(EDGAR Online via COMTEX) -- MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except share and per share amounts)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of operations of Cadre Holdings, Inc. (D/B/A The Safariland Group) ("Cadre," "the Company" "we," "us" and "our") should be read in conjunction with our unaudited consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The following discussion contains forward-looking statements that reflect future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside of Cadre's control. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward- looking statements include, but are not limited to, those discussed in the sections entitled "Risk Factors" and "Cautionary Statement Regarding Forward-Looking Statements" included elsewhere in this Quarterly Report on Form 10-Q.
Our Business
Cadre is a global leader in the manufacturing and distribution of safety and survivability equipment for first responders. Our equipment provides critical protection to allow its users to safely and securely perform their duties and protect those around them in hazardous or life-threatening situations. Through our dedication to superior quality, we establish a direct covenant with end users that our products will perform and keep them safe when they are most needed. We sell a wide range of products including body armor, explosive ordnance disposal equipment and duty gear through both direct and indirect channels. In addition, through our owned distribution, we serve as a one-stop shop for first responders providing equipment we manufacture as well as third-party products including uniforms, optics, boots, firearms and ammunition. The majority of our diversified product offering is governed by rigorous safety standards and regulations. Demand for our products is driven by technological advancement as well as recurring modernization and replacement cycles for the equipment to maintain its efficiency, effective performance and regulatory compliance.
We service the ever-changing needs of our end users by investing in research and development for new product innovation and technical advancements that continually raise the standards for safety and survivability equipment in the first responder market. Our target end user base includes domestic and international first responders such as state and local law enforcement, fire and rescue, explosive ordnance disposal technicians, emergency medical technicians, fishing and wildlife enforcement and departments of corrections, as well as federal agencies including the U.S. Department of State, U.S. Department of Defense, U.S. Department of Interior, U.S. Department of Justice, U.S. Department of Homeland Security, U.S. Department of Corrections and numerous foreign government agencies in over 100 countries.
In January 2022, Company acquired Radar Leather Division S.r.l. ("Radar") for $19.8 million, net of cash acquired. We recorded a preliminary allocation of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. These estimates are preliminary and subject to adjustments as we complete our valuation process.
In May 2022, the Company acquired Cyalume Technologies, Inc, CT SAS Holdings, Inc. and Cyalume Technologies SAS (collectively "Cyalume") for approximately $35.0 million. The purchase accounting for this acquisition is in progress. In connection with the acquisition, the purchase price was funded with a draw on the Company's Revolving Loan of $35.0 million.
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CADRE HOLDINGS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except share and per share amounts)
The following table sets forth a summary of our financial highlights for the
periods indicated:
Three months ended March 31,
(in thousands) 2022 2021
Net sales $ 104,406 $ 110,536
Net (loss) income $ (10,165) $ 6,864
Adjusted EBITDA(1) $ 14,219 $ 20,246
Adjusted EBITDA is a non-GAAP financial measure. See "Non-GAAP Measures"
Net sales decreased by $6.1 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, primarily as a result of a large U.S. Federal duty gear shipment in the prior year period, combined with stronger commercial demand and higher demand for crowd control products in the comparable period last year.
Net (loss) income decreased by $17.0 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, primarily as a result of the change in year over year revenue and stock-based compensation expense.
COVID-19
The global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. and European governments in March 2020, with governments world-wide implementing safety measures restricting travel and requiring citizen lockdowns and self-confinements for quarantining purposes. This has negatively affected the U.S. and global economies, disrupted global supply chains, and resulted in significant transport restrictions and disruption of global financial markets.
The COVID-19 pandemic has significantly impacted the global supply chain, with restrictions and limitations on related activities causing disruption and delay, along with increased raw material, storage, and shipping costs. These disruptions and delays have strained domestic and international supply chains, which have affected and could continue to negatively affect the flow or availability of certain critical raw materials and finished good products that the Company relies upon. Furthermore, any negative impacts on our logistical operations, including our fulfillment and shipping functions, could result in periodic delays in the delivery of our products.
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CADRE HOLDINGS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except share and per share amounts)
KEY PERFORMANCE METRICS
Orders backlog
We monitor our orders backlog, which we believe is a forward-looking indicator of potential sales. Our orders backlog for products includes all orders that have been received and are believed to be firm. Due to municipal government procurement rules, in certain cases orders included in backlog are subject to budget appropriation or other contract cancellation clauses. Consequently, our orders backlog may differ from actual future sales. Orders backlog can be helpful to investors in evaluating the performance of our business and identify trends over time.
The following table presents our orders backlog as of the periods indicated:
(in thousands) March 31, 2022 December 31, 2021 Orders backlog $ 117,146 $ 113,840
Orders comprising backlog as of a given balance sheet date are typically invoiced in subsequent periods. The majority of our products are generally processed and shipped within one to three weeks of an order being placed, though the fulfillment time for certain products, for example, explosive ordnance disposal equipment, may take three months or longer. Our orders backlog could experience volatility between periods, including as a result of customer order volumes and the speed of our order fulfilment, which in turn may be impacted by the nature of products ordered, the amount of inventory on hand and the necessary manufacturing lead time.
Orders backlog increased by $3.3 million as of March 31, 2022 compared to December 31, 2021, primarily due to a $5.5 million increase from higher demand for soft armor products and duty gear backlog increase driven by the acquisition of Radar and increased demand across channels. This was partially offset by a $2.8 million reduction from 2022 shipments of a large contractual armor order, $2.0 million reduction from 2022 shipments of a large order for high risk search tools, and $1.9 million driven by current year reductions in supplier past-dues for ammunition and firearms through our company-owned retail locations.
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CADRE HOLDINGS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except share and per share amounts)
RESULTS OF OPERATIONS
In order to reflect the way our chief operation decision maker reviews and assesses the performance of the business, Cadre has determined that it has two reportable segments - the Product segment and the Distribution segment. Segment information is consistent with how the chief operating decision maker, our chief executive officer, reviews the business, makes investing and resource allocation decisions and assesses operating performance.
The following table presents data from our results of operations for the three months ended March 31, 2022 and 2021 (in thousands unless otherwise noted):
Three months ended March 31,
2022 2021
(Unaudited) (Unaudited) % Chg
Net sales $ 104,406 $ 110,536 (5.5) %
Cost of goods sold 64,217 66,577 (3.5) %
Gross profit 40,189 43,959 (8.6) %
Operating expenses
Selling, general and administrative 53,950 28,051 92.3 %
Restructuring and transaction costs 599 321 86.6 %
Related party expense 122 153 (20.3) %
Total operating expenses 54,671 28,525 91.7 %
Operating (loss) income (14,482) 15,434 (193.8) %
Other expense
Interest expense (1,490) (5,044) (70.5) %
Other expense, net (205) (44) 365.9 %
Total other expense, net (1,695) (5,088) (66.7) %
(Loss) income before provision for income taxes (16,177) 10,346 (256.4) %
Benefit (provision) for income taxes 6,012 (3,482) (272.7) %
Net (loss) income $ (10,165) $ 6,864 (248.1) %
The following table presents segment data for the three months ended March 31, 2022 and 2021 (in thousands unless otherwise noted):
Three months ended March 31, 2022
Reconciling
Products Distribution Items(1) Total
Net sales $ 85,386 $ 24,096 $ (5,076) $ 104,406
Cost of goods sold 51,120 18,172 (5,075) 64,217
Gross profit $ 34,266 $ 5,924 $ (1) $ 40,189
Three months ended March 31, 2021
Reconciling
Products Distribution Items(1) Total
Net sales $ 93,818 $ 22,660 $ (5,942) $ 110,536
Cost of goods sold 55,594 16,921 (5,938) 66,577
Gross profit $ 38,224 $ 5,739 $ (4) $ 43,959
(1) Reconciling items consist primarily of intercompany eliminations and items not directly attributable to operating segments
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CADRE HOLDINGS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except share and per share amounts)
Comparison of Three Months Ended March 31, 2022 to Three Months Ended March 31, 2021
Net sales. Product segment net sales decreased by $8.4 million, or 9.0%, from $93.8 million to $85.4 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, primarily due to a $4.6 million decrease for duty gear primarily due to a large US Federal shipment in the prior year and prior year commercial demand strength and a $3.0 million decrease for the less lethal product line due to higher demand for crowd control products in the prior year. Distribution segment net sales increased by $1.4 million, or 6.3%, from $22.7 million to $24.1 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, primarily due to our suppliers reducing their past due ammunition orders. Reconciling items consisting primarily of intercompany eliminations were $5.1 million for three months ended March 31, 2022 and the three months ended March 31, 2021.
Cost of goods sold and Gross Profit. Product segment cost of goods sold decreased by $4.5 million, or 8.0%, from $55.6 million to $51.1 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, primarily due to costs to manufacture product (namely material and labor). Product segment gross profit as a percentage of net sales decreased by 60 basis points to 40.1% for the three months ended March 31, 2022 from 40.7% for the three months ended March 31, 2021, mainly driven by unfavorable portfolio mix partially offset by price (in excess of material and labor inflation). Distribution segment cost of goods sold increased by $1.3 million, or 7.4%, from $16.9 million to $18.2 million for the three months ended March 31, 2022 as compared to the same period in 2021, primarily due to increased costs to acquire products. Distribution segment gross profit as a percentage of net sales decreased by 70 basis points to 24.6% for the three months ended March 31, 2022 from 25.3% for the three months ended March 31, 2021, mainly driven by unfavorable channel mix with more volume going to agencies versus retail. Reconciling items consisting primarily of intercompany eliminations were $5.1 million for three months ended March 31, 2022 and the three months ended March 31, 2021.
Selling, general and administrative. SG&A increased by $25.9 million, or 92.3%, for the three months ended March 31, 2022 as compared to the same period in 2021, primarily due to stock-based compensation expense of $23.7 million and increases in marketing spend, commissions expense and corporate insurances.
Restructuring and transaction costs. Restructuring and transaction costs increased by $0.3 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, primarily due to increased transactions costs and consulting fees incurred related to the acquisition of Cyalume.
Related party expense. Related party expense was relatively consistent period over period with $0.1 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively. We recorded rent expense relating to distribution warehouses and retail stores that we lease from related parties.
Interest expense. Interest expense decreased by $3.6 million, or 70.5%, for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, due to an interest rate decrease as a result of our recent refinancing and debt repayments on our outstanding debt.
Other expense, net. Other expense, net increased by $0.2 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, primarily due to a $0.2 million loss on foreign currency transactions for the three months ended March 31, 2021 compared to the three months ended March 31, 2021.
Benefit (provision) for income taxes. Income tax benefit was $6.0 million for the three months ended March 31, 2022 compared to a tax provision of $3.5 million for the three months ended March 31, 2021. The effective tax rate was 37.2% for the three months ended March 31, 2022 and was higher than the statutory rate due to state taxes and executive compensation, partially offset by research and development tax credits. For the three months ended March 31, 2021, the effective tax rate was 33.7% and was higher than the statutory rate primarily due to state taxes and the tax impact of our foreign earnings, partially offset by research and development tax credits.
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CADRE HOLDINGS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except share and per share amounts)
NON-GAAP MEASURES
This Quarterly Report on Form 10-Q includes EBITDA, Adjusted EBITDA and Adjusted EBITDA Conversion Rate, which are non-GAAP financial measures that we use to supplement our results presented in accordance with U.S. GAAP. EBITDA is defined as net income before depreciation and amortization expense, interest expense and (benefit) provision for income tax. Adjusted EBITDA represents EBITDA that excludes restructuring and transaction costs, other expense, net, stock-based compensation expense and long-term incentive plan ("LTIP") bonus as these items do not represent our core operating performance. We also present Adjusted EBITDA Conversion Rate, which we define as Adjusted EBITDA less capital expenditures divided by Adjusted EBITDA. We use Adjusted EBITDA Conversion Rate as a measurement of the cash generation capacity of our underlying operations, exclusive of impacts relating to our capital structure.
EBITDA, Adjusted EBITDA and Adjusted EBITDA Conversion Rate are performance measures that we believe are useful to investors and analysts because they illustrate the underlying financial and business trends relating to our core, recurring results of operations and enhance comparability between periods. Adjusted EBITDA is considered by our board of directors and management as an important factor in determining performance-based compensation. Adjusted EBITDA Conversion Rate is a liquidity measure that we believe provides investors and analysts with important information about our core, recurring cash generation trends, which are an indication of our ability to make acquisitions, incur additional debt or return capital to investors, after making the capital investments required to support our business operations.
EBITDA, Adjusted EBITDA and Adjusted EBITDA Conversion Rate are not recognized measures under U.S. GAAP and are not intended to be a substitute for any U.S. GAAP financial measure and, as calculated, may not be comparable to other similarly-titled measures of performance of other companies. Investors should exercise caution in comparing our non-GAAP measures to any similarly titled measures used by other companies. These non-GAAP financial measures exclude certain items required by U.S. GAAP and should not be considered as alternatives to information reported in accordance with U.S. GAAP.
The table below presents our EBITDA, Adjusted EBITDA and Adjusted EBITDA Conversion Rate reconciled to the most comparable GAAP financial measures for the periods indicated:
Three Months Ended March 31,
(in thousands) 2022 2021
Net (loss) income $ (10,165) $ 6,864
Add back:
Depreciation and amortization 3,544 3,539
Interest expense 1,490 5,044
(Benefit) provision for income taxes (6,012) 3,482
EBITDA $ (11,143) $ 18,929
Add back:
Restructuring and transaction costs(1) 599 321
Other expense, net(2) 205 44
Stock-based compensation expense(3) 23,723 -
Stock-based compensation payroll tax expense(4) 298 -
LTIP bonus(5) 384 952
Amortization of inventory step-up(6) 153 -
Adjusted EBITDA $ 14,219 $ 20,246
Less: Capital expenditures (1,069) (788)
Adjusted EBITDA less capital expenditures $ 13,150 $ 19,458
Adjusted EBITDA conversion rate 92 % 96 %
Reflects the "Restructuring and transaction costs" line item on our
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CADRE HOLDINGS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except share and per share amounts)
Reflects the "Other expense, net" line item on our consolidated statement of
(3) Reflects compensation expense related to equity and liability classified stock-based compensation plans.
(4) Reflects payroll taxes associated with vested stock-based compensation awards.
(5) Reflects the cost of a cash-based long-term incentive plan awarded to employees that vests over three years.
(6) Reflects amortization expense related to the step-up inventory adjustment recorded as part of the Radar acquisition.
Adjusted EBITDA decreased by $6.0 million for the three months ended March 31, 2022 as compared to 2021, primarily due to the decrease in net sales and unfavorable product portfolio mix, offset by favorable pricing.
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CADRE HOLDINGS, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except share and per share amounts)
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to our ability to generate sufficient cash flows to meet the cash requirements of our business operations, including working capital needs, capital expenditures, debt service, acquisitions and other commitments. Our principal sources of liquidity have been cash provided by operating activities, cash on hand and amounts available under our Revolving Loan.
For the three months ended March 31, 2022, net cash provided from operating activities totaled $8.9 million and as of March 31, 2022, cash and cash equivalents totaled $9.9 million. We believe that our cash flows from operations and cash on hand, and available borrowing capacity under our existing credit facilities (as described below) will be adequate to meet our liquidity requirements for at least the 12 months following the date of this Quarterly Report on Form 10-Q. Our future capital requirements will depend on several factors, including future acquisitions and investments in our manufacturing facilities and equipment. We could be required, or could elect, to seek additional funding through public or private equity or debt financings; however, additional funds may not be available on terms acceptable to us, if at all.
Debt
As of March 31, 2022 and December 31, 2021, we had $156.4 million and $159.7 million in outstanding debt, net of debt discounts and debt issuance costs, respectively, primarily related to the term loan facilities.
New Credit Agreement
On August 20, 2021 (the "Closing Date"), the Company refinanced its existing credit facilities and entered into a new credit agreement whereby Safariland, LLC, as borrower (the "Borrower"), the Company and certain domestic subsidiaries of the Borrower, as guarantors (the "Guarantors"), closed on and received funding under a credit agreement (initially entered into on July 23, 2021), pursuant to a First Amendment to Credit Agreement (collectively, the "New Credit Agreement") with PNC Bank, National Association ("PNC"), as administrative agent, and the several lenders from time to time party thereto (together with PNC, the "Lenders") pursuant to which the Borrower (i) borrowed $200.0 million under a term loan (the "Term Loan"), and (ii) may borrow up to $100.0 million under a revolving credit facility (including up to $15.0 million for letters of credit and up to $10.0 million for swing line loans) (the "Revolving Loan"). Each of the Term Loan and the Revolving Loan mature on July 23, 2026. Commencing December 31, 2021, the New Term Loan requires scheduled quarterly payments in amounts equal to 1.25% per quarter of the original aggregate principal amount of the Term Loan, with the balance due at maturity. The New Credit Agreement is guaranteed, jointly and severally, by the Guarantors and, subject to certain exceptions, secured by a first-priority security interest in substantially all of the assets of the Borrower and the Guarantors pursuant to a Security and Pledge Agreement and a Guaranty and Suretyship Agreement, each dated as of the Closing Date.
There were no amounts outstanding under any revolving loans as of March 31, 2022 and December 31, 2021. As of March 31, 2022, there were $3.1 million in outstanding letters of credit, and $96.9 million of availability.
The Borrower may elect to have the Revolving Loan and Term Loan under the New Credit Agreement bear interest at a base rate or a LIBOR rate, in each case, plus an applicable margin. The applicable margin for these borrowings will range from 0.50% to 1.50% per annum, in the case of base rate borrowings, and 1.50% to 2.50% per annum, in the case of LIBOR borrowings, in each case based upon the level of the Company's consolidated total net leverage ratio. The New Credit Agreement also requires the Borrower to pay a commitment fee on the unused portion of the loan commitments. Such commitment fee will range between 0.175% and 0.25% per annum, and is also based upon the level of the Company's consolidated total net leverage ratio.
The New Credit Agreement also contains customary representations and warranties, and affirmative and negative covenants, including limitations on additional indebtedness, dividends, and other distributions, entry into new lines of business, use of loan proceeds, capital expenditures, restricted payments, restrictions on liens on the assets of the Borrowers or any Guarantor, transactions with affiliates, amendments to organizational documents, accounting . . .
May 16, 2022
COMTEX_407290989/2041/2022-05-16T17:41:29
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