PERIMETER SOLUTIONS, SA The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this quarterly report on Form 10Q for the quarter endedSeptember 30, 2022 (this "Quarterly Report"). This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, such statements are subject to the "safe harbor" created by those sections and involve risks and uncertainties. Forward-looking statements are based on our management's beliefs and assumptions and on information available to our management as of the date hereof. As a result of many factors, such as those set forth under "Item 1A. Risk Factors" included in our 2021 Annual Report and Part II, "Item 1A. Risk Factors" in this Quarterly Report, our actual results may differ materially from those anticipated in these forward-looking statements, accordingly, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Such factors may be amplified by the COVID-19 pandemic and its potential impact on our business and the global economy.
Overview
Perimeter Solutions, S.A. ("PSSA"), a public company limited by shares (société anonyme) was incorporated onJune 21, 2021 under the laws of the Grand Duchy of Luxembourg for the purpose of effecting a business combination. PSSA is headquartered in the Grand Duchy of Luxembourg with global operations inNorth America ,Europe , andAsia Pacific . PSSA's ordinary shares, nominal value,$1.00 per share (the "Ordinary Shares"), are listed onNew York Stock Exchange ("NYSE") and trade under the symbol "PRM." OnNovember 9, 2021 (the "Closing Date"), PSSA consummated the transactions contemplated by the business combination (the "Business Combination") with EverArc Holdings Limited, the former parent company of PSSA ("EverArc"),SK Invictus Holdings , S.à r.l., ("SK Holdings "), SK Invictus Intermediate S.à r.l., ("SK Intermediate"), doing business under the namePerimeter Solutions ("Perimeter" or "Perimeter Solutions") andEverArc (BVI) Merger Sub Limited , incorporated in theBritish Virgin Islands and a wholly-owned subsidiary of PSSA (the "Merger Sub") pursuant to a business combination agreement (the "Business Combination Agreement") datedJune 15, 2021 . The term the "Company" refers to PSSA and its consolidated subsidiaries, including SK Intermediate and Perimeter, after the closing of the Business Combination (the "Closing"). Upon the acquisition of SK Intermediate, PSSA was determined to be the legal and accounting acquirer (the "Successor") and SK Intermediate was deemed to be the accounting predecessor (the "Predecessor"). Our business is organized and managed in two reporting segments: Fire Safety and Specialty Products, formerly Oil Additives. Approximately 73% of our 2021 annual revenues were derived inthe United States , approximately 13% inEurope , approximately 7% inCanada and approximately 2% inMexico , with the remaining approximately 5% spread across various other countries. The Fire Safety segment is a formulator and manufacturer of fire management products that help our customers combat various types of fires, including wildland, structural, flammable liquids and other types of fires. Our Fire Safety segment also offers specialized equipment and services, typically in conjunction with its fire management products, to support its customers' firefighting operations. Our specialized equipment includes air base retardant storage, mixing, and delivery equipment; mobile retardant bases; retardant ground application units; mobile foam equipment; and equipment that we custom design and manufacture to meet specific customer needs. Our service network can meet the emergency resupply needs of over 150 air tanker bases inNorth America , as well as many other customer locations globally. The segment is built on the premise of superior technology, exceptional responsiveness to our customers' needs, and a "never-fail" service network. Significant end markets primarily include government-related entities and are dependent on concessions, licenses, and permits granted by the respective governments and commercial customers around the world. InJune 2022 , the Oil Additives segment, which produces and sells Phosphorus Pentasulfide ("P2S5"), was renamed the Specialty Products segment to better reflect the current and expanding applications for P2S5 in several end markets and applications, including lubricant additives, various agricultural applications, various mining applications, and emerging electric battery technologies. Within the lubricant additive end market, currently our largest end market application, P2S5 is primarily used in the production of a family of compounds called Zinc Dialkyldithiophosphates ("ZDDP"), which is 26
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considered an essential component in the formulation of engine oils with its main function to provide anti-wear protection to engine components.
Known Trends and Uncertainties
Growth in Fire Safety
We believe that our Fire Safety segment benefits from several secular growth drivers, including increasing fire severity, as measured by higher acres burned and longer fire seasons, a growing wildland urban interface, and increasing airtanker capacity. We believe that these trends are prevalent inNorth America , as well as globally. We are also attempting to grow our fire prevention and protection business, which is primarily focused on high hazard industries like electrical utilities, railroads and transportation agencies. Fire prevention products can be used to prevent fire ignitions and protect property from potential fire danger by providing proactive retardant treatment in high-risk areas. Treating these areas ahead of the fire season can potentially stop ignitions from equipment failures or sparks. Our new Phos-Chek Fortify products, applied before or early in the fire season, may provide protection all season. In addition, Phos-Chek Fortify can proactively be applied to protect high value assets and critical infrastructure from the danger of wildfire. We expect these trends to continue and drive growth in demand for fire retardant products. We have invested and intend to continue investing in the expansion of our fire safety business through acquisitions in order to further grow our global customer base. Acquisitions for all periods presented are described in Note 3, "Business Acquisitions," in the notes to the condensed consolidated financial statements included in this Quarterly Report.
Weather Conditions and Climate Trends
Our business is highly dependent on the needs of government agencies to suppress fires. As such, our financial condition and results of operations are significantly impacted by weather as well as environmental and other factors affecting climate change, which impact the number and severity of fires in any given year. Historically, sales of our products have been higher in the summer season of each fiscal year due to weather patterns which are generally correlated to a higher prevalence of wildfires. This is in part offset by the disbursement of our operations in both the northern and southern hemispheres, where the summer seasons alternate.
Global Economic Environment
InFebruary 2022 ,Russia invadedUkraine . While we have limited exposure inRussia andUkraine , we continue to monitor any broader impact to the global economy, including with respect to inflation, supply chains and fuel prices. The full impact of the conflict on our business and financial results remains uncertain and will depend on the severity and duration of the conflict and its impact on regional and global economic conditions.
Inflationary Cost Environment
During fiscal 2021 and continuing into the current fiscal year, global commodity and labor markets experienced significant inflationary pressures attributable to ongoing economic recovery and supply chain issues. We are subject to inflationary pressures with respect to raw materials, labor and transportation. Accordingly, we continue to take actions with our customers and suppliers to mitigate the impact of these inflationary pressures in the future. Actions to mitigate inflationary pressures with suppliers include aggregation of purchase requirements to achieve optimal volume benefits, negotiation of cost-reductions and identification of more cost competitive suppliers. While these actions are designed to offset the impact of inflationary pressures, we cannot provide assurance that it will be successful in fully offsetting increased costs resulting from inflationary pressure. Interest payments for borrowings under our revolving credit facility are based on variable rates. As a result, an increase in interest rates may reduce our cash flow available for other corporate purposes.
Ongoing COVID-19 Pandemic
The pandemic caused by an outbreak of a novel strain of coronavirus, SARS-CoV-2,
which causes COVID-19 that began in
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millions of confirmed COVID-19 cases, business slowdowns or shutdowns, government challenges and market volatility throughout 2020 into 2022.
While the ongoing impact from the COVID-19 pandemic has subsided, disruptions to supply chains, transportation efficiency, and availability of raw materials and labor continue to persist. The exact pace and timing of the economic recovery remains uncertain and is expected to continue to be uneven depending on various factors. As the consequences of the pandemic and adverse impact to the global economy continue to evolve, the future adverse impact on our business and financial statements remains subject to uncertainty as of the date of this filing.
Results of Operations
Three Months Ended
The following table sets forth our results of operations for each of the periods
indicated (in thousands):
Successor Predecessor
Three Months Change
Ended September Three Months Ended
30, 2022 September 30, 2021 $ %
Net sales $ 160,509 $ 195,414 $ (34,905) (18 %)
Cost of goods sold 74,707 86,081 (11,374) (13 %)
Gross profit 85,802 109,333 (23,531) (22 %)
Operating expenses
Selling, general and administrative
expense 22,381 15,333 7,048 46 %
Amortization expense 13,738 13,276 462 3 %
Founders advisory fees - related party (73,713) - (73,713) - %
Other operating expense (51) 313 (364) (116 %)
Total operating expenses (37,645) 28,922 (66,567) (230 %)
Operating income 123,447 80,411 43,036 54 %
Other expense (income):
Interest expense, net 9,944 8,065 1,879 23 %
Gain on contingent earn-out (3,644) - (3,644) - %
Unrealized foreign currency loss 4,705 1,634 3,071 188 %
Other (income) expense, net (785) 66 (851) (1289 %)
Total other expense, net 10,220 9,765 455 5 %
Income before income taxes 113,227 70,646 42,581 60 %
Income tax expense (34,516) (18,637) (15,879) 85 %
Net income $ 78,711 $ 52,009 $ 26,702 51 %
Net Sales . Net sales decreased by $34.9 million for the three months ended
September 30, 2022 compared to the same period in 2021. The decrease in net
sales was primarily due to $50.5 million lower sales generated by the Fire
Safety segment. Within the Fire Safety segment, sales of fire retardants and
fire suppressants decreased by $48.9 million and $1.6 million , respectively.
Fire retardant sales decreased by $50.8 million in the Americas due to a mild
fire season offset by a $1.9 million increase in Europe . Fire retardant sales in
a given geography are generally driven by the severity of the fire season in
that geography. Fire suppressant sales decreased by $2.3 million in Europe
primarily due to lower Class B foam concentrate sales offset by a $0.7 million
increase in Asia Pacific as a result of higher fluorine free foam concentrates
sales in Australia along with increased shipments to Asia . Fire suppressant
sales in the Americas were unchanged between periods. Net sales in the Specialty
Products segment increased by $15.6 million , of which $13.4 million was in the
Americas and $2.2 million was in Europe . Specialty Product sales are primarily
driven by changes in our relevant market share in each region; as well as the
adoption of our P2S5 products in several new end markets and applications.
Cost of Goods Sold. Cost of goods sold decreased by $11.4 million for the three
months ended September 30, 2022 compared to the same period in 2021. The
decrease was primarily as a result of a $13.2 million decrease in the Fire
Safety segment due to lower material and manufacturing costs of $14.3 million
offset by an increase of $0.7 million in the
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amortization of inventory step-up related to the Business Combination and increased labor and share-based compensation expense of$0.4 million . The$1.8 million increase in cost of goods sold in the Specialty Products segment was due to a$0.8 million increase in insurance costs, a$0.6 million increase in depreciation expense and a$0.4 million increase related to higher material and manufacturing costs. Selling, General and Administrative Expense. Selling, general and administrative expense increased by$7.0 million for the three months endedSeptember 30, 2022 compared to the same period in 2021. The increase was primarily driven by a$6.6 million increase in personnel related and share-based compensation expenses, a$1.6 million increase in insurance costs and a$1.5 million increase in logistics expenses offset by a$2.7 million decrease in accounting, legal, consulting and other administrative expenses. Founder advisory fees - related party. The reduction in founder advisory fees - related party of$73.7 million for the three months endedSeptember 30, 2022 represents a decrease in the fair value of the liability-classified variable and fixed annual advisory amounts as ofSeptember 30, 2022 . The fair value of the variable annual advisory amount decreased by$53.2 million and the fair value of the fixed annual advisory amount decreased by$20.5 million . The variable annual advisory amount at the end of each reporting period is valued using a Monte Carlo simulation model and the fixed annual advisory amount is valued using the period end volume weighted average closing share price of our Ordinary Shares for ten consecutive trading days. Interest Expense. Interest expense increased by$1.9 million for the three months endedSeptember 30, 2022 compared to the same period in 2021. The increase was primarily due to the$1.6 million of dividends on the 6.50% redeemable preferred shares of PSSA ("Redeemable Preferred Shares"), included in interest expense, and higher interest rates on outstanding debt compared to the same period in 2021. Gain on Contingent Earn-out. The contingent earn-out related to the purchase of LaderaTech changed by$3.6 million for the three months endedSeptember 30, 2022 compared to the same period in 2021 due to a reduction in the fair value of the contingent consideration by$3.6 million in 2022 as a result of a change in the forecast of the product mix from an earn-out eligible fire retardant to a non earn-out eligible Company developed fire retardant. There was no change in the fair value of the contingent consideration for the three months endedSeptember 30, 2021 . Unrealized Foreign Currency Loss. Unrealized foreign currency loss increased by$3.1 million for the three months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily due to unfavorable foreign currency rate changes, primarily in the Euro, during the three months endedSeptember 30, 2022 compared to the same period in 2021. Income Tax Expense. Income tax expense increased by$15.9 million for the three months endedSeptember 30, 2022 compared to the same period in 2021. The increase is due primarily to changes in earnings in jurisdictions that were not covered by a valuation allowance and the impact of non-deductible compensation, non-taxable gain on contingent earn-out and accrued withholding taxes on the annualized effective tax rate. 29
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Nine Months EndedSeptember 30, 2022 Compared to the Nine Months EndedSeptember 30, 2021 Successor Predecessor Nine Months Ended Change September 30, Nine Months Ended 2022 September 30, 2021 $ % Net sales$ 319,232 $ 316,460$ 2,772 1 % Cost of goods sold 191,757 159,895 31,862 20 % Gross profit 127,475 156,565 (29,090) (19 %) Operating expenses Selling, general and administrative expense 64,803 42,544 22,259 52 % Amortization expense 41,395 39,818 1,577 4 % Founders advisory fees - related party (154,026) - (154,026) - % Other operating expense 405 1,066 (661) (62 %) Total operating expenses (47,423) 83,428 (130,851) (157 %) Operating income 174,898 73,137 101,761 139 % Other expense (income): Interest expense, net 32,582 23,951 8,631 36 % (Gain) loss on contingent earn-out (13,042) 2,763 (15,805) (572 %) Unrealized foreign currency loss 8,741 3,892 4,849 125 % Other income, net (820) (252) (568) 225 % Total other expense, net 27,461 30,354 (2,893) (10 %) Income before income taxes 147,437 42,783 104,654 245 % Income tax expense (23,692) (13,151) (10,541) 80 % Net income$ 123,745 $ 29,632$ 94,113 318 %Net Sales . Net sales increased by$2.8 million for the nine months endedSeptember 30, 2022 compared to the same period in 2021. Net sales in the Fire Safety segment decreased by$30.2 million , representing lower fire retardant sales of$36.5 million offset by a$6.3 million increase in fire suppressant sales. Fire retardant sales decreased by$40.2 million in theAmericas due to a mild fire season offset by increases of$2.5 million inAsia Pacific and$1.2 million inEurope . Fire retardant sales in a given geography are generally driven by the severity of the fire season in that geography. Fire suppressant sales increased by$2.7 million inAsia Pacific because of higher fluorine free concentrates sales inAustralia along with increased shipments toAsia ,$2.1 million in theAmericas driven by fluorine free foam concentrate and foam systems and$1.5 million inEurope due to improved market share and geographic reach. Net sales in the Specialty Products segment increased by$33.0 million , of which$24.4 million was in theAmericas and$8.6 million was inEurope . Specialty Product sales are primarily driven by changes in our relevant market share in each region; as well as the adoption of our P2S5 products in several new end markets and applications. Cost of Goods Sold. Cost of goods sold increased by$31.9 million for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The increase was primarily as a result of a$26.4 million increase in the Fire Safety segment due to an increase of$28.0 million in amortization of inventory step-up related to the Business Combination and$2.8 million in increased labor and share-based compensation expense offset by$4.4 million in lower material and manufacturing costs. The$5.5 million increase in the Specialty Products segment was due to a$2.4 million increase in insurance costs, a$1.9 million increase in depreciation expense, a$0.6 million increase in lease expense and$0.8 million higher raw material and manufacturing costs offset by a$0.2 million decrease in other manufacturing related expenses. Selling, General and Administrative Expense. Selling, general and administrative expense increased by$22.3 million for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The increase was primarily driven by a$19.2 million increase in personnel related and share-based compensation expenses, a$4.9 million increase in insurance costs, a$4.1 million increase in logistics expenses, offset by a$5.9 million decrease in accounting, legal, consulting and other administrative expenses. Founder advisory fees - related party. The reduction in founder advisory fees - related party of$154.0 million for the nine months endedSeptember 30, 2022 represents a decrease in the fair value of the liability-classified variable and fixed annual advisory amounts as ofSeptember 30, 2022 . The fair value of the variable annual advisory amount decreased by$114.8 million and the fair value of the fixed annual advisory amount decreased by$39.2 million . The variable annual 30
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advisory amount at the end of each reporting period is valued using a Monte Carlo simulation model and the fixed annual advisory amount is valued using the period end volume weighted average closing share price of our Ordinary Shares for ten consecutive trading days. Interest Expense. Interest expense increased by$8.6 million for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The increase was primarily due to$4.9 million of dividends on the 6.50% redeemable preferred shares of PSSA ("Redeemable Preferred Shares"), included in interest expense, and higher interest rates on outstanding debt compared to the same period in 2021. (Gain) Loss on Contingent Earn-out. The contingent earn-out related to the purchase of LaderaTech changed by$15.8 million for the nine months endedSeptember 30, 2022 compared to the same period in 2021 due to a reduction in the fair value of the contingent consideration by$13.0 million in 2022 as a result of a change in the forecast of the product mix from an earn-out eligible fire retardant to a non earn-out eligible Company developed fire retardant compared to a$2.8 million increase in 2021 in the fair value of the contingent consideration. Unrealized Foreign Currency Loss. Unrealized foreign currency loss increased by$4.8 million for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The increase was primarily due to unfavorable foreign currency rate changes, primarily in the Euro, during the nine months endedSeptember 30, 2022 compared to the same period in 2021. Income Tax Expense. Income tax expense increased by$10.5 million for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The increase is due primarily to changes in earnings in jurisdictions that were not covered by a valuation allowance and the impact of non-deductible compensation, non-taxable gain on contingent earn-out and accrued withholding taxes on the annualized effective tax rate.
Business Segments
We use segment net sales and segment adjusted earnings before interest, taxes,
depreciation and amortization ("Adjusted EBITDA"), financial measures that are
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"), to evaluate our operating performance by
segment, for business planning purposes and to allocate resources. The following
tables provide information for our net sales and Adjusted EBITDA (in thousands):
Three Months Ended September 30, 2022 Compared to the Three Months Ended
September 30, 2021
Successor Predecessor
Three Months Ended September 30, 2022 Three Months Ended September 30, 2021
Specialty Specialty
Fire Safety Products Fire Safety Products
Net sales $ 121,963 $ 38,546 $ 172,445 $ 22,969
Segment Adjusted EBITDA $ 60,363 $ 15,264 $ 97,854 $ 2,496 Adjusted EBITDA for our Fire Safety segment during the three months ended
Adjusted EBITDA for our Specialty Products segment during the three months endedSeptember 30, 2022 increased by$12.8 million to$15.3 million . The increase was primarily due to higher sales offset by higher cost of goods sold and operating expenses. Nine Months EndedSeptember 30, 2022 Compared to the Nine Months EndedSeptember 30, 2021 Successor Predecessor Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021 Specialty Specialty Fire Safety Products Fire Safety Products Net sales$ 207,010 $ 112,222 $ 237,256 $ 79,204 Segment Adjusted EBITDA$ 81,248 $ 42,038 $ 116,680 $ 17,919 31
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Adjusted EBITDA for our Fire Safety segment during the nine months ended
Adjusted EBITDA for our Specialty Products segment during the nine months endedSeptember 30, 2022 increased by$24.1 million to$42.0 million . The increase was primarily due to higher sales offset by higher cost of goods sold and operating expenses.
Liquidity and Capital Resources
We have historically funded our operations primarily through cash flows from operations, borrowings under our revolving credit facility, and the issuance of debt and equity securities. However, future cash flows are subject to a number of variables, including the length and severity of the fire season, growth of the wildland urban interface and the availability of air tanker capacity, all of which could negatively impact revenues, earnings and cash flows, and potentially our liquidity if we do not moderate our expenditures accordingly. As ofSeptember 30, 2022 , our cash requirements, cash flows, indebtedness and available credit is discussed below. We believe that our existing cash and cash equivalents of approximately$166.3 million as ofSeptember 30, 2022 , net cash flows generated from operations and availability under the Revolving Credit Facility will be sufficient to meet our current capital expenditures, working capital, founders advisory fee payments and debt service requirements for at least 12 months from the filing date of this Quarterly Report. As ofSeptember 30, 2022 , we expect our remaining fiscal year 2022 capital expenditure budget of approximately$4.0 million will cover both our maintenance and growth capital expenditures. We may also utilize borrowings under other various financing sources available to us, including the issuance of equity and/or debt securities through public offerings or private placements, to fund our acquisitions, the Advisory Amounts and long-term liquidity needs. Our ability to complete future offerings of equity or debt securities and the timing of these offerings will depend upon various factors including prevailing market conditions and our financial condition.
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