Cadre Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; amounts below are in millions except per-share data and percentages. Cadre manufactures and distributes safety and survivability products, including body armor, duty gear and explosive ordnance disposal equipment.
Financial performance
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $111.6 | $98.7 | $334.2 | $323.8 |
| Gross profit / margin | $43.7 / 39.2% | $39.3 / 39.8% | $127.2 / 38.1% | $131.5 / 40.6% |
| Operating income / margin | $10.3 / 9.2% | $11.5 / 11.7% | $4.0 / 1.2% | $42.4 / 13.1% |
| Net income (loss) | $4.9 | ($5.3) | ($0.8) | $8.4 |
| EPS, basic and diluted | $0.13 | ($0.19) | ($0.02) | $0.30 |
| Adjusted EBITDA (non-GAAP) | $20.7 | $15.4 | $53.3 | $56.1 |
Q3 sales rose 13.1%, supported by acquisitions, armor volume and agency demand for hard goods. Nine-month sales increased 3.2%; acquisitions and armor demand were partly offset by prior-year large armor, duty gear and crowd-control orders. Nine-month gross margin fell to 38.1%, reflecting acquisition-related inventory step-up amortization and unfavorable product mix, while pricing partly offset material inflation. Distribution margin also weakened on a greater agency-versus-retail sales mix.
Q3 net income improved year over year partly because the 2021 comparison included a $15.2 million debt-extinguishment loss. For nine months, operating income fell 90.6% and net income turned to a loss. Management attributed the deterioration principally to unfavorable product and portfolio mix and $29.4 million of stock-based compensation expense. The compensation expense included a $22.1 million charge upon modification of an executive incentive plan.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $29.5 million, versus $31.0 million a year earlier. It included a $29.0 million noncash stock-compensation add-back; accounts receivable, inventory and payables/other liabilities were cash uses.
- Investing cash outflow was $58.0 million, including $55.0 million net cash paid for the Radar and Cyalume acquisitions and $2.9 million for capital expenditures. Financing cash inflow was $31.2 million, principally from the secondary offering.
- Cash was $36.4 million at September 30, 2022. Total debt, net of discounts and issuance costs, was approximately $153.1 million, down from $159.7 million at year-end 2021. No borrowings were outstanding on the $100 million revolving facility; availability was $97.7 million after letters of credit.
- Current assets were $187.8 million and current liabilities $74.4 million. The term loan matures in 2026 and bears floating-rate exposure; a $100 million interest-rate swap hedges a portion. Credit covenants include a minimum fixed-charge coverage ratio of 1.25:1 and a maximum leverage ratio of 3.75:1 through Q3 2022, stepping down to 3.50:1 thereafter.
- Management stated that cash, operating cash flows and available borrowing capacity should meet liquidity needs for at least 12 months following the filing.
Material changes and other notable items
- Cadre acquired Radar in January for $19.4 million and Cyalume in May for $35.7 million, net of cash acquired. Purchase-price allocations remained preliminary. Reported goodwill rose to $77.2 million, and inventory increased to $79.2 million from $64.0 million at year-end.
- The company completed a primary share issuance in two tranches, receiving approximately $53.4 million in net proceeds. Shares issued and outstanding increased from 34.4 million at year-end to 37.3 million at September 30.
- Orders backlog was $125.2 million, up from $113.8 million at December 31, 2021. Management said the increase reflected acquisitions, armor demand and large government less-lethal orders, partly offset by shipments of large international bomb-suit and contractual armor orders. Some backlog orders depend on budget appropriations or may be canceled.
- No specific earnings or sales guidance was provided. Management cited supply-chain disruption and delays, inflation in materials, labor and shipping, foreign-currency losses, and potential delivery delays as risks.
- A DOJ investigation concerns allegations about labeling of soft-body-armor vest accessory panels; the company said it could not yet assess the merits or potential exposure. A $7.5 million product-liability jury verdict was on appeal, with oral argument held October 25, 2022; management considered a loss reasonably possible but not probable and said applicable insurance would indemnify losses. The filing also describes a prior FTC consent order and ongoing compliance obligations.
- Cadre paid $1.0 million to a company controlled by its CEO for Cyalume acquisition services and $2.0 million for secondary-offering services. Management reported disclosure controls were effective; integration of acquired companies’ financial controls was ongoing.
Important facts for investors to verify
- How much of the Q3 and year-to-date sales growth is organic versus attributable to Radar and Cyalume, and whether backlog converts to sales on expected timing.
- Whether margin pressure, acquisition inventory step-up costs and elevated operating expenses persist; review results excluding the unusually large stock-based compensation charge as well as GAAP results.
- Debt covenant headroom, floating-rate borrowing costs, and the effect of interest-rate changes beyond the portion hedged by the swap.
- Final acquisition purchase-price allocations, acquired-company integration, and any further acquisition-related costs or working-capital needs.
- Developments in the DOJ investigation and product-liability appeal, including insurance coverage and any potential exposure not covered by insurance.
- The durability of cash generation and liquidity given working-capital needs, planned investment, dividends and the company’s stated reliance on available credit capacity.