Perimeter Solutions, Inc. (Perimeter Solutions, S.A.) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The company provides fire-safety products, equipment and services, and phosphorus pentasulfide used mainly in oil additives. It reports Fire Safety and Oil Additives segments. The 2022 period is presented as the “Successor” and Q1 2021 as the “Predecessor” following the November 2021 business combination; results may not be directly comparable.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Net sales | $57.8 million | $33.9 million | Up 70%; Oil Additives contributed $39.3 million and Fire Safety $18.5 million. |
| Gross profit / margin | $13.1 million / 22.7% | $9.0 million / 26.4% | Gross profit rose, but margin declined as cost of goods sold grew faster than sales. |
| Operating income (loss) | $39.1 million | $(13.5) million | Includes a $59.8 million reduction in founder advisory fee expense from a fair-value decrease. |
| Net income (loss) | $37.8 million | $(18.5) million | Reported profit was substantially affected by the founder-fee fair-value credit. |
| Diluted EPS | $0.22 | $(0.35) | Prior-period comparison is affected by the business combination and share-count change. |
| Segment Adjusted EBITDA | $12.0 million | $3.1 million | Oil Additives: $15.3 million; Fire Safety: $(3.3) million. Non-GAAP measure. |
| Operating cash flow | $(70.9) million | $(0.2) million | Includes $53.5 million cash payment of 2021 founder advisory amounts and working-capital outflows. |
| Cash and cash equivalents | $153.5 million | $225.6 million at Dec. 31, 2021 | Cash declined by $72.0 million during the quarter. |
| Debt | $664.4 million carrying value | $664.1 million at Dec. 31, 2021 | $675 million principal amount of 5% senior notes due 2029; no revolver borrowings. |
Material changes and financial position
- Revenue increased by $23.8 million year over year: Oil Additives rose $13.0 million and Fire Safety rose $10.8 million. Management attributed growth to higher oil-additive sales, wildfire-related retardant demand, and increased suppressant sales.
- Cost of goods sold rose 79%, exceeding 70% sales growth. The increase included $9.3 million of noncash acquisition-related inventory step-up expense, along with higher materials, manufacturing and labor costs.
- Cash used in operations was mainly driven by the founder advisory cash payment and negative working capital movements, including higher receivables and inventory. Investing outflow was $3.0 million, including $1.3 million of capital expenditures and a $1.7 million business-combination purchase-price adjustment.
- At March 31, current assets were $332.2 million and current liabilities were $80.1 million. The company had a $100 million revolving credit facility, undrawn at quarter-end, and said it was in compliance with its covenants.
- Redeemable preferred shares are classified as liabilities and carry a 6.5% cumulative annual dividend. The company recorded $1.6 million of preferred dividends in interest expense; $1.5 million was in arrears at quarter-end.
Outlook, risks and unusual items
- No specific financial guidance was provided. Management said it expected fire-safety demand trends, including wildfire severity and growth of the wildland-urban interface, to support demand in 2022 and beyond.
- Management estimated remaining 2022 capital expenditures of approximately $8.3 million and stated that cash, operating cash flows and available revolver capacity should meet capital, working-capital and debt-service requirements for at least 12 months from filing.
- Business is seasonal and weather-dependent. Management cited persistent inflation in raw materials, labor and transportation; supply-chain disruptions; and uncertainty related to COVID-19 and the Russia-Ukraine conflict. It cautioned that mitigation efforts may not fully offset cost increases.
- The company faces aqueous film-forming foam litigation and related claims. Management said potential losses were not considered probable or reasonably estimable at the filing date.
- Disclosure controls and procedures were reported ineffective at March 31, 2022 because material weaknesses continued, including journal-entry segregation, review of acquisition valuation assumptions, complex accounting and disclosure reviews, business-combination accounting, and earnings-repatriation forecasting. Remediation was underway.
- Reported operating income and net income were unusually influenced by the $59.8 million noncash founder-advisory fair-value credit. The filing also identifies substantial founder advisory obligations, including fair values of $308.0 million for the variable amount and $169.2 million for the fixed amount.
Important facts for investors to verify
- How much of revenue growth and margin change reflects volume, pricing, product mix, inflation, and the acquisition accounting inventory step-up.
- The recurring cash cost, dilution, and fair-value volatility of the founder advisory agreement, and the terms and timing of future payments.
- Whether Fire Safety can improve from negative segment Adjusted EBITDA, and whether Oil Additives growth and profitability persist.
- Working-capital needs, seasonal cash-flow patterns, and the company’s capacity to service its $675 million senior notes and redeemable preferred obligations.
- Progress in remediating material weaknesses, and any developments in AFFF litigation or other product-liability contingencies.