Perimeter Solutions, Inc. (Perimeter Solutions, S.A.) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The company supplies fire-safety products and services and specialty chemicals, principally through its Fire Safety and Specialty Products segments. All amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $142.7 | $160.5 | $262.7 | $319.2 |
| Gross profit | $73.3 | $86.7 | $118.1 | $132.1 |
| Gross margin | 51.4% | 54.0% | 45.0% | 41.4% |
| Operating income | $27.2 | $131.1 | $103.4 | $189.8 |
| Net income | $19.3 | $106.2 | $80.7 | $152.1 |
| Diluted EPS | $0.12 | $0.60 | $0.48 | $0.86 |
| Segment Adjusted EBITDA | $61.5 | $75.6 | $85.6 | $123.3 |
- Revenue and segment trends: Q3 sales fell 11%; nine-month sales fell 18%. Fire Safety sales declined $3.7 million in Q3 and $16.8 million year to date, as lower retardant sales outweighed growth in suppressants. Specialty Products sales fell $14.2 million in Q3 and $39.8 million year to date, largely due to customer inventory destocking. Segment Adjusted EBITDA declined in both segments.
- Cash flow: Operating activities used $10.2 million in the first nine months, versus $43.2 million used in 2022. Investing activities used $6.6 million, mainly for property and equipment; financing activities used $37.5 million, including $37.2 million of share repurchases. Cash declined $55.0 million to $71.8 million.
- Debt and liquidity: Senior Notes had $675.0 million principal outstanding, with a $666.2 million carrying value, bear 5.00% interest, and mature October 2029. The company had no borrowings under its $100 million revolving facility and reported covenant compliance. Management said existing cash, operating cash flows and facility availability should cover current needs for at least 12 months from the filing date. Remaining 2023 capital expenditure budget was approximately $3.4 million.
- Other balance-sheet items: Current assets were $294.4 million and current liabilities $63.5 million at September 30. Redeemable preferred shares were carried as a $104.8 million liability; their redemption price was $107.5 million, including accrued dividends. Long-term debt and preferred-share obligations are in addition to lease liabilities.
Material changes and unusual items
- Q3 results included a $40.7 million non-cash impairment of technology related to a LaderaTech fire-retardant product following a downward revision to its revenue forecast. The company also recorded a $7.7 million gain because the related contingent earn-out was no longer payable.
- Fair-value reductions in liability-classified founder advisory fees generated expense credits of $24.5 million in Q3 and $108.8 million for the nine months. These non-cash credits materially affected reported operating results; the amounts depend in part on the company’s share price.
- Despite the impairment trigger, the interim goodwill test recorded no goodwill impairment. Estimated fair value exceeded carrying value by 5.9% for Fire Safety and 15.3% for Specialty Products. Management cautioned that these estimates are sensitive to forecasts, discount rates and market value.
- The company repurchased 5.85 million shares for $37.2 million during the first nine months; 1.74 million were repurchased in Q3 at an average $5.76 per share. Shares outstanding at September 30 were 152.8 million.
- For the nine months, a $34.0 million reduction in unrecognized tax benefits followed an amended tax filing. Remaining unrecognized tax benefits were $2.3 million, not expected to decrease within 12 months.
Outlook, risks and controls
- No quantified revenue or earnings guidance is provided. Management describes fire-safety demand as seasonal and dependent on weather, fire activity and government agency needs; it cites longer fire seasons, fire severity and expansion of the wildland-urban interface as potential demand drivers. Suppressant sales benefited from emergency response activity, geographic expansion and fluorine-free foam products.
- Management identified specialty-chemical customer destocking, inflation in materials, labor and transportation, and variable-rate borrowing costs as pressures. It is pursuing pricing measures and supplier cost reductions but cannot assure that these will fully offset inflation.
- Risks include dependence on a limited number of customers—including the USDA Forest Service and California—seasonality, customer concentration, supply and commodity-price volatility, foreign-exchange exposure, and product liability and environmental concerns. The company reported no hedging activity.
- Legal proceedings include aqueous film-forming foam (AFFF) multidistrict litigation and similar cases. The company said potential losses were not probable or reasonably estimable at the reporting date.
- Material weaknesses in internal control over financial reporting remained at September 30. They relate to review controls for performance-based stock-option grant dates, complex accounting and valuation matters (including goodwill impairment), and business-combination accounting and presentation. Management said remediation was underway, including added qualified resources and implementation of new controls.
Investor facts to verify
- Whether fire-retardant demand recovers and specialty-chemical customers resume purchasing after destocking.
- Whether the impairment assumptions and goodwill valuation headroom remain supportable as forecasts and share price change.
- Cash generation, working-capital requirements and capacity to service debt and preferred-share redemption obligations; operating cash flow was negative for the first nine months.
- Progress and effectiveness of remediation of the disclosed material weaknesses.
- Developments in AFFF litigation and any change in the company’s assessment of potential losses.
- The continuing cost and terms of founder advisory arrangements and the pace of share repurchases.