Cadre Holdings, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless noted. Cadre manufactures and distributes safety equipment for law enforcement, first responders, military and nuclear markets. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $137.9 | $111.7 | +23.4% |
| Gross profit / margin | $57.6 / 41.8% | $46.6 / 41.7% | +23.6% gross profit |
| Operating income / margin | $12.0 / 8.7% | $11.2 / 10.0% | +6.8% |
| Net income / margin | $6.9 / 5.0% | $7.0 / 6.3% | -1.1% |
| Diluted earnings per share | $0.18 | $0.19 | Down $0.01 |
| Adjusted EBITDA | $24.5 | $18.6 | +31.7% |
| Operating cash flow | $2.1 | $12.7 | Down $10.6 |
Gross margin was broadly steady overall, while the lower operating margin reflected faster growth in operating expenses. Adjusted EBITDA is a non-GAAP measure; Cadre’s reconciliation adds back items including transaction and restructuring costs, stock compensation, acquisition inventory step-up amortization and contingent consideration expense.
- Cash and liquidity: Cash was $87.1 million at March 31, versus $87.7 million at December 31, 2023. Current assets were $269.3 million and current liabilities $95.6 million.
- Debt: Total debt, net of discounts and issuance costs, was approximately $215.8 million, up from $140.1 million at year-end; cash less debt was approximately $128.8 million net debt. The $100 million revolving facility had no borrowings and $95.5 million availability, after letters of credit, at March 31.
- Cash flow: Operating cash flow fell chiefly as accounts payable and other liabilities declined $21.7 million. Investing used $142.6 million, including $141.3 million for acquisitions. Financing provided $139.8 million, principally from an $80.0 million incremental term loan and $73.5 million of offering proceeds.
Material changes and business developments
- Cadre acquired ICOR Technology on January 9 and Alpha Safety on February 29, expanding its explosive ordnance disposal and nuclear-market businesses. The acquisitions added approximately $67.5 million of goodwill; purchase price allocations remain preliminary.
- Sales growth reflected acquisitions, higher demand for armor and explosive ordnance disposal products, and increased agency demand for distribution hard goods. Product segment sales rose 27.5%; Distribution sales rose 14.3%.
- Cost pressures included materials, labor, inflation and acquisition-related inventory step-up amortization. Product gross margin declined to 43.0% from 43.6%; Distribution gross margin declined to 23.5% from 24.2%.
- Orders backlog was $159.1 million at March 31, up from $126.7 million at year-end, primarily due to acquisitions, partly offset by delivery of large EOD and armor orders. Backlog may include orders subject to appropriation or cancellation clauses.
- On March 19, Cadre issued 2.2 million shares at $35 per share, receiving net proceeds of $72.8 million. On April 1, underwriters exercised the full over-allotment for another 545,719 shares, yielding $18.2 million net proceeds after quarter-end.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said cash, operating cash flow and borrowing availability should be adequate for liquidity needs for at least 12 months after the report date.
- Remaining contractual performance obligations were $44.7 million; Cadre expects approximately 82% to be recognized within 12 months, with the balance over the following two years. This is distinct from the reported orders backlog.
- Acquisition-related restructuring and transaction costs were $3.1 million in operating expenses. Related-party expense included a $1.75 million fee paid to Kanders & Company, controlled by CEO Warren Kanders, for Alpha Safety acquisition services; the filing also includes this fee in its Adjusted EBITDA reconciliation add-backs.
- Debt bears floating rates, partly hedged by interest-rate swaps. Cadre estimated a 100-basis-point rate change would affect annual interest expense by $2.2 million before swaps, with an immaterial effect after swaps. Other exposures include currency fluctuations, inflation, supply-chain disruption, competition, product acceptance and acquisition integration.
- Legal matters arising in the ordinary course were not expected to create a material adverse effect beyond insurance coverage. A Canadian subsidiary’s 2018 and 2019 tax returns are under examination. The company reported no known potential or pending investigations concerning international operations.
- Management reported effective disclosure controls as of March 31 and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Track whether the acquisitions deliver expected growth and synergies, and review final purchase price allocations and integration costs.
- Monitor debt levels, covenant headroom, floating-rate exposure and the effect of acquisition financing on leverage.
- Assess whether operating cash flow recovers after the large working-capital outflow, and whether margins withstand inflation and acquisition-related costs.
- Distinguish reported backlog from enforceable future revenue, given procurement, appropriation and cancellation provisions.
- Review dilution and proceeds from the March offering and April over-allotment, as well as the continuing quarterly dividend.