Cadre - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered above-expectations execution: net sales $130.1M, GAAP diluted EPS $0.23, gross margin 43.1%, and adjusted EBITDA $20.5M; gross margin expanded 130 bps year-over-year supported by pricing, mix, and absence of inventory step-up amortization.
• Revenue and EPS beat Wall Street: consensus revenue $121.5M* vs actual $130.1M and consensus EPS $0.12* vs actual $0.23; adjusted EBITDA also exceeded consensus ($16.2M* vs $18.7M actual on SPGI Primary EBITDA) as pricing actions and faster shipments in Armor/EOD aided performance.
• Guidance raised post Carr’s Engineering acquisition: FY25 net sales to $618–$648M and adjusted EBITDA to $112–$122M, with ~$46M net sales and ~$6.5M EBITDA contribution expected from the Engineering Division; capex guided to $8–$10M.
• Catalysts: raised FY25 outlook, backlog up $22.4M driven by EOD and Cyalume, and nuclear platform expansion (remote handling/robotics) enhancing medium-term growth visibility.

What Went Well and What Went Wrong

What Went Well

• Gross margin expanded 130 bps YoY to 43.1% on favorable pricing/mix and absence of inventory step-up; management noted ~60 bps of the lift was from the lack of step-up amortization, with the rest from price/productivity.
• Backlog increased $22.4M in the quarter, primarily from EOD and Cyalume demand; Armor and EOD shipments executed faster than expected, lifting revenue vs internal plan.
• Strategic M&A: closed Carr’s Engineering Division (£75M EV), deepening nuclear exposure and expanding international footprint; management highlighted remote handling/robotics capabilities positioning Cadre uniquely in nuclear markets.

Quote: “We are pleased to have delivered another quarter of financial results above expectations, highlighted by gross margins that increased 130 basis points year-over-year.” – Warren Kanders, CEO

What Went Wrong

• Net sales declined 5.6% YoY on shipment timing in EOD and armor, partly reflecting tough comps (large Q1 2024 Armor shipment) and project timing lumpiness inherent in these categories.
• Adjusted EBITDA margin compressed to 15.8% from 17.8% YoY, reflecting lower volumes and mix (Alpha Safety/EOD) despite price/productivity offsets.
• Distribution segment gross margin declined to 21.6% (from 23.5%) on mix; management also flagged broader consumer market softness (consumer channel ~7% of contract sales post-acquisition).

Transcript

Operator (participant)

Good morning and welcome to Cadre Holdings' First Quarter 2025 Conference Call. Today's call is being recorded. All lines have been placed on mute. If you would like to ask a question at the end of the prepared marks, please press the star key and the number one on your touchstone phone. Okay, at this time, I would like to turn the conference over to Matt Berkowitz of the IGB Group for introductions and the reading of the safe harbor statement. Please go ahead, sir.

Matt Berkowitz (Managing Director)

Thank you, and welcome to today's conference call to discuss Cadre's first quarter results. Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements, and we make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to the risks and uncertainties that face Cadre and the industries and markets in which we operate. More information on potential factors that could affect Cadre's financial results is included from time to time in Cadre's public reports filed with the Securities and Exchange Commission. Please also note that we have posted presentation materials on our website at www.cadre-holdings.com, which supplement our comments this morning and include a reconciliation of certain non-GAAP financial measures.

I'd like to remind everyone that this call will be available for replay through May 21. A webcast replay will also be available via the link provided in yesterday's press release, as well as on Cadre's website. At this time, I would like to turn the call over to Cadre's Chairman and CEO, Warren Kanders.

Warren Kanders (Chairman and CEO)

Good morning, and thank you for joining Cadre's first quarter earnings call. I am joined today by our President, Brad Williams, and Chief Financial Officer, Blaine Browers. We are pleased to have reported first quarter results above expectations, reflective of sustained demand for our best-in-class, mission-critical safety products, as well as Cadre's outstanding strategic execution. In addition to important operational progress during the first quarter, which Brad and Blaine will outline, we have begun the year with the successfully completed acquisition of the Engineering Division from Carr's, a well-established provider of products focused on our nuclear vertical. Since our IPO in 2021, we have consistently discussed our goal for Cadre to evolve into a multi-vertical provider of engineered, mission-critical safety products. With the acquisition of Alpha Safety last year, we delivered on that promise, establishing a platform in the nuclear space with meaningful organic growth potential and a robust M&A pipeline.

The addition of the Engineering Division represents a critical next step. These are the best-in-class businesses complementary to Cadre's current nuclear safety focus that manufacture highly engineered products supporting mission-critical initiatives with entrenched customers and compelling growth opportunities. We are excited to deepen Cadre's exposure to the nuclear market while strengthening relationships with key international customers and providing an entry point to grow in new sub-verticals. While our nuclear businesses already operate at attractive margins, we believe the Cadre Operating Model can help unlock further efficiency and profitability moving forward. We continue to see additional M&A as a possibility and maintain a robust pipeline of targets across all our current verticals, including the nuclear, law enforcement, first responders, and military markets. We believe the current environment, characterized by sustained interest rates, persistent uncertainty, and a growing backlog of actionable opportunities, will continue to play to our strengths.

We are reviewing a number of opportunities that are at various stages, and we have the balance sheet strength to be opportunistic while also being patient and disciplined. On a macro level, like all businesses in the current operating environment, we are navigating a great deal of unpredictability and uncertainty. The important point to highlight, however, is that even in times of economic turbulence, Cadre has delivered consistent and stable growth. Our resilience is a key differentiator with businesses that are largely unaffected by economic, political, geopolitical, and other cycles. Overall, we are confident in Cadre's long-term outlook and remain focused on taking advantage of both organic and inorganic opportunities ahead. With that, thank you for being with us today, and I will turn the call over to Brad. Brad, over to you.

Brad Williams (President)

Thank you, Warren. On today's call, Blaine and I will provide a Q1 update and business overview, including recent trends, financial performance, and 2025 guidance, followed by a Q&A session. We'll begin on slide five. Following our best quarter as a public company in Q4 of 2024, we were able to achieve Q1 results ahead of expectations as we continued to capitalize on strong and recurring demand for our best-in-class, mission-critical safety products. While the uncertainty in many business environments has not abated, we are proud of our team's ability to navigate challenges and leverage the Cadre Operating Model to drive continuous improvement every day. A key tenet of the model is leadership in product growth and innovation, and we have built a loyal customer base and strong relationships across our end market.

Operator (participant)

Please pause for a moment.

Matt Berkowitz (Managing Director)

Do we have Brad on?

Operator (participant)

We're back on the live.

Brad Williams (President)

All right. Sorry about that. For some reason, I lost landline connectivity there. To pick right back up, a key tenet of the model is leadership in product growth and innovation, and we have built a loyal customer base and strong relationships across our end markets, allowing Cadre to continue to deliver premium products at comprehensive price points. Turning to our product mix in the first quarter, it was less favorable as expected, driven by Alpha Safety and EOD volume. On a positive note, orders backlog increased $22.4 million during the quarter, primarily driven by EOD and siloed demand. Regarding M&A, we maintain a healthy funnel of potential opportunities following the completion of our latest transaction. As you heard from Warren, we are very excited to have acquired the Engineering Division, which accomplishes multiple key objectives for Cadre.

These include adding scale to our nuclear vertical, a larger international footprint, and expanding nuclear TAM with entry into exciting new areas like automation, robotics, and nuclear medicine. Following the deal's close last month, we have begun the initial phases of integration. Our top priorities include working with the teams related to finance, accounting, IT, legal, and compliance. We look forward to implementing core Cadre Operating Model tools in the coming months. In terms of capital allocation, we continue to generate strong free cash flow, enabling the company to support core organic growth and M&A objectives. While also increasing dividend payments last year, we increased our dividend and followed up with another 9% increase this year, reflecting our confidence in the strength and consistency of our business.

Our most recent dividend was our 14th consecutive, and we remain committed to delivering meaningful shareholder returns while maintaining the balance sheet strength to execute our growth strategy. On slide six, we lay out a number of long-term industry tailwinds supporting Cadre's growth opportunity across both our core LE and nuclear safety sectors. On the law enforcement side, we expect a long history of positive spending related to personal protection equipment to continue, supported by bipartisan support for public safety. Similarly, we see considerable long-term tailwinds underpinning growth in the nuclear market, which we believe are best understood by highlighting three key nuclear silos, as you've heard me mention before. Environmental safety is one, based on our growing demand related to decades of U.S. nuclear material processing and handling. National security is another, with expanding national defense programs driving consistent and growing demand.

Commercial nuclear energy is the third, and we continue to anticipate opportunities for our nuclear safety business in the future as small modular reactor projects develop and SMRs become operational. As we think about more current market trends, we're seeing multidirectional support for nuclear coming in many forms. Supportive nominations and appointments continue to flow with the new administration for key federal positions, and there is a push to reform the Department of Energy's construction permit regulations for U.S. national labs. Nuclear modernization is a strong priority within our administration. Turning to slide seven, I'll take a moment to talk about a couple of other developments in our business environment. Fin per officer remains stable in North America, and a critical point to highlight is that when it comes to budget decisions, we have seen repeatedly throughout Cadre's history, customers prioritize life-saving tools and equipment to protect first responders.

Zooming in on our consumer channel, which represents approximately 7% of contract sales after the acquisition of the Engineering Division, we are monitoring broader weakening trends in the market. However, Cadre's brands have shown resilience to date based on the strong followership we've established and well-received product introductions over the last 24 months. Innovation is at the heart of everything we do, and we are proud to have recently announced the next step in our collaboration with Axon on a new suite of holsters and accessories integrating signal technology for law enforcement. This involves a sensor turning on the Axon Body camera when an officer draws their weapon from Safariland holsters and ensures critical incidents are captured without officers having to manually activate their cameras, allowing them to stay focused on the situation at hand. New products include nearly 30 holster fits with signal technology integrated.

These fits include our recently launched Ballast Duty holster, where significant time was spent with Axon optimizing the placement of sensor technology as the holster was designed to optimize signal performance and longevity. For the first time, we're also offering six new signal sensor-compatible pouches for non-firearm equipment like OC spray, batons, and handcuffs, helping agencies expand camera activation coverage beyond just firearms. Before I turn it over to Blaine, I'd like to provide a brief update on the uncertainty we have been assessing in our business environment since the year began. As you will recall, last quarter, I spoke about shifting priorities within the new administration and the potential for delayed transactional processes within certain federal agencies and changes to the rhythm of how these organizations have traditionally operated. We're tracking these developments very closely without any major changes.

As we look forward, while there is clearly continued uncertainty in our business environment, specifically related to tariffs, which Blaine will discuss more shortly, Cadre has a history of resilience, and we are confident in our ability to navigate these challenges and sustain exceptional results. I'll now turn the call over to our CFO, Blaine Browers.

Blaine Browers (CFO)

Thanks, Brad. I'll kick off my comments with the review of our recently completed acquisition, as well as our overall M&A strategy. As you heard from Brad and Warren, we finalized the acquisition of the Engineering Division from Carr's Group in April. We've outlined transaction highlights on slide nine, and I'll touch on a few here. These are industry-leading niche brands providing products and engineered services for our nuclear safety and protection. In combination with our current expertise in material handling, manufacturing, and radiation protection, we believe the new division's premier technology, particularly in remote handling and robotics, uniquely positions Cadre to deliver unparalleled capabilities to a global customer base. With a manufacturing footprint in the U.K. and Germany, as well as the U.S., the acquisition also accomplishes strategic objectives in terms of expanding Cadre's presence in international markets and strengthening relationships with key international customers.

Overall, we view the addition of these brands as an important next step in scaling our nuclear products category, and we anticipate additional opportunities to augment growth through select acquisitions. Across both nuclear and core law enforcement targets, our M&A funnel remains robust, and as always, our approach will be patient and disciplined. We continue to evaluate actionable opportunities focused on complementary businesses with strong margins, leading and defensible market positions, and recurring revenue. Turning now to a summary of Cadre's financial performance, slides 11 and 12 detail our first quarter results. As we've discussed before, certain products in our portfolio have projects that can move our revenue timing around in any given year. Q1 net sales of $130.1 million and adjusted EBITDA of $20.5 million were above our expectations.

Of note, first quarter gross margin improved to 130 basis points year-over-year, driven by prior year inventory step-up amortization, along with favorable Q1 pricing. Illustrated in slide 12 is net sales and adjusted EBITDA growth year-over-year, including our new 2025 guidance, which I'll discuss more in a moment. After completing Carr's' acquisition, this outlook implies full year revenue and adjusted EBITDA growth of 11.6% and 11.5% respectively at the midpoints. On slide 13, we present our capital structure as of March 31, 2025, prior to the completed acquisition. Even after the acquisition, we continue to have significant financial flexibility to pursue organic and inorganic opportunities with a pro forma net leverage ratio less than 1.75x. We provided updated 2025 guidance on slide 14. Net sales are expected to be between $618 million and $648 million.

Our adjusted EBITDA guidance is between $112 million and $122 million, implying adjusted EBITDA margins of 18.5%. To put these new ranges into context, we have reaffirmed our previous organic guidance with the higher midpoints reflective of the completed acquisition, assuming the Engineering Division contributes approximately $46 million in net sales and $6.5 million of EBITDA. I noted that our guidance ranges today also reflect the estimated impact of tariffs and assume that mitigating actions help offset future potential impacts. Based on our understanding of tariffs as of March, when we reported Q4 earnings, our initial assumption had been that on an annualized basis, we would see incremental cost to Cadre in the range of $18 million-$22 million, not building any offsetting mitigation. That original estimate was provided at a time when there were no exemptions for USMCA, and the majority of that tariff range was driven by U.S.

Tariffs on imports from year-over-year and Mexico. With the current exemption, the anticipated impact on Cadre is significantly less than we had originally forecasted. We have included the tariff impact for China as of today, along with our countermeasures to offset that tariff pressure. Our current view is that we can fully offset any pressure generated by tariffs that are in place today. With that said, as we have all seen, tariff policy remains uncertain and continues to evolve. Our focus remains on controlling what we can, and we are proactively strategizing in terms of which actions and countermeasures are the most viable as the environment changes. We have taken steps to mitigate tariffs across our businesses and continue to position our portfolio of brands to be successful in both the short term and long term.

As we think about the remainder of the year, we expect revenue to be up sequentially about 17%, with adjusted EBITDA margins around 17%. We are taking a conservative approach as we've owned the nuclear businesses for less than 30 days. We continue to expect the second half to be stronger than the first half, driven by armor and EOD project timing. I'll now turn it back to Brad for a concluding comment.

Brad Williams (President)

Thank you, Blaine. As you can see, we're taking a strategic approach during this uncertain time to not only maintain but grow earnings, invest in future opportunities, and position Cadre for long-term success regardless of the operating conditions we face. Supported by Cadre's entrenched positions and favorable industry trends across our law enforcement, first responder, military, and nuclear markets, we're excited to continue to build our platform and further enhance our market leadership moving forward. Complementing our core organic growth initiatives, we are actively evaluating attractive M&A opportunities to add complementary businesses with strong margins, leading and defensible market positions, and recurring revenue profiles. Overall, we believe Cadre is well-positioned to navigate any near-term obstacles based on our track record of effectively addressing supply chain disruptions in the past and consistent high-level execution in line with our strategic objectives.

We look forward to continuing to update you on our progress. With that, operator, please open up the lines for Q&A.

Operator (participant)

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Greg Konrad with Jefferies. Please go ahead.

Greg Konrad (SVP of Equity Research)

Good morning. Maybe just to start, I was hoping to put a finer point on the pricing commentary given it seemed to exceed the target in Q1. How do you think about the contribution in the quarter? Maybe just given the timing, how does that contribute to the rest of the year?

Blaine Browers (CFO)

From the tariff perspective and pricing, we did our normal pricing that we would do every year, January 1. We put in some countermeasures as the tariff amounts seemed to firm up, but that was really Q2 based. For Q1, there was not a significant impact. As we look forward, we expect to be able to fully offset the tariffs as of today. As I mentioned, as well as Brad Williams did, this is an evolving environment, so we will stay close to it. As of today, with what has been announced, we feel comfortable with our ability to offset any tariff pressure for the remainder of the year.

Greg Konrad (SVP of Equity Research)

Maybe just following up on the Engineering acquisition, you mentioned the geographical diversity. I mean, how do you think about the revenue synergy opportunity on the distribution side, just given kind of the expanding customer base and just any timing in terms of exercising that option?

Brad Williams (President)

Yeah. So when you look at the customer base there, this gives us a couple of things. One, geographic expansion. When we acquired Alpha Safety, part of that strategy was to grow geographically with them and some of their products into customers that they did not have tight relationships with within their product categories. For example, we have mentioned in the past, like Sellafield, which is in the U.K., one of the largest disposal sites in the world. What this gives us is when you look at the Engineering Division that we acquired, there are various brands that have very good relationships with Sellafield already in the U.K. Then within some of the brands that we acquired, they also have relationships and install base, for example, in customers like Fukushima in Japan.

Part of that strategy was to be able to have those Alpha Safety products that we could then begin to present to those customers. In the U.K. example, manufacturing-wise, it gives us that footprint to manufacture locally for the product categories that we have.

Greg Konrad (SVP of Equity Research)

I'll leave it at two. Thank you.

Brad Williams (President)

Thank you.

Operator (participant)

Your next question comes from the line of Mark Smith with Lake Street Capital Markets. Please go ahead.

Mark Smith (Senior Research Analyst)

Hi guys. First question for me is just as we think about kind of timing and kind of flow of business here through the rest of the year, any lumpiness or timing of shipments maybe that you have visibility on now that we should be aware of?

Blaine Browers (CFO)

Yeah. Thanks for the question. As we've talked about before, we do have somewhat limited backlog visibility. The quarters do tend to move around a bit. Everything I say, I just want to caveat it that as we move forward through the year and we get a little more clarity, we'll provide updates. Right now, we do expect Q2 to be up from Q1. We look across the quarters for the remainder of the year. Right now, Q4 seems to be shaping up to the biggest quarter of the year. Honestly, not much different than Q4 of last year. Down slightly, obviously, as we had the bump as we shipped that incremental backlog in Q4 last year. Some of those projects in particular on EOD and armor are looking heavier in Q4.

Mark Smith (Senior Research Analyst)

Perfect. Just as we think about tariff mitigation, outside of pricing, are there other steps and things that you guys are doing that you can give us insights into as far as moving any production or adding capacity domestically, anything that we should be aware of?

Brad Williams (President)

Yeah, Mark, like we talked about last time, the same items are still on the list that we're working through. First was working through any kind of mitigating price increases. We feel like we've done that piece. The second side of things on the list was looking at what I call product line shifts, not moves necessarily. For those of us who have been in this for a long time, we all know that product moves or factory moves can take a lot of time and be a bit challenging. For us, we've got various options to shift some product categories around between facilities. I think we used the example of our bomb suit production we have in two countries, in the U.S. and also in Canada, where our headquarters is at for that part of the business.

We frequently, on a daily basis, shift production between those two facilities. It gives us that optionality. We have that within some other product lines without going through all those. That was the other one. The team's been working on productivity acceleration. We run on a 12-month rolling funnel within our Operating Model. It's just a standard part of our monthly business reviews. Each of the folks that lead the business units have 12-month rolling productivity funnels. What I've asked the teams to do is to get all your manufacturing engineers together and start talking through what additional projects can we do to accelerate productivity. The team's going to be walking me through that here in the next couple of weeks and see what we can do to accelerate those.

Mark Smith (Senior Research Analyst)

Excellent. Thank you.

Operator (participant)

Your next question comes from the line of Jeff Van Sinderen with B. Riley Securities. Please go ahead.

Jeff Van Sinderen (Senior Research Analyst)

Hi, good morning, everyone. Let me say congratulations on the strong Q1 metrics. First question, I wanted to see if we could circle back a little bit. I know that last quarter, we touched on potential procurement delays or maybe disruption resulting from changes in the broader government agencies. Just wondering if you've seen anything there or if it's been fairly steady and if you're anticipating that it will be steady as far as you can see, I guess.

Brad Williams (President)

Yeah. No, thanks. Thanks for the question. So far, we can talk about what we've seen. We talked about, or at least I talked about last quarter, potentially having any kind of disruptions due to any dose changes in the federal side of things with any positions being eliminated. More on the transactional side of things, we saw it during COVID. We saw it in the U.S. We saw it in Canada, where it took folks a bit of time to get reorganized and together to get purchase orders cut and things like that. We have not seen that at this point in time. We have not seen any major changes there. There has been some talk in the news around sanctuary cities, for example, and potential effects there. We have not, at this point, seen any effects to our business on that side of things either.

We've got our ears to the ground. Don't forget, even though we go through third-party distributors around the world, we also have three of our company-owned distributors up the East Coast in the U.S. We rely on our sales folks there to make sure that we're keeping abreast of everything. We have our own sales teams internationally and here domestically. We feel like we've got a good net of contacts to make sure that we stay on top and continue to see what's going on.

Jeff Van Sinderen (Senior Research Analyst)

Okay, great. Given the recent closure of the Carr's acquisition, I guess just maybe a little more focus on nuclear. Any more color you can share on what you're seeing in the overall nuclear market demand for your business lines there and I guess your outlook for that segment for organic growth? As we think about M&A, and I know this is a tough question because it's sort of opportunistic, but at this point, are you more focused on nuclear M&A or similarly focused on LE M&A?

Brad Williams (President)

I'll work those backwards. Let me know if I missed something there with the multiple parts to the question. Our funnel is.

Jeff Van Sinderen (Senior Research Analyst)

Sorry about that.

Brad Williams (President)

That's okay. Our funnel is robust in both sides of things. When I say both sides, that's the public safety side and also the nuclear side of the equation. We're not putting an emphasis on, we're not weighting either funnel. Everyone knows that M&A, when you have those opportunities, you got to take advantage of them and you go after them. Now, as you guys know, we've been using a very, very disciplined approach to that as we go forward. We have opportunities in both sides of it. We're working the nuclear funnel, which, as we've talked about before, a lot of that funnel came with the acquisition of Alpha Safety, which has been great. The Alpha Safety folks have been involved and helped identify additional acquisitions. They've got contacts throughout the market.

It only continues to help as we now have the Engineering Group, the amazing brands that we've acquired with Wallace Miller and Bendalls Engineering and NW Total and NuVision. Those are all great brands throughout the nuclear side of things. We feel good about going into a new vertical like that. We think Alpha Safety was the right pick as we jumped into it. Now, with all these together, it just continues to help fill the funnel. On the law enforcement or public safety side of things, we've been doing that for so long. There's such a long history there with our existing teams that we have. Also, throughout more formal channels, we have great opportunities there. We'll continue to see what's next and what pops out. This time, it was nuclear with the Carr's Engineering Division acquisition.

Next time, we'll see. On the nuclear front, with law enforcement, we've talked about in the past, budgets are typically, when you look over the long term, anywhere from 2.8%-3% CAGR over 10, 12 years when you look at those budgets. They remain consistent no matter typically whether it's an industrial recession, financial recession, COVID, defund the police. That's why we love that part of the business. It's been very consistent. That consistency, what we do with it with our Operating Model, we feel like is pretty amazing. On the nuclear side, when you look at it, we've estimated about a 4%-6% grower over time. In terms of demand, we've not seen changes in demand. Actually, we've seen with the new administration, there's various appointments that continue to flow through on that side of things, which is good.

That's a positive indication. When you look at various countries around the world, the focus on nuclear, for example, just taking one of the three that we always talk about, nuclear power, for example, there is a phenomenal support for nuclear power as a clean form of energy and stop relying on various countries for power and other forms and focus on your own destiny, which is on the nuclear power side. The last one is just seeing the support from tech companies on nuclear in terms of power that's needed for them to really support AI work that they're doing. There are multiple commitments from various tech companies on nuclear power plants and on that front. It is very positive when we look at what we can do in the nuclear space and how we can begin to pull this all together.

Jeff Van Sinderen (Senior Research Analyst)

Okay. Good to hear. Thanks for taking my questions. I'll take the rest offline.

Brad Williams (President)

Okay. Thanks.

Operator (participant)

Your next question comes from the line of Larry Solow with CJS Securities. Please go ahead.

Larry Solow (Partner, Managing Director, and Equity Analyst)

Great. Thanks. Good morning, everybody. Most of my questions have been answered. I guess just first question on the Q1 results, obviously somewhat better than the initial expectations or the Q1 guide you had given. Could you just remind us? I know I think sales still declined like 6%, maybe closer to 10% organically. I guess the two questions I have there are sort of the reminders just on the year-over-year drop. I believe it was just primarily due to a difficult comp, right? Year-over-year, I think last year you grew really strong in Q1. The second part of that question is, what was the sort of the delta, what drove kind of the upside this quarter relative to your sort of expectations initially? I will have a follow-up.

Blaine Browers (CFO)

All right. No, thanks, Larry, for the question. It really was a tough comp. In Q1 of 2024, one of the biggest things that was unusual for us was a pretty large Q1 2024 for our armor business, in particular with a federal law enforcement agency. Typically, we would expect Q1 for armor maybe not to be the lowest quarter of the year, but certainly not one of the bigger quarters of the year. Ex the Q3 event last year, it would have been the largest quarter for that business. The other piece, and we knew this coming into the year, Q1 in the EOD space was going to be light. This is not a typical layout for the business, but it is just dependent on those large projects, right? There is just a limited number of bomb suit opportunities in the world.

How those stack up in a given year really has an impact on their revenue. That's really, I think, the driver on that year-over-year, if we kind of went back to what we guided to a couple of months ago. When we think about what occurred in Q1 of this year versus expectations, actually, the armor business was able to generate a little more revenue than we expected in the quarter, as well as EOD. We both had really surprises to the upside on the team that were just able to execute on some of those orders a little bit more quickly, both on getting the orders into backlog, but as well as shipping in the quarter. The teams did a great job navigating that, as well as, I would say, the general uncertainty in the market. We're very pleased with the Q1 results.

Larry Solow (Partner, Managing Director, and Equity Analyst)

Gotcha. How about on the margin side? At least on the growth side, I think it went up 130 bps on a lower sales number. There may have been a little bit of less adjustments, I guess, this year too as well. Still, just from a high level, looks like a pretty good number considering some drivers there and, I guess, opportunities going forward to continue to expand on the gross margin side.

Blaine Browers (CFO)

Yeah. We did have a bit of a helping hand in the sense that we did not have the repeat of the inventory step-up that was associated with ICOR and Alpha last year in Q1. That accounted for about 60 bps of the lift. You kind of remove that piece, and we still had really strong execution on price and productivity by the teams, which is to a degree what we expect and really what the teams work on every day. Very pleased to see those margins continue to inch up. I'll say that will not happen every quarter, but over the course of a year, we do expect those margins to improve between pricing and productivity. Mix was a relatively flat impact for us in Q1. This has really resulted in just the strong execution of the teams.

Larry Solow (Partner, Managing Director, and Equity Analyst)

Just on the Carr's, the incremental addition for the outlook, it looks like you're basically keeping numbers that look similar to the kind of, at least the 12-month data you provided, I think, from, I think it was August of 2024. Fair to say maybe you're keeping it sort of flat-ish, but as you mentioned, you just acquired it. No reason to be a hero. Is that kind of the way to look at your outlook?

Blaine Browers (CFO)

Yeah. I think very similar to how we approached Alpha last year. Alpha had similar timing, right? Deal closed, and we were out with earnings shortly thereafter, much the same with the Carr's Engineering Group. We want to have, it's early days, right? We've obviously done a lot of work on diligence. Now that they're part of Cadre, we'll continue to dig in. As we move through the year, we will absolutely sharpen the pencil. As it gates, we want to take a practical approach on guiding. Yeah, as you said, we kept the core guidance, the core organic guidance flat, which I think is, honestly, in this today's environment, a pretty strong indicator of how we feel the year is shaping up and demand continues for us.

Larry Solow (Partner, Managing Director, and Equity Analyst)

Thanks, Blaine. I appreciate it.

Blaine Browers (CFO)

Thank you.

Operator (participant)

Your last question comes from the line of Matthew Koranda with Roth Capital. Please go ahead.

Matthew Koranda (Managing Director and Senior Research Analyst)

I guess a lot has been asked and answered, but I guess just on Carr's, it looks like no surprise. It's coming sort of at that mid-teens adjusted EBITDA margin that you guys had talked about around the acquisition. What levers do you have in the near term to bring that up sort of to the corporate adjusted EBITDA margin? Help us, maybe Blaine, if you could, just understand how that threads into gross margins in the near term. Is that where we need to dilute in the near term? Maybe just a little bit more detail on that.

Brad Williams (President)

Yeah. Hey, Matt, it's Brad. I'll start us off on that one. When you look at synergies and our recipe is, as I mentioned in the prepared remarks, to start with IT, finance, accounting, legal compliance, you name it. That's kind of the foundational type stuff. We've got to make sure that we get our arms around, make sure we get it integrated or not integrated, or just become extremely familiar with it. That's where we focus the first 120 days. We try not to go in and begin to lay in an Operating Model on top of those priorities within these businesses. That's what we'll start out doing. We've got a Cadre Operating Model bootcamp scheduled in, I think it's in July timeframe.

We're going to hold it in Europe so that we can have the Engineering Division folks, the leaders and their leadership teams there attend. We'll be bringing some of the other facilities we have on the public safety side, some of their leadership folks into it. We'll hold a bootcamp. That's where it all gets started. At that point, we'll begin to work through and typically begin to identify what are those other opportunities that we'll see within the business to improve any margins, talent, retention, engagement, all the elements within the Operating Model.

Blaine Browers (CFO)

On the margin side, Matt, for your question, on an adjusted basis, non-GAAP, excluding D&A, we expect them to be around 40%. Slightly diluted out of the gates. Of note, though, that would exclude step-up as well as intangible amortization that would fall in the gross margin. It is early, obviously, as we work through the opening balance sheet. If we kind of look back to what we saw for Alpha and ICOR, I think same $10 million between amortization and step-up, maybe kind of split 50/50 down the middle is probably a good place to start on the modeling side. As we move forward, as Brad talked about, the opportunity as it relates to the Operating Model, we would expect that improvement to be mostly in the gross margin line. We do not see this acquisition as an opportunity to strip out SG&A.

This is well-run businesses, provides unique opportunities for us to continue to expand internationally on that nuclear platform and honestly bring some of the international products into the US market. This will be on the growth side, but really more focused on the gross margin side and moving those margins up to Cadre level and then leveraging the volume growth to get the EBITDA margin up.

Matthew Koranda (Managing Director and Senior Research Analyst)

Okay. That makes sense, guys. Appreciate it. Maybe just a broader question. Noted that there's no real tariff impact anymore, just given that a lot of what you source is Canada and Mexico, so we're exempt now from the tariff regime. Any reconsideration, I guess, of the production footprint in light of the changes that we've gotten year to date from the administration? Just wanted to hear your thoughts on sort of how we're thinking about our posture and production-wise.

Blaine Browers (CFO)

I'll let Brad answer the production location side of it, but just note a clarity on tariffs. That $18 million-$22 million was primarily driven by that Canada and Mexico tariffs. We still have exposure on China while it's not material, and we have actions in place to offset. There still is some impact in there that we've baked into the guidance along with [RR] countermeasures around price and productivity. I'll turn it over to Brad, he can talk about the geographic footprint and manufacturing.

Brad Williams (President)

Yeah. On the footprint side of that, we're overall, I'll say we're happy with our footprint and where we're at. We've done a lot of facility-type footprint work in the early days and made quite a few changes from that aspect. At this point, talked about over the last 12-14 months, mitigating some risk on our Tijuana, Mexico location as we've seen statutory increases in labor costs go up in that region. We've done work there. We've not talked about what country that we've worked within, but we've definitely done a lot of work around mitigating some of the costs on that front. It's gone extremely well. We continue to look at ways to increase production in that area. That's one mitigation that we've worked on and did that well before any of the tariffs type stuff come up.

In terms of other location footprint, when you look at the nuclear side of things and the facilities that we have, the nuclear facilities internationally are all very strategically placed. There is a facility in the U.K. that is near about a couple of hours from London that is positioned closer to Sellafield that supports the Sellafield folks there with some products. We have got NW Total that is positioned closer to a couple of larger customers in the nuclear subside of things, BAE Systems and Rolls-Royce, for example. Bendalls Engineering is positioned well in the U.K. So geographically, we like where those locations are at. Wallace Miller is in Germany, and they are supplying globally around the world, including the U.S. You never know as we go forward as we continue to build things out. At this point, we are pretty happy with where we are sitting footprint-wise.

Matthew Koranda (Managing Director and Senior Research Analyst)

Okay. Appreciate it, guys.

Operator (participant)

That concludes our question and answer session. I will now turn the conference back over to Brad Williams for closing remarks.

Brad Williams (President)

Okay. Thank you. Thank you, operator. I'd like to thank everyone again for joining us on today's call and for your continued interest in Cadre Holdings. Thanks a lot. Have a great day.

Operator (participant)

This concludes today's conference call. Thank you and have a great day.