Cadre Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. Cadre manufactures and distributes safety and survivability products for law enforcement, first responders, military and related markets. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Net sales | $104.4 million | $110.5 million |
| Gross profit and margin | $40.2 million; 38.5% | $44.0 million; 39.8% |
| Operating income (loss) | ($14.5) million | $15.4 million |
| Net income (loss) | ($10.2) million; ($0.30) per diluted share | $6.9 million; $0.25 per diluted share |
| Adjusted EBITDA (non-GAAP) | $14.2 million | $20.2 million |
| Cash from operating activities | $8.9 million | $16.8 million |
| Cash and cash equivalents | $9.9 million at March 31, 2022 | $33.9 million at December 31, 2021 |
| Total debt, net of discounts and issuance costs | $156.4 million at March 31, 2022 | $159.7 million at December 31, 2021 |
| Current assets / current liabilities | $143.7 million / $75.9 million | At March 31, 2022 |
Gross margin was approximately 38.5%, down from 39.8%. Adjusted EBITDA less capital expenditures was $13.2 million, yielding a company-reported Adjusted EBITDA conversion rate of 92%, versus 96% in Q1 2021. These are non-GAAP measures.
Operating cash flow was positive, but below the prior-year period. Investing cash outflow was $20.7 million, including $19.8 million net cash consideration for Radar and $1.0 million of capital expenditures. Financing cash outflow was $13.0 million, including $2.5 million of term-loan principal payments, $6.2 million of taxes paid on employee stock transactions and $2.8 million of dividends.
The company had a $200 million term loan and a $100 million revolving facility under its credit agreement, maturing in July 2026. No revolving borrowings were outstanding at March 31; $96.9 million was available after letters of credit. A $100 million interest-rate swap hedged a portion of floating-rate exposure. The filing reports compliance requirements including a minimum fixed-charge coverage ratio of 1.25x and maximum net leverage ratio of 3.75x through September 2022, then 3.50x, subject to specified acquisition provisions.
Changes versus the prior comparable period
- Sales decreased 5.5%. Products-segment sales fell 9.0%, mainly reflecting a prior-year large U.S. federal duty-gear shipment and higher prior-year demand for less-lethal products. Distribution sales increased 6.3%.
- Products gross margin declined 60 basis points to 40.1%, largely due to unfavorable product mix, partly offset by pricing. Distribution gross margin declined 70 basis points to 24.6%, primarily due to channel mix.
- SG&A rose $25.9 million to $54.0 million. The principal driver was $23.7 million of stock-based compensation expense, including $23.0 million related to a modified executive compensation plan. This expense was a major reason the company swung from operating income to an operating loss.
- Interest expense declined to $1.5 million from $5.0 million, which management attributed to refinancing and debt repayments. Adjusted EBITDA fell $6.0 million, reflecting lower sales and unfavorable product mix, partly offset by pricing.
- Orders backlog was $117.1 million at March 31, up from $113.8 million at year-end. Remaining performance obligations were $18.6 million; approximately 67% was expected to be recognized over the following 12 months.
Outlook, commentary, risks and unusual items
- Management did not provide specific financial guidance. It stated that cash, operating cash flow and available credit were expected to meet liquidity needs for at least 12 months from the report date. Future capital needs depend in part on acquisitions and investment in facilities and equipment.
- Cadre acquired Italian duty-gear business Radar in January for $19.8 million net of cash acquired; purchase-price allocation remained preliminary. In May, after quarter-end, it acquired Cyalume for approximately $35 million, funded with a revolving-loan draw. As of May 9, $35 million was outstanding on that facility.
- Management cited COVID-related supply-chain disruption, delays, and higher raw-material, storage and shipping costs, which could affect product availability and delivery. Backlog includes some orders subject to appropriation or cancellation provisions and is not equivalent to guaranteed future sales.
- A jury awarded $7.5 million in a product-liability case. The court entered judgment in April 2022; Cadre said it planned to appeal and believed loss was reasonably possible, not probable, while stating applicable insurance was expected to indemnify losses. The filing does not establish the final outcome or coverage determination.
- A DOJ False Claims Act investigation concerning labeling of soft-body-armor vest accessory panels remained at a preliminary stage; the company said it could not yet assess merits or exposure. Other legal matters were described as not expected to have a material adverse effect beyond insurance coverage.
- Other items to note include the planned 2022 sale of the Daventry, UK facility and the company’s statement that disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the unusually large executive stock-compensation charge is nonrecurring, and how compensation expense and equity-settled awards affect future reported earnings and dilution.
- Subsequent-quarter cash, debt and covenant headroom after the $35 million Cyalume-related revolver draw, and the effect of the Radar and Cyalume acquisitions on earnings and cash generation.
- The resolution, appeal and insurance coverage of the $7.5 million product-liability judgment, and any developments in the DOJ investigation.
- Whether backlog converts to sales as expected, given cancellation/appropriation terms, fulfillment lead times and continuing supply-chain pressures.
- Gross-margin trends, working-capital needs and cash conversion, including whether lower operating cash flow and cash balances persist.