Cadre Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2021; comparisons are with the three and nine months ended September 30, 2020 unless noted. Cadre manufactures and distributes safety and survivability products for law enforcement, first responders and military customers through Products and Distribution segments. Financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $98.7 million | $105.7 million | $323.8 million | $297.0 million |
| Gross profit | $39.3 million | $40.0 million | $131.5 million | $113.2 million |
| Gross margin | 39.8% | 37.8% | 40.6% | 38.1% |
| Operating income | $11.5 million | $12.8 million | $42.4 million | $40.5 million |
| Net income (loss) | $(5.3) million | $6.4 million | $8.4 million | $22.7 million |
| Adjusted EBITDA (non-GAAP) | $15.4 million | $15.0 million | $56.1 million | $42.5 million |
- Q3 diluted loss per share was $0.19; nine-month diluted earnings per share were $0.30, versus $0.23 and $0.82, respectively, in 2020.
- Operating cash flow for the first nine months was $31.0 million, compared with $28.2 million. Capital expenditures were $2.2 million; investing cash flow was a $2.2 million outflow. Financing cash flow was a $16.4 million outflow, including $10.0 million of dividends.
- Cash was $15.3 million at September 30, 2021, versus $2.9 million at year-end 2020. Current assets were $143.6 million and current liabilities were $77.5 million.
- Debt, net of discounts and issuance costs, totaled approximately $225.9 million, including $12.9 million current and $212.9 million long-term. The new revolving facility had $25.5 million drawn, $2.8 million in letters of credit and $71.7 million available.
- Management said cash, operating cash flows and available borrowing capacity should meet liquidity needs for at least 12 months following the report date.
Material changes and notable items
- Q3 sales declined 6.7%, reflecting prior-year demand spikes for duty gear, crowd-control products, ammunition and firearms, as well as timing of customer shipments. Nine-month sales increased 9.0%, led by international shipments and demand for armor, crowd-control products, ammunition and firearms.
- Despite lower Q3 sales, gross margin improved, which management attributed mainly to favorable pricing and product mix. Nine-month gross profit rose 16.2%.
- Q3 net loss chiefly reflected a $15.2 million debt-extinguishment loss from the August refinancing. For the nine-month comparison, earnings were also affected by the absence of 2020 gains from a facility sale and Axon earn-out stock, and by higher income-tax expense. Lower interest expense and improved gross profit partly offset these items.
- Inventory increased to $71.1 million from $60.9 million at year-end. Orders backlog was $123.2 million, down from $131.8 million at December 31, 2020; some backlog orders may be subject to budget appropriations or cancellation provisions.
- The August refinancing provided a $200 million term loan and a $100 million revolving facility, both maturing in July 2026. The facilities are floating-rate and secured, and include financial covenants, including a 1.25:1 minimum fixed-charge coverage ratio and maximum net leverage limits.
Outlook, risks and contingencies
- The filing gives no numerical revenue, earnings or margin guidance. Management noted that COVID-19 had relatively little effect on operations through the first nine months of 2021, but its future effects remained uncertain.
- On November 3, 2021, Cadre completed its IPO, selling 6.9 million shares at $13 per share for $89.7 million gross proceeds. On November 9, it used IPO proceeds to repay $38.9 million of term debt and $20.5 million of revolving borrowings. The company later announced a quarterly dividend of $0.08 per share, subject to board approval and credit-agreement restrictions.
- A jury returned a $7.5 million verdict in a product-liability case; no judgment had been entered as of the filing, the company filed post-trial motions and said applicable insurance would indemnify losses. A DOJ investigation concerns allegations about labeling of body-armor accessory panels; the company said it could not yet assess the merits or potential exposure.
- Cadre disclosed a material weakness in controls over segregation of duties for journal entries in one general-ledger system. Management reported no identified misstatements and was working on remediation; controls were not yet considered remediated.
- Other risks include product liability and warranty exposure, government procurement and regulatory requirements, supply constraints, competition, foreign exchange and interest-rate exposure, and substantial debt. A $100 million interest-rate swap hedges part of floating-rate exposure. A $962,000 out-of-period adjustment was recorded in Q3 and described as immaterial to the current and previously issued interim statements.
Important facts for investors to verify
- Whether the new credit facilities’ leverage and coverage covenants remain satisfied, and how IPO-related repayments affect net debt, interest expense and liquidity.
- Whether backlog converts to sales as expected, given shipment timing, customer budget conditions and cancellation clauses.
- Developments in the DOJ investigation and the post-trial rulings, appeal and insurance coverage in the $7.5 million verdict case.
- Progress and testing supporting remediation of the journal-entry segregation-of-duties material weakness.
- Future sales and margins, especially after prior-year demand spikes, and the sustainability of the announced dividend under operating results and debt restrictions.