Cadre Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions where shown. Cadre manufactures and distributes safety and survivability products for law enforcement, first responders, and military customers through Product and Distribution segments.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $121.1m | $118.2m | $232.8m | $222.6m |
| Gross profit | $50.7m | $43.2m | $97.4m | $83.4m |
| Gross margin | 41.9% | 36.6% | 41.8% | 37.5% |
| Operating income (loss) | $15.9m | $8.2m | $27.1m | $(6.3)m |
| Net income (loss) | $11.0m | $4.4m | $18.0m | $(5.7)m |
| Diluted EPS | $0.29 | $0.12 | $0.48 | $(0.16) |
| Adjusted EBITDA (non-GAAP) | $22.8m | $18.4m | $41.4m | $32.6m |
Q2 sales grew 2.4% year over year; first-half sales grew 4.6%. Management attributed growth principally to Cyalume and higher armor, holster, hard-goods, and crowd-control demand, partly offset by prior-year large international explosive ordnance disposal orders. Q2 gross margin improved 5.3 percentage points; management cited pricing, product mix, and productivity, net of inflation. First-half net income improved substantially, in part because 2022 included significantly higher stock-based compensation expense, including a large executive-plan charge.
Cash, debt, and liquidity
- First-half operating cash flow was $28.3m, versus $25.0m in 2022. Inventory increased $12.0m, partly offset by a $7.6m decrease in receivables.
- Cash was $55.8m at June 30, 2023, up from $45.3m at December 31, 2022. Investing activities used $2.2m; financing activities used $15.9m, including $5.0m of term-loan principal payments and $6.0m of dividends distributed.
- Debt, net of discounts and issuance costs, was approximately $142.7m, down from $149.7m at year-end. No amounts were drawn on the $100m revolving facility; $97.4m was available after letters of credit. The term loan and revolver mature in July 2026.
- Floating-rate debt exposure is partly hedged through two interest-rate swaps with $150m combined notional. The credit agreement transitioned from LIBOR to SOFR in May 2023. Management said cash, operating cash flow, and borrowing availability should meet liquidity needs for at least 12 months after filing.
Material changes and outlook
- Backlog rose to $133.2m at June 30, 2023, from $117.9m at December 31, 2022. Increases in armor, crowd-control, holster, and government orders were partly offset by lower Distribution and chemiluminescent-payload backlog. Backlog may be affected by appropriations, cancellation provisions, and fulfillment timing.
- Product segment sales increased 3.5% in Q2 and 6.1% in the first half; Distribution sales increased 8.4% and 5.4%, respectively. Product and Distribution gross margins both improved, with favorable mix contributing to each.
- No specific full-year revenue, earnings, or margin guidance is provided in the filing. Management expects to recognize approximately 86% of $12.2m in remaining contract performance obligations over the next 12 months.
- Cadre reports no material changes to its risk factors or market-risk exposures. It identifies potential risks including customer demand and procurement timing, competition, inflation, supply-chain and logistics disruption, foreign exchange, interest rates, cybersecurity, and the availability of capital.
Contingencies and other notable items
- A 2021 jury verdict awarded a plaintiff $7.5m in a product-liability case. The appeal decision remained pending; the company considered a loss reasonably possible but not probable and stated that applicable losses would be indemnified by its insurer.
- Canadian tax returns for 2018 and 2019 were under examination. The company reported no known pending or potential investigations concerning international operations, including export controls and anti-corruption laws.
- Management concluded disclosure controls were effective as of June 30, 2023, with no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether backlog converts to revenue as expected, given procurement, cancellation, and delivery timing risks.
- How much margin improvement persists after favorable pricing, mix, productivity, and the absence of prior-year acquisition inventory step-up costs.
- Debt covenant headroom and the applicable leverage-ratio threshold: the credit-agreement discussion in the filing gives differing timing for the 3.50-to-1.00 threshold.
- The appeal outcome, insurance coverage, and any potential exposure in the $7.5m product-liability case.
- That Adjusted EBITDA is a non-GAAP measure and excludes specified expenses; compare it with GAAP earnings and cash generation.