Perimeter Solutions

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Perimeter Solutions is a global specialty chemicals provider, primarily known for its fire safety and specialty products used in various industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Perimeter Solutions (PRM) is a global provider of high-quality fire safety and specialty materials and technologies. The company operates in two main segments: Fire Safety and Specialty Products.

  • Fire Safety: This segment offers fire retardants, foams, and gel products, as well as equipment and services, for fighting all types of wildfires, specifically designed to contain and extinguish wildfires. They also offer related training and technical support.

  • Specialty Products: This segment produces and sells a diverse range of products including chemical additives, lubricant additives, and specialty formulations used in industries such as: aviation, agriculture, energy, and other industrial applications, including lubricant additives, various agricultural applications, emerging electric mobility technologies, and specialty chemicals. The Specialty Products segment also manufactures and supplies products to enhance oil well production.

The company generates approximately 65% of revenues in the fire safety segment and 35% in the specialty products segment. However, specialty products contributes the larger share of profitability of PRM.

Financials Overview

PRM’s financial performance is a mix of growth and challenges. Here’s a detailed breakdown:

  • Revenue Trends : Recent results suggest a stabilization of revenue following a decline in previous years, with a slight rise in 2023. While the fire safety division dominates in size, the specialty products division makes a larger share of company profits.
  • Profit Margins: Gross profit margin and EBITDA margin are relatively stable, at 29.5% and 27.9% respectively as of the most recent report, which is impressive given the amount of investment into R&D. A notable drop from previous periods, however.
  • Net Income and EPS: Net income is volatile and can swing a lot based on acquisitions, with recent acquisitions showing strong EPS growth.
  • Debt and Leverage: The company uses a meaningful amount of debt. It is important to note though that PRM’s debt to equity is a key financial risk and should be monitored.

Key Financial Figures (2022 & 2023 YTD)

| Metric | 2022 (A) | Q1-Q3 2023 (U) | 2023 (Projected) | | —————————– | ———– | ————- | ————- | | Net Sales ($M) | 306.9 | 259.9 | 350M - 400M | | Gross Profit Margin | 29.8% | 29.5% | 30% | | Operating Income / Loss ($M) | (107) | 44 | 90 - 110 | | Adjusted EBITDA ($M) | 67.6 | 71.7 | 125M - 145M | | Net Debt / Adj. EBITDA | - | - | < 4x | | Net Income ($M) | -10.0 | -60.3 | 40 - 70 | A = Actuals, U=Unaudited; For both years, numbers reported in millions. Figures as of 9/30 *Based on recent reports and guidance.

Moat Analysis

PRM’s moat can be characterized as a 3 out of 5, a narrow moat with some identifiable but not necessarily overwhelming competitive advantages:

  • Proprietary Formulations: In its Specialty Products segment, PRM boasts many unique and highly specified chemical formulations. These formulations give them a competitive advantage as other companies are not able to easily replicate or compete with it. However, these formulations are not covered by patents that can give it a wider moat, but do offer a competitive advantage.

  • Established Customer Relationships: With deep ties to large organizations, including fire fighting agencies and major manufacturers in varied industries, provides some stickiness to their customer base. Because of this many customers will not simply switch for a cheaper alternative. But this is not a very defensible moat, and is susceptible to disruptions.

  • Global Presence and Distribution: The company’s global reach and established distribution networks, especially in fire-fighting products, means it can reliably service customers worldwide, which represents a competitive advantage that new competitors will have to compete against.
  • Switching Costs Some of their products are highly integrated within the clients systems. Switching to new products can create issues and increase operational risk, which makes it less likely for companies to switch. But switching is also not impossible for customers.

Risks to the Moat and Business Resilience

PRM faces several risks that could impact its moat and business performance:

  • Competition: The company faces intense competition, especially in specialty chemicals. Competitors could create similar or lower priced products that erode existing profitability. As well as competitors in the fire safety market.
  • Regulation: New fire-fighting regulations could change the market, rendering a subset of PRM’s products obsolete. Although it has close relationships with the government that have set a track record of providing consistent performance to them, this is a potential risk.
  • Economic Downturns: A significant global or economic downturn could reduce overall spending, which would mean lower revenues from the company.
  • Debt Leverage: A very high debt and high interest rates might impair the companies ability to refinance debt, and could seriously harm the business in the case of a crisis.
  • Supply Chain Issues: The company relies heavily on obtaining the raw materials for their specialty chemicals. The volatile nature of the supply chain could lead to higher costs, as well as an inability to produce products at the required rates.

Despite these risks, PRM shows resilience through:

  • Product Diversification: Operating in two separate segments gives them a broader base of operations to fall back on if one segment underperforms, as a substitute of relying only on fire safety as a whole.
  • Long-Term Contracts A considerable portion of the business is based on long term contracts, offering consistent revenues from year to year.
  • Global Presence By selling products across the globe, it is less reliant on any single region. Also, the market is very diverse.

Understandability Rating

I would rate PRM’s understandability as a 3 out of 5:

  • The core business of producing and selling chemicals and fire-fighting equipment is moderately complex, but not overly difficult to understand.
  • The financial statements are complex with multiple reconciliations and assumptions, which requires more expertise in reading financial statements and reports.
  • There are a couple of different accounting principles that need to be understood (such as adjusted EBITDA) to properly grasp how the company works.

Balance Sheet Health Rating

PRM’s balance sheet health can be rated a 4 out of 5:

  • The company has a positive free cash flow and an adequate cash position.
  • Debt is a key risk but is offset by strong operational margins.
  • They have limited short term risk, the main risk comes from the leverage associated with long term debt which is manageable.

Recent Concerns / Controversies & Management Perspective

PRM has been facing some operational and financial headwinds. Here are some key points:

  • Q4 Guidance: The company lowered their guidance for 2023 EBITDA to be at $125-$145 million due to weaker macro factors, including the housing market and raw materials costs. The CEO expressed confidence that this change was isolated and would not change the long-term outlook.
  • Acquisitions: Despite the volatile market, the company seems focused on future growth. Through acquisitions it is looking to diversify the product portfolio, as well as to capture more earnings through increased pricing power.
  • Long term planning: The company seems focused on their long term plan to become an acquirer and a strategic business. It is focused on growing through organic revenue as well as by diversifying to other high margin industries. It is also focused on improving their credit profile and their business operations.
  • Shareholder Focus: Many questions in the earnings calls are about improving shareholder value and increasing investor confidence, to show that management is focused on long term value.

It is important to note that although acquisitions may result in larger overall business and revenues for PRM, it might also lead to higher integration costs and a risk of business disruptions if not done well. The company has taken on a significant amount of debt to do this which carries with it a risk if interest rates rise or the company’s ability to produce consistent positive cash flow falters.

Conclusion

PRM is an interesting business with some sustainable competitive advantages. The business has both potential for growth and also risk factors that any investor should know about. Overall, the company is worth further research to see if the market is undervaluing it’s current operations.