Perimeter Solutions, Inc. (Perimeter Solutions, S.A.) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The company provides fire retardants, firefighting products, equipment and services, and phosphorus pentasulfide products. Results are reported for Fire Safety and Specialty Products (renamed from Oil Additives in June 2022). Comparisons are between the post-November 2021 “Successor” and pre-combination “Predecessor” periods, so they are not fully like-for-like.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $101.0 million | $87.1 million | $158.7 million | $121.0 million |
| Gross profit | $28.5 million | $38.3 million | $41.7 million | $47.2 million |
| Gross margin | 28.3% | 43.9% | 26.3% | 39.0% |
| Operating income (loss) | $12.3 million | $6.3 million | $51.5 million | $(7.3) million |
| Net income (loss) | $7.2 million | $(3.8) million | $45.0 million | $(22.4) million |
| Diluted earnings (loss) per share | $0.04 | $(0.07) | $0.26 | $(0.42) |
| Segment Adjusted EBITDA | $35.7 million | $31.1 million | $47.7 million | $34.3 million |
- Sales and segments: Q2 sales rose 16%; Fire Safety contributed $66.6 million and Specialty Products $34.4 million. Six-month sales rose 31%; segment sales were $85.0 million and $73.7 million, respectively. Management attributed growth to higher Fire Safety sales and increased Specialty Products sales, including adoption in additional applications.
- Profitability and unusual items: Gross profit and margin fell despite higher sales. Cost of goods sold included $18.0 million of acquisition-related inventory step-up in Q2 and $27.3 million for the first half, as well as higher material, manufacturing and labor costs. Reported operating income and net income benefited from reductions in fair-value expense for related-party founder advisory fees of $20.5 million in Q2 and $80.3 million for the first half. These are not recurring operating improvements. The company also recorded a $9.4 million contingent earn-out gain in both 2022 periods.
- Cash flow: Operating cash flow was negative $89.4 million for the first half, versus negative $10.5 million a year earlier. Management cited the $53.5 million cash payment for 2021 founder advisory amounts and working-capital needs, including preseason inventory build. Investing cash flow was negative $5.6 million; financing cash flow was negative $4.5 million, including $5.0 million of share repurchases. Cash declined to $125.5 million from $225.6 million at year-end 2021.
- Liquidity and debt: Long-term debt was $664.7 million net of issuance costs ($675.0 million principal), consisting of 5.00% senior notes due 2029. No borrowings were outstanding on the $100 million revolving facility; the company reported covenant compliance. Redeemable preferred shares were classified as liabilities ($102.5 million redemption price at June 30) and carry a 6.50% cumulative dividend. Total current assets were $349.4 million and current liabilities were $98.3 million.
- Other balance-sheet items: Accounts receivable was $68.5 million and inventory was $123.1 million at June 30. Shareholders’ equity was $1.13 billion. The company repurchased 597,513 shares for $5.0 million during the first half.
Changes, outlook and material risks
- Management said existing cash, expected operating cash flows and revolver availability should cover capital expenditures, working capital and debt service for at least 12 months from the filing date. Remaining 2022 capital expenditure budget was approximately $6.0 million. No quantified revenue or earnings guidance was provided.
- Management expects wildfire severity, longer fire seasons, wildland-urban interface growth and fire-prevention demand to support Fire Safety demand, but sales are seasonal and depend on weather, fire activity and government purchasing. The company is substantially dependent on the USDA Forest Service and California, and a small number of customers account for significant revenue.
- Raw material, labor and transportation inflation, supply-chain disruptions, and currency movements may pressure costs and margins. Management described mitigation efforts but gave no assurance they will fully offset inflation. The Ukraine conflict’s broader effects remain uncertain; the company said its direct exposure is limited. COVID-related supply-chain and labor disruptions persisted.
- The company is involved in aqueous film-forming foam (AFFF) multi-district and related litigation. It said potential losses were not probable or reasonably estimable at the time of filing.
- Disclosure controls and procedures remained ineffective at June 30, 2022 because of continuing material weaknesses, including segregation-of-duties and review-control deficiencies, complex accounting and business-combination controls, and controls over tax earnings-repatriation forecasts. The company reported adding accounting resources and engaging outside assistance to remediate weaknesses.
Important facts for investors to verify
- How much of reported profit reflects recurring operations versus the noncash founder-advisory fair-value reduction and contingent earn-out gain.
- Whether inventory step-up costs, inflation and other cost pressures continue to constrain gross margin, and whether seasonal demand converts into operating cash flow.
- The pace of working-capital use and the company’s liquidity after the substantial first-half cash decline and founder advisory payment.
- Exposure to AFFF litigation, customer concentration and fire-season variability, given the filing’s statement that potential legal losses cannot currently be estimated.
- Progress in remediating the disclosed material weaknesses and the implications of the related-party advisory arrangements and preferred-share obligations.