Perimeter Solutions, Inc. (Perimeter Solutions, S.A.) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. Unless stated otherwise, dollar amounts are in millions. The 2022 successor-period results are compared with 2021 predecessor-period results following the November 2021 business combination, so the periods are not fully comparable.
Business context and reporting period
Perimeter operates in two segments: Fire Safety, which sells fire retardants, suppressants, equipment and services, and Specialty Products, which produces phosphorus pentasulfide for lubricant additives and other applications. The company renamed its Oil Additives segment Specialty Products in June 2022. Fire Safety is seasonal and sensitive to wildfire activity; management said a mild fire season reduced 2022 retardant demand, particularly in the Americas.
Financial highlights
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $160.5 | $195.4 | $319.2 | $316.5 |
| Gross profit | $85.8 | $109.3 | $127.5 | $156.6 |
| Gross margin | 53.5% | 56.0% | 39.9% | 49.5% |
| Operating income | $123.4 | $80.4 | $174.9 | $73.1 |
| Net income | $78.7 | $52.0 | $123.7 | $29.6 |
| Diluted EPS | $0.45 | $0.98 | $0.70 | $0.56 |
| Operating cash flow | Not presented by quarter | $(43.2) | $32.4 |
Revenue fell 18% in Q3, primarily because Fire Safety sales declined $50.5 million, including lower retardant sales amid mild conditions. Specialty Products sales rose $15.6 million. For the nine-month period, revenue was nearly flat: Fire Safety declined $30.2 million while Specialty Products grew $33.0 million.
Reported operating income and net income benefited substantially from reductions in the fair value of liability-classified founder advisory fees: $73.7 million in Q3 and $154.0 million year to date. These were noncash fair-value adjustments, not recurring operating revenue. Nine-month cost of goods sold also included $28.0 million of acquisition-related inventory step-up amortization. Segment Adjusted EBITDA totaled $75.6 million in Q3, down from $100.4 million, and $123.3 million year to date, down from $134.6 million. Fire Safety Adjusted EBITDA declined; Specialty Products Adjusted EBITDA increased.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $166.3 million at September 30, 2022, down from $225.6 million at year-end 2021. Current assets were $377.9 million and current liabilities were $167.4 million.
- Operating cash flow was negative $43.2 million for the first nine months, versus positive $32.4 million in 2021. The filing cites the $53.5 million cash founder-advisory payment and higher inventory as key pressures. Investing cash outflow was $7.7 million; financing cash outflow was $7.0 million, including share repurchases.
- Long-term debt had $675.0 million principal outstanding, carried net of issuance costs at $665.0 million. The 5.00% senior notes mature in October 2029. The $100 million revolving facility had no borrowings outstanding; the company reported covenant compliance.
- Redeemable preferred shares carry a 6.50% cumulative dividend and are mandatorily redeemable. Their redemption price was $103.5 million at quarter-end, with $3.5 million of dividends in arrears.
- Accrued expenses and other current liabilities included $91.8 million of accrued taxes, compared with $0.4 million at year-end 2021.
Outlook, risks and unusual items
- No quantitative earnings or revenue guidance was provided. Management said cash, expected operating cash flows and the undrawn revolver were expected to cover current capital expenditure, working capital, advisory-payment and debt-service needs for at least 12 months from the filing date. Remaining 2022 capital expenditures were estimated at approximately $4.0 million.
- Management cited wildfire severity and timing, customer concentration (including the USDA Forest Service and California), inflation in raw materials, labor and transportation, supply-chain disruption, foreign exchange and higher interest rates as risks. The company said it was pursuing pricing and supplier actions to mitigate inflation, but could not assure full recovery of increased costs.
- The company is involved in aqueous film-forming foam (AFFF) multidistrict litigation and related proceedings. It said potential losses were not considered probable or reasonably estimable at the time of filing.
- Disclosure controls and procedures were reported ineffective at September 30, 2022. Previously identified material weaknesses remained, including deficiencies in segregation of duties, review of complex accounting and estimates, business-combination accounting, and tax-related controls. Remediation efforts were underway.
- In the period after quarter-end through November 1, the company repurchased approximately 5.05 million shares at an average price of approximately $7.55. The board subsequently approved a plan to repurchase up to $100 million over 24 months.
Important facts for investors to verify
- How much reported earnings depended on the noncash founder-advisory fair-value gain, and how advisory obligations may affect future cash, shares and dilution.
- Whether the large accrued-tax balance is settled as expected and what drove its increase.
- Whether operating cash flow recovers as inventory and receivables normalize after the mild fire season.
- Fire-season demand, customer concentration, Specialty Products growth and the company’s ability to pass inflationary costs through to customers.
- Progress in remediating material weaknesses, and any developments in AFFF litigation or other contingencies.
- Successor/predecessor comparability and the effects of purchase accounting, including inventory step-up amortization, on reported margins and earnings.