service network. Significant end markets include
primarily government-related entities and are dependent on approvals,
qualifications, and permits granted by the respective governments and commercial
customers around the world.In June 2022, the Oil Additives segment, which produces and sells P2S5, was
renamed the Specialty Products segment to better reflect the current and
expanding applications for P2S5 in several end markets and applications,
including lubricant additives, various agricultural applications, various mining
applications, and emerging electric battery technologies. Within the lubricant
additive end market, currently the Company's largest end market application,
P2S5 is primarily used in the production of a family of compounds called ZDDP,
which is considered an essential component in the formulation of engine oils
with its main function to provide anti-wear protection to engine components. In
addition, ZDDP inhibits oxidation of engine oil by scavenging free radicals that
initiate oil breakdown and sludge formation, resulting in better and longer
engine function. P2S5 is also used in pesticide and mining chemicals
applications. We offer several grades of P2S5 with varying degrees of phosphorus
content, particle size, distribution, and reactivity to global customers.
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During the third quarter of 2022, we completed a re-organization into seven
business units within our two reporting segments. The business unit structure is
meant to promote the decentralized execution and accountability, and maintain
the geography- and product-specific focus and granularity, necessary to drive
continued improvement in our key operational value drivers. Our key operational
value drivers are profitable new business, pricing our products and services to
the value they provide, and continued productivity improvements. Each business
unit has a business unit manager, who is responsible for achieving targeted
financial and operational results.
Reformulation and review of previously issued financial statements
In relation to the preparation of this annual report, we have determined that:
•the technical requirements under ASC 718 for establishing a grant date on the
date when the PBNQSO were awarded to employees and non-employees were not met
since a mutual understanding of the terms and conditions did not exist as our
compensation committee has the ability to adjust, at its discretion, how AOP
against the performance target will be measured. Consequently, the service
inception date of these PBNQSO precedes the grant date and we should have
recognized compensation expense beginning on the service inception date and
remeasured the fair value of the PBNQSO at the end of each reporting period
until a grant date is established. Under the previously applied accounting
treatment, we recorded compensation costs based on the grant date fair value
calculated using the Black-Scholes option-pricing model (the "Stock Options
Error"); and•the amortization of the step-up in basis of inventory, which is a non-cash
adjustment to inventory cost established at the time of Business Combination was
understated during the period from November 9, 2021 through December 31, 2021
(the "Inventory Amortization Error").Management evaluated the effect of the Stock Options Error and the Inventory
Amortization Error on our previously issued consolidated financial statements
under ASC 250, "Accounting Changes and Error Corrections", Staff Accounting
Bulletin No. 99, "Materiality", and Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" and concluded that:•the Stock Options Error and the Inventory Amortization Error were material to
the previously issued September 2022 Quarter and June 2022 Quarter, and, as a
result, such unaudited financial statements should be restated;•Stock Options Error and the Inventory Amortization Error were immaterial to the
previously issued March 2022 Quarter, and, as a result, such unaudited financial
statements should be revised.
•The inventory amortization error was not material for the previously issued December
Period 2021 and therefore these financial statements should be revised.
This Annual Report includes (1) unaudited condensed consolidated financial
statements for the September 2022 Quarter and the June 2022 Quarter with
modifications as necessary to reflect the restatement, (2) unaudited condensed
consolidated financial statements for the March 2022 Quarter with modifications
as necessary to reflect revisions for correcting immaterial errors and (3)
consolidated financial statements for the December 2021 Period with
modifications as necessary to reflect revisions for correcting an immaterial
error to the following items: Part I, Item 1A. Risk Factors, Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Part II, Item 8. Financial Statements and Supplementary Data and
Part II, Item 9A. Controls and Procedures.We do not plan to amend previously issued September 2022 Quarter and June 2022
Quarter quarterly reports in connection with the restatement. Accordingly,
investors should no longer rely upon our previously released financial
statements and any earnings releases or other financial communications relating
to this period. The condensed consolidated financial statements that have been
previously filed or otherwise reported for this period are superseded by the
information in this Annual Report. Unless otherwise stated, all financial and
accounting information contained in this Annual Report has been revised to
reflect the corrected presentation.In connection with the restatement, management has assessed the effectiveness of
internal control over financial reporting. Based on this assessment, management
identified material weaknesses in our internal control over financial reporting,
resulting in the conclusion by our Chief Executive Officer and Chief Financial
Officer that our internal control
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over financial reporting and our disclosure controls and procedures were not
effective as of December 31, 2022. Management is taking steps to remediate the
material weaknesses in our internal control over financial reporting, as
described in Part II, Item 9A, "Controls and Procedures."
Known trends and uncertainties
Increased fire safety
We believe that our Fire Safety segment benefits from several secular growth
drivers, including increasing fire severity, as measured by higher acres burned,
longer fire seasons and a growing wildland urban interface resulting in a need
for higher quantity of retardant use per acre and thereby increasing airtanker
capacity. We believe that these trends are prevalent in North America, as well
as globally.We are also attempting to grow our fire prevention and protection business,
which is primarily focused on high hazard industries like electrical utilities,
railroads and transportation agencies. Fire prevention products can be used to
prevent fire ignitions and protect property from potential fire danger by
providing proactive retardant treatment in high-risk areas. Treating these areas
ahead of the fire season can potentially stop ignitions from equipment failures
or sparks. Our new Phos-Chek Fortify product, applied before or early in the
fire season, can provide long-term protection until a significant rainfall
event. In addition, Phos-Chek Fortify can proactively be applied to protect high
value assets and critical infrastructure from the danger of wildfire.We expect these trends to continue in 2023 and beyond and drive growth in demand
for fire retardant products. We have invested and also intend to continue
investing in the expansion our fire safety business through acquisitions in
order to further grow our global customer base. Acquisitions and divestitures
during the most recent two fiscal years are described in Note 3, "Business
Acquisitions," in the notes to the consolidated financial statements included in
this Annual Report.
Weather conditions and climate trends
Our business is highly dependent on the needs of government agencies to suppress
fires. As such, our financial condition and results of operations are
significantly impacted by weather as well as environmental and other factors
affecting climate change, which impact the number and severity of fires in any
given year. Historically, sales of our products have been higher in the summer
season of each fiscal year due to weather patterns which are generally
correlated to a higher prevalence of wildfires. This is in part offset by the
disbursement of our operations in both the northern and southern hemispheres,
where the summer seasons alternate.
Global Economic Environment
The Russian invasion of Ukraine
In February 2022, Russia invaded Ukraine. While we have limited exposure in
Russia and Ukraine, we continue to monitor any broader impact to the global
economy, including with respect to inflation, supply chains and fuel prices. The
full impact of the conflict on our business and financial results remains
uncertain and will depend on the severity and duration of the conflict and its
impact on regional and global economic conditions.
Inflationary cost environment
During fiscal 2021 and continuing into the current fiscal year, global commodity
and labor markets experienced significant inflationary pressures attributable to
ongoing economic recovery and supply chain issues. We are subject to
inflationary pressures with respect to raw materials, labor and transportation.
Accordingly, we continue to take actions with our customers and suppliers to
mitigate the impact of these inflationary pressures in the future. Actions to
mitigate inflationary pressures with suppliers include aggregation of purchase
requirements to achieve optimal volume benefits, negotiation of cost-reductions
and identification of more cost competitive suppliers. While these actions are
designed to offset the impact of inflationary pressures, we cannot provide
assurance that they will be successful in fully offsetting increased costs
resulting from inflationary pressure. Interest payments for borrowings under our
revolving credit facility are based on variable rates. As a result, any
continued increase in interest rates may reduce our cash flow available for
other corporate purposes.
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Ongoing COVID-19 pandemic
The pandemic caused by an outbreak of a novel strain of coronavirus, SARS-CoV-2,
which causes COVID-19 that began in December 2019 introduced significant
volatility to the global health and economic environment, including millions of
confirmed COVID-19 cases, business slowdowns or shutdowns, government challenges
and market volatility throughout 2020 into 2022.While the ongoing impact from the COVID-19 pandemic has subsided, disruptions to
supply chains, transportation efficiency, and availability of raw materials and
labor continue to persist. The exact pace and timing of the economic recovery
remains uncertain and is expected to continue to be uneven depending on various
factors. As the consequences of the pandemic and adverse impact to the global
economy continue to evolve, the future adverse impact on our business and
financial statements remains subject to uncertainty as of the date of this
filing.
Results of operations
We have prepared our discussion of the results of operations for the year ended
December 31, 2022 compared to the year ended December 31, 2021 by comparing the
results for the year ended December 31, 2022 with the combined amounts for 2021
Successor Period and the 2021 Predecessor Period ("S/P Combined") as the
Successor and Predecessor entities are expected to be largely consistent,
excluding the impact on certain financial statement line items that were
impacted by the Business Combination such as depreciation and amortization
expense on PSSA's property, plant, and equipment and intangible asset balances
made under the new basis of accounting. We believe this approach provides the
most meaningful basis of comparison and is more useful in discussing our overall
operating performance when compared to the same period in the prior year.The combined results of operations included in our discussion below are not
considered to be prepared in accordance with U.S. GAAP ("non-U.S. GAAP") and
have not been prepared as pro forma results under applicable regulations, may
not reflect the actual results we would have achieved had the Business
Combination occurred at the beginning of fiscal 2021, and should not be viewed
as a substitute for the results of operations of the 2021 Successor Period and
the 2021 Predecessor presented in our consolidated financial statements in
accordance with U.S. GAAP.
Year ended December 31, 2022 compared to year ended December 31, 2021 (“S/P
combined”)
Total Company
The following table sets forth our results of operations for each of the periods
indicated. The change column reflects the comparison of the year ended December
31, 2022 with the S/P Combined ("2021") (in thousands):
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Successor PredecessorYear Ended November 9, 2021 January 1, 2021 Change
December 31, Through Through (non-GAAP)
2022 December 31, 2021 November 8, 2021 S/P Combined $ %
Net sales $ 360,505 $ 21,023 $ 341,315 $ 362,338 $ (1,833) (1 %)
Cost of goods sold 217,853 23,710 172,136 195,846 22,007 11 %
Gross profit 142,652 (2,687) 169,179 166,492 (23,840) (14 %)
Operating expenses
Selling, general and
administrative expense 74,319 16,982 38,981 55,963 18,356 33 %
Amortization expense 55,105 8,004 45,424 53,428 1,677 3 %
Founders advisory fees -
related party (117,302) 652,990 - 652,990 (770,292) (118 %)
Other operating expense 465 92 4,153 4,245 (3,780) (89 %)
Total operating expenses 12,587 678,068 88,558 766,626 (754,039) (98 %)
Operating income (loss) 130,065 (680,755) 80,621 (600,134) 730,199 (122 %)
Other expense (income):
Interest expense, net 42,585 6,352 39,087 45,439 (2,854) (6 %)
(Gain) loss on contingent
earn-out (12,706) 198 2,965 3,163 (15,869) (502 %)
Unrealized foreign currency
loss 3,462 1,006 4,026 5,032 (1,570) (31 %)
Other (income) expense, net (503) (2) (222) (224) (279) 125 %
Total other expense, net 32,838 7,554 45,856 53,410 (20,572) (39 %)
Income (loss) before income
taxes 97,227 (688,309) 34,765 (653,544) 750,771 (115 %)
Income tax (expense) benefit (5,469) 6,160 (14,136) (7,976) 2,507 (31 %)
Net income (loss) $ 91,758 $ (682,149) $ 20,629 $ (661,520) $ 753,278 (114 %)Net Sales. Net sales decreased by $1.8 million for the year ended December 31,
2022 compared to the same period in 2021. Net sales in the Fire Safety segment
decreased by $34.6 million, representing lower fire retardant sales of $42.5
million offset by a $7.9 million increase in fire suppressant sales. Fire
retardant sales decreased by $44.6 million in the Americas due to a mild fire
season in North America offset by increases of $1.6 million in Asia Pacific and
$0.5 million in Europe. Fire retardant sales in a given geography are generally
driven by the severity of the fire season in that geography. Fire suppressant
sales increased by $3.1 million in the Americas driven by fluorine free foam
concentrate and foam systems, $2.4 million in Asia Pacific because of higher
fluorine free concentrates sales in Australia along with increased shipments to
Asia and $2.4 million in Europe due to improved market share and geographic
reach. Net sales in the Specialty Products segment increased by $32.8 million,
of which $24.2 million was in the Americas and $8.6 million was in Europe.
Specialty Product sales are primarily driven by improvement in our relevant
market position in each region; as well as the adoption of our P2S5 products in
several new end markets and applications.Cost of Goods Sold. Cost of goods sold increased by $22.0 million for the year
ended December 31, 2022 compared to the same period in 2021. The increase in
Fire Safety segment of $20.0 million was primarily due to a $21.6 million
increase in amortization of inventory step-up related to the Business
Combination and $1.8 million in increased labor and share-based compensation
expense offset by $3.4 million in lower material and manufacturing costs. The
$2.0 million increase in the Specialty Products segment was due to a $2.7
million increase in insurance costs, a $2.3 million increase in depreciation
expense, a $0.9 million increase in lease expense offset by a $2.9 million
decrease in amortization of step-up inventory related to the Business
Combination and $1.0 million in lower raw material and manufacturing costs.Selling, General and Administrative Expense. Selling, general and administrative
expense increased by $18.4 million for the year ended December 31, 2022 compared
to the same period in 2021. The increase was primarily driven by a $4.2 million
increase in personnel related and share-based compensation expenses, a $5.5
million increase in accounting, legal, consulting and other administrative
expenses, a $5.2 million increase in insurance costs and a $3.5 million increase
in logistics expenses.Amortization Expense. Amortization expense increased by $1.7 million for the
year ended December 31, 2022 compared to the same period in 2021. The increase
was primarily due to a $2.2 million increase in amortization expense related to
definite lived intangible assets offset by a $0.5 million effect of changes in
foreign currency exchange rates.
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Founder advisory fees - related party. The founder advisory fees - related party
decreased by $770.3 million for the year ended December 31, 2022 compared to the
same period in 2021. The decrease was due to recognizing the entire liability in
2021 and recording a reduction in the fair value in 2022, primarily due to a
decrease in average price from $13.63 per Ordinary Share to $8.86 per Ordinary
Share, of the liability-classified Fixed and Variable Annual Advisory Amounts of
$117.3 million (the Fixed Annual Advisory Amount decreased by $35.6 million and
Variable Annual Advisory Amount decreased by $81.7 million) for the year ended
December 31, 2022. The expense recorded for the Fixed and Variable Annual
Advisory Amounts in 2021 was $653.0 million (Fixed Annual Advisory Amount of
$213.3 million and Variable Annual Advisory Amount of $439.7 million). The Fixed
Annual Advisory Amount is valued using the period end volume weighted average
closing share price of our Ordinary Shares for ten consecutive trading days and
the Variable Annual Advisory Amount at the end of each reporting period is
valued using a Monte Carlo simulation model.Interest Expense. Interest expense decreased by $2.9 million for the year ended
December 31, 2022 compared to the same period in 2021. The decrease was due to
$11.8 million write-off of the deferred finance fees on repayment of Predecessor
debt upon consummation of the Business Combination recognized in 2021, offset by
$6.5 million of dividends on the 6.50% Redeemable Preferred Shares, included in
interest expense, and higher interest rates on outstanding debt compared to the
same period in 2021.Gain on Contingent Earn-out. The contingent earn-out relating to the purchase of
LaderaTech, Inc. decreased by $15.9 million for the year ended December 31, 2022
compared to the same period in 2021 due to a reduction in the fair value of the
contingent consideration by $12.7 million in 2022 as a result of a change in the
forecast of the product mix from an earn-out eligible fire retardant to the
Company-developed fire retardant that is ineligible for earn-out compared to a
$3.2 million increase in 2021 in the fair value of the contingent consideration.Unrealized Foreign Currency Loss. Unrealized foreign currency loss decreased by
$1.6 million for the year ended December 31, 2022 compared to the same period in
2021. The decrease was primarily due to strengthening of the US dollar,
primarily against the Euro, during the year ended December 31, 2022.Income Tax Expense. Income tax expense decreased by $2.5 million for the year
ended December 31, 2022 compared to the same period in 2021. The decrease is due
primarily to changes in earnings in jurisdictions that were not covered by a
valuation allowance and the impact of non-deductible compensation, non-taxable
gain on contingent earn-out and accrued withholding taxes on unremitted
earnings.
Business segments
We use segment net sales and segment adjusted earnings before interest, taxes,
depreciation and amortization ("Adjusted EBITDA"), financial measures that are
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"), to evaluate operating performance by
segment, for business planning purposes and to allocate resources. The following
tables provide information for our net sales and Adjusted EBITDA (in thousands):Successor Predecessor
(non-GAAP) Combined S/P
November 9, 2021 January 1, 2021
Year Ended Through Through Year Ended
December 31, 2022 December 31, 2021 November 8, 2021
December 31, 2021
Specialty Specialty Specialty Specialty
Fire Safety Products Fire Safety Products Fire Safety Products Fire Safety Products
Net sales $ 226,583 $ 133,922 $ 7,913 $ 13,110 $ 253,267 $ 88,048 $ 261,180 $ 101,158
Adjusted EBITDA $77,365 $48,026 (3,696)
$ 1,838 $ 121,589 $ 21,703 $ 117,893 $ 23,541Adjusted EBITDA for our Fire Safety segment for the year ended December 31, 2022
decreased by $40.5 million to $77.4 million compared to the same period in 2021.
The decrease was primarily due to lower sales as a result of a mild fire season
in North America and higher operating expenses offset by lower cost of goods
sold.Adjusted EBITDA for our Specialty Products segment for the year ended
December 31, 2022 increased by $24.5 million to $48.0 million compared to the
same period in 2021. The increase was primarily due to higher sales offset by
higher cost of goods sold and operating expenses.
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Year Ended December 31, 2021 (“Combined S/P”) Compared to Year Ended
December 31, 2020
For a detailed discussion of our consolidated results of operations for S/P
Combined compared to 2020 Predecessor Period, refer to Part II, Item 7.
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" of Form 10-K for the year ended December 31, 2021, as filed with the
SEC on March 31, 2022.
Restated financial information
Quarter September 2022
The following table and discussion reflect the effect of the restatement on the
Results of operations for the September 2022 quarter (in thousands):
Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022
As Reported Adjustment As Restated As Reported Adjustment As Restated
Net sales $ 160,509 $ -
$160,509 $319,232 – $319,232
Cost of goods sold
74,707 (946) 73,761 191,757 (4,603) 187,154
Gross profit 85,802 946 86,748 127,475 4,603 132,078
Operating expenses:
Selling, general and
administrative expense 22,381 (6,731) 15,650 64,803 (10,320) 54,483
Amortization expense 13,738 - 13,738 41,395 - 41,395
Founders advisory fees -
related party (73,713) - (73,713) (154,026) -
(154,026)
Other operating expense (51) - (51) 405 -
405
Total operating expenses (37,645) (6,731) (44,376) (47,423) (10,320) (57,743)
Operating income 123,447 7,677 131,124 174,898 14,923 189,821
Other expense (income):
Interest expense, net 9,944 - 9,944 32,582 -
32,582
Gain on contingent earn-out (3,644) - (3,644) (13,042) -
(13,042)
Unrealized foreign currency
loss 4,705 - 4,705 8,741 - 8,741
Other income, net (785) - (785) (820) - (820)
Total other expense, net 10,220 - 10,220 27,461 - 27,461
Income before income taxes 113,227 7,677 120,904 147,437 14,923
162,360
Income tax (expense) benefit (34,516) 19,839 (14,677) (23,692) 13,449 (10,243)
Net income $ 78,711 $ 27,516 $ 106,227 $ 123,745 $ 28,372 $ 152,117Cost of Goods Sold. Cost of goods sold decreased by $0.9 million for the three
months ended September 30, 2022 primarily due to recognizing compensation
expense based on the remeasurement of the fair value of the PBNQSO at period end
using the Black-Scholes option-pricing model compared to the previously
recognized compensation expense based on the grant date fair value calculated
using the Black-Scholes option-pricing model. Cost of goods sold decreased by
$4.6 million for the nine months ended September 30, 2022 primarily due to
recognizing compensation expense based on the remeasurement of the fair value of
the PBNQSO at period end using the Black-Scholes option-pricing model compared
to the previously recognized compensation expense based on the grant date fair
value calculated using the Black-Scholes option-pricing model of $1.4 million
and a decrease in the amortization of inventory step-up related to the Business
Combination of $3.2 million.Selling, General and Administrative Expense. Selling, general and administrative
expense decreased by $6.7 million and $10.3 million for the three and nine
months ended September 30, 2022, respectively, primarily due to recognizing
compensation expense based on the remeasurement of the fair value of the PBNQSO
at period end using the Black-Scholes option-pricing model compared to the
previously recognized compensation expense based on the grant date fair value
calculated using the Black-Scholes option-pricing model.Income Tax (Expense) Benefit. Income tax expense decreased by $19.8 million and
$13.4 million for the three and nine months ended September 30, 2022,
respectively, primarily due to the change in recognizing compensation expense
related to the PBNQSO.
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June quarter 2022
The following table and discussion reflect the effect of the restatement on the
Results of operations for the June 2022 quarter (in thousands):
Three Months Ended June 30, 2022 Six Months Ended June 30, 2022
As Reported Adjustment As Restated As Reported Adjustment As Restated
Net sales $ 100,965 $ - $ 100,965 $ 158,723 $ - $ 158,723
Cost of goods sold 72,423 (373) 72,050 117,050 (3,657) 113,393
Gross profit 28,542 373 28,915 41,673 3,657 45,330
Operating expenses:
Selling, general and
administrative expense 22,614 (2,935) 19,679 42,422 (3,589) 38,833
Amortization expense 13,802 - 13,802 27,657 - 27,657
Founders advisory fees -
related party (20,465) - (20,465) (80,313) - (80,313)
Other operating expense 260 - 260 456 - 456
Total operating expenses
(income) 16,211 (2,935) 13,276 (9,778) (3,589) (13,367)
Operating income 12,331 3,308 15,639 51,451 7,246 58,697
Other expense (income):
Interest expense, net 12,142 - 12,142 22,638 - 22,638
Gain on contingent earn-out (9,398) - (9,398) (9,398) -
(9,398)
Unrealized foreign currency
loss 3,156 - 3,156 4,036 - 4,036
Other income, net (200) - (200) (35) - (35)
Total other expense, net 5,700 - 5,700 17,241 - 17,241
Income before income taxes 6,631 3,308 9,939 34,210 7,246
41,456
Income tax benefit (expense) 592 (1,604) (1,012) 10,824 (6,390) 4,434
Net income $ 7,223 $ 1,704 $ 8,927 $ 45,034 $ 856 $ 45,890Cost of Goods Sold. Cost of goods sold decreased by $0.4 million for the three
months ended June 30, 2022 primarily due to recognizing compensation expense
based on the remeasurement of the fair value of the PBNQSO at period end using
the Black-Scholes option-pricing model compared to the previously recognized
compensation expense based on the grant date fair value calculated using the
Black-Scholes option-pricing model. Cost of goods sold decreased by $3.7 million
for the six months ended June 30, 2022 primarily due to recognizing compensation
expense based on the remeasurement of the fair value of the PBNQSO at period end
using the Black-Scholes option-pricing model compared to the previously
recognized compensation expense based on the grant date fair value calculated
using the Black-Scholes option-pricing model of $0.5 million and a decrease in
the amortization of inventory step-up related to the Business Combination of
$3.2 million.Selling, General and Administrative Expense. Selling, general and administrative
expense decreased by $2.9 million and $3.6 million, for the three and six months
ended June 30, 2022, respectively, primarily due to recognizing compensation
expense based on the remeasurement of the fair value of the PBNQSO at period end
using the Black-Scholes option-pricing model compared to the previously
recognized compensation expense based on the grant date fair value calculated
using the Black-Scholes option-pricing model.Income Tax Benefit (Expense). Income tax benefit decreased by $1.6 million and
$6.4 million for the three and six months ended June 30, 2022, respectively,
primarily due to the change in recognizing compensation expense related to the
PBNQSO.March 2022 Quarter
The following table reflects the effect of revisions on the results of
operations for the quarter of March 2022 (in thousands):
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Three months ended March 31, 2022
As Reported Adjustment As RestatedCost of goods sold $ 44,627 $ (3,284) $ 41,343
Gross profit $ 13,131 $ 3,284 $ 16,415
Operating expenses:
Selling, general and administrative expense $ 19,808 $ (654) $ 19,154Total operating expenses $ (25,989) $ (654) $ (26,643)
Operating income $ 39,120 $ 3,938 $ 43,058Income before income taxes $ 27,579 $ 3,938 $ 31,517
Income tax benefit (expense) 10,232 (4,786) 5,446
Net income (loss) $ 37,811 $ (848) $ 36,963December 2021 Period
The following table reflects the effect of revisions on the results of
operations for the period of December 2021 (in thousands):
November 9, 2021 Through December 31, 2021
As Reported Adjustment As RestatedCost of goods sold $ 20,533 $ 3,177 $ 23,710
Gross profit $ 490 $ (3,177) $ (2,687)Operating loss $ (677,578) $ (3,177) $ (680,755)
Loss before income taxes $ (685,132) $ (3,177) $ (688,309)
Income tax benefit 4,675 1,485 6,160
Net loss $ (680,457) $ (1,692) $ (682,149)
Liquidity and capital resources
We have historically funded our operations primarily through cash flows from
operations, borrowings under our revolving credit facility, and the issuance of
debt and equity securities. However, future cash flows are subject to a number
of variables, including the length and severity of the fire season, growth of
the wildland urban interface and the availability of air tanker capacity, higher
costs from inflation, all of which could negatively impact revenues, earnings
and cash flows, and potentially our liquidity if we do not moderate our
expenditures accordingly.
We have the following financing arrangements in place to, among other things,
finance our operations and supplement our liquidity position.
Revolving credit service
On November 9, 2021, SK Intermediate II entered a five-year rolling period
a line of credit (the “Revolving Line of Credit”), provided for by a senior
a secured revolving line of credit for a total aggregate amount of up to
$100.0 million.
The Revolving Credit Facility matures on November 9, 2026. The Revolving Credit
Facility includes a $20.0 million swingline sub-facility and a $25.0 million
letter of credit sub-facility. The Revolving Credit Facility allows Invictus II
to increase commitments under the Revolving Credit Facility up to an aggregate
amount not to exceed the greater of (i) $143.0 million and (ii) 100.00% of
consolidated earnings before interest, taxes, depreciation and amortization
("EBITDA") for the most recent four-quarter period (minus the aggregate
outstanding principal amount of certain ratio debt permitted to be incurred
thereunder). All borrowings under the Revolving Credit Facility are subject to
the satisfaction of customary conditions, including the absence of a default and
the accuracy of representations and warranties, subject to certain exceptions.Borrowings under the Revolving Credit Facility bear interest at a rate equal to
(i) an applicable margin, plus (ii) at Invictus II's option, either (x) LIBOR
determined by reference to the cost of funds for U.S. dollar deposits for the
interest period relevant to such borrowing, adjusted for certain additional
costs (but which will not be less than a 0.00% LIBOR
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floor) or (y) a base rate determined by reference to the highest of (a) the
prime commercial lending rate published by the Wall Street Journal, (b) the
federal funds rate plus 0.50%, (c) the one-month LIBOR rate plus 1.00% and (d) a
minimum floor of 1.00%. The applicable margin is 3.25% in the case of
LIBOR-based loans and 2.25% in the case of base rate-based loans, with two step
downs of 0.25% each based upon the achievement of certain leverage ratios.As of December 31, 2022, the Company did not have any outstanding borrowings
under the Revolving Credit Facility and was in compliance with all covenants,
including the financial covenants.
senior notes
On November 9, 2021, SK Intermediate II assumed $675.0 million principal amount
of 5.00% senior secured notes due October 30, 2029 issued by Escrow Issuer under
an indenture dated as of October 22, 2021 ("Indenture"). The Senior Notes bear
interest at an annual rate of 5.00%. Interest on the Senior Notes is payable in
cash semi-annually in arrears on April 30 and October 30 of each year,
commencing on April 30, 2022.The Senior Notes are general, secured, senior obligations of SK Intermediate II;
rank equally in right of payment with all existing and future senior
indebtedness of SK Intermediate II (including, without limitation, the Revolving
Credit Facility); and together with the Revolving Credit Facility, are
effectively senior to all existing and future indebtedness of Invictus II that
is not secured by the collateral.
For additional information regarding our long-term debt, see Note 7, “Long-Term
Debt and redeemable preferred shares”, in the consolidated notes
financial statements included in this Annual Report.
Share buyback plan
On December 7, 2021, subject to the approval of our shareholders, the Board
authorized the Share Repurchase Plan. Under the Share Repurchase Plan, we and
our subsidiaries are authorized to repurchase up to $100.0 million of our issued
and outstanding Ordinary Shares at any time during the next 24 months or, if
different, such other timeframe as approved by our shareholders. Until such time
as the Share Repurchase Plan was approved by the shareholders of the Company,
the Board authorized any subsidiary of the Company to take such actions
necessary to purchase Ordinary Shares of the Company. Repurchases under the
Share Repurchase Plan may be made, from time to time, in such quantities, in
such manner and on such terms and conditions and at prices the Company deems
appropriate.On July 21, 2022, subject to certain limits, the shareholders' of the Company
approved a proposal authorizing the Board to repurchase up to 25% of the
Company's Ordinary Shares outstanding as of the date of the shareholders'
approval, being 40,659,257 Ordinary Shares, at any time during the next five
years. On November 3, 2022, the Board re-established the limit for Ordinary
Share repurchases at $100.0 million, which is within the repurchase limit
approved by Company's shareholder on July 21, 2022.The Company repurchased 6,436,736 Ordinary Shares for the year ended
December 31, 2022, of which 597,513 Ordinary Shares were repurchased on behalf
of a wholly-owned subsidiary. The repurchased Ordinary Shares were recorded at
cost and are being held in treasury.For additional information about our Share Repurchase Plan, refer to Item 5,
"Market for the Company's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities," and Note 10, "Equity," in the notes to the
consolidated financial statements included in this Annual Report.
Founder Advisory Agreement
On December 12, 2019, EverArc and the EverArc Founder Entity entered into the
Founder Advisory Agreement to provide incentives to the EverArc Founders to
achieve EverArc's, and following the Merger, the Company's, objectives. In
exchange for the services provided to the Company, including strategic and
capital allocation advice, the EverArc Founder Entity will be entitled to
receive both a Fixed Annual Advisory Amount and a Variable Annual Advisory
Amount until the years ending December 31, 2027 and 2031, respectively. Under
the Founder Advisory Agreement, at the election of the EverArc Founder Entity,
at least 50% of the Advisory Amounts will be paid in Ordinary Shares and the
remainder in cash.
The fixed annual advisory amount will be equal to 2,357,061 ordinary shares
(1.5% of the 157,137,410 ordinary shares outstanding on November 9, 2021) for
every year until December 31, 2027 and is valued according to the end of the period
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volume weighted average closing share price for ten consecutive trading day of
Ordinary Shares. The Variable Annual Advisory Amount for each year through
December 31, 2031 is based on the appreciation of the market price of Ordinary
Shares if such market price exceeds certain trading price minimums at the end of
each reporting period and is valued using a Monte Carlo simulation model.
Because up to 50% of the aggregate shares could be settled through a cash
payment, 50% are classified as a liability and the remaining 50% is classified
within equity. For Advisory Amounts classified within equity, the Company does
not subsequently remeasure the fair value. For the Advisory Amounts classified
as a liability, the Company remeasures the fair value at each reporting date. As
a result, the compensation expense recorded by the Company in the future will
depend upon changes in the fair value of the liability-classified Advisory
Amounts.As of December 31, 2022, the Advisory Amounts payable to the EverArc Founder
Entity over the term of the Founder Advisory Agreement was $341.4 million. The
fair value of the Fixed Annual Advisory Amount was calculated to be $104.4
million based on the period end volume weighted average closing share price for
ten consecutive trading days of Ordinary Shares of $8.86 and the fair value of
the Variable Annual Advisory Amount was determined to be $237.0 million using a
Monte Carlo simulation model.For 2022, the EverArc Founder Entity is entitled to receive Fixed Annual
Advisory Amount of 2,357,061 Ordinary Shares or a value of $20.9 million, based
on average price of $8.86 per Ordinary Share (the "2022 Fixed Amount"). The
EverArc Founder Entity did not qualify to receive Variable Annual Advisory
Amount for 2022 as average price of $8.86 per Ordinary Share for 2022 was lower
than the average price of $13.63 per Ordinary Share established for 2021. The
EverArc Founder Entity elected to receive approximately 77.7% of the 2022
Advisory Amounts in Ordinary Shares (1,831,653 Ordinary Shares) and
approximately 22.3% of the Advisory Amounts in cash ($4.7 million). On February
15, 2023, the Company issued 1,831,653 Ordinary Shares and paid $4.7 million in
cash in satisfaction of 2022 Advisory Amounts.For additional information about the Founder Advisory Agreement, refer to Note
13, "Related Parties," in the notes to the consolidated financial statements
included in this Annual Report.We believe that our existing cash and cash equivalents of approximately $126.8
million as of December 31, 2022, net cash flows generated from operations and
availability under the Revolving Credit Facility will be sufficient to meet our
current capital expenditures, working capital, founders' advisory fee payments
and debt service requirements for at least 12 months from the filing date of
this Annual Report. Our fiscal year 2023 capital expenditure budget is $10
million, which we expect will cover both our maintenance and growth capital
expenditures. We may also utilize borrowings available to us under various other
financing sources, including the issuance of equity and/or debt securities
through public offerings or private placements, to fund our acquisitions, pay
the Advisory Amounts and meet long-term liquidity needs. Our ability to complete
future offerings of equity or debt securities and the timing of these offerings
will depend upon various factors including prevailing market conditions and our
financial condition.Sources and Uses of Cash
The following table presents the sources and uses of our cash for the periods
presented (in thousands):Successor Predecessor
January 1,
2021
Year Ended November 9, 2021 Through Year Ended
December 31, Through November 8, December 31,
2022 December 31, 2021 2021 2020
Cash (used in) provided by:
Operating activities $ (40,172) $ 4,359 $ 67,991 $ 70,826
Investing activities (10,251) (1,210,623) (15,746) (9,467)
Financing activities (48,812) (697,221) (64,210) (45,610)
Effect of foreign currency on cash
and cash equivalents 431 (738) 435 (3,093)
Net change in cash and cash
equivalents $ (98,804) $ (1,904,223) $ (11,530) $ 12,656Operating Activities
Cash (used in) provided by operating activities was $(40.2) million, $4.4
million, $68.0 million and $70.8 million for the year ended December 31, 2022,
Successor Period 2021, Predecessor Period 2021 and Predecessor Period 2020,
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respectively. For the year ended December 31, 2022, the change was primarily due
to a founders advisory fee payment of $53.5 million and an increase in inventory
of $61.9 million due to a mild fire season in North America during 2022 offset
by higher net income. During the 2021 Successor Period the operating cash flows
were negatively impacted by lower net income and an increase in working capital,
offset by share-based compensation. Operating cash flows for the 2021
Predecessor Period were negatively impacted by an increase in working capital
which was offset by higher net income and non-cash depreciation and amortization
expense. The increase in working capital was primarily due to an increase in
accounts receivable from higher net sales. Operating cash flows for the 2020
Predecessor Period were favorably impacted by the increased net income primarily
driven by higher retardant sales, partially offset by declines in working
capital.
Investment activities
Cash used in investing activities was $10.3 million, $1,210.6 million, $15.7
million and $9.5 million for the year ended December 31, 2022, 2021 Successor
Period, 2021 Predecessor Period and 2020 Predecessor Period, respectively.
During the year ended December 31, 2022, we purchased property and equipment of
$8.6 million and paid an additional $1.6 million to SK Holdings upon
finalization of the difference in estimated and actual working capital as of the
Closing Date under the Business Combination Agreement. During the 2021 Successor
Period, we acquired SK Intermediate for cash consideration of $1,209.2 million,
net of approximately $11.0 million in cash acquired, and purchased property and
equipment of $1.5 million. During the 2021 Predecessor Period, we paid a total
of $7.5 million in cash related to the acquisitions of Budenheim Iberica,
S.L.U., PC Australasia Pty Ltd., and Magnum Fire & Safety Systems. We also
purchased property and equipment of $8.3 million. During the 2020 Predecessor
Period, we paid $2.0 million, net of cash acquired, related to the acquisition
of LaderaTech, Inc., and also purchased property and equipment of $7.5 million.
Financing activities
Cash used in financing activities was $48.8 million, $697.2 million, $64.2
million and $45.6 million for the year ended December 31, 2022, 2021 Successor
Period, 2021 Predecessor Period and 2020 Predecessor Period, respectively.
During the year ended December 31, 2022, we repurchased outstanding Ordinary
Shares for $49.3 million offset by $0.5 million in proceeds from exercise of
Warrants. During the 2021 Successor Period, we borrowed $40.0 million against
the Revolving Credit Facility and paid $2.3 million of revolver fees. The
Revolving Credit Facility was repaid in full on December 9, 2021. Upon the
Business Combination, the Director Subscribers acquired Ordinary Shares valued
at $2.0 million. We repaid $697.0 million of debt previously held by SK
Intermediate. During the 2021 Predecessor Period, we distributed $60.0 million
to our shareholders and we received $19.5 million in proceeds from the Revolving
Credit Facility, which was offset by repayments of $19.5 million on the
Revolving Credit Facility and repayments of $4.2 million on long-term debt.
During the 2020 Predecessor Period, we received $72.1 million in proceeds from
the Revolving Credit Facility, which was fully offset by repayments of $97.1
million and $20.6 million against the outstanding balance on the Revolving
Credit Facility and long-term debt, respectively.
Critical accounting estimates and policies
Our consolidated financial statements have been prepared in conformity with U.S.
GAAP, which often requires the judgment of management in the selection and
application of certain accounting principles and methods. The preparation of
these financial statements requires us to make estimates, assumptions and
judgments that affect the reported amount of assets, liabilities and expenses.
On an ongoing basis, we evaluate these estimates and judgments. We based our
estimates on historical experience and on various assumptions that we believe to
be reasonable under the circumstances. These estimates and assumptions form the
basis for making judgments about the carrying values of assets and liabilities
and the recording of expenses that are not readily apparent from other sources.
Actual results could, therefore, differ materially from these estimates under
different assumptions or conditions.We have identified the following estimates as our most critical accounting
estimates, which are those that are most important to aid in fully understanding
and evaluating the Company's financial condition and results of operations, and
that require management's most subjective and complex judgments. Information
regarding our other significant accounting estimates and policies are described
in more detail in Note 2, "Summary of Significant Accounting Policies and Recent
Accounting Pronouncements" in the notes to the consolidated financial statements
included in this Annual Report. We believe that the following accounting
estimates and policies are most critical to the judgments and estimates used in
the preparation of the consolidated financial statements.
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Business combinations
We account for our business combinations using the acquisition accounting
method, which requires us to determine and recognize assets acquired and
liabilities assumed at their acquisition date fair value, including any
contingent consideration and the recognition of acquisition-related costs in the
consolidated statements of operations and comprehensive income (loss) in
accordance with the Financial Accounting Standards Board ("FASB") ASC Topic 805,
Business Combinations.Accounting for business combinations requires us to make significant estimates
and assumptions at the acquisition date, including estimates of the fair value
of acquired inventory, property and equipment, identifiable intangible assets,
contractual obligations assumed, preacquisition contingencies, where applicable,
and equity issued. Significant assumptions relevant to the determination of the
fair value of the assets acquired and liabilities assumed include, but are not
limited to, future expected cash flows, discount rates, royalty rates, and other
assumptions. The approach to valuing an initial contingent consideration
associated with the purchase price also uses similar unobservable factors such
as projected revenues and expenses over the term of the contingent earn-out
period, discounted for the period over which the initial contingent
consideration is measured, and relevant volatility rates. Based upon these
assumptions, the initial contingent consideration is then valued using a Monte
Carlo simulation. These significant assumptions are based on company specific
information and projections, which are not observable in the market and,
therefore, are considered Level 2 and Level 3 measurements. These significant
assumptions are forward-looking and could be affected by future changes in
economic and market conditions.We generally use third-party qualified consultants to assist management in
determining the fair value of assets acquired and liabilities assumed. This
includes, when necessary, assistance with the determination of economic useful
lives and valuation of property, plant and equipment and identifiable
intangibles. The purchase price allocation process also entails us to refine
these estimates over a measurement period not to exceed one year to reflect new
information obtained surrounding facts and circumstances existing at acquisition
date. The excess of the purchase price over the fair value of the identified
assets acquired and liabilities assumed is recorded as goodwill.
Impairment of goodwill and long-lived assets
Goodwill is deemed to have an indefinite life and is assessed for impairment
annually at the reporting unit level or more frequently when events or
circumstances occur that indicate that it is more likely than not that the fair
value of a reporting unit or an intangible asset is less than its carrying
value. The Company conducts an annual impairment test on October 1st each year.We perform a qualitative assessment to determine whether it is more likely than
not that goodwill is impaired. Factors utilized in the qualitative assessment
include macroeconomic conditions, industry and market considerations, cost
factors, overall financial performance and events specific to us. If the
qualitative assessment indicates it is more likely than not that goodwill is
impaired, the entity performs a quantitative assessment, which consists of a
comparison of the fair value of the reporting unit with its carrying amount.In accordance with the accounting guidance, we elected to bypass the qualitative
assessment and proceeded directly to performing a quantitative goodwill
impairment test. On October 1, 2022, we performed a quantitative assessment for
our Fire Safety and Specialty Products reporting units to determine whether
impairment exists from the most recent valuation date due to current adverse
macro-economic conditions, including but not limited to supply chain delays,
geopolitical conflict and more recently from unfavorable changes in foreign
exchange rates due to strengthening of the U.S. dollar, steady increase in
federal funds rate by the Federal Reserve and decline in market price of our
Ordinary Shares. In determining the fair value of the reporting unit, we used a
combination of the income and market approaches to estimate the reporting unit's
business enterprise value.Under the income approach, we calculate the fair value of a reporting unit based
on estimated future discounted cash flows which require assumptions about short
and long-term revenue growth rates, operating margins for each reporting unit,
discount rates, foreign currency exchange rates and estimates of capital
expenditures. The assumptions we use are based on what we believe a hypothetical
marketplace participant would use in estimating fair value. Under the market
approach, we estimate the fair value based on market multiples of our EBITDA.
Values are derived separately from each of the income and market approaches
Valuation techniques were used to develop an overall estimate of a report
the fair value of the unit. We use a consistent approach in both units of information
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when considering the weight of the income and market approaches for calculating
the fair value of each of our reporting units. This approach relies equally
(50%) on the calculated fair value derived from the income approach and market
approach. We believe this approach is consistent with that of a market
participant in valuing prospective purchase business combinations. The selection
and weighting of the various fair value techniques may result in a higher or
lower fair value. Judgment is applied in determining the weightings that are
most representative of fair value.The assumptions for our future cash flows begin with our historical operating
performance adjusted for the impact of known economic, industry and market
trends as well as the impact that we expect from planned business initiatives
including new product initiatives, client service and retention standards, and
cost management programs. At the end of the forecast period, the long-term
growth rate we used to determine the terminal value of our reporting units was
3.0% based on management's assessment of the minimum expected terminal growth
rate of the reporting unit, as well as broader economic considerations such as
inflation and the maturity of the markets we serve. We projected revenue growth
for our reporting units in completing our impairment testing based on expected
planned business initiatives and prevailing trends exhibited by these reporting
units. The anticipated revenue growth in the reporting units, however, is
partially offset by assumed increases in expenses.We utilize a weighted average cost of capital ("WACC"), in our impairment
analysis that makes assumptions about the capital structure that we believe a
market participant would make and include a risk premium based on an assessment
of risks related to the projected cash flows for the reporting unit. We believe
this approach yields a discount rate that is consistent with an implied rate of
return that a market participant would require for an investment in a company
having similar risks and business characteristics to the reporting unit being
assessed. To calculate the WACC, the cost of equity and cost of debt are
multiplied by the assumed capital structure of the reporting unit as compared to
industry trends and relevant benchmark company structures. We believe the
benchmark companies used for our Fire Safety and Specialty Products reporting
units serve as an appropriate input for calculating a fair value for the
reporting unit as those benchmark companies have similar risks and participate
in similar markets. The cost of equity was computed using the Capital Asset
Pricing Model which considers the risk-free interest rate, beta, equity risk
premium and specific company risk premium related to a particular reporting
unit. The cost of debt was computed using a benchmark rate and the Company's tax
rate. For the annual goodwill impairment evaluation, the discount rates used to
develop the estimated fair value of the Fire Safety and Specialty Products
reporting units were 15.5% and 10.5%, respectively.The estimated fair value of the reporting units is derived from the valuation
techniques described above incorporating the related projections and
assumptions. Impairment occurs when the estimated fair value of the reporting
unit is below the carrying value of its equity. The estimated fair value for our
Fire Safety and Specialty Products reporting units exceeded their related
carrying values as of October 1, 2022. As a result, no goodwill impairment was
recorded.The estimated fair value of the reporting unit is highly sensitive to changes in
these projections and assumptions; therefore, in some instances changes in these
assumptions could impact whether the fair value of a reporting unit is greater
than its carrying value. For example, an increase in the discount rate and
decline in the projected cumulative cash flow of a reporting unit could cause
the fair value of certain reporting units to be below its carrying value. We
perform sensitivity analyses around these assumptions in order to assess the
reasonableness of the assumptions and the resulting estimated fair values.
Ultimately, future potential changes in these assumptions may impact the
estimated fair value of a reporting unit and cause the fair value of the
reporting unit to be below its carrying value.Long-lived assets include acquired property, plant, and equipment and intangible
assets subject to amortization. We evaluate the recoverability of long-lived
assets for possible impairment when events or changes in circumstances indicate
that the carrying amount of such assets may not be fully recoverable. Such
events and changes may include significant changes in performance relative to
expected operating results, significant changes in asset use, significant
negative industry or economic trends, and changes in our business strategy.The process of evaluating the potential impairment of long-lived assets under
the accounting guidance on property, plant and equipment and intangible assets
subject to amortization is also highly subjective and requires significant
judgment. In order to estimate the fair value of long-lived assets, we typically
make various assumptions about the future prospects of our business or the part
of our business to which the long-lived assets relate to estimate future cash
flows to be generated by the asset group, which requires significant judgment as
it is based on assumptions about market demand for our products over a number of
future years. Based on these assumptions and estimates, we determine the
recoverability of such assets by comparing an asset's respective carrying value
to estimates of the sum of the undiscounted future cash flows expected to result
from its asset group. If such review indicates that the carrying amount of
long-lived assets is not recoverable, the carrying amount of such assets is
reduced to fair value. Assumptions and estimates about future values and
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remaining useful lives are complex and often subjective. They can be affected by
a variety of factors, including external factors, such as industry and economic
trends, and internal factors, such as changes in our business strategy and our
internal forecasts. Although we believe the assumptions and estimates we have
made have been reasonable and appropriate, changes in assumptions and estimates
could materially impact our reported financial results. As of December 31, 2022,
based on the consideration of impairment indicators, we determined that there
were no indications that the carrying values of the Company's asset groups are
not recoverable, as a result, we concluded that there was no impairment of
property, plant and equipment and intangible assets subject to amortization.
Income Taxes
We compute income taxes using the asset-and-liability method. Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities, as well as loss
and tax credit carryforwards. Changes in tax rates and laws are recognized in
income in the period such changes are enacted.On a jurisdiction-by-jurisdiction basis, we establish a valuation allowance if,
based upon available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized. We consider all positive and
negative evidence, including historical operating results, the existence of
cumulative losses, estimates of future operating income, and the reversal of
existing taxable temporary differences in assessing the need for a valuation
allowance.Our tax positions are subject to income tax audits by multiple tax jurisdictions
throughout the world. We recognize the tax benefit of an uncertain tax position
only if it is more likely than not the position will be sustainable upon
examination by the taxing authority, including resolution of any related appeals
or litigation processes. This evaluation is based on all available evidence and
assumes that the tax authorities have full knowledge of all relevant information
concerning the tax position. The tax benefit recognized is measured as the
largest amount of benefit which is more likely than not (greater than 50%
likely) to be realized upon ultimate settlement with the taxing authority. We
record interest and penalties related to unrecognized tax benefits in income tax
expense. We make adjustments to these reserves in accordance with the income tax
guidance when facts and circumstances change, such as the closing of a tax audit
or the refinement of an estimate. To the extent that the final tax outcome of
these matters is different from the amounts recorded, such differences will
affect the provision for income taxes in the period in which such determination
is made and could have a material impact on our financial condition and
operating results.
Stock-based compensation
We have granted equity-based awards consisting of PBNQSO to key employees,
officers and directors. The PBNQSO are subject to performance conditions such
that the number of awards that ultimately vest depends on the calculation of AOP
during the performance period compared to targets established at the award date.
Because the terms of the PBNQSO provide discretion to make certain adjustments
to the performance calculation, the service inception date of these awards
precedes the grant date. Accordingly, the Company recognizes compensation
expense beginning on the service inception date and remeasures the fair value of
the awards until a grant date is established. The estimate of the awards' fair
values will be fixed in the period in which the grant date occurs, and
cumulative compensation expense will be adjusted based on the fair values
calculated using the Black-Scholes option-pricing model at the grant date. The
fair value for PBNQSO for which a grant date has not been established is
estimated on the last date of the reporting period using the Black-Scholes
option-pricing model, which requires the input of highly subjective assumptions,
including the fair value of the underlying Ordinary Shares, the risk-free
interest rate, the expected equity volatility, and the expected term of the
option. The Company records forfeitures as they are incurred. The fair value of
PBNQSO is expensed proportionately for each tranche over the applicable service
period in which the performance conditions are deemed probable of achievement.Service-based restricted stock units are valued using the market price of our
Ordinary Shares on the grant date. The grant date fair value of the restricted
stock units is expensed on a straight-line basis over the applicable vesting
period.Under the Founder Advisory Agreement, in exchange for the services provided to
the Company, including strategic and capital allocation advice, the EverArc
Founders Entity is entitled to receive both, a Fixed Annual Advisory Amount and
a Variable Annual Advisory Amount until the years ending December 31, 2027 and
2031, respectively. At the election of the EverArc Founders Entity, at least 50%
of the Advisory Amounts will be paid in Ordinary Shares and the remainder in
cash. The Fixed Annual Advisory Amount will be equal to 2,357,061 Ordinary
Shares (1.5% of 157,137,410 Ordinary Shares outstanding as of November 9, 2021)
for each year through December 31, 2027 and valued using the period end volume
weighted average closing share price for ten consecutive trading days of
Ordinary Shares. The Variable Annual
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Advisory Amount for each year through December 31, 2031 is based on the
appreciation of the market price of Ordinary Shares if such market price exceeds
certain trading price minimums at the end of each reporting period and is valued
using a Monte Carlo simulation model, which requires the input of highly
subjective assumptions, including the fair value of the underlying Ordinary
Shares, the risk-free interest rate, the expected equity volatility, and the
expected term of the Founder Advisory Agreement.As of December 31, 2022, the Advisory Amounts payable to the EverArc Founder
Entity over the term of the Founder Advisory Agreement was $341.4 million. The
fair value of the Fixed Annual Advisory Amount was calculated to be $104.4
million based on the period end volume weighted average closing share price for
ten consecutive trading days of Ordinary Shares of $8.86 and the fair value of
the Variable Annual Advisory Amount was determined to be $237.0 million using a
Monte Carlo simulation model.New Accounting Standards
For information on the new accounting standards, see Note 2, “Summary of
Significant accounting policies and recent accounting pronouncements” in
notes to the consolidated annual accounts included in this Annual Report.
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