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10-Q: CADRE HOLDINGS, INC.

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(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 on Form 10-Q and in our final prospectus related to our initial public offering, or IPO, dated November 3, 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 ("EMT"), fishing and wildlife enforcement and departments of corrections, as well as federal agencies including the U.S. Department of State ("DoS"), U.S. Department of Defense ("DoD"), U.S. Department of Interior ("DoI"), U.S. Department of Justice ("DoJ"), U.S. Department of Homeland Security ("DHS"), U.S. Department of Corrections ("DoC") and numerous foreign government agencies in over 104 countries.

The following table sets forth a summary of our financial highlights for the periods indicated:







                                Three months ended        Nine months ended
                                   September 30,             September 30,
        (in thousands)           2021         2020        2021         2020
        Net sales             $   98,654    $ 105,735   $ 323,751    $ 297,019
        Net (loss) income     $  (5,306)    $   6,447   $   8,373    $  22,673
        Adjusted EBITDA(1)    $   15,419    $  15,039   $  56,120    $  42,487
        


Adjusted EBITDA is a non-GAAP financial measure. See "Non-GAAP Measures"

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CADRE HOLDINGS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except share and per share amounts)

Net sales decreased by $7.1 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily as a result of spikes in demand experienced in the prior year for duty gear and crowd control products, as well as for ammunition and firearms through our Distribution segment, partially offset by project timing. Net sales increased by $26.7 million for the nine months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily as a result of higher demand for structural armor, body armor, crowd control products and distribution of ammunition and firearms.

Net (loss) income decreased by $11.8 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily as a result of a loss on extinguishment of debt incurred from the execution of the New Credit Agreement. Net (loss) income decreased by $14.3 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily as a result of a loss on extinguishment of debt incurred from the execution of the New Credit Agreement, an increase in provision for income taxes due to the release of a valuation allowance on a portion of our deferred tax assets in December 2020 and the following non-recurring transactions recognized in the period ended September 30, 2020: a gain on the sale of a long-lived asset and receipt of earn-out stock payments. These were offset by improvements in gross profit due to increased sales, favorable pricing and product mix.

COVID-19

On January 30, 2020, the World Health Organization ("WHO") announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the "COVID-19 outbreak") and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

The full impact of the COVID-19 pandemic continues to evolve as of the date of this Quarterly Report on Form 10-Q. During 2020 and the first nine months of 2021, the financial results of our business were relatively unaffected by COVID-19. In all of the countries and states in which our business operates, the relevant local authorities have deemed our business to be essential in nature and thereby allowed us to continue operations during any government mandated shutdowns. We took and continue to take many measures to mitigate outbreaks in any of our facilities that would negatively impact the business, such as allowing employees to work remote, new manufacturing layouts to enable social distancing and daily temperature checks. The extent to which our business may be affected by the COVID-19 pandemic will largely depend on both current and future developments, including its duration, spread and treatment, all of which are highly uncertain and cannot be reasonably predicted. While any impact to global markets is uncertain, the Company continues to monitor developments.

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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) September 30, 2021 December 31, 2020 Orders backlog $ 123,208 $ 131,814

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 decreased by $8.6 million as of September 30, 2021 compared to December 31, 2020, primarily due to a reduction in past dues of $2.6 million from duty gear holsters, $11.4 million from 2021 shipments of large contractual armor orders, and $2.7 million from 2021 shipments of large contractual less lethal orders. This was partially offset by an increase of $4.9 million from the distribution of ammunition and firearms through our company-owned retail locations and an increase of $3.2 million from the crew survivability line due to customer refresh cycles.

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CADRE HOLDINGS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except share and per share amounts)

DESCRIPTION OF CERTAIN COMPONENTS OF FINANCIAL DATA

Net sales

We recognize revenue when a contract exists with a customer that specifies the goods and services to be provided at an agreed upon sales price and when the performance obligation is satisfied by transferring the goods or service to the customer. The performance obligation is considered satisfied when control transfers, which is generally determined when products are shipped or delivered to the customer but could be delayed until the receipt of customer acceptance, depending on the terms of the contract. At the time of revenue recognition we also provide for estimated sales returns and miscellaneous claims from customers as reductions to revenues. Charges for shipping and handling fees billed to customers are included in net sales. Taxes collected from customers and remitted to government authorities are reported on a net basis and are excluded from sales.

We generate sales primarily through our four main sales channels: U.S. state and local agencies, international, U.S. federal agencies, and commercial.

Costs and Expenses

Cost of goods sold. Cost of goods sold includes raw material purchases, manufacturing-related labor costs, contracted labor, shipping, reimbursable research and development costs, allocated manufacturing overhead, facility costs, depreciation and amortization, and product warranty costs.

Selling, general and administrative. Selling, general and administrative ("SG&A") expense includes personnel-related costs, professional services, marketing and advertising expense, research and development, depreciation and amortization, and impairment charges. We anticipate our SG&A to stay relatively consistent from year to year in absolute dollars.

Restructuring and transaction costs. Restructuring costs consist primarily of termination benefits and relocation of employees, termination of operating leases and other contracts related to consolidating or closing facilities. Transaction costs consist of legal fees and consulting costs related to one-time transactions.

Related party expense. Related party expense primarily consists of rent expense related to 5 distribution locations owned by certain employees and any one-time transaction fees paid to related parties.

Other general income. Other general income consists primarily of gains from the disposition of a long- lived asset coupled with earn-out stock programs.

Interest expense. Interest expense consists primarily of interest on outstanding debt.

Loss on extinguishment of debt. Loss on extinguishment of debt consists primarily of recorded losses associated with debt restructuring.

Other (expense) income, net. Other (expense) income, net primarily consists of non-operating gains and losses, such as gains or losses on the sale of equity securities and foreign currency impacts.

Benefit (provision) for income taxes. A provision or benefit for income tax is calculated for each of the jurisdictions in which we operate. The provision or benefit for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The benefit or provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the book and tax bases of assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

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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 and nine months ended September 30, 2021 and 2020 (in thousands unless otherwise noted):







                                                          Three Months Ended                           Nine Months Ended
                                                            September 30,                                September 30,
                                                        2021             2020                        2021             2020
                                                     (Unaudited)      (Unaudited)      % Chg      (Unaudited)      (Unaudited)      % Chg
        Net sales                                   $      98,654    $     105,735      (6.7)  % $     323,751    $     297,019        9.0 %
        Cost of goods sold                                 59,346           65,739      (9.7)  %       192,256          183,869        4.6 %
        Gross profit                                       39,308           39,996      (1.7)  %       131,495          113,150       16.2 %
        Operating expenses
        Selling, general and administrative                27,673           26,908        2.8  %        87,168           79,963        9.0 %
        Restructuring and transaction costs                  (49)              171    (128.7)  %         1,491            3,143     (52.6) %
        Related party expense                                 142              159     (10.7)  %           437              480      (9.0) %
        Other general income                                    -                -          -                -         (10,950)    (100.0) %
        Total operating expenses                           27,766           27,238        1.9  %        89,096           72,636       22.7 %
        Operating income                                   11,542           12,758      (9.5)  %        42,399           40,514        4.7 %
        Other expense
        Interest expense                                  (3,464)          (5,668)     (38.9)  %      (14,129)         (18,275)     (22.7) %
        Loss on extinguishment of debt                   (15,155)                -          -         (15,155)                -          -
        Other (expense) income, net                         (352)            (213)       65.3  %         (881)            1,925    (145.8) %
        Total other expense, net                         (18,971)          (5,881)      222.6  %      (30,165)         (16,350)       84.5 %
        (Loss) income before provision for
        income taxes                                      (7,429)            6,877    (208.0)  %        12,234           24,164     (49.4) %
        Benefit (provision) for income taxes                2,123            (430)    (593.7)  %       (3,861)          (1,491)      159.0 %
        


Net (loss) income $ (5,306) $ 6,447 (182.3) % $ 8,373 $ 22,673 (63.1) %

Comparison of Three Months Ended September 30, 2021 to Three Months Ended September 30, 2020

Net sales. Product segment net sales decreased by $5.0 million, or 5.6%, from $88.9 million to $83.9 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to a $3.9 million decrease for duty gear holsters due to shipment timing for a customer contract in the U.S. federal agencies channel and a $1.1 million decrease for the less lethal product line due to higher demand for crowd control products during the three months ended September 30, 2020. Distribution segment net sales decreased by $2.2 million, or 9.2%, from $23.7 million to $21.5 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to higher demand for ammunition and firearms product in 2020. Reconciling items consisting primarily of intercompany eliminations were ($6.8) million for three months ended September 30, 2021 and the three months ended September 30, 2020.

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CADRE HOLDINGS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except share and per share amounts)

Cost of goods sold and Gross Profit. Product segment cost of goods sold decreased by $4.4 million, or 8.1%, from $54.3 million to $49.9 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to costs to manufacture product (namely material and labor). Product segment gross profit as a percentage of net sales increased by 1.7% to 40.5% for the three months ended September 30, 2021 from 38.9% for the three months ended September 30, 2020, mainly driven by favorable pricing and product mix. Distribution segment cost of goods sold decreased by $2.1 million, or 11.5%, from $18.3 million to $16.2 million for the three months ended September 30, 2021 as compared to the same period in 2020, primarily due to decreased costs to acquire products. Distribution segment gross profit as a percentage of net sales increased by 1.7% to 24.6% for the three months ended September 30, 2021 from 22.9% for the three months ended September 30, 2020, mainly driven by favorable pricing on ecommerce and retail sales. Reconciling items consisting primarily of intercompany eliminations were ($6.8) million for three months ended September 30, 2021 and the three months ended September 30, 2020.

Selling, general and administrative. SG&A increased by $0.8 million, or 2.8%, for the three months ended September 30, 2021 as compared to the same period in 2020, primarily due to the implementation of the LTIP bonus plan in 2021 and increases in marketing and travel spend.

Restructuring and transaction costs. Restructuring and transaction costs decreased by $0.2 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to lower transactions costs and consulting fees incurred.

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 September 30, 2021 and 2020, respectively. We recorded rent expense relating to distribution warehouses and retail stores that we lease from certain employees.

Interest expense. Interest expense decreased by $2.2 million, or 38.9%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, due to an interest rate decrease as a result of our recent refinancings and voluntary debt repayments on our outstanding debt.

Loss on extinguishment of debt. Loss on extinguishment of debt increased by $15.2 million for the three months ended September 30, 2021 as compared to the same period in 2020, due to the refinancing of our long-term debt in August 2021.

Other (expense) income, net. Other (expense) income, net decreased by $0.1 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to a $0.6 million unrealized loss on the value of Axon stock, partially offset by a $0.2 million gain on foreign currency transactions for the three months ended September 30, 2020 compared to no activity in 2021 due to the Axon stock being sold in December 2020 and a $0.6 million loss on foreign currency transactions for the three months ended September 30, 2021.

Benefit (provision) for income taxes. Benefit (provision) for income taxes decreased by $2.6 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to the release of a valuation allowance on a portion of our deferred tax assets in December 2020.

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CADRE HOLDINGS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except share and per share amounts)

Comparison of Nine Months Ended September 30, 2021 to Nine Months Ended September 30, 2020

Net sales. Product segment net sales increased by $22.6 million, or 9.0%, from $251.4 million to $274.0 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to $22.9 million increase in the international channel due to shipment timing for customer contracts, a $1.4 million increase in the U.S. state and local agencies channel primarily due to an increase in shipments for body armor and a $2.0 million increase in the commercial channel primarily due to an increase in duty gear holster demand, partially offset by a $4.4 million decrease in the U.S. federal agencies channel due to shipment timing for a customer contract for duty gear holsters. Distribution segment net sales increased by $6.4 million, or 10.2%, from $62.7 million to $69.1 million for the nine months ended September 30, 2021 as compared to the same period in 2020, mainly due to increases in retail and e-commerce sales as a result of market demand for our ammunition and firearms. Reconciling items consisting primarily of intercompany eliminations were ($19.4) million and ($17.1) million for the nine months ended September 30, 2021 and 2020, respectively.

Cost of goods sold and Gross Profit. Product segment cost of goods sold increased by $6.7 million, or 4.4%, from $153.2 million to $159.9 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to material and labor costs to manufacture product. Product segment gross profit as a percentage of net sales increased by 2.6% to 41.6% for the nine months ended September 30, 2021 from 39.1% for the nine months ended September 30, 2020, mainly driven by favorable pricing and product mix. Distribution segment cost of goods sold increased by $3.8 million, or 7.9%, from $47.9 million to $51.7 million for the nine months ended September 30, 2021 as compared to the same period in 2020, primarily due to increased costs to acquire products. Distribution segment gross profit as a percentage of net sales increased by 1.6% to 25.2% for the nine months ended September 30, 2021 from 23.6% for the nine months ended September 30, 2020, mainly driven by an increase in ammunition and firearms sales and favorable pricing. Reconciling items consisting primarily of intercompany eliminations were ($19.4) million and ($17.3) million for the nine months ended September 30, 2021 and 2020, respectively.

Selling, general and administrative. SG&A increased by $7.2 million, or 9.01%, for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to the implementation of the LTIP bonus plan in 2021 and increases in incentive bonus and commissions.

Restructuring and transaction costs. Restructuring and transaction costs decreased by $1.7 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to lower transactions costs and consulting fees incurred.

Related party expense. Related party expense was relatively consistent period over period with $0.4 million and $0.5 million for the nine months ended September 30, 2021 and 2020, respectively. We recorded rent expense relating to distribution warehouses and retail stores that we lease from certain employees.

Other general income. Other general income decreased by $11.0 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The decrease is related to a gain from Ontario facility asset sale of $6.2 million and earn-out stock payments from Axon Enterprise, Inc. ("Axon") for $4.7 million for the nine months ended September 30, 2020 compared to no activity for the nine months ended September 30, 2021.

Interest expense. Interest expense decreased by $4.1 million, or 22.7%, for the nine months ended September 30, 2021 as compared to 2020, due to an interest rate decrease as a result of our recent refinancings and voluntary debt repayments on our outstanding debt.

Loss on extinguishment of debt. Loss on extinguishment of debt increased by $15.2 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, due to the refinancing of our long-term debt in August 2021.

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CADRE HOLDINGS, INC.

MANAGEMENT DISCUSSION AND ANALYSIS

(in thousands, except share and per share amounts)

Other (expense) income, net. Other (expense) income, net decreased by $2.8 million for the nine months ended September 30, 2021 as compared to the same period in 2020, primarily due to a $1.5 million unrealized gain on the appreciation of Axon stock and a $0.3 million gain on foreign exchange transactions for the nine months ended September 30, 2020 compared to no activity in 2021 due to the Axon stock being sold in December 2020 and a $0.6 million loss on foreign exchange transactions for the nine months ended September 30, 2021.

Benefit (provision) for income taxes. Benefit (provision) for income taxes increased by $2.4 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to the release of a valuation allowance on a portion of our deferred tax assets in December 2020.

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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 . . .

Dec 02, 2021

COMTEX_398189387/2041/2021-12-02T16:36:53

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