What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-01 compared with 2024-05-09 · 113 added, 58 removed, 139 unchanged (55% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this quarterly report on Form 10‑Q for the quarter ended March 31, 2024 (this “Quarterly Report”).

This Quarterly 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.

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We are a global solutions provider, producing high-quality firefighting products and phosphorus-based specialty chemicals.

Approximately 65% of our 2023 annual revenues were derived in the United States, approximately 15% in Europe, approximately 14% in Canada with the remaining approximately 6% spread across various other countries.

Approximately 65% of our 2023 annual revenues were derived in the United States, approximately 15% in Europe and approximately 14% in Canada with the remaining approximately 6% spread across various other countries.

Our business is organized and managed in two reporting segments:

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Each business unit has a business unit manager, who is responsible for achieving targeted financial and operational results.

During the three months ended March 31, 2024, the Company changed the presentation to present freight expense as a component of cost of goods sold rather than selling, general and administrative expense to better align freight expense with

freight income.

The change has been applied retrospectively to the condensed consolidated financial statements for the prior period presented in this Quarterly Report.

The impact to the accompanying condensed consolidated statements of operations and comprehensive income (loss) is presented in the following table (in thousands).

In 2024, the Company changed the presentation of freight expense from selling, general and administrative expense to cost of goods sold, to better match freight expense with freight income.

The change has been applied retrospectively to the

condensed consolidated financial statements for the prior periods presented in this Quarterly Report.

The impact to the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2023 is presented in the following table (in thousands).

There was no impact on previously reported balances in the accompanying condensed consolidated balance sheet or statement of cash flows.

Three Months Ended March 31, 2023

As Previous Reported As Adjusted Effect of Change

Three Months Ended June 30, 2023 Six Months Ended June 30, 2023

As Previously Reported As Adjusted Effect of Change As Previously Reported As Adjusted Effect of Change

Cost of goods sold $ 44,140 $ 46,811 $ 2,671 $ 75,152 $ 80,271 $ 5,119

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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 necessitating an increase of the airtanker capacity.

We believe that these trends are prevalent in North America, as well as globally and we expect these trends to continue and drive growth in demand for fire retardant products.

We believe that these trends are prevalent in North America, as well as globally and we expect these trends to continue and to drive growth in demand for fire retardant products.

We are also working to grow our fire prevention and protection business, which is primarily focused on expanding use of ground-applications for long-term fire retardant.

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Treating these areas ahead of the fire season can potentially stop ignitions from equipment failures or sparks.

We have invested and intend to continue investing in the expansion of our fire safety business through acquisitions in order to further grow our global customer base.

We have invested and intend to continue investing in the expansion of our fire safety business through acquisitions to further grow our global customer base.

Weather Conditions and Climate Trends

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Results of Operations

Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023

Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023

Total Company

The following table sets forth our results of operations for each of the periods indicated (in thousands):

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2024 2023 $ %

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Total operating expenses 28,249 (34,021) 62,270 (183 %)

Operating income 45,018 63,347 (18,329) (29 %)

Other expense :

Interest expense, net 10,590 10,344 246 2 %

Loss on contingent earn-out — 146 (146) (100 %)

Foreign currency loss 224 93 131 141 %

Other expense, net 74 17 57 335 %

Total other expense, net 10,888 10,600 288 3 %

Income before income taxes 34,130 52,747 (18,617) (35 %)

Income tax expense (12,480) (733) (11,747) 1603 %

Net income $ 21,650 $ 52,014 $ (30,364) (58 %)

Net product and services sales increased by $51.1 million for the three months ended June 30, 2024 compared to the same period in 202 3.

Net sales in the Fire Safety segment increased by $45.4 million, representing a $41.3 million increase in fire retardant sales and a $4.1 million increase in fire suppressant sales.

Fire retardant sales increased $42.5 million in the Americas and $0.6 million in Asia Pacific, partially offset by a decrease of $1.8 million in Europe.

Retardant strength was driven by increasingly proactive use of air attack, and by extension of fire retardant, by our customers, as they combat the growing threat of wildfires, as well as by continued implementation of the Company’s strategies on profitable new business, productivity and pricing our products and services to the value they provide.

Fire suppressant sales increased by $4.5 million in Americas and $0.6 million in Asia Pacific, driven by sales of fluorine-free foam concentrates, offset by a $1.0 million decrease in Europe.

Net sales in the Specialty Products segment increased by $5.7 million, of which $6.3 million was an increase in Americas offset by a $0.6 million decrease in Europe.

The growth in Specialty Products sales reflects an increase in purchases by our lubricant additives customers.

The Company continues to monitor the inventory rationalization activities in its key end markets.

Cost of Goods Sold.

Cost of goods sold increased by $7.2 million for the three months ended June 30, 2024 compared to the same period in 2023.

The increase in the Fire Safety segment of $6.1 million was primarily due to an $5.9 million increase in labor, material and freight costs as a result of the increase in revenue and a $0.2 million increase in other costs.

The $1.1 million increase in the Specialty Products segment was due to a $1.9 million increase in raw material, manufacturing and freight, offset by a $0.8 million decrease in other costs.

Selling, General and Administrative Expense.

Selling, general and administrative expense increased by $1.7 million for the three months ended June 30, 2024 compared to the same period in 2023.

The increase was primarily due to a $1.7

million increase in personnel related and share-based compensation expenses and a $1.2 million increase in other costs partially offset by $1.2 million decrease in professional fees.

Founder advisory fees - related party.

Founder advisory fees - related party represents the change in the fair value of the liability-classified Fixed Annual Advisory Amount and Variable Annual Advisory Amount (collectively, the “Annual Advisory Amounts”).

The increase in the fair value of the Annual Advisory Amounts for the three months ended June 30, 2024 of $0.6 million was primarily due to an increase in the average price per Ordinary Share from $6.81 as of March 31, 2024 to $7.75 as of June 30, 2024.

The decrease in the fair value of the Annual Advisory Amount for the three months ended June 30, 2023 of $60.0 million was primarily due to a reduction in the average price per Ordinary Share from $7.73 as of March 31, 2023 to $5.89 June 30, 2023.

Income Tax Expense.

Income tax expense increased by $11.7 million for the three months ended June 30, 2024 compared to the same period in 2023.

The increase is due primarily to changes in earnings in jurisdictions that were not covered by a valuation allowance and the impact of non-deductible compensation and accrued withholding taxes on the annualized effective tax rate .

Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023

Six Months Ended June 30, Change

2024 2023 $ %

Net sales $ 186,320 $ 119,995 $ 66,325 55 %

Cost of goods sold 92,351 80,271 12,080 15 %

Gross profit 93,969 39,724 54,245 137 %

Operating expenses

Selling, general and administrative expense 27,368 20,243 7,125 35 %

Amortization expense 27,526 27,534 (8) — %

Founders advisory fees - related party 68,921 (84,262) 153,183 (182 %)

Other operating expense — 10 (10) (100 %)

Total operating expenses 123,815 (36,475) 160,290 (439 %)

Operating (loss) income (29,846) 76,199 (106,045) (139 %)

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(Loss) income before income taxes (52,702) 55,856 (108,558) (194 %)

Income tax benefit 4,274 6,322 (2,048) (32 %)

Income tax (expense) benefit (8,206) 5,589 (13,795) (247 %)

Net (loss) income $ (60,908) $ 61,445 $ (122,353) (199 %)

Net sales overall increased by $15.2 million for the three months ended March 31, 2024 compared to the same period in 202 3.

Net sales in the Fire Safety segment increased by $6.4 million, representing a $7.0 million increase in fire suppressant sales offset by a decrease of $0.6 million in fire retardant sales.

Fire suppressant sales increased $8.9 million in the Americas driven by sales of Flourine-Free Foam concentrates and foam systems offset by a $1.9 million decrease in product sales in Europe.

Fire retardant sales decreased by $0.5 million in Asia Pacific and $0.5 million in Europe offset by a $0.4 million increase in Americas.

Fire retardant sales in a given geography are generally driven by the intensity of, and level of activity associated with, the fire season in that geography.

Net product and services sales for the six months ended June 30, 2024 increased by $66.3 million compared to the same period in 202 3.

Net sales in the Fire Safety segment increased by $51.8 million, representing a $40.7 million increase in fire retardant sales and $11.1 million increase in fire suppressant sales.

Fire retardant sales increased $42.9 million in the Americas and $0.1 million in Asia Pacific partially offset by a $2.3 million decrease in Europe.

Fire suppressant sales increased $13.4 million in Americas and $0.6 million in Asia Pacific, driven by sales of fluorine-free foam concentrates, offset by a decrease of $2.9 million in Europe.

Net sales in the Specialty Products segment increased by $14.5 million, of which $13.7 million was in the Americas and $0.8 million was in Europe.

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Cost of Goods Sold.

Cost of goods sold increased by $4.9 million for the three months ended March 31, 2024 compared to the same period in 2023.

The increase in the Fire Safety segment of $2.5 million was primarily due to a $2.3 million increase in labor, material and freight costs and a $0.2 million increase in other costs.

Cost of goods sold increased by $12.1 million for the six months ended June 30, 2024 compared to the same period in 2023.

The increase in the Fire Safety segment of $8.7 million was primarily due to an $8.3 million

increase in labor, material and freight costs as a result of the increase in revenue and a $0.4 million increase in other costs.

The $3.4 million increase in the Specialty Products segment was due to a $4.8 million increase in raw material, manufacturing and freight, offset by a $1.4 million decrease in other costs.

Selling, General and Administrative Expense.

Selling, general and administrative expense increased by $5.4 million for the three months ended March 31, 2024 compared to the same period in 2023.

The increase was primarily due to a $4.5 million increase in personnel related and share-based compensation expenses and a $0.9 million increase in other costs.

Selling, general and administrative expense increased by $7.1 million for the six months ended June 30, 2024 compared to the same period in 2023.

The increase was primarily due to a $6.1 million increase in personnel related and share-based compensation expenses and a $3.4 million increase in other costs partially offset by $2.4 million decrease in professional fees.

Founder advisory fees - related party.

The increase in the fair value of the Annual Advisory Amounts for the three months ended March 31, 2024 of $68.3 million was primarily due to an increase in the average price per Ordinary Share from $4.51 as of December 31, 2023 to $6.81.

The decrease in the fair value of the Annual Advisory Amount for the three months ended March 31, 2023 of $24.2 million was primarily due to a reduction in the average price per Ordinary Share from $8.86 as of December 31, 2022 to $7.73.

Founder advisory fees - related party represents the change in the fair value of the liability-classified Fixed Annual Advisory Amount and Variable Annual Advisory Amount.

The increase in the fair value of the Annual Advisory Amounts for the six months ended June 30, 2024 of $68.9 million was primarily due to a increase in the average price per Ordinary Share from $4.51 as of December 31, 2023 to $7.75 as of June 30, 2024.

The decrease in the fair value of the Annual Advisory Amount for the six months ended June 30, 2023 of $84.3 million was primarily due to a reduction in the average price per Ordinary Share from $8.86 as of December 31, 2022 to $5.89 as of June 30, 2023.

Foreign Currency Loss (Gain).

Foreign currency loss of $1.3 million for the three months ended March 31, 2024 reflects strengthening of the U.S.

dollar, primarily against the Euro, during the quarter.

Foreign currency gain of $0.7 million for the three months ended March 31, 2023 reflects weakening of the U.S.

dollar, primarily against the Euro, during the quarter.

Income Tax Benefit.

Income tax benefit decreased by $2.0 million for the three months ended March 31, 2024 compared to the same period in 2023.

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 and accrued withholding taxes on the annualized effective tax rate .

Foreign currency loss of $1.5 million for the six months ended June 30, 2024 reflects strengthening of the U.S.

dollar, primarily against the Euro.

Foreign currency gain of $0.6 million for the six months ended June 30, 2023 reflects weakening of the U.S.

dollar, primarily against the Euro.

Income Tax (Expense)Benefit.

Income tax expense increased by $13.8 million for the six months ended June 30, 2024 compared to the same period in 2023.

Business Segments

We use segment net sales and segment adjusted earnings before interest, taxes, depreciation and amortization (“Segment Adjusted EBITDA”) to evaluate operating performance by segment, for business planning purposes and to allocate resources.

The following tables provide information for our net sales and Segment Adjusted EBITDA (in thousands):

Three Months Ended March 31, 2024 Three Months Ended March 31, 2023

The following tables provide information for our net sales and Segment Adjusted EBITDA (in thousands) for the three and six months ended June 30, 2024 compared to the same periods in 2023:

Three Months Ended June 30, 2024 Three Months Ended June 30, 2023

Fire Safety Specialty Products Fire Safety Specialty Products

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Segment Adjusted EBITDA $ 55,639 $ 9,269 $ 16,532 $ 4,458

Adjusted EBITDA for our Fire Safety segment increased by $3.1 million compared to the three months ended March 31, 2023.

The increase was primarily due to higher net sales offset by higher cost of goods sold and operating expenses.

Adjusted EBITDA for our Specialty Products segment increased by $5.9 million compared to the three months ended March 31, 2023.

The increase was primarily due to higher net sales offset by higher cost of goods sold and operating expenses.

Adjusted EBITDA for our Fire Safety segment increased by $39.1 million during the three months ended June 30, 2024 compared with the same period in 2023 .

The increase was primarily due to higher net sales.

Adjusted EBITDA for our Specialty Products segment increased by $4.8 million during the three months ended June 30, 2024 compared with the same period in 2023.

The increase was primarily due to higher net sales.

Six Months Ended June 30, 2024 Six Months Ended June 30, 2023

Fire Safety Specialty Products Fire Safety Specialty Products

Net sales $ 123,693 $ 62,627 $ 71,884 $ 48,111

Segment Adjusted EBITDA $ 55,398 $ 21,646 $ 13,171 $ 10,935

Adjusted EBITDA for our Fire Safety segment increased by $42.2 million during the six months ended June 30, 2024 compared with the same period in 2023.

The increase was primarily due to higher net sales.

Adjusted EBITDA for our Specialty Products segment increased by $10.7 million during the six months ended June 30, 2024 compared with the same period in 2023.

The increase was primarily due to higher net sales.

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, all of which could negatively impact revenues, earnings and cash flows, and potentially our liquidity if we do not moderate our expenditures accordingly.

O ur cash requirements, cash flows, indebtedness and available credit as of March 31, 2024 is discussed below.

We believe that our existing cash and cash equivalents of approximately $34.4 million, net cash flows generated from operations and availability under the Revolving Credit Facility as of March 31, 2024 will be sufficient to meet our current capital expenditures, working capital, and debt service requirements for at least 12 months from the filing date of this Quarterly Report.

As of March 31, 2024, we expect our remaining fiscal year 2024 capital expenditure budget of approximately $8.4 million, will cover both our maintenance and growth capital expenditures.

However, future operating 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, all of which could negatively impact revenues, earnings and cash flows, and potentially our liquidity if we do not moderate our expenditures accordingly.

O ur cash requirements, cash flows, indebtedness and available credit as of June 30, 2024 is discussed below.

We believe that our existing cash and cash equivalents of approximately $43.2 million, net cash flows generated from operations and availability under the Revolving Credit Facility as of June 30, 2024 will be sufficient to meet our current capital expenditures, working capital, and debt service requirements for at least 12 months from the filing date of this Quarterly Report.

As of June 30, 2024, we expect our remaining fiscal year 2024 capital expenditure budget to cover both our maintenance and growth capital expenditures.

We may also utilize borrowings under other various financing sources available to us, including the issuance of equity and/or debt securities through public offerings or private placements, to fund our acquisitions, the Annual Advisory Amounts and long-term liquidity needs.

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The applicable margin is 3.25% in the case of Term SOFR-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 March 31, 2024, the Company did not have any outstanding borrowings under the Revolving Credit Facility and was in compliance with all covenants.

As of June 30, 2024, the Company did not have any outstanding borrowings under the Revolving Credit Facility and was in compliance with all covenants.

SK Intermediate II has $675.0 million principal amount of 5.00% senior secured notes due October 30, 2029 ("Senior Notes").

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Share Repurchase Plan

On February 21, 2024, the Board re-established the limit for Ordinary Share repurchases at $100.0 million, which is within the repurchase limit approved by the Company’s shareholders on July 21, 2022.

We repurchased 2,969,357 Ordinary Shares during the three months ended March 31, 2024.

On May 23, 2024, 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 36,310,028 Ordinary Shares, at any time during the next five years.

The Board had re-established the limit for Ordinary Share repurchases at $100.0 million on February 21, 2024, which is within the repurchase limit approved by the Company’s shareholders’ on May 23, 2024.

We repurchased 18,535 and 2,987,892 Ordinary Shares during the three and six months ended June 30, 2024, respectively .

The repurchased Ordinary Shares were recorded at cost and are being held in treasury.

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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.

For 2023, the EverArc Founder Entity was entitled receive the Fixed Annual Advisory Amount of 2,357,061 Ordinary Shares or a value of $10.6 million, based on average price of $4.51 per Ordinary Share (the “2023 Fixed Amount”).

EverArc Founder Entity did not qualify to receive the Variable Annual Advisory Amount as the average price of $4.51 per Ordinary Share for 2023 was lower than the average price of $13.63 per Ordinary Share established in 2021 (the “2023 Variable Amount” and together with the 2023 Fixed Amount, the “2023 Advisory Amount”).

For 2023, the EverArc Founder Entity was entitled to receive the Fixed Annual Advisory Amount of 2,357,061 Ordinary Shares or a value of $10.6 million, based on average price of $4.51 per Ordinary Share (the “2023 Fixed Amount”).

The EverArc Founder Entity did not qualify to receive the Variable Annual Advisory Amount as the average price of $4.51 per Ordinary Share for 2023 was lower than the average price of $13.63 per Ordinary Share established in 2021 (the “2023 Variable Amount” and together with the 2023 Fixed Amount, the “2023 Advisory Amount”).

The EverArc Founder Entity elected to receive approximately 74.6% of the 2023 Advisory Amount in Ordinary Shares 1,758,464 Ordinary Shares) and approximately 25.4% of the 2023 Fixed Amount in cash $2.7 million).

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The summary of our cash flows is as follows (in thousands):

Three Months Ended March 31,

Six Months Ended June 30,

Cash provided by (used in):

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Operating Activities

Cash provided by (used in) operating activities was $2.8 million and $(31.6) million for the three months ended March 31, 2024 and 2023, respectively.

The change to cash provided in 2024 from cash used in 2023 of $34.4 was primarily due to a reduction in payment of founders advisory fee of $2.0 million, reduction in inventory, accounts receivable and other current assets of $10.4 million, higher net income after adjusting for non-cash items of $9.3 million and a change in operating liabilities of $12.7 million, compared to the same period in 2023.

Cash provided by (used in) operating activities was $11.4 million and $(72.9) million for the six months ended June 30, 2024 and 2023, respectively.

The change of $84.3 million between cash provided in 2024 from cash used in 2023 was primarily due to higher net income after adjusting for non-cash items of $46.6 million and an increase in operating liabilities of $36.2 million, a reduction in inventory of $22.6 million offset by increase in accounts receivable and other currents assets of $23.1 million, and payment of founders advisory fees of $2.0 million, compared with the same period in 2023.

Investing Activities

Cash used in investing activities was $0.5 million and $2.5 million for the three months ended March 31, 2024 and 2023, respectively.

During the three months ended March 31, 2024, the Company purchased property and equipment of $1.6 million offset by decrease in short-term investments of $1.1 million due to the settlement of a Euro denominated certificate of deposit.

During the three months ended March 31, 2023, the Company purchased property and equipment of $2.5 million.

Cash provided by (used in) investing activities was $0.2 million and $(4.4) million for the six months ended June 30, 2024 and 2023 respectively.

During the six months ended June 30, 2024, the Company purchased property and equipment of $5.2 million offset by proceeds from short-term investments of $5.4 million upon settlement of a Euro denominated certificate of deposit.

During the six months ended June 30, 2023, the Company purchased property and equipment of $4.4 million.

Financing Activities

Cash used in financing activities was $14.5 million and $0.9 million for the three months ended March 31, 2024 and 2023, respectively.

During the three months ended March 31, 2024, we repurchased outstanding Ordinary Shares for $14.3 million and made $0.2 million in principal payments on finance lease obligations.

During the three months ended March 31, 2023, we repurchased outstanding Ordinary Shares for $0.9 million.

Cash used in financing activities was $14.8 million and $27.3 million for the six months ended June 30, 2024 and 2023 respectively.

During the six months ended June 30, 2024, we repurchased outstanding Ordinary Shares for $14.4 million and made $0.3 million in principal payments on finance lease obligations.

During the six months ended June 30, 2023, we repurchased outstanding Ordinary Shares for $27.2 million and made principal payments on finance lease obligations of $0.1 million.

Critical Accounting Estimates and Policies

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements which have been prepared in accordance with U.S.

As of March 31, 2024, the Company’s significant accounting policies and estimates are consistent with those discussed in Note 2 - “Summary of Significant Accounting Policies and Recent Accounting Pronouncements” of its consolidated financial statements included in the Company’s 2023 Annual Report filed on Form 10-K with the SEC on February 22, 2024 .

The Company’s significant accounting policies and estimates are consistent with those discussed in Note 2 - “Summary of Significant Accounting Policies and Recent Accounting Pronouncements” of its consolidated financial statements included in the Company’s 2023 Annual Report filed on Form 10-K with the SEC on February 22, 2024 .

Significant estimates made by management in connection with the preparation of the accompanying condensed consolidated financial statements include the useful lives of long-lived and intangible assets, the fair value of financial assets and liabilities, stock options, founder advisory fees and realizability of deferred tax assets.

We are not presently aware of any events or circumstances that would require us to update our estimates, assumptions or revise the carrying value of our assets or liabilities.

estimates may change, however, as new events occur and additional information is obtained.

Our estimates may change, however, as new events occur and additional information is obtained.

As a result, actual results may differ significantly from our estimates, and any such differences may be material to our financial statements.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis