Perimeter Solutions, S.A. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. The company operates globally in Fire Safety and Specialty Products, including firefighting products and services and phosphorus pentasulfide used in lubricant additives and other applications. Results are seasonal and interim results may not indicate full-year performance.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $43.9 million | $57.8 million |
| Gross profit / gross margin | $12.8 million / 29.3% | $16.4 million / 28.4% |
| Operating income | $12.9 million | $43.1 million |
| Net income / diluted EPS | $9.4 million / $0.06 | $37.0 million / $0.21 |
| Segment Adjusted EBITDA | $3.1 million | $12.0 million |
| Cash used in operating activities | $31.6 million | $70.9 million |
Margins: Gross margin improved to approximately 29.3% from 28.4%, while net margin declined to approximately 21.5% from 64.0%. Net income included a $6.3 million income tax benefit; operating results also included a $24.2 million non-cash credit from remeasurement of founder advisory fees. These items affect period-to-period comparability.
Segments: Fire Safety sales rose 1% to $18.7 million; Adjusted EBITDA was a loss of $3.4 million, broadly flat year over year. Specialty Products sales fell 36% to $25.1 million and Adjusted EBITDA declined to $6.5 million from $15.3 million, primarily reflecting lower customer purchases as lubricant-additive customers destocked inventories.
Balance sheet, cash flow and liquidity
- Cash and cash equivalents were $91.8 million at March 31, 2023, down from $126.8 million at year-end 2022. The company used $35.0 million of cash during the quarter, including $31.6 million from operating activities and $2.5 million for capital expenditures.
- Current assets were $286.0 million and current liabilities $71.0 million. Inventory increased to $156.3 million from $143.0 million, partly reflecting preseason build-up.
- Senior Notes were $675.0 million principal, with $665.6 million net carrying value, bearing 5.00% interest and due October 2029. The company had no borrowings under its $100 million revolving credit facility and reported compliance with covenants.
- Redeemable preferred shares are classified as liabilities; their March 31 carrying value was $102.7 million, with a $105.5 million redemption price and $5.5 million of dividends in arrears.
- Management said cash, expected operating cash flows and revolver availability were sufficient for current capital, working-capital and debt-service needs for at least 12 months from the filing date. Remaining 2023 capital expenditure budget was approximately $7.5 million.
Material changes, outlook and other considerations
- Revenue decreased 24% year over year. Fire Safety retardant sales were affected by mild fire activity in the Americas and Asia Pacific; European suppressant sales benefited from market-share gains and new fluorine-free foam products. Specialty Products experienced lower demand as customers reduced inventories.
- Management expects fire-severity, longer fire seasons and growth in the wildland-urban interface to support long-term fire-retardant demand, and said it expects these trends to continue during 2023 and beyond. No specific financial guidance was provided.
- Operating cash use improved from Q1 2022, mainly because cash founder-advisory payments were lower; the company nevertheless reported seasonal inventory investment and lower cash on hand.
- The company repurchased 115,570 shares for $0.9 million during Q1. From April 1 through May 5, it repurchased approximately 1.48 million additional shares at an average price of approximately $7.34.
- Founder advisory arrangements create significant related-party costs and liabilities, with fair values sensitive to the share price and valuation assumptions. A separate contingent earn-out liability was $7.5 million at quarter-end.
- Legal matters include aqueous film-forming foam (AFFF) multidistrict litigation and similar proceedings. The company said potential losses were not considered probable or reasonably estimable.
- Risks include seasonality and weather-driven demand, reliance on government customers including the USDA Forest Service and California, customer concentration, raw-material and inflation pressures, variable-rate borrowing exposure, currency fluctuations, and possible product liability and environmental claims.
- Management reported continuing material weaknesses in disclosure controls and procedures related to stock-compensation grant-date reviews, complex accounting and disclosures, and business-combination accounting and presentation. Remediation efforts were underway; the weaknesses had not been remediated as of March 31, 2023.
Most important facts for investors to verify
- Whether customer destocking in Specialty Products has eased and when sales and segment profitability may recover.
- Fire-season conditions, government purchasing patterns and any changes in demand from major public-sector customers.
- Cash conversion through the seasonal inventory cycle, capital spending, and the company’s ability to maintain liquidity while servicing debt and preferred-share obligations.
- The effects of founder advisory fees, preferred dividends and share repurchases on cash, dilution and reported earnings.
- Developments in AFFF litigation and any changes in the company’s assessment of potential exposure.
- Progress in remediating the disclosed material weaknesses and the reliability of related accounting estimates and controls.