Cadre Holdings, Inc. (CDRE) Earnings Call Transcript & Summary

Good morning, and welcome to Cadre Holdings First Quarter 2025 Conference Call. Today's call is being recorded. [Operator Instructions] 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.

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'll 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.

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. And 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 subverticals. 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.

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 5. 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 markets...

We will pause for a moment.

Do we have Brad on?

And we're back on the live.

All right. Sorry about that. Some reason I lost landline connectivity there. So 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 Cyalume 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 6, 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 the 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 3 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 are 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 7. I'll take a moment to talk about a couple of other developments in our business environment. Spend 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 are also offering 6 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 are 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.

Thanks, Brad. I'll kick off my comments with a 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 9, 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 on 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 of 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 to $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 Canada 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 concluding comment.

Thank you, Blaine. As you can see, we are 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 position and favorable industry trends across our law enforcement, first responder, military and nuclear end 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 Instructions] Your first question comes from the line of Greg Konrad with Jefferies.

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

Yes. 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 seem to firm up, but that was really Q2 based. So for Q1, there wasn't a significant impact. And then as we look forward, we expect to be able to fully offset the tariffs as of today. As I mentioned as well as Brad and Warren did, this is an evolving environment, so we'll stay close to it. But as of today, with what's been announced, we feel comfortable with our ability to offset any tariff pressure for the remainder of the year.

And then 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?

Yes. So the -- when you look at the customer base there, so -- this gives us a couple of things. One, geographic expansion. So when we acquired Alpha Safety, part of that strategy was to grow geographically with them and some of their products into customers that they didn't have tight relationships with within their product categories. For example, we've mentioned in the past like Sellafield, which is in the U.K., one of the largest disposal sites in the world. So 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. And then within some of the brands that we acquired, they also have relationships and installed base, for example, in customers like Fukushima in Japan. So part of that strategy was to be able to have those Alpha Safety products that we could then begin to present to those customers. And then in the U.K. example, manufacturing-wise, it gives us that footprint to manufacture locally for the product categories that we have.

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

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?

Yes. And as we've talked about before, we do have somewhat limited backlog visibility. So the quarters do tend to move around a bit. So everything I say, I just want to caveat, that, as we move forward through the year and we get a little more clarity, we'll provide updates. But right now, we do expect Q2 to be up from Q1. And then if 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, and 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. But some of those projects, in particular on EOD and Armor, are looking more -- are looking heavier in Q4.

Perfect. And then 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?

Yes, Mark, there's -- like we talked about last time, the same items are still on the list that we're working through. So first was working through any kind of mitigating price increases. So 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 be -- take a lot of time and a bit challenging. So for us, we've got various options to shift some product categories around between facilities. And I think we used the example of -- our bomb suit production, we have in 2 countries, in the U.S. and also in Canada, where our headquarters is at for that part of the business. And we frequently on a daily basis shift production between those 2 facilities. So it gives us that optionality. We have that within some other product lines without going through all those. So that was the other one. And then the team has been working on productivity acceleration. So we run on a 12-month rolling funnel within our operating model. It's just a standard part of our monthly business reviews. And each of the folks that lead the business units have 12-month rolling productivity funnels. And 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. And the team is going to be walking me through that here in the next couple of weeks, and see what we can do to accelerate those.

Your next question comes from the line of [ Ken ] Van Sinderen with B. Riley Securities.

Let me say congratulations on the strong Q1 metrics. So 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?

Yes. So far, we can talk about what we've seen. So we talked about -- or at least I talked about last quarter potentially having any kind of disruptions due to any of those changes in the federal side of things with any positions being eliminated, and 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. So we've not seen any major changes there. There's 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. So 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 3 of our company-owned distributors up the East Coast in the U.S. So we rely on our sales folks there to make sure that we're keeping abreast of everything. And then we have our own sales teams internationally and then here domestically. So 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.

Okay. Great. And then 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? And then 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?

So I'll work those backwards, and let me know if I missed something there with the multiple parts to the question. But our funnel is...

Sorry about that.

That's okay. Our funnel is robust in both sides of things. And 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. But we have opportunities on both sides of it. We're working in 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 Walischmiller and Bendalls Engineering and NW Total and NuVision. Those are all great brands throughout the nuclear side of things. So we feel good about going into a new vertical like that. We think Alpha Safety was the right pick as we jumped into it. And then now with all these together, it just continues to help fill the funnel. And then on the law enforcement or public safety side of things, we've been doing that for so long and there's such a long history there with our existing teams that we have and then also throughout more formal channels. We have great opportunities there. So we'll continue to see what's next and what pops out. This time, it was nuclear with the Carr's Engineering Division acquisition, and next time, we'll see. And then 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% to 3% CAGR over 10, 12 years when you look at those budgets, and they remain consistent no matter typically whether it's an industrial recession, a financial recession, COVID, defund the police. That's why we love that part of the business. It's been very consistent. And then that consistency, what we do with our operating model, we feel like is pretty amazing. On the nuclear side, when you look at it, it's a -- we've estimated about a 4% to 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. And when you look at various countries around the world, the focus is on nuclear. For example, just taking 1 of the 3 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. And then 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. So there's multiple commitments from various tech companies on nuclear power plants and on that front. So it's very positive when we look at what we can do in the nuclear space and how we can begin to pull this all together.

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

Most of my questions have been answered. I guess just first question on the Q1 results. Obviously, somewhat better than the initial expectations of the Q1 guide you had given. Can you just remind us -- I know -- I think sales still declined like 6% and maybe closer to 10% organically. I guess the 2 questions I have there are, sort of remind us 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. And then 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? Then I have a follow-up.

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. And 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. And this is not a typical layout for the business, but it's just dependent on those large projects, right? There's just a limited number of bomb suit opportunities in the world, and so how those stack up in a given year really has an impact on their revenue. So 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. So we both had really surprises to the upside on the team. They 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. So the teams did a great job navigating that as well as, I would say, the general uncertainty in the market. So we're very pleased with the Q1 results.

Got you. And 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. But still just from a high level, it looks like a pretty good number considering -- so drivers there and I guess opportunities going forward to continue to expand on the gross margin side?

Yes. We did have a bit of a helping hand in the sense that we didn't have the repeat of the inventory step-up that was associated with ICOR and Alpha last year in Q1, and that accounted for about 60 bps of the lift. So 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. So very pleased to see those margins continue to inch up. I'll say that won't happen every quarter, but over the course of the year, we do expect those margins to improve between pricing and productivity. Mix was a relatively flat impact for us in Q1, so this is really a result of just the strong execution of the teams.

And 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 trailing 12-month data you provided, I think, from -- I think it was August of '24. So fair to say maybe you're keeping it sort of flattish. But as you mentioned, you just acquired it and no reason to be a hero. Is that kind of the way to look at your outlook?

Yes. 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. So 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. And as we move through the year, we will absolutely sharpen the pencil. But out of the gates, we want to take a practical approach on guiding. And as you said, we kept the core guidance -- the core organic guidance flat, which I think is, honestly, in today's environment a pretty strong indicator of how we feel the year is shaping up and demand continues for us.

Your last question comes from the line of Matthew Koranda with ROTH Capital.

A lot have been asked and answered. But I guess just on Carr's, it looks like no surprise it's coming sort of at mid-teens adjusted EBITDA margin that you guys had talked about around the acquisition. But what levers do you have in the near term to bring that up sort of to the corporate adjusted EBITDA margin? And help us maybe, Blaine, if you could, just understand how that spreads 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.

Yes. Matt, it's Brad. I'll start this off on that one. So when you look at synergies and -- our recipe is, as I mentioned in the prepared remarks, is 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 to make sure we get it integrated or not integrated or just become extremely familiar with it. So 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. So that's what we'll start out doing. And then we've got a country operating model boot camp scheduled in -- I think it's in July time frame, and 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. And then we'll be bringing some of the other facilities we have on the public safety side, some of their leadership folks into it. And we'll hold a boot camp, and that's where it all gets started. So 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.

And then on the margin side, Matt, for your question. On an adjusted basis, non-GAAP, excluding D&A, we expect them to be around 40%. So slightly dilutive 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's early, obviously, as we work through the opening balance sheet. But if we kind of look back to what we saw for Alpha and ICOR, I think, saying $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. And then as we move forward, as Brad talked about, the opportunity as it relates to the operating model, we'd expect that improvement to be mostly in the gross margin line. We don't 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 U.S. market. So 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.

Okay. That makes sense, guys. I appreciate it. And then 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 lines.

And I'll let Brad answer the production, location side of it, but just a note of clarity on tariffs. That $18 million to $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. So there still is some impact in there that we've baked into the guidance along with our countermeasures around price and productivity. But -- and I'll turn it over to Brad. He can talk about the geographic footprint of manufacturing.

Yes. On the footprint side, Matt, 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, we 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. So 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. And it's gone extremely well and we continue to look at ways to increase production in that area. So that's one mitigation that we worked on and did that well before any of the tariffs type stuff had 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's a facility in the U.K. that's near -- about a couple of hours from London that's positioned closer to Sellafield that supports the Sellafield folks there with some products. We've got NW Total that's positioned closer to a couple of larger customers in the nuclear sub side 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. Walischmiller is in Germany, and they're supplying globally around the world, including the U.S. So you never know as we go forward, as we continue to build things out. But at this point, we're pretty happy with where we're sitting footprint-wise.

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

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.

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