Cadre Holdings, Inc. — Q1 2023 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. Cadre manufactures and distributes safety and survivability products for law enforcement, first responders, military and related markets through its Product and Distribution segments.
Key financial results
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $111.7 | $104.4 | +7.0% |
| Gross profit / gross margin | $46.6 / 41.7% | $40.2 / 38.5% | Margin +3.2 pts |
| Operating income (loss) | $11.2 | $(14.5) | Improved |
| Net income (loss) | $7.0 | $(10.2) | Improved |
| Diluted earnings (loss) per share | $0.19 | $(0.30) | Improved |
| Adjusted EBITDA (non-GAAP) | $18.6 | $14.2 | +30.8% |
| Cash from operating activities | $12.7 | $8.9 | +$3.8 |
- Revenue mix and drivers: Product segment sales rose 9.1% to $93.2 million, while Distribution sales rose 2.3% to $24.7 million. Growth reflected acquisitions, stronger armor and holster demand, and agency demand for hard goods; lower sales of certain large international explosive-ordnance orders partly offset growth.
- Margins and expenses: Product gross margin improved to 43.6%, primarily from pricing and productivity gains net of inflation. Distribution gross margin declined to 24.2% due mainly to less favorable channel mix. SG&A fell 34.7% to $35.3 million, primarily because stock-based compensation expense was $21.0 million lower than in Q1 2022.
- Cash and liquidity: Cash was $48.3 million at quarter-end, up from $45.3 million at year-end 2022. Current assets were $198.5 million and current liabilities $75.4 million. Operating cash flow included a $9.1 million reduction in receivables, partly offset by a $5.8 million inventory increase. Investing activities used $0.6 million; financing activities used $9.3 million, including $3.0 million of dividends and $2.5 million of term-loan principal payments.
- Debt: Reported debt, net of discounts and issuance costs, was approximately $146.2 million at March 31, 2023, primarily term loans. No U.S. or Canadian revolver borrowings were outstanding. The U.S. facility had $97.3 million available, subject to its terms, with $2.7 million of letters of credit outstanding. The term loan matures in July 2026 and bears floating-rate interest; a $100 million interest-rate swap hedges part of the exposure.
- Backlog and contracted revenue: Orders backlog was $137.0 million at March 31, up $19.1 million from December 31, 2022. Remaining performance obligations were $26.7 million; the company expects to recognize about 67% within 12 months. Backlog may include orders subject to appropriation or cancellation provisions and is not equivalent to future sales.
Material changes and management commentary
Sales increased 7.0%, while gross profit rose 16.0%. The swing to GAAP profitability was driven in part by the sharp decline in SG&A and stock compensation versus the prior-year quarter. Q1 2022 included a $22.1 million compensation expense recorded upon modification of the executive compensation plan; stock-based compensation expense was $23.7 million in Q1 2022 versus $2.7 million in Q1 2023. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
Management stated that cash on hand, operating cash flows and available borrowing capacity should meet liquidity requirements for at least the 12 months following the filing. The filing provides no specific revenue or earnings guidance. Management cited potential future capital needs related to acquisitions and investment in manufacturing facilities and equipment.
Risks, contingencies and unusual items
- A product-liability case has a $7.5 million jury verdict against a subsidiary; appeal proceedings were pending. Management considered a loss reasonably possible but not probable and stated that any loss would be indemnified by insurance under applicable policies. Coverage sufficiency is not assured.
- Debt agreements require a minimum fixed-charge coverage ratio of 1.25 to 1.00 and impose a maximum net-leverage covenant, along with restrictions including on dividends and additional debt. The filing describes the applicable leverage limit as changing over time; verify the operative covenant threshold and compliance.
- Floating-rate debt exposes the company to higher interest expense. Management estimated that a 100-basis-point rate change would affect annual interest expense by about $1.5 million before, or $0.5 million after, the swap. Foreign-currency movements, inflation, supply-chain disruption, competition, regulation and acquisition integration are among the disclosed business risks.
- The 2018 and 2019 tax returns of a Canadian subsidiary were under examination. Management said it knew of no potential or pending investigations concerning international operations at the filing date.
- Management reported disclosure controls were effective as of March 31, 2023 and no material change in internal control over financial reporting during the quarter. The company is an emerging growth company and has elected the extended transition period for certain accounting standards.
Important facts for investors to verify
- Whether higher backlog converts to shipments and revenue on schedule, particularly large international orders, and how much may be subject to cancellation or appropriation.
- How much of the earnings improvement reflects durable operating performance versus the unusually high Q1 2022 stock-compensation comparison.
- Current debt-covenant headroom, floating-rate exposure, and the timing and refinancing implications of the July 2026 maturity.
- The status and insurance coverage of the $7.5 million product-liability verdict, and any material developments in the Canadian tax examination.
- Whether inventory growth, dividend payments and future acquisition or capital-spending plans remain consistent with management’s liquidity outlook.