Business context and reporting period
Perimeter Solutions, SA (NYSE: PRM) filed its Form 10-K for the fiscal year ended December 31, 2022. The company operates globally in two segments: Fire Safety, which sells fire retardants, firefighting foams, equipment and services; and Specialty Products, which manufactures phosphorus pentasulfide (P₂S₅), principally for lubricant additives. Results are seasonal, with Fire Safety sales typically concentrated in the second and third quarters.
The company’s 2021 comparison below combines Successor and Predecessor periods and is a non-GAAP, non-pro forma presentation; the acquisition accounting basis changed at the November 2021 business combination. Comparisons should therefore be treated with care. Figures are in U.S. dollars.
Key financial results and liquidity
| Metric | FY 2022 | FY 2021 combined comparator |
|---|---|---|
| Net sales | $360.5 million | $362.3 million |
| Gross profit / margin | $142.7 million / 39.6% | $166.5 million / 46.0% |
| Operating income (loss) | $130.1 million | $(600.1) million |
| Net income (loss) | $91.8 million | $(661.5) million |
| Basic / diluted EPS | $0.57 / $0.52 | Not clearly comparable |
| Operating cash flow | $(40.2) million | $72.4 million |
| Capital expenditures | $8.6 million | Not presented as a combined comparable figure |
The large reported earnings swing largely reflects founder advisory fee accounting: 2022 included a $117.3 million reduction in the fair value of the liability-classified obligation, while 2021 included a $653.0 million expense. These items materially distort the year-over-year operating income and net income comparison. FY 2022 segment Adjusted EBITDA was $125.4 million, versus $141.4 million in the combined 2021 comparator; it is a segment performance measure, not net income.
At year-end, cash and cash equivalents were $126.8 million, current assets $308.5 million and current liabilities $74.2 million. Long-term debt was $675.0 million principal ($665.3 million net of issuance costs); the $100 million revolving facility had no borrowings outstanding, and the company reported covenant compliance. Redeemable preferred shares were liabilities, with a 6.5% cumulative dividend and $4.5 million of preferred dividends in arrears. Management expected cash, operating cash flows and revolver availability to cover needs for at least 12 months from filing. The FY 2023 capital expenditure budget was $10 million.
Material changes versus the prior period
- Sales were nearly flat overall, down $1.8 million (0.5%). Fire Safety sales fell $34.6 million to $226.6 million, principally due to a mild North American fire season and lower retardant sales. Specialty Products sales rose $32.8 million to $133.9 million.
- Fire Safety Adjusted EBITDA fell $40.5 million to $77.4 million, reflecting lower sales and higher operating costs. Specialty Products Adjusted EBITDA increased $24.5 million to $48.0 million, primarily on higher sales.
- Gross margin declined to 39.6% from 46.0%. Cost of goods sold rose $22.0 million, including $21.6 million more amortization of acquisition-related inventory step-up.
- Operating cash flow was negative, mainly due to a $53.5 million cash payment for 2021 founder advisory fees and a $61.9 million inventory increase, partly associated with the mild fire season. The company repurchased 6.4 million shares for $49.3 million during 2022.
- Cash declined from $225.6 million to $126.8 million. The company adopted lease accounting standards in 2022, recognizing operating lease right-of-use assets and liabilities; adoption did not materially affect results or cash flows.
Outlook, risks and unusual items
No quantified revenue or earnings guidance is provided. Management expects longer fire seasons, greater wildfire severity, expanding wildland-urban interfaces and growth in fluorine-free firefighting foams to support demand over time. It also cites potential growth in fire prevention and new P₂S₅ applications, while noting that actual fire activity and demand are uncertain. Inflation in materials, labor and transport, supply-chain disruption, interest rates and the Russia-Ukraine conflict remain potential pressures.
The filing restates previously issued June and September 2022 quarterly financial statements for errors in performance-based stock-option accounting and acquisition inventory amortization. March 2022 statements and the 2021 post-combination period were revised for errors deemed immaterial to those periods. Investors are advised not to rely on the previously reported June and September quarterly statements or related communications.
Management concluded that disclosure controls and internal control over financial reporting were ineffective at December 31, 2022. The auditor issued an adverse opinion on internal control, citing material weaknesses involving stock-option grant-date accounting and controls over complex accounting, including business combinations and goodwill impairment. Management described remediation steps but cautioned that remediation was not complete.
Legal and regulatory exposure includes AFFF/PFAS litigation in multidistrict litigation with more than 2,000 pending cases. The company reported approximately 430 indemnity claims from Amerex and a small number of direct claims; it said losses were not probable or reasonably estimable at the filing date. Other key risks include customer concentration (USDA Forest Service represented 27% of 2022 revenue; Afton Chemical 12%), dependence on the Forest Service and California, seasonality, product liability, environmental regulation, and substantial debt. The company recorded no goodwill impairment in 2022; goodwill was $1.03 billion at year-end.
Important facts for investors to verify
- Review the restated 2022 quarterly results and confirm the impact of the stock-option and inventory-amortization corrections on reported earnings, taxes and equity.
- Track remediation of the disclosed material weaknesses and whether future filings report effective controls.
- Assess normalized earnings and cash generation excluding founder advisory fair-value changes, purchase-accounting amortization and other unusual items.
- Monitor wildfire activity, Fire Safety customer purchasing, inventory levels and the recovery of operating cash flow.
- Evaluate AFFF/PFAS litigation, indemnity claims, potential environmental liabilities and insurance coverage as proceedings develop.
- Review the full terms and future cash and share dilution implications of the founder advisory agreement, preferred shares and debt arrangements.