Perimeter Solutions(PRM) - 2023 Q2 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Statements - This report contains forward-looking statements concerning future events and financial performance. These statements are based on current expectations and are subject to risks and uncertainties, meaning actual results could differ materially[8] - Key areas covered by forward-looking statements include future financial performance, expansion of the fire safety business, capital expenditures, demand for products, and the impact of economic conditions[9] - Significant risks that could affect results include dependence on government customers (USDA Forest Service, California), seasonality, supply chain issues, and litigation[11] PART I - FINANCIAL INFORMATION Financial Statements Unaudited financial statements for June 30, 2023, show assets decreased, net sales declined, but net income increased, primarily due to a non-cash fee reduction Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | June 30, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $22,118 | $126,750 | | Total current assets | $262,011 | $308,522 | | Goodwill | $1,033,642 | $1,031,460 | | Total assets | $2,387,916 | $2,456,616 | | Liabilities & Equity | | | | Total current liabilities | $66,427 | $74,154 | | Long-term debt | $665,879 | $665,280 | | Total liabilities | $1,212,854 | $1,317,716 | | Total shareholders' equity | $1,175,062 | $1,138,900 | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $76,137 | $100,965 | $119,995 | $158,723 | | Gross profit | $31,997 | $28,915 | $44,843 | $45,330 | | Operating income | $63,347 | $15,639 | $76,199 | $58,697 | | Net income | $52,014 | $8,927 | $61,445 | $45,890 | | Diluted EPS | $0.31 | $0.05 | $0.36 | $0.26 | - A significant driver of the increase in operating and net income was a $60.0 million and $84.3 million non-cash reduction in founders advisory fees for the three and six months ended June 30, 2023, respectively, due to a decrease in the company's share price[15][88] Condensed Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(72,936) | $(89,351) | | Net cash used in investing activities | $(4,375) | $(5,644) | | Net cash used in financing activities | $(27,315) | $(4,479) | | Net change in cash and cash equivalents | $(104,632) | $(100,052) | - The decrease in cash used in operating activities was primarily due to a $48.9 million reduction in cash-settled founder advisory fees compared to the prior year period[20][147] - Cash used in financing activities increased significantly due to $27.2 million in ordinary share repurchases during the first six months of 2023, compared to $5.0 million in the same period of 2022[20][149] Notes to Condensed Consolidated Financial Statements Notes detail company structure, accounting policies, and financial components, including segment operations, debt, advisory fees, and declining Adjusted EBITDA - The company operates in two segments: Fire Safety (fire management products and services) and Specialty Products (primarily Phosphorus Pentasulfide for various industrial applications)[24][25] - Long-term debt primarily consists of $675.0 million in 5.00% Senior Notes due 2029. The company also has an undrawn $100.0 million Revolving Credit Facility[53][54][60] - The company has a Share Repurchase Plan authorizing up to $100.0 million in repurchases. During the six months ended June 30, 2023, the company repurchased 4,108,626 Ordinary Shares[74][75][159] Segment Net Sales and Adjusted EBITDA (in thousands) | Metric | Period | Fire Safety | Specialty Products | Total Segment | | :--- | :--- | :--- | :--- | :--- | | Net Sales | Q2 2023 | $53,140 | $22,997 | $76,137 | | | Q2 2022 | $66,577 | $34,388 | $100,965 | | | H1 2023 | $71,884 | $48,111 | $119,995 | | | H1 2022 | $85,047 | $73,676 | $158,723 | | Adjusted EBITDA | Q2 2023 | $16,532 | $4,458 | $20,990 | | | Q2 2022 | $24,219 | $11,463 | $35,682 | | | H1 2023 | $13,171 | $10,935 | $24,106 | | | H1 2022 | $20,885 | $26,774 | $47,659 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes net sales decline to lower fire activity and destocking; operating income rose significantly due to non-cash gains; liquidity is sufficient Known Trends and Uncertainties - The Fire Safety segment is expected to benefit from secular growth drivers including increasing fire severity, longer fire seasons, and a growing wildland-urban interface[114] - The company is focused on growing its fire prevention and protection business, particularly for high-hazard industries like utilities and railroads, with products like Phos-Chek Fortify[115] - The business is highly dependent on weather conditions, with sales historically higher in the summer season. Global inflationary pressures on materials and labor are being monitored and mitigated through various actions with customers and suppliers[117][118] Results of Operations Comparison of Results for the Six Months Ended June 30 (in thousands) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $119,995 | $158,723 | $(38,728) | (24%) | | Cost of goods sold | $75,152 | $113,393 | $(38,241) | (34%) | | Gross profit | $44,843 | $45,330 | $(487) | (1%) | | Operating income | $76,199 | $58,697 | $17,502 | 30% | | Net income | $61,445 | $45,890 | $15,555 | 34% | - For H1 2023, Fire Safety net sales decreased by $13.1 million due to lower fire activity in the Americas. Specialty Products net sales decreased by $25.6 million due to inventory destocking by customers[128][129] - Cost of Goods Sold for H1 2023 decreased by $38.2 million, primarily due to a $24.1 million decrease in amortization of inventory step-up related to the 2021 Business Combination, which was present in the 2022 period[130] - Adjusted EBITDA for the Fire Safety segment decreased by $7.7 million to $13.2 million in H1 2023, while Specialty Products Adjusted EBITDA decreased by $15.8 million to $10.9 million, both driven by lower sales[141][142] Liquidity and Capital Resources - The company believes its existing cash of $22.1 million, cash from operations, and availability under its $100.0 million Revolving Credit Facility will be sufficient to meet requirements for at least the next 12 months[144] Summary of Cash Flows for the Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Operating activities | $(72,936) | $(89,351) | | Investing activities | $(4,375) | $(5,644) | | Financing activities | $(27,315) | $(4,479) | - The company has a Founder Advisory Agreement that entitles the EverArc Founder Entity to fixed and variable annual advisory amounts, payable in a mix of cash and shares. For 2022, this resulted in a payment of $4.7 million in cash and 1,831,653 Ordinary Shares in February 2023[160][161][162] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks including foreign currency, interest rates on its undrawn credit facility, and commodity price volatility, with inflationary pressures actively managed - The company is exposed to foreign currency exchange risk from international sales and operations, primarily involving the Euro, Canadian dollar, Norwegian krone, and Australian dollar[167] - Interest rate risk is present due to the variable-rate Revolving Credit Facility. As of June 30, 2023, there were no borrowings outstanding under this facility[168] - The company faces commodity price risk, as some material supply contracts follow market prices while product sales prices may be fixed, potentially impacting margins[169] Controls and Procedures Management concluded disclosure controls were ineffective as of June 30, 2023, due to material weaknesses in complex accounting, with a remediation plan underway - Management concluded that disclosure controls and procedures were not effective as of June 30, 2023, due to existing material weaknesses[171][172] - Material weaknesses include failure to design and implement sufficiently precise review controls over accounting for performance-based stock, business combinations, and goodwill impairment[172] - A remediation plan is in progress, involving implementing new controls, hiring qualified personnel, and engaging external resources to improve internal controls over financial reporting[172][173] PART II - OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, notably multi-district litigation related to aqueous film forming foam (AFFF), with potential losses not considered probable or reasonably estimable - The company is involved in legal proceedings arising in the ordinary course of business, including multi-district litigation concerning aqueous film forming foam (AFFF)[177] - Potential losses from these legal matters are not considered probable or reasonably estimable at this time[177] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K - No material changes have been made to the risk factors disclosed in the 2022 Annual Report[178] Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended June 30, 2023, the company repurchased a total of 3,993,056 of its Ordinary Shares at an average price of $6.58 per share under its publicly announced share repurchase program Share Repurchases for the Quarter Ended June 30, 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2023 | 1,183,226 | $7.35 | | May 2023 | 1,291,385 | $6.44 | | June 2023 | 1,518,445 | $6.09 | | Total | 3,993,056 | $6.58 | Other Information On June 9, 2023, CEO Haitham Khouri entered into a Rule 10b5-1 sales plan for the sale of up to 600,000 Ordinary Shares - On June 9, 2023, CEO Haitham Khouri entered into a 10b5-1 sales plan for the sale of up to 600,000 Ordinary Shares[183] Exhibits This section lists the exhibits filed with the Form 10-Q, including officer certifications (Sarbanes-Oxley Sections 302 and 906) and XBRL data files - The report includes required certifications from the Principal Executive Officer and Principal Financial Officer, as well as XBRL data files[184]