Cadre (CDRE) - 2022 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for the three months ended March 31, 2022, with comparative data for 2021 Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $320,998 | $311,796 | | Total Current Assets | $143,657 | $159,981 | | Goodwill | $72,510 | $66,262 | | Total Liabilities | $225,053 | $223,156 | | Total Current Liabilities | $75,899 | $74,621 | | Long-term Debt | $144,661 | $146,516 | | Total Shareholders' Equity | $95,945 | $88,640 | Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net Sales | $104,406 | $110,536 | | Gross Profit | $40,189 | $43,959 | | Operating (Loss) Income | $(14,482) | $15,434 | | Net (Loss) Income | $(10,165) | $6,864 | | Diluted (Loss) Income Per Share | $(0.30) | $0.25 | Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $8,916 | $16,832 | | Net cash used in investing activities | $(20,737) | $(788) | | Net cash used in financing activities | $(12,957) | $(1,490) | | Change in cash and cash equivalents | $(23,980) | $14,567 | Notes to Consolidated Financial Statements The notes provide detailed explanations for items in the financial statements, covering significant accounting policies, the acquisition of Radar, revenue disaggregation, debt structure, compensation plans, segment performance, and subsequent events - On January 11, 2022, the Company acquired Radar Leather Division S.r.l. for $19.8 million, net of cash acquired, with the acquisition expected to be accretive[63][64] Net Sales by Channel (in thousands) | Channel | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | U.S. state and local agencies | $57,923 | $59,377 | | Commercial | $11,034 | $11,842 | | U.S. federal agencies | $7,914 | $15,593 | | International | $27,019 | $21,994 | | Total Net Sales | $104,406 | $110,536 | - As of March 31, 2022, total debt was $156.6 million, including a $200 million Term Loan and a $100 million Revolving Loan facility, both maturing in July 2026[80][82] - A modification to the executive compensation plan on March 9, 2022, resulted in the recognition of $23.0 million in compensation expense during the first quarter[117] - In May 2022, subsequent to the quarter end, the Company acquired Cyalume Technologies for approximately $35.0 million, funded by a draw on its Revolving Loan facility[124] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management provides an analysis of the financial results for Q1 2022 compared to Q1 2021, covering business overview, acquisitions, key metrics, operational results by segment, liquidity, and critical accounting policies Results of Operations Net sales for Q1 2022 decreased by 5.5% to $104.4 million from $110.5 million in Q1 2021, primarily due to a large prior-year federal shipment and increased stock-based compensation expense - Product segment net sales decreased by $8.4 million (9.0%) YoY, mainly due to a large US Federal shipment in the prior year and lower demand for less lethal products compared to Q1 2021[150] - Selling, general and administrative (SG&A) expenses increased by $25.9 million (92.3%) YoY, primarily due to $23.7 million in stock-based compensation expense[152] - Interest expense decreased by $3.6 million (70.5%) YoY due to debt refinancing at a lower interest rate and debt repayments[155] Key Performance Metrics The company monitors its order backlog as a forward-looking indicator of potential sales, which increased as of March 31, 2022 Orders Backlog (in thousands) | Date | Orders Backlog | | :--- | :--- | | March 31, 2022 | $117,146 | | December 31, 2021 | $113,840 | - The order backlog increased by $3.3 million from Q4 2021 to Q1 2022, driven by higher demand for soft armor and duty gear, partially offset by shipments of large contractual orders[143] Non-GAAP Measures The company uses non-GAAP measures such as EBITDA and Adjusted EBITDA to supplement its GAAP results, with Adjusted EBITDA decreasing to $14.2 million in Q1 2022 Adjusted EBITDA Reconciliation (in thousands) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net (loss) income | $(10,165) | $6,864 | | EBITDA | $(11,143) | $18,929 | | Stock-based compensation expense | $23,723 | $— | | Adjusted EBITDA | $14,219 | $20,246 | | Adjusted EBITDA conversion rate | 92% | 96% | - Adjusted EBITDA decreased by $6.0 million in Q1 2022 compared to Q1 2021, primarily due to the decrease in net sales and unfavorable product portfolio mix, partially offset by favorable pricing[169] Liquidity and Capital Resources The company's primary liquidity sources are cash from operations, cash on hand, and its revolving credit facility, with $8.9 million in net cash from operations in Q1 2022 Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $8,916 | $16,832 | | Net cash used in investing activities | $(20,737) | $(788) | | Net cash used in financing activities | $(12,957) | $(1,490) | - As of March 31, 2022, the company had $156.4 million in outstanding debt, primarily related to its term loan facilities[174] - As of March 31, 2022, there were no amounts outstanding under the Revolving Loan, with $96.9 million of availability, and subsequently $35.0 million was drawn in May 2022 to fund the Cyalume acquisition[176][181] Quantitative and Qualitative Disclosures About Market Risk The company states that as a smaller reporting company, it is not required to provide the information for this item - As a smaller reporting company, Cadre is not required to provide quantitative and qualitative disclosures about market risk[206] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[207] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[208] PART II OTHER INFORMATION Legal Proceedings This section refers to Note 7 of the financial statements, detailing ongoing legal matters including a DOJ investigation and a personal injury lawsuit - The company is subject to a Department of Justice (DOJ) False Claims Act investigation regarding allegations that soft body armor accessory panels were falsely labeled as compliant with National Institute of Justice standards[100] - A subsidiary, Safariland, LLC, received a $7.5 million jury verdict in a personal injury case, which the company is appealing and believes any potential losses would be covered by insurance[102] Risk Factors The company reports no material changes to its risk factors from its last Annual Report on Form 10-K, except for no longer being a "controlled company" under NYSE rules - The company is no longer a "controlled company" under NYSE rules as CEO Warren B. Kanders no longer beneficially owns a majority of the outstanding common stock following equity issuances for employee compensation[215] - Due to the change in status, the company must meet certain NYSE corporate governance requirements, such as having a majority-independent board, within specified transition periods[215] Exhibits This section lists the exhibits filed with the 10-Q report, including the Stock Purchase Agreement for the Cyalume Technologies acquisition and officer certifications - A key exhibit filed is the Stock Purchase Agreement dated May 3, 2022, for the acquisition of Cyalume Technologies Holdings, Inc[219]