Cadre Q3 2024 Earnings Report

Cadre EPS Results

• Actual EPS: $0.09
• Consensus EPS: $0.06
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: $0.29

Cadre Revenue Results

• Actual Revenue: $109.41 million
• Expected Revenue: $126.27 million
• Beat/Miss: Missed by -$16.86 million
• YoY Revenue Growth: -12.60%

Cadre Announcement Details

• Quarter: Q3 2024
• Date: 11/6/2024
• Time: After Market Closes
• Conference Call Date: Wednesday, November 6, 2024
• Conference Call Time: 5:00PM ET

Cadre (NYSE:CDRE) is a manufacturer of equipment designed to protect and support military personnel, law enforcement officers, first responders and other public-safety professionals. The company operates through a portfolio of specialized brands, including Safariland, and focuses on products used in high-risk and mission-critical environments.

Its products include body armor, tactical and duty equipment, holsters, protective apparel, forensic equipment, explosive ordnance disposal suits and related public-safety gear. Cadre also provides equipment for emergency response and defense applications, with products intended to improve personal protection, operational readiness and survivability.

Cadre serves customers in the United States and international markets through government agencies, defense organizations, law-enforcement departments and commercial distributors. The company was formed around the Safariland business and became a publicly traded company on the New York Stock Exchange in 2021.

Cadre Q3 2024 Earnings Call Transcript

Key Takeaways

• Continued strong demand for mission-critical safety products across law enforcement, first responder, military and nuclear markets, with the CADRE operating model driving process optimization and potential margin expansion.
• Two cybersecurity incidents in Q3 caused roughly 5 points of gross margin pressure, led to $1.5 M of inventory step-up amortization and delayed some shipments into Q4 and early 2025, though customer relationships remain intact.
• Maintains a robust M&A pipeline and expects at least one acquisition before year-end, backed by a low net leverage of 1.3×, strong free cash flow and an asset-light model.
• Order backlog increased to $167 M (up $21 M sequentially) and Q4 guidance implies net sales of $560–570 M with adjusted EBITDA of $101–107 M, supported by inventory build and operational leverage.
• Nuclear safety segment benefits from long-term tailwinds—DOE cleanup, national security missions and impending small modular reactor projects—with Alpha Safety providing stable, contract-driven revenue.

Presentation

[Operator]

Good afternoon and welcome to Cadre Holdings' Third Quarter 2024 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 remarks, please press the star key, then the number one on your touch-tone phone. 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.

[Matthew Berkowitz, Managing Director at IGB Group]

Thank you, and welcome to today's conference call to discuss Cadre's third quarter results. Before we begin, I would 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.

[Matthew Berkowitz, Managing Director at IGB Group]

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 note that we have posted presentation materials on our website at www.cadre-holdings.com, which supplement our comments this evening and include a reconciliation of certain non-GAAP financial measures.

[Matthew Berkowitz, Managing Director at IGB Group]

I'd like to remind everyone that this call will be available for replay through November 20, 2024, starting at 8:00 P.M. Eastern Time tonight. A webcast replay will also be available via the link provided in today'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 at Cadre Holdings]

Good afternoon, and thank you for joining Cadre's earnings call to discuss our results for the third quarter of 2024. I am joined today by our President, Brad Williams, and Chief Financial Officer, Blaine Browers. During the quarter, we continue to see strong demand for Cadre's mission-critical safety products across our law enforcement, first responder, military, and nuclear markets.

[Warren Kanders, Chairman and CEO at Cadre Holdings]

We've been pleased with the team's overall progress and execution consistent with our stated strategic objectives. Implementation of the Cadre Operating Model is ongoing, and we remain excited about the potential to further optimize processes throughout the business, driving margin expansion and increased profitability as we continue to grow.

[Warren Kanders, Chairman and CEO at Cadre Holdings]

While there was a short-term impact on our financial results this quarter as a result of the cybersecurity incidents, business macros are strong, and we continue to see attractive long-term growth opportunities supported by Cadre's entrenched positions in the markets in which we operate, as well as favorable industry trends related to public safety. In the context of the U.S. election, I'd like to underscore the resilience and consistency of Cadre's business through cycles.

[Warren Kanders, Chairman and CEO at Cadre Holdings]

Historically, our financial results have not been significantly affected by economic, political, geopolitical, and other cycles, and we expect this will continue to be the case. As you all know, our largest market segment is law enforcement, and over multiple decades, major domestic law enforcement budgets and police protection expenditures have grown despite financial and industrial recessions and a political climate that has oscillated.

[Warren Kanders, Chairman and CEO at Cadre Holdings]

In recent years, defund the police has become refund the police, and there is an expectation that regardless of which party is in office, there will be a commitment to public safety spending and ensuring those who protect and serve us are equipped with the safest and most reliable products. Looking ahead, complementing our core organic growth initiatives to capitalize on these headwinds, Cadre's M&A program is a key component to accelerate long-term growth.

[Warren Kanders, Chairman and CEO at Cadre Holdings]

We continue to aggressively evaluate a robust pipeline of potential transactions and are tracking well to further grow our platform and enhance our market leadership through M&A. Cadre maintains an advantage in pursuing targets given the strength of our balance sheet and our ability to act quickly.

[Warren Kanders, Chairman and CEO at Cadre Holdings]

Based on the opportunities we are seeing and the status of active discussions, we still believe we are well positioned to announce at least one transaction before the end of 2024 while maintaining patience and discipline. 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 at Cadre Holdings]

Thank you, Warren. On today's call, Blaine and I will provide a Q3 update and business overview, including recent trends and financial performance, followed by a Q&A session. We'll begin on slide five. We made progress executing our strategic objectives during the third quarter and continued to see strong and recurring demand for our best-in-class mission-critical safety equipment. Our teams remain committed to the principles of the Cadre Operating Model, which is driving improvement every day throughout the organization.

[Brad Williams, President at Cadre Holdings]

From a broader demand and pricing growth perspective, Cadre continues to benefit from an innovative product offering, premium brands, and leading positions across our law enforcement, first responder, military, and nuclear markets. Our mix in the third quarter was neutral. We maintain a strong orders backlog, which was $167 million as of September 30th. This represents a $21 million increase from Q2, excluding Alpha Safety and ICOR.

[Brad Williams, President at Cadre Holdings]

As Warren mentioned, our M&A funnel also remains strong. Blaine will outline our M&A priorities in greater detail, but the primary takeaway is that we continue to be excited about the opportunities we are actively evaluating. Based on our asset-light business model with minimal CapEx needs, Cadre's strong free cash flow generation continues to support our M&A objectives while also enabling the company to prioritize the return of capital to shareholders.

[Brad Williams, President at Cadre Holdings]

We've paid 12 consecutive quarterly dividends since going public and raised our dividend earlier this year to $0.35 per share on an annualized basis. Turning to slide six, I'll briefly highlight the long-term market tailwinds that investors familiar with Cadre know well. As public safety has increasingly become a nonpartisan issue, we see favorable macro trends fueling global demand for our mission-critical equipment.

[Brad Williams, President at Cadre Holdings]

As Warren mentioned, Cadre's core law enforcement and military business has always been acyclical, delivering consistent and stable growth regardless of economic, political, and geopolitical conditions. A primary reason we were drawn to nuclear safety is the similar attributes it shares as a business area with very stable organic growth. Alpha Safety has a protected market position and highly visible revenue supported by long-term contracts and recurring purchase orders.

[Brad Williams, President at Cadre Holdings]

As we take a step back and look at the nuclear safety sector as a whole, we like to think about long-term market tailwinds supporting growth in terms of three key nuclear missions. The first two are related to environmental safety, which is driven by DOE mission-critical and mandated cleanup efforts, and national security underpinned by expanding national defense programs.

[Brad Williams, President at Cadre Holdings]

Third is nuclear energy, which we recognize as an area of growing interest as focus intensifies on how to increase the sustainability of energy supplies globally. We see future opportunities for our nuclear safety business in conjunction with the growth of the global small modular reactor pipeline. Once SMRs become operational, their requirements will resemble those of the current commercial nuclear reactor fleet, and there will be a number of opportunities for us to win new business.

[Brad Williams, President at Cadre Holdings]

We expect to see demand for ventilation, shielding, and containment products, particularly during outage cycles, much like we do with existing reactors. Turning to slide seven, we outline the latest market trends impacting our business on a more current basis. Trends related to North American law enforcement, the geopolitical landscape, and new products have remained mostly unchanged in the last three months.

[Brad Williams, President at Cadre Holdings]

Zooming in on our consumer channel, which represents approximately 8% of Cadre's sales after the acquisitions of ICOR and Alpha Safety, I'd like to highlight that we've continued to see solid demand despite broader market weakness. I'll now turn the call over to our CFO, Blaine Browers.

[Blaine Browers, CFO at Cadre Holdings]

Thanks, Brad. I'll kick off my comments with a review of our M&A strategy. We continue to evaluate potential transactions consistent with our highly selective key criteria listed on slide eight. The pipeline is robust, and we see actionable opportunities to build out our nuclear platform as well as to expand our suite of core safety products for law enforcement and military. Turning now to a summary of Cadre's financial performance, slides 10 and 11 detail our Q3 results.

[Blaine Browers, CFO at Cadre Holdings]

On slide 10, you'll see, as discussed, the effect of the cybersecurity incidents on our short-term financial performance. Our best estimate at this time is the cyber incidents created about five points of gross margin pressure in the quarter. In Q3, we've expensed $1.5 million related to inventory step-up amortization for the acquisitions of ICOR and Alpha Safety. In addition, intangibles amortization and cost of goods sold was $900,000 in Q3.

[Blaine Browers, CFO at Cadre Holdings]

Combined, this created 225 basis points of headwind compared to last year. Illustrated on slide 11 is net sales and Adjusted EBITDA growth year over year, including our updated 2024 guidance, which I'll discuss in more detail in a moment. At its midpoint, this outlook implies full-year revenue and Adjusted EBITDA growth this year of over 17% and 21%, respectively. On slide 12, we present our capital structure as of September 30th.

[Blaine Browers, CFO at Cadre Holdings]

Our net debt leverage of 1.3 times remains low, with ample dry powder available to continue to pursue acquisition opportunities. Before turning to our full-year guidance on the next slide, I'd like to provide an update on the cybersecurity incident we reported last quarter. In response to the July incident, we immediately took steps to remediate the incident with the help of outside experts.

[Blaine Browers, CFO at Cadre Holdings]

During the process of reinstating the affected technology systems, we experienced a second cyber incident as we were transitioning to a steady-state environment. Fortunately, with a number of countermeasures already established, our internal and external cybersecurity teams were able to act quickly and minimize the disruption. To date, we have implemented many countermeasures to improve our infrastructure and will continue implementing additional countermeasures to protect our systems and data.

[Blaine Browers, CFO at Cadre Holdings]

Our full-year guidance in August was based on the information we had available to us at the time as we worked diligently with cyber experts and internal teams to estimate how long it would take to resume normal operations. It's important to highlight that customer and supplier relationships have remained strong. While these incidents have had an impact on our short-term financial performance, we continue to see favorable demand trends for Cadre's best-in-class mission-critical safety equipment across our categories.

[Blaine Browers, CFO at Cadre Holdings]

To reiterate a point that Brad made, our teams have ramped up effectively, and we've been pleased with their overall progress and execution, leveraging the Cadre operating model to drive constant organizational improvement. With that being said, taking into account both cyber incidents, the company has modified its full-year guidance for 2024, which is reflected on slide 13. Cadre now expects to generate net sales in the range of $560 million-$570 million and adjusted EBITDA in the range of $101 million-$107 million. We expect capital expenditures to be in the range of $6 million-$8 million. I'll now turn it back to Brad for concluding comments.

[Brad Williams, President at Cadre Holdings]

Thank you, Blaine. In summary, we continue to execute in line with our strategic objectives and capitalize on the favorable market trends driving strong demand for Cadre's best-in-class mission-critical safety equipment. 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.

[Brad Williams, President at Cadre Holdings]

Supported by Cadre's entrenched positions and favorable industry trends across our law enforcement, first responder, military, and nuclear end markets, we are confident in Cadre's forward outlook and excited to build on our track record of superior execution and further enhance our market leadership. With that, operator, please note to put up the lines for Q&A.

[Operator]

Thank you. If you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad to raise your hand and join the queue. To withdraw your question, press star one again. If you have dialed in 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. Our first question comes from the line of Jeff Van Sinderen with B. Riley Securities. Please go ahead.

[Jeff Van Sinderen, Senior Analyst at B. Riley & Co.]

Hi, everyone, and just wanted to clarify a little bit on the cybersecurity. Regarding the revenue that did not occur in Q3, does that revenue shift into Q4, all of it in Q4? And then also, was there any impact to future booking timing or order timing? And then is it fair to say at this point that there's really no other impact to your business other than just the timing of shipping a few orders?

[Warren Kanders, Chairman and CEO at Cadre Holdings]

Yeah. So, hi, Jeff. Thanks for the question. With the second incident, some of that revenue does get pushed into 2025, which is the reason for the changing guidance. There is no other impact outside of the Q3 margins and then the point I just made on the revenue shifting out. At this point, it's contained inside Q3, and we're focused on executing to a large Q4 here. And the teams have done a great job of coming back up, ensuring supply chains were intact during the incidents, allowing us to not only build inventory during the incidents, but be prepared for Q4 as well.

[Jeff Van Sinderen, Senior Analyst at B. Riley & Co.]

Okay. Great. And then since you mentioned Alpha Safety and certainly an area that I think is top of mind for folks, can you just talk a little bit more about what you're seeing around Alpha's M&A pipeline and maybe give us a sense, I guess, of how your broader pipeline stands at this moment where you might emphasize acquisitions? And it sounds like there's no impact to that from the cyber incident. Is that correct?

[Brad Williams, President at Cadre Holdings]

That's correct. Hey, Jeff, it's Brad. I'll take that one. So I would say overall, the funnel for Alpha Safety is definitely solid, more than solid, as we look at what's been going on on the nuclear side of things. So companies in the funnel that we're looking for are everything from engineered-type systems type companies that are in the funnel that would be solutions providers for large end customers, both in the U.S. and also internationally.

[Brad Williams, President at Cadre Holdings]

And then also very interested in the funnel with companies that are similar to Alpha in manufacturing certain products for the nuclear industry where those products are repeated and supplied. So those are the two that we see the most opportunity in, not just in the U.S., but also internationally. If you remember, one of our strategies with Alpha Safety was to expand outside of the U.S. geographically into Europe. And so we're also keen on acquisitions that fit into that.

[Jeff Van Sinderen, Senior Analyst at B. Riley & Co.]

Okay. Great. Thanks for taking my questions. I'll take the rest offline.

[Brad Williams, President at Cadre Holdings]

Okay. Thanks, Jeff.

[Warren Kanders, Chairman and CEO at Cadre Holdings]

Thanks, Jeff.

[Operator]

Our next question comes from the line of Lawrence Solow with CJS Securities. Please go ahead.

[Larry Solow, Managing Director at CJS Securities]

Great. Good evening, guys. I guess just not to beat a dead horse with the security question, but just, I guess, so it sounds like there was a second little breach, but you guys feel pretty confident that it now won't happen again. Was there any? Did you have to increase security or expenses any more after the second breach? And is there any, going forward, any recurring expenses or anything related to this, or is it de minimis?

[Warren Kanders, Chairman and CEO at Cadre Holdings]

Hey, Larry. Appreciate the question. Coming out of the first incident, we had a number of countermeasures and additional security measures we put in place. The second, because of that, it minimized the impact of the second incident. So the teams did a great job of executing on that first and then minimizing that second incident.

[Warren Kanders, Chairman and CEO at Cadre Holdings]

So it was a much different scope and impact to the company. Coming out of that second incident, we absolutely had additional measures we put in place, and we've since engaged an additional group of outside experts to continue to put more countermeasures in place. So while we can't guarantee we can prevent any future events, I can assure you our environment is much more robust than it was going back to early July, but we're not done.

[Brad Williams, President at Cadre Holdings]

We view this no different than any other part of the company when we think about continuous improvement and how do we get better. We'll continue to apply resources, both time and money, to ensure we harden our environment. This will be a longer-term project. There's a list of items that are short-term in nature and then a medium-term list, and then there's a long-term list, and we'll continue to execute those.

[Brad Williams, President at Cadre Holdings]

On a cost basis, there weren't significant or material costs incurred related to the second incident that we didn't talk about in the earnings. I wouldn't view this as materially changing our financial position because of these countermeasures. It certainly costs something, but it's not an amount that we would discuss externally.

[Larry Solow, Managing Director at CJS Securities]

Right. And I'm just curious, Blaine, so you missed the sales number because I think you had guided a little bit higher because of the second incident, but actually, you were able to cut SG&A pretty significantly. I thought in the face of declining sales, I thought that SG&A would kind of stay up because it was just a temporary blip in the sales. So is that some of that just incentive comp or any color there?

[Blaine Browers, CFO at Cadre Holdings]

Yeah. A good portion of that, Larry, was incentive comp. Obviously, on a year-on-year basis, when you look at the numbers absolute, there's certainly some headwind there. And we evaluated the incentive comp structure and made appropriate adjustments based on the Q3 results.

[Larry Solow, Managing Director at CJS Securities]

Gotcha. Okay. And then just last question, just broad brush. It sounds like your end markets don't change rapidly anyhow, but it sounds like they're all doing consistent and steady and doing pretty well, we can get into more detail offline, but just no specific changes. Doesn't feel like the election or anything in the U.S. is going to really change dramatically because of the results or anything like that. So anything we should be aware of just from a top level, high level on the macro?

[Brad Williams, President at Cadre Holdings]

No, not at all, Larry. This is Brad. I mean, everything's in line macro-wise with what we've seen. As you know, that's why we love the business overall, just the durability of it. So whether it's elections or "defund the police" or COVID or industrial recessions, financial recessions, you name it, we haven't seen any major changes like that. So nothing there to report.

[Larry Solow, Managing Director at CJS Securities]

Gotcha. Great. All right. Thank you very much.

[Brad Williams, President at Cadre Holdings]

Thank you, Larry.

[Operator]

Our next question comes from the line of Matt Koranda with Roth Capital. Please go ahead.

[Matthew Koranda, Managing Director at Roth Capital]

Hey, guys. Maybe trying to get at the cybersecurity question in a little bit of a different way. Is there any way to just characterize sort of sales by month in the quarter? I would assume it was down a bunch in July, just given production was constrained, then maybe recovered to positive in August, and then the September incident may have sent you back negative. But any way to kind of just give us the shape of the quarter so we can understand sort of the impact of the two incidents and how they hit the quarter?

[Warren Kanders, Chairman and CEO at Cadre Holdings]

Yeah. So July was the most severely impacted month in the quarter. In August, we started to ramp up, and actually, September was the strongest month in the quarter despite the second incident because the teams had built up quite a bit of production and inventory in the back half of August that got shipped prior to the second incident.

[Warren Kanders, Chairman and CEO at Cadre Holdings]

The other good news, Matt, is the teams were able to. The teams that were impacted by systems being down were still able to produce during the second incident. Some businesses on that 100% were 90%, other businesses maybe 60%-70%, but they had the systems in place coming out of that first incident to immediately continue production. So it wasn't a case where there were significant outages like the first. And also call out, and you can see it in the statement of cash flow and the balance sheet, but the teams did build inventory in September, which helps position us well for Q4.

[Matthew Koranda, Managing Director at Roth Capital]

Got it. Okay. And then if we think about I know there's noise from the cyber incident in the quarter, but any just rough cut on the contribution that you got from Alpha and ICOR within the third quarter?

[Blaine Browers, CFO at Cadre Holdings]

I assume on a revenue basis, ICOR was pretty consistent with what we saw last quarter. So again, they're a little over $20 million, fairly evenly spread through the year. And then Alpha tends to be a back-end-loaded business based on the timing of their projects. So for them, they ramped up from into Q3 from Q2 pretty significantly, called a 20%-30% ramp sequentially. Again, completely unrelated to the incidents. Neither of those businesses were impacted.

[Matthew Koranda, Managing Director at Roth Capital]

Yeah. Okay. No, that's good to hear. And then just, I guess, lastly, on the guidance, I just want to get my head around it's a pretty steep ramp in revenue, but also it would call for something in the low 20% EBITDA margin in the fourth quarter, which would be well ahead of sort of any other quarter you guys have done.

[Matthew Koranda, Managing Director at Roth Capital]

Maybe just speak to sort of how we get the incrementals. Is it just a pure benefit of like, "Hey, we just have a whole bunch of shipments that got delayed, pushed into the fourth quarter that we get without the associated sort of SG&A costs?" Maybe just kind of give us a little bit of comfort around sort of the ramp if we use the midpoint of the guide.

[Blaine Browers, CFO at Cadre Holdings]

Yeah. So when we break it down a level lower, gross margins in Q4 we expect to be really kind of similar to Q1 on a rate basis. We are going to incur incremental expenses around production in Q4 for overtime, etc. The EBITDA rate pickup in Q4, Matt, is really that leverage on the SG&A. We expect our SG&A to be really kind of more in line with Q1 rather than what we saw in Q3.

[Blaine Browers, CFO at Cadre Holdings]

And obviously, it will be one of our bigger quarters from a production output or revenue output. But like I said, the teams had the plans in place. We did build inventory in Q3, so we're bullish on Q4. Q4 will be a tough quarter and, frankly, a record quarter, but the teams have gone through the detailed plans, and we're comfortable with our outlook for the year.

[Matthew Koranda, Managing Director at Roth Capital]

Okay. Appreciate it. I'll leave it there.

[Operator]

Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

[Sheila Kahyaoglu, Analyst at Jefferies]

Hi. Good afternoon, guys, and Blaine, maybe on that last line of questioning, I think it's just if you look at the Q4 implied run rate of 40% and then the margins as well, you're about 45% through the quarter. So is the quarter trending in line with that? How do we think about that exit rate and the cadence into '25 as well? So I guess what gives you confidence in that Q4 guidance despite what's happened?

[Blaine Browers, CFO at Cadre Holdings]

So we are already into Q4. So a couple of things, I guess, Sheila, and thanks for the question. First, the inventory position coming out, it looks like a very large revenue number, but some of that is really inventory sitting and ready to go or relatively ready to go with the final steps to be made. The second piece is we're looking at the schedules.

[Blaine Browers, CFO at Cadre Holdings]

We're looking at incremental days, OT. So when we think about businesses that are on a four-day workweek, 4-10s, they're looking at 5-10s and that incremental capacity. Also, we've added days by postponing physical inventories to, again, you get two or three days there. So these are all small things, but when you start to add them up, if you're running an additional day a week, you're adding 25% capacity there. You add three days in the quarter, right?

[Blaine Browers, CFO at Cadre Holdings]

That gives you another 5% production capacity. You have inventory on the shelf. So they do start to add up, and while it's a big number, we're comfortable with it, and if we weren't, we wouldn't have put it out in the guidance, but certainly will require a high-level execution from the teams, but we're confident in the team's ability to execute.

[Sheila Kahyaoglu, Analyst at Jefferies]

Okay. And then maybe along the line of the Cadence for the 2025 and maybe just bigger picture stepping back, just given the complexity of the one-time items in the second half, how do we think about the underlying potential for the business in 2025 plus as the accretive M&A continues to roll in and you keep pushing for that 50 basis points of the annual margin expansion? So maybe if you could just talk about how we think about the underlying business or remove the one-time complexities for us.

[Blaine Browers, CFO at Cadre Holdings]

Yeah. So I think the one-timers outside of the inventory step-up, we've talked about kind of this five-point margin pressure in Q3, which is approximately $5 million of pressure that should bounce back. We think about next year, Sheila, we would say it's consistent with what we have seen historically, which is the market grows 3% for the military and law enforcement side.

[Blaine Browers, CFO at Cadre Holdings]

Expect more in that 4%-6% range on the nuclear side. The tough part now would be for us to think about quarterly timing. It's pretty far out for us. As we get into 2025, announce a guidance will provide a little more clarity on the timing and the pacing through the year. But nothing's really changed with our outlook. And in my mind, the one-timers are really just that $5 million of margin pressure in Q3 as well as the inventory step-up.

[Sheila Kahyaoglu, Analyst at Jefferies]

Okay. Thank you so much. Appreciate it.

[Brad Williams, President at Cadre Holdings]

Thanks, Sheila.

[Operator]

Our next question comes from the line of Jordan Lamm with Bank of America. Please go ahead.

[Jordan Lamm, Analyst at Bank of America]

Hey, thank you guys for taking the question. For Q4, could you give us a sense about what's driving the sales increase? Is it explosive ordnance devices? Is it commercial sales? What's the underlying growth by segment?

[Warren Kanders, Chairman and CEO at Cadre Holdings]

Yeah. I'd say the two largest areas, if you're thinking sequentially, Jordan, is really armor and duty gear. I mean, two of the larger businesses definitely have some pent-up backlog coming out of Q3 as well as inventory. So those are the drivers. The EOD business on the bomb suit side, we expected to be a big Q4 for us prior to the incident, so in the absence of those. So that's still a big quarter for them. And those are really the three bigger drivers for there. So EOD suits, as expected, big Q4, and then armor and duty gear more driven by the incident and that pent-up backlog.

[Jordan Lamm, Analyst at Bank of America]

Got it. Thank you.

[Warren Kanders, Chairman and CEO at Cadre Holdings]

Thank you.

[Operator]

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

[Mark Smith, Senior Research Analyst at Lake Street Capital Markets]

Hi, guys. First off, just a kind of broad question on the nuclear business. Just as we look at kind of new projects, startup of plants, what kind of opportunities are you guys seeing, and maybe runway for how long it takes to recognize and see benefit from some new startups?

[Brad Williams, President at Cadre Holdings]

Yeah. Hey, Mark. It's Brad. So from a new startup perspective, and maybe specifically where you're coming from, there's obviously a lot of information out there around small modular reactors, as we talked about in the remarks. The thing to keep in mind there is, for us, our cycle currently with Alpha Safety would be once those type of plants are up and running and they're starting to create waste in the reaction type process. So that's where our products tend to begin to kick in. So don't think of it as if a plant is being built. Our products are involved in that beginning part of the process.

[Mark Smith, Senior Research Analyst at Lake Street Capital Markets]

Okay. And then I just wanted to think also broadly here on kind of election results yesterday, last night, today, kind of exposure, any changes in long-term outlook. I know Warren had talked about kind of the consistency of the business, but maybe any reminders that you can give us on tariffs or any potential impact that you see from the results of the election?

[Brad Williams, President at Cadre Holdings]

Actually, we don't see any changes, or we don't foresee any changes as we go forward in terms of from that perspective. I think there's been a lot of learnings wherever you sit, whether it's Republicans or Democrats in terms of law enforcement and the needs for continuing to invest in those areas. So, as you know, that's a big core part of the business that we have today.

[Brad Williams, President at Cadre Holdings]

So we expect that it'll remain the same and will remain strong. We don't expect, even though it's about 8% of the business on the consumer commercial side for us, we don't expect a large, extremely large uptick in demand in that side of things based on the transition from Democratic office to Republican side of things. So pretty much status quo, Mark, is where we're sitting, which is great.

[Brad Williams, President at Cadre Holdings]

Innovation has been a key, as you know, as we've innovated a lot of products over the last couple of years, and others continue to be in the pipeline, and for us, it's about sticking to our game and continuing to move forward with it. Supply chain-wise, keep in mind we don't have a supply chain that extends very, very lengthy, especially into Asian countries, which is good for us. Most of the supply chain is regional, and that gives us that ability to stay close to where we're at from a manufacturing standpoint and not be affected by some of the potential things that are being talked about.

[Mark Smith, Senior Research Analyst at Lake Street Capital Markets]

Excellent. Thank you.

[Brad Williams, President at Cadre Holdings]

You're welcome.

[Operator]

Thank you. We have no further questions at this time. I will now turn the call back over to Brad Williams for any closing comments.

[Brad Williams, President at Cadre Holdings]

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

[Operator]

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

Participants

Executives

• Brad Williams, President
• Warren Kanders, Chairman and CEO
• Blaine Browers, CFO

Analysts

• Mark Smith, Senior Research Analyst at Lake Street Capital Markets
• Larry Solow, Managing Director at CJS Securities
• Matthew Berkowitz, Managing Director at IGB Group
• Jordan Lamm, Analyst at Bank of America
• Matthew Koranda, Managing Director at Roth Capital
• Sheila Kahyaoglu, Analyst at Jefferies
• Jeff Van Sinderen, Senior Analyst at B. Riley & Co.