Core & Main, Inc. - Quarter Report: 2022 July (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2022
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For transition period from to
Commission File Number 001-40650
![cnm-20220731_g1.jpg](https://www.sec.gov/Archives/edgar/data/0001856525/000185652522000045/cnm-20220731_g1.jpg)
Core & Main, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 86-3149194 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
1830 Craig Park Court
St. Louis, Missouri 63146
(314) 432-4700
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
Class A common stock, par value $0.01 per share | CNM | The New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||
Non-accelerated filer | ☒ | Smaller reporting company | ☐ | ||||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒
As of September 9, 2022, there were 168,127,268 shares of the registrant’s Class A common stock, par value $0.01 per share, and 77,768,489 shares of the registrant’s Class B common stock, par value $0.01 per share, outstanding.
Table of Contents
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2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include, without limitation, all statements other than statements of historical facts contained in this Quarterly Report, including statements relating to our intentions, beliefs, assumptions or current expectations concerning, among other things, our future results of operations and financial position, business strategy and plans and objectives of management for future operations, including, among others, statements regarding expected growth, future capital expenditures and debt service obligations, and the anticipated impact of the novel coronavirus, or COVID-19, on our business.
Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “shall,” “should,” “would,” “could,” “seeks,” “aims,” “projects,” “is optimistic,” “intends,” “plans,” “estimates,” “anticipates” or the negative versions of these words or other comparable terms.
Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be outside our control. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes, including, without limitation, our actual results of operations, financial condition and liquidity, and the development of the market in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report on Form 10-Q. In addition, even if our results of operations, financial condition, cash flows and the development of the market in which we operate are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors, including, without limitation, the risks and uncertainties discussed under the captions “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 30, 2022 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q, could cause actual results and outcomes to differ materially from those reflected in the forward-looking statements. Furthermore, new risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. Factors that could cause actual results and outcomes to differ from those reflected in forward-looking statements include, without limitation:
•declines, volatility and cyclicality in the U.S. residential and non-residential construction markets;
•slowdowns in municipal infrastructure spending and delays in appropriations of federal funds;
•price fluctuations in our product costs, particularly with respect to the commodity-based products that we sell;
•our ability to manage our inventory effectively, including during periods of supply chain disruptions;
•our ability to obtain product;
•general business and economic conditions;
•risks involved with acquisitions and other strategic transactions, including our ability to identify, acquire, close or integrate acquisition targets successfully;
•the impact of seasonality and weather-related impacts, including natural disasters or similar extreme weather events;
•the fragmented and highly competitive markets in which we compete and consolidation within our industry;
•our ability to competitively bid for municipal and private contracts;
•the development of alternatives to distributors of our products in the supply chain;
•our ability to hire, engage and retain key personnel, including sales representatives, qualified branch, district and region managers and senior management;
•our ability to identify, develop and maintain relationships with a sufficient number of qualified suppliers and the potential that our exclusive or restrictive supplier distribution rights are terminated;
•the availability and cost of freight and energy, such as fuel;
•the ability of our customers to make payments on credit sales;
•changes in supplier rebates or other terms of our supplier agreements;
•our ability to identify and introduce new products and product lines effectively;
•the spread of, and response to, COVID-19, and the inability to predict the ultimate impact on us;
3
•costs and potential liabilities or obligations imposed by environmental, health and safety laws and requirements;
•regulatory change and the costs of compliance with regulation;
•exposure to product liability, construction defect and warranty claims and other litigation and legal proceedings;
•potential harm to our reputation;
•difficulties with or interruptions of our fabrication services;
•safety and labor risks associated with the distribution of our products as well as work stoppages and other disruptions due to labor disputes;
•impairment in the carrying value of goodwill, intangible assets or other long-lived assets;
•the domestic and international political environment with regard to trade relationships and tariffs, as well as difficulty sourcing products as a result of import constraints;
•our ability to operate our business consistently through highly dispersed locations across the United States;
•interruptions in the proper functioning of our information technology systems, including from cybersecurity threats;
•risks associated with raising capital;
•our ability to continue our customer relationships with short-term contracts;
•risks associated with exporting our products internationally;
•our ability to renew or replace our existing leases on favorable terms or at all;
•our ability to maintain effective internal controls over financial reporting and remediate any material weaknesses;
•our substantial indebtedness and the potential that we may incur additional indebtedness;
•the limitations and restrictions in the agreements governing our indebtedness, the Second Amended and Restated Agreement of Limited Partnership of Holdings and the Tax Receivable Agreements (each as defined herein);
•increases in interest rates and the impact of transitioning from LIBOR (as defined herein) as the benchmark rate in contracts;
•changes in our credit ratings and outlook;
•our ability to generate the significant amount of cash needed to service our indebtedness;
•our organizational structure, including our payment obligations under the Tax Receivable Agreements, which may be significant;
•our ability to sustain an active, liquid trading market for our Class A common stock;
•the significant influence that CD&R (as defined herein) has over us and potential conflicts between the interests of CD&R and other stockholders; and
•risks related to other factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 30, 2022.
You should read this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended January 30, 2022 completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this Quarterly Report on Form 10-Q are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this Quarterly Report on Form 10-Q, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise.
4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CORE & MAIN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Amounts in millions (except share and per share data), unaudited
July 31, 2022 | January 30, 2022 | ||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | — | $ | 1 | |||||||
Receivables, net of allowance for credit losses of $8 and $5, respectively | 1,264 | 884 | |||||||||
Inventories | 1,166 | 856 | |||||||||
Prepaid expenses and other current assets | 31 | 26 | |||||||||
Total current assets | 2,461 | 1,767 | |||||||||
Property, plant and equipment, net | 101 | 94 | |||||||||
Operating lease right-of-use assets | 166 | 152 | |||||||||
Intangible assets, net | 824 | 871 | |||||||||
Goodwill | 1,527 | 1,515 | |||||||||
Other assets | 69 | 35 | |||||||||
Total assets | $ | 5,148 | $ | 4,434 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Current liabilities: | |||||||||||
Current maturities of long-term debt | $ | 15 | $ | 15 | |||||||
Accounts payable | 826 | 608 | |||||||||
Accrued compensation and benefits | 90 | 109 | |||||||||
Current operating lease liabilities | 52 | 49 | |||||||||
Other current liabilities | 96 | 58 | |||||||||
Total current liabilities | 1,079 | 839 | |||||||||
Long-term debt | 1,592 | 1,456 | |||||||||
Non-current operating lease liabilities | 114 | 103 | |||||||||
Deferred income taxes | 31 | 35 | |||||||||
Payable to related parties pursuant to Tax Receivable Agreements | 148 | 153 | |||||||||
Other liabilities | 19 | 17 | |||||||||
Total liabilities | 2,983 | 2,603 | |||||||||
Commitments and contingencies | |||||||||||
Class A common stock, par value $0.01 per share, 1,000,000,000 shares authorized, 167,963,575 and 167,522,403 shares issued and outstanding as of July 31, 2022 and January 30, 2022, respectively | 2 | 2 | |||||||||
Class B common stock, par value $0.01 per share, 500,000,000 shares authorized, 77,930,404 and 78,398,141 shares issued and outstanding as of July 31, 2022 and January 30, 2022, respectively | 1 | 1 | |||||||||
Additional paid-in capital | 1,216 | 1,214 | |||||||||
Retained earnings | 298 | 92 | |||||||||
Accumulated other comprehensive income | 33 | 16 | |||||||||
Total stockholders’ equity attributable to Core & Main, Inc. | 1,550 | 1,325 | |||||||||
Non-controlling interests | 615 | 506 | |||||||||
Total stockholders’ equity | 2,165 | 1,831 | |||||||||
Total liabilities and stockholders’ equity | $ | 5,148 | $ | 4,434 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
CORE & MAIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Amounts in millions (except share and per share data), unaudited
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
July 31, 2022 | August 1, 2021 | July 31, 2022 | August 1, 2021 | |||||||||||||||||||||||
Net sales | $ | 1,861 | $ | 1,298 | $ | 3,459 | $ | 2,353 | ||||||||||||||||||
Cost of sales | 1,360 | 973 | 2,537 | 1,771 | ||||||||||||||||||||||
Gross profit | 501 | 325 | 922 | 582 | ||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||
Selling, general and administrative | 230 | 192 | 436 | 346 | ||||||||||||||||||||||
Depreciation and amortization | 34 | 33 | 69 | 67 | ||||||||||||||||||||||
Total operating expenses | 264 | 225 | 505 | 413 | ||||||||||||||||||||||
Operating income | 237 | 100 | 417 | 169 | ||||||||||||||||||||||
Interest expense | 17 | 37 | 30 | 73 | ||||||||||||||||||||||
Loss on debt modification and extinguishment | — | 50 | — | 50 | ||||||||||||||||||||||
Income before provision for income taxes | 220 | 13 | 387 | 46 | ||||||||||||||||||||||
Provision for income taxes | 38 | 3 | 68 | 9 | ||||||||||||||||||||||
Net income | 182 | 10 | 319 | 37 | ||||||||||||||||||||||
Less: net income (loss) attributable to non-controlling interests | 67 | (17) | 118 | (17) | ||||||||||||||||||||||
Net income attributable to Core & Main, Inc. (1) | $ | 115 | $ | 27 | $ | 201 | $ | 54 | ||||||||||||||||||
Earnings (loss) per share (2) | ||||||||||||||||||||||||||
Basic | $ | 0.69 | $ | (0.14) | $ | 1.20 | $ | (0.14) | ||||||||||||||||||
Diluted | $ | 0.67 | $ | (0.14) | $ | 1.17 | $ | (0.14) | ||||||||||||||||||
Number of shares used in computing EPS (2) | ||||||||||||||||||||||||||
Basic | 167,876,179 | 138,978,366 | 167,708,034 | 138,978,366 | ||||||||||||||||||||||
Diluted | 246,175,878 | 138,978,366 | 246,160,811 | 138,978,366 |
(1) For the three and six months ended August 1, 2021, the net income (loss) attributable to Core & Main, Inc. includes net income prior to the Reorganization Transactions (as defined in Note 1) of $47 million and $74 million, respectively, and a net loss subsequent to the Reorganization Transactions of $20 million for both periods. Refer to the Statements of Changes in Stockholders’ Equity/Partners’ Capital for a summary of net income (loss) attributable to Core & Main, Inc. prior to and subsequent to the Reorganization Transactions. See Note 1 for a description of the Basis of Presentation of the consolidated financial statements.
(2) For the three and six months ended August 1, 2021, this represents basic and diluted earnings per share of Class A common stock and weighted average shares of Class A common stock outstanding for the period from July 23, 2021 through August 1, 2021, which is the period following the Reorganization Transactions described in Note 1. Refer to calculation of earnings per share in Note 10.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
CORE & MAIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Amounts in millions, unaudited
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
July 31, 2022 | August 1, 2021 | July 31, 2022 | August 1, 2021 | ||||||||||||||||||||
Net income | $ | 182 | $ | 10 | $ | 319 | $ | 37 | |||||||||||||||
Net interest rate swap (loss) gain, net of tax benefit (expense) of $2, $(1), $(6) $(1), respectively | (9) | 4 | 28 | 6 | |||||||||||||||||||
Total comprehensive income | 173 | 14 | 347 | 43 | |||||||||||||||||||
Less: comprehensive income (loss) attributable to non-controlling interests | 64 | (16) | 129 | (16) | |||||||||||||||||||
Total comprehensive income attributable to Core & Main, Inc. | $ | 109 | $ | 30 | $ | 218 | $ | 59 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
CORE & MAIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY/PARTNERS’ CAPITAL
Amounts in millions (except share and per share data), unaudited
Class A Common Stock | Class B Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Partners’ Capital | Shares | Amount | Shares | Amount | Additional Paid In Capital | Accumulated Other Comprehensive Income | Retained Earnings | Non-Controlling Interests | Total Stockholders’ Equity/ Partners’ Capital | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at January 30, 2022 | $ | — | 167,522,403 | $ | 2 | 78,398,141 | $ | 1 | $ | 1,214 | $ | 16 | $ | 92 | $ | 506 | $ | 1,831 | ||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | 86 | 51 | 137 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity-based compensation | — | — | — | — | — | — | — | 2 | 1 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest rate swap gain, net of tax | — | — | — | — | — | — | 23 | — | 14 | 37 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to non-controlling interest holders | — | — | — | — | — | — | — | — | (3) | (3) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange of Partnership Interests and Class B Shares for Class A Shares | — | 55,595 | — | (55,713) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustment of deferred tax liability associated with Core & Main investment in Core & Main Holdings, LP | — | — | — | — | — | 1 | — | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Activity under equity-based compensation plans, net of tax withholdings | — | 1,321 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Forfeiture of Class A Shares and Partnership Interests | — | (20) | — | (34,703) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-controlling interest adjustments for vesting of Core & Main Holdings, LP Partnership Interests held by non-controlling interests | — | — | — | — | — | (1) | — | — | 1 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at May 1, 2022 | — | 167,579,299 | 2 | 78,307,725 | 1 | 1,214 | 39 | 180 | 570 | 2,006 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | 115 | 67 | 182 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity-based compensation | — | — | — | — | — | — | — | 3 | 1 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest rate swap loss, net of tax | — | — | — | — | — | — | (6) | — | (3) | (9) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to non-controlling interest holders | — | — | — | — | — | — | — | — | (17) | (17) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange of Partnership Interests and Class B Shares for Class A Shares | — | 377,321 | — | (377,321) | — | 3 | — | — | (3) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustment of deferred tax liability associated with Core & Main investment in Core & Main Holdings, LP | — | — | — | — | — | 1 | — | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact of Tax Receivable Agreements | — | — | — | — | — | (2) | — | — | — | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Activity under equity-based compensation plans, net of tax withholdings | — | 6,955 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at July 31, 2022 | $ | — | 167,963,575 | $ | 2 | 77,930,404 | $ | 1 | $ | 1,216 | $ | 33 | $ | 298 | $ | 615 | $ | 2,165 | ||||||||||||||||||||||||||||||||||||||||||||
Class A Common Stock | Class B Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Partners’ Capital | Shares | Amount | Shares | Amount | Additional Paid In Capital | Accumulated Other Comprehensive Income | Retained Earnings | Non-Controlling Interests | Total Stockholders’ Equity/ Partners’ Capital | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at January 31, 2021 | $ | 801 | — | $ | — | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 801 | ||||||||||||||||||||||||||||||||||||||||||||
Equity-based compensation | 1 | — | — | — | — | — | — | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to partners' capital | 27 | — | — | — | — | — | — | — | — | 27 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest rate swap gain, net of tax | 2 | — | — | — | — | — | — | — | — | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to partners | (10) | — | — | — | — | — | — | — | — | (10) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at May 2, 2021 | 821 | — | — | — | — | — | — | — | — | 821 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity-based compensation | 14 | — | — | — | — | — | — | — | — | 14 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to partners' capital | 47 | — | — | — | — | — | — | — | — | 47 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest rate swap gain, net of tax | 2 | — | — | — | — | — | — | — | — | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions to partners | (13) | — | — | — | — | — | — | — | — | (13) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at July 22, 2021 prior to Reorganization Transactions and IPO | 871 | — | — | — | — | — | — | — | — | 871 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Reclassification of partners’ capital | (871) | — | — | — | — | 871 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Reorganization transactions | — | 119,950,882 | 1 | 85,853,383 | 1 | (2) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Reclassification of non-controlling interests upon reorganization | — | — | — | — | — | (300) | (2) | — | 302 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Class A Shares, net of issuance costs | — | 34,883,721 | 1 | — | — | 655 | — | — | — | 656 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-controlling interests adjustment for purchase of Partnership Interests from Core & Main Holdings, LP | — | — | — | — | — | (180) | — | — | 180 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustment of deferred tax liability associated with Core & Main investment in Core & Main Holdings, LP | — | — | — | — | — | 140 | — | — | — | 140 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact of Former Limited Partners Tax Receivable Agreement | — | — | — | — | — | (89) | — | — | — | (89) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (20) | (17) | (37) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity-based compensation | — | — | — | — | — | 3 | — | — | 2 | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net old interest rate swap gain, net of tax | — | — | — | — | — | — | 2 | — | 2 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net new interest rate swap loss, net of tax | — | — | — | — | — | — | (1) | — | (1) | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-controlling interests adjustment for vesting of Core & Main Holdings, LP Partnership Interests held by non-controlling interests | — | — | — | — | — | (8) | — | — | 8 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at August 1, 2021 | $ | — | 154,834,603 | $ | 2 | 85,853,383 | $ | 1 | $ | 1,090 | $ | (1) | $ | (20) | $ | 476 | $ | 1,548 | ||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
CORE & MAIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in millions, unaudited
Six Months Ended | |||||||||||
July 31, 2022 | August 1, 2021 | ||||||||||
Cash Flows From Operating Activities: | |||||||||||
Net income | $ | 319 | $ | 37 | |||||||
Adjustments to reconcile net cash from operating activities: | |||||||||||
Depreciation and amortization | 73 | 75 | |||||||||
Provision for bad debt | 3 | 1 | |||||||||
Equity-based compensation expense | 7 | 20 | |||||||||
Loss on debt modification and extinguishment | — | 48 | |||||||||
Other | (8) | (4) | |||||||||
Changes in assets and liabilities: | |||||||||||
(Increase) decrease in receivables | (376) | (277) | |||||||||
(Increase) decrease in inventories | (298) | (209) | |||||||||
(Increase) decrease in other assets | (7) | — | |||||||||
Increase (decrease) in accounts payable | 217 | 239 | |||||||||
Increase (decrease) in accrued liabilities | 9 | (24) | |||||||||
Increase (decrease) in other liabilities | 1 | (5) | |||||||||
Net cash used in operating activities | (60) | (99) | |||||||||
Cash Flows From Investing Activities: | |||||||||||
Capital expenditures | (15) | (8) | |||||||||
Acquisitions of businesses, net of cash acquired | (42) | — | |||||||||
Settlement of interest rate swap | — | (5) | |||||||||
Proceeds from the sale of property and equipment | 1 | — | |||||||||
Net cash used in investing activities | (56) | (13) | |||||||||
Cash Flows From Financing Activities: | |||||||||||
IPO proceeds, net of underwriting discounts and commissions | — | 664 | |||||||||
Payments for offering costs | — | (4) | |||||||||
Distributions to non-controlling interest holders | (17) | (20) | |||||||||
Borrowings on asset-based revolving credit facility | 214 | — | |||||||||
Repayments on asset-based revolving credit facility | (72) | — | |||||||||
Issuance of long-term debt | — | 1,500 | |||||||||
Repayments of long-term debt | (8) | (2,311) | |||||||||
Payment of debt redemption premiums | — | (18) | |||||||||
Debt issuance costs | (2) | (13) | |||||||||
Net cash provided by (used in) financing activities | 115 | (202) | |||||||||
Decrease in cash and cash equivalents | (1) | (314) | |||||||||
Cash and cash equivalents at the beginning of the period | 1 | 381 | |||||||||
Cash and cash equivalents at the end of the period | $ | — | $ | 67 | |||||||
Cash paid for interest | $ | 27 | $ | 102 | |||||||
Cash paid for taxes | 62 | 15 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
CORE & MAIN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollars in millions, except as noted, unaudited
1) BASIS OF PRESENTATION & DESCRIPTION OF BUSINESS
Organization
Core & Main, Inc. (“Core & Main”) is a Delaware corporation that was incorporated on April 9, 2021 for the purpose of facilitating an initial public offering and other related transactions, as described below, in order to carry on the business of Core & Main Holdings, LP, a Delaware limited partnership (“Holdings”), and its consolidated subsidiaries. Core & Main is a holding company and its primary material asset is its ownership interest in Holdings, a portion of which is held indirectly through CD&R WW, LLC. Holdings has no operations and no material assets of its own other than its indirect ownership interest in Core & Main LP, a Florida limited partnership, the legal entity that conducts the operations of Core & Main. Core & Main, together with its wholly-owned subsidiaries, including Holdings and its consolidated subsidiaries, are referred to as the “Company”.
The Company is a leading specialized distributor of water, wastewater, storm drainage and fire protection products and related services to municipalities, private water companies and professional contractors across municipal, non-residential and residential end markets nationwide. The Company’s specialty products and services are used in the maintenance, repair, replacement, and construction of water and fire protection infrastructure. The Company reaches customers through a nationwide network of approximately 300 branches across 48 states. The Company’s products include pipes, valves, fittings, storm drainage products, fire protection products, meter products and other products for use in the construction, maintenance and repair of water and waste-water systems as well as fire protection systems. The Company has complemented its core products through additional offerings, including smart meter systems, fusible high-density polyethylene (“fusible HDPE”) piping solutions and specifically engineered treatment plant products, services and geosynthetics used in erosion control. The Company’s services and capabilities allow for integration with customers and form part of their sourcing and procurement function. All of the Company’s long-lived assets are located within the United States (“U.S.”).
Initial Public Offering
On July 27, 2021, Core & Main completed its initial public offering of 34,883,721 shares of Class A common stock at a price to the public of $20.00 per share (the “IPO”). Core & Main received net proceeds of approximately $664 million, after deducting underwriting discounts and commissions. All of the net proceeds from the IPO, less $8 million of transaction costs directly attributable to the IPO, were utilized to purchase 34,883,721 newly issued limited partner interests of Holdings (“Partnership Interests”) for approximately $656 million in the aggregate. In turn, Holdings and Core & Main LP utilized the net proceeds of the IPO directly or indirectly received from Core & Main, together with the net proceeds from borrowings under the Senior Term Loan Facility (as defined below and described in Note 6) and cash on hand to redeem (i) all $300 million aggregate principal amount of the senior unsecured notes due September 15, 2024 issued by Holdings (the “Senior 2024 Notes”) and (2) all $750 million aggregate principal amount of the senior unsecured notes due August 15, 2025 issued by Core & Main LP (the “Senior 2025 Notes”). Additionally, Core & Main LP amended the terms of the credit agreement governing the senior term loan facility with an original principal balance of $1,300 million maturing on August 1, 2024 issued by Core & Main LP (the “Prior Term Loan Facility”) in order to, among other things, enter into a new $1,500 million seven-year senior term loan (the “Senior Term Loan Facility”).
On August 20, 2021, Core & Main issued 5,232,558 shares of Class A common stock pursuant to the full exercise of the underwriters’ option to purchase additional shares of Class A common stock in connection with the IPO at the initial public offering price of $20.00 per share before underwriting discounts and commissions (the “IPO Overallotment Option Exercise”). Core & Main received net proceeds of approximately $100 million after deducting underwriting discounts and commissions. All of the net proceeds were utilized to purchase 5,232,558 newly issued Partnership Interests of Holdings at a price per unit equal to the public offering price per share less underwriting discounts and commissions. In turn, Holdings and Core & Main LP utilized the net proceeds of the IPO Overallotment Option Exercise directly or indirectly received from Core & Main for general corporate purposes.
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Secondary Offering
On January 10, 2022, a secondary public offering of 20,000,000 shares of Class A common stock on behalf of certain selling stockholders affiliated with Clayton, Dubilier & Rice, LLC (the “Selling Stockholders”) was completed at a price to the public of $26.00 per share (the “Secondary Offering”). As part of the Secondary Offering, 7,455,242 Partnership Interests were exchanged, together with the retirement of a corresponding number of shares of Class B common stock, for an equal number of shares of Class A common stock, which were a portion of the shares sold by the Selling Stockholders. These shares were sold along with an existing 12,544,758 shares of Class A common stock held by the Selling Stockholders. The Company did not issue any shares of Class A common stock in the offering and did not receive any of the proceeds from the sale. The Company paid the costs associated with the sale of shares by the Selling Stockholders, other than underwriting discounts and commissions.
Reorganization Transactions
In connection with the IPO, the Company completed the following transactions (collectively, the “Reorganization Transactions”):
•the formation of Core & Main as a Delaware corporation to function as the direct and indirect parent of Holdings and a publicly traded entity;
•the amendment and restatement of the limited partnership agreement of Holdings to, among other things first, modify the capital structure of Holdings and second, admit Core & Main as the general partner and a limited partner of Holdings;
•Core & Main’s acquisition of the Partnership Interests held by certain Former Limited Partners (as defined below) and the issuance of Class A common stock to the Former Limited Partners, pursuant to the mergers of CD&R WW Advisor, LLC and CD&R WW Holdings, LLC (the “Blocker Companies”) with and into Core & Main via merger subsidiaries of Core & Main (the “Blocker Mergers”); and
•entry into a Master Reorganization Agreement, dated as of July 22, 2021 (the “Master Reorganization Agreement”), with Holdings, the Continuing Limited Partners (as defined below), the Blocker Companies, CD&R Waterworks Holdings GP, CD&R Associates X Waterworks, L.P., CD&R WW Holdings, L.P., Core & Main GP, LLC, CD&R Plumb Buyer, LLC, CD&R Fund X Advisor Waterworks B, L.P., CD&R Fund X Waterworks B1, L.P., CD&R Fund X-A Waterworks B, L.P., CD&R WW, LLC, Brooks Merger Sub 1, Inc. and Brooks Merger Sub 2, Inc. Pursuant to the Master Reorganization Agreement, the Former Limited Partners received Partnership Interests in exchange for their indirect ownership interests in Holdings and exchanged these Partnership Interests for shares of Class A common stock of Core & Main prior to the consummation of the IPO.
The Former Limited Partners are defined as CD&R Fund X Advisor Waterworks B, L.P., CD&R Fund X Waterworks B1, L.P., CD&R Fund X-A Waterworks B, L.P. and the other Original Limited Partners (as defined below) that transferred all or a portion of their Partnership Interests (including those held indirectly through the Blocker Companies) for shares of Class A common stock in connection with the Reorganization Transactions and the IPO, and represent entities that transferred all of their Partnership Interests (including Partnership Interests held indirectly through certain “blocker” corporations) for shares of Class A common stock in connection with the consummation of the Reorganization Transactions.
The Continuing Limited Partners are defined as CD&R Waterworks Holdings, LLC (“CD&R Waterworks Holdings”) and Core & Main Management Feeder, LLC (“Management Feeder”), and represent the Original Limited Partners that continued to own Partnership Interests after the Reorganization Transactions and that are entitled to exchange their Partnership Interests, together with the retirement of a corresponding number of shares of Class B common stock for shares of Class A common stock.
The Original Limited Partners are defined as CD&R Waterworks Holdings, the Former Limited Partners and Management Feeder and represent the direct and indirect owners of Holdings prior to the Reorganization Transactions and the IPO.
The shareholder ownership as of July 31, 2022 include the following:
•the shareholders of Core & Main, excluding the Continuing Limited Partners and Former Limited Partners, collectively held 60,558,287 shares of Class A common stock;
•the Former Limited Partners collectively held 107,397,971 shares of Class A common stock;
•Core & Main, directly or indirectly through our wholly-owned subsidiary, held 167,963,575 Partnership Interests; and
•the Continuing Limited Partners collectively held 7,317 shares of Class A common stock, 77,930,404 Partnership Interests and 77,930,404 shares of Class B common stock.
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As the Reorganization Transactions were between entities under common control, the financial statements for the periods prior to the IPO and Reorganization Transactions have been adjusted to combine previously separate entities for presentation purposes. These entities include Core & Main, Holdings and its consolidated subsidiaries and the Blocker Companies. Prior to the Reorganization Transactions, Core & Main had no operations and the Blocker Companies were holding companies for indirect investments in Holdings. The Blocker Companies had no operations but did receive distributions from Holdings associated with their tax obligations from allocations of Holdings' taxable income. As such, the Blocker Companies' financial statements reflected tax provisions and operating cash outflows for payments to taxing authorities. Their balance sheets collectively included $330 million of goodwill and deferred tax liabilities and equity. In connection with the Blocker Mergers, Core & Main assumed the balance sheets of the Blocker Companies.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements present the results of operations, financial position and cash flows of Core & Main and its subsidiaries, which includes the consolidated financial statements of Holdings and its consolidated subsidiary, Core & Main LP, as the legal entity that conducts the operations of the Company. Holdings is considered a variable interest entity. Core & Main is the primary beneficiary and general partner of Holdings and has decision making authority that significantly affects the economic performance of Holdings. As a result, Core & Main consolidates the consolidated financial statements of Holdings. All intercompany balances and transactions have been eliminated in consolidation. The Company records non-controlling interests related to Partnership Interest held by the Continuing Limited Partners in Holdings on its consolidated statements of operations and comprehensive income. The ownership interest of the Continuing Limited Partners related to Partnership Interests held by the Continuing Limited Partners is reflected as non-controlling interests in Core & Main’s consolidated Balance Sheets.
In management’s opinion, the unaudited condensed consolidated financial information for the interim periods presented include all normal recurring adjustments necessary for a fair statement of the Company's results of operations, financial position and cash flows, which include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim unaudited condensed consolidated financial statements may not be the same as those for the full year. The January 30, 2022 condensed consolidated Balance Sheet was derived from audited financial statements as of that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the fiscal year ended January 30, 2022 included in our 2021 Annual Report on Form 10-K.
Fiscal Year
The Company’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31st. Quarters within the fiscal year include 13-week periods, unless a fiscal year includes a 53rd week, in which case the fourth quarter of the fiscal year will be a 14-week period. Each of the three months ended July 31, 2022 and three months ended August 1, 2021 included 13 weeks and each of the six months ended July 31, 2022 and six months ended August 1, 2021 included 26 weeks. The current fiscal year ending January 29, 2023 (“fiscal 2022”) will include 52 weeks.
Estimates
Management has made a number of estimates and assumptions relating to the reporting of certain assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses in preparing the elements of these financial statements in conformity with U.S. GAAP. Actual results could differ from these estimates.
Accounting Policies
The Company’s significant accounting policies are discussed in Note 2 to the audited consolidated financial statements in our 2021 Annual Report on Form 10-K. There have been no significant changes to these policies which have had a material impact on the Company’s interim unaudited condensed consolidated financial statements and related notes during the three and six months ended July 31, 2022.
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2) RECENT ACCOUNTING PRONOUNCEMENTS
Reference Rate Reform - In March 2020, the Financial Accounting Standards Board issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by ASU 2020-04 are effective for prospective contract modifications made and qualifying hedging relationships entered into as of March 12, 2020 through December 31, 2022.
In July 2022, the Company amended the terms of the Senior ABL Credit Facility (as defined below) in order to, among other things, implement a forward-looking rate based on the secured overnight financing rate (“SOFR”) in lieu of LIBOR. The guidance of ASU 2020-04 did not have an impact on the assessment of the Senior ABL Credit Facility amendment.
At the time of a qualifying future transactions that replace LIBOR with a new interest rate index, the Company will consider the application of ASU 2020-04.
3) REVENUE
Disaggregation of Revenue
The following table represents net sales disaggregated by product category:
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
Product Category | July 31, 2022 | August 1, 2021 | July 31, 2022 | August 1, 2021 | |||||||||||||||||||
Pipes, valves & fittings products | $ | 1,291 | $ | 888 | $ | 2,401 | $ | 1,593 | |||||||||||||||
Storm drainage products | 266 | 173 | 475 | 303 | |||||||||||||||||||
Fire protection products | 192 | 138 | 364 | 257 | |||||||||||||||||||
Meter products | 112 | 99 | 219 | 200 | |||||||||||||||||||
Total net sales | $ | 1,861 | $ | 1,298 | $ | 3,459 | $ | 2,353 |
4) ACQUISITIONS
Earthsavers Acquisition
On June 28, 2022, the Company completed the acquisition of certain assets and assumption of certain liabilities of Earthsavers Erosion Control, LLC (“Earthsavers”) in a transaction valued up to $25 million, subject to working capital adjustments (the “Earthsavers Acquisition”). Earthsavers has three locations and produces and distributes a variety of geosynthetic materials, including straw wattles, erosion control blankets and a broad array of geotextile products. The transaction price was funded with cash on hand. Given the size of the purchase price, a full purchase price allocation has not been presented. However, significant components of the preliminary purchase price allocation include $9 million to net working capital, $9 million to goodwill and $7 million to customer relationships.
L&M Acquisition
On August 30, 2021, the Company completed the acquisition of certain assets and assumption of certain liabilities of L&M Bag & Supply Co., Inc. (“L&M”) in a transaction valued up to $60 million, subject to working capital adjustments (the “L&M Acquisition”). L&M is a specialized supplier of geotextile fabrics and geogrids, silt fences, turbidity barriers and safety fences, weed control fabric and sod staples. The transaction price was funded with cash on hand.
Pacific Pipe Acquisition
On August 9, 2021, the Company completed the acquisition of all of the outstanding shares of Pacific Pipe Company, Inc. (“Pacific Pipe”) in a transaction valued up to $103 million, subject to working capital adjustments (the “Pacific Pipe Acquisition”). Pacific Pipe has four branch locations and serves municipalities and contractors in the water, wastewater, storm drainage and irrigation industries throughout Hawaii, with a broad product offering. The transaction price was funded with cash on hand.
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Other Acquisitions
During the six months ended July 31, 2022, the Company completed the acquisitions of certain assets and liabilities in transactions valued at $17 million in total, subject to working capital adjustments (the “Other 2022 Acquisitions”). Given the lack of significance of these transactions, a full purchase price allocation has not been presented. However, a substantial portion of the aggregate purchase price was allocated to customer relationships, goodwill and net working capital.
In the above transactions, to the extent applicable, the excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents the assembled workforce and anticipated long-term growth in new markets, customers and products. Goodwill associated with the Earthsavers Acquisition, the L&M Acquisition and the Other 2022 Acquisitions are fully deductible by the Company for U.S. income tax purposes.
The following table represents the final allocation of the transaction price to the fair value of identifiable assets acquired and liabilities assumed in the L&M Acquisition and Pacific Pipe Acquisition:
L&M Acquisition | Pacific Pipe Acquisition | |||||||||||||
Cash | $ | — | $ | 2 | ||||||||||
Accounts receivable | 7 | 10 | ||||||||||||
Inventories | 16 | 17 | ||||||||||||
Intangible assets | 19 | 47 | ||||||||||||
Goodwill | 18 | 41 | ||||||||||||
Operating lease right-of-use assets | 2 | 17 | ||||||||||||
Other assets, current and non-current | 5 | 6 | ||||||||||||
Total assets acquired | 67 | 140 | ||||||||||||
Accounts payable | 3 | 5 | ||||||||||||
Deferred income taxes | — | 12 | ||||||||||||
Operating lease liabilities | 2 | 17 | ||||||||||||
Net assets acquired | $ | 62 | $ | 106 |
The following reconciles the total consideration to net assets acquired:
L&M Acquisition | Pacific Pipe Acquisition | |||||||||||||
Total consideration, net of cash | $ | 62 | $ | 104 | ||||||||||
Plus: Cash acquired in acquisition | — | 2 | ||||||||||||
Net assets acquired; investing cash outflow | $ | 62 | $ | 106 |
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Pro Forma Financial Information
The following pro forma information presents a summary of the results of operations for the periods indicated as if the Pacific Pipe and L&M acquisitions had been completed as of February 3, 2020. The pro forma financial information is based on the historical financial information for the Company and Pacific Pipe and L&M, along with certain pro forma adjustments. These pro forma adjustments consist primarily of:
•increased amortization expense related to the intangible assets acquired in the Pacific Pipe and L&M acquisitions;
•reclassification of direct acquisition transaction costs, retention bonuses and inventory fair value adjustments from the period incurred to periods these expenses would have been recognized given the assumed transaction dates identified above; and
•the related income tax effects of the aforementioned adjustments to the provision for income taxes for Core & Main.
The following pro forma information has been prepared for comparative purposes only and is not necessarily indicative of the results of operations as they would have been had the Pacific Pipe and L&M acquisitions occurred on the assumed dates, nor is it necessarily an indication of future operating results. In addition, the pro forma information does not reflect the cost of any integration activities, benefits from any synergies that may be derived from the Pacific Pipe and L&M acquisitions or revenue growth that may be anticipated.
Three Months Ended | Six Months Ended | |||||||||||||
August 1, 2021 | August 1, 2021 | |||||||||||||
Net sales | $ | 1,335 | $ | 2,424 | ||||||||||
Net income | 15 | 44 |
As a result of integration of the Pacific Pipe and L&M acquisitions, including the consolidation of certain acquired and existing branches, it is impracticable to identify the explicit financial performance associated with the Pacific Pipe and L&M acquisitions. As such, the Company has not presented the post-acquisition net sales and net income for the Pacific Pipe and L&M acquisitions.
Intangible Assets
For the Pacific Pipe and L&M acquisitions discussed above, the Company valued intangible assets acquired, which included customer relationships and trademarks.
The customer relationship intangible assets represent the value associated with those customer relationships in place at the date of the Pacific Pipe and L&M acquisitions. The Company valued the customer relationships using an excess earnings method using various inputs such as customer attrition rate, revenue growth rate, gross margin percentage and discount rate. Cash flows associated with the existing relationships are expected to diminish over time due to customer turnover. The Company reflected this expected diminishing cash flow through the utilization of an annual customer attrition rate assumption and in its method of amortization.
The trademark intangible asset represents the value associated with the brand names in place at the date of the Pacific Pipe acquisition.
A summary of the intangible assets acquired and assumptions utilized in the valuation for the Pacific Pipe and L&M acquisitions are as follows:
Intangible Asset Amount | Amortization Period | Discount Rate | Attrition Rate | ||||||||||||||||||||
L&M Acquisition | |||||||||||||||||||||||
Customer relationships | $ | 19 | 10 years | 15.5 | % | 15.0 | % | ||||||||||||||||
Pacific Pipe Acquisition | |||||||||||||||||||||||
Customer relationships | $ | 46 | 10 years | 11.5 | % | 10.0 | % | ||||||||||||||||
Trademark | 1 | 2 years | 11.5 | % | N/A |
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5) GOODWILL AND INTANGIBLE ASSETS
Goodwill
The carrying amount of the Company’s goodwill included in its Balance Sheets is as follows:
July 31, 2022 | January 30, 2022 | ||||||||||
Gross Goodwill | $ | 1,527 | $ | 1,515 | |||||||
Accumulated Impairment | — | — | |||||||||
Net Goodwill | $ | 1,527 | $ | 1,515 |
The changes in the carrying amount of goodwill are as follows:
Six Months Ended | |||||
July 31, 2022 | |||||
Beginning Balance | $ | 1,515 | |||
Goodwill acquired during the year | 12 | ||||
Ending balance | $ | 1,527 |
Goodwill acquired during the six months ended July 31, 2022 was related to the Earthsavers Acquisition and the Other 2022 Acquisitions, as further described in Note 4.
Goodwill represents the excess of purchase price over the fair value of net assets acquired. The Company does not amortize goodwill, but does assess the recoverability of goodwill on an annual basis during the fourth quarter. If an event occurs or circumstances change that would “more likely than not” reduce the fair value of a reporting unit below its carrying value, an interim impairment test would be performed between annual tests.
Intangible Assets
The Company’s intangible assets included in its Balance Sheets consist of the following:
July 31, 2022 | January 30, 2022 | ||||||||||||||||||||||||||||||||||
Gross Intangible | Accumulated Amortization | Net Intangible | Gross Intangible | Accumulated Amortization | Net Intangible | ||||||||||||||||||||||||||||||
Customer relationships | $ | 1,359 | $ | 537 | $ | 822 | $ | 1,347 | $ | 478 | $ | 869 | |||||||||||||||||||||||
Other intangible assets | 4 | 2 | 2 | 4 | 2 | 2 | |||||||||||||||||||||||||||||
Total | $ | 1,363 | $ | 539 | $ | 824 | $ | 1,351 | $ | 480 | $ | 871 |
Amortization expense related to intangible assets was as follows:
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
July 31, 2022 | August 1, 2021 | July 31, 2022 | August 1, 2021 | ||||||||||||||||||||
Amortization expense | $ | 29 | $ | 29 | $ | 59 | $ | 58 |
The estimated aggregate amortization expense on intangible assets owned by the Company for the remainder of fiscal 2022 and the next four full fiscal years is expected to be as follows:
Fiscal 2022 | $ | 59 | |||
Fiscal 2023 | 110 | ||||
Fiscal 2024 | 102 | ||||
Fiscal 2025 | 94 | ||||
Fiscal 2026 | 87 |
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6) DEBT
Debt consisted of the following:
July 31, 2022 | January 30, 2022 | ||||||||||||||||||||||
Principal | Unamortized Discount and Debt Issuance Costs | Principal | Unamortized Discount and Debt Issuance Costs | ||||||||||||||||||||
Current maturities of long-term debt: | |||||||||||||||||||||||
Senior Term Loan due July 2028 | $ | 15 | $ | — | $ | 15 | $ | — | |||||||||||||||
Long-term debt: | |||||||||||||||||||||||
Senior ABL Credit Facility due July 2026 | 142 | — | — | — | |||||||||||||||||||
Senior Term Loan due July 2028 | 1,470 | 20 | 1,478 | 22 | |||||||||||||||||||
1,612 | 20 | 1,478 | 22 | ||||||||||||||||||||
Total | $ | 1,627 | $ | 20 | $ | 1,493 | $ | 22 |
The Company’s debt obligations as of July 31, 2022 included the following debt agreements:
Senior Term Loan Facility
On July 27, 2021, Core & Main LP entered into the Senior Term Loan Facility, which matures on July 27, 2028. The Senior Term Loan Facility requires quarterly principal payments, payable on the last business day of each fiscal quarter in an amount equal to approximately 0.25% of the original principal amount of the Senior Term Loan Facility. The remaining balance is payable upon final maturity of the Senior Term Loan Facility on July 27, 2028. The Senior Term Loan Facility bears interest at a rate equal to (i) LIBOR plus, in each case, an applicable margin of 2.50% or (ii) the base rate, which will be the highest of (x) the corporate base rate established by the administrative agent as its prime rate in effect at its principal office in New York City from time to time, (y) the overnight federal funds rate plus 0.50% per annum and (z) one-month LIBOR (adjusted for maximum reserves) plus 1.00% per annum, plus, in each case, an applicable margin of 1.50%. The Senior Term Loan Facility is subject to a LIBOR “floor” of 0.00%. The weighted average interest rate, excluding the effect of the interest rate swap, of Core & Main LP’s outstanding borrowings under the Senior Term Loan Facility as of July 31, 2022 was 4.64%. See further discussion of the interest rate swap below. Based on quotes from financial institutions (i.e., level 2 of the fair value hierarchy), the fair value of the Senior Term Loan Facility was $1,431 million as of July 31, 2022.
Asset-Based Credit Facility
On July 29, 2022, Core & Main LP amended the terms of the credit agreement governing the senior asset-based revolving credit facility (as amended, the “Senior ABL Credit Facility”) in order to, among other things, increase the aggregate amount of commitments under the asset-based revolving credit facility by $400 million to $1,250 million overall, subject to borrowing base availability, and implement a rate based on SOFR in lieu of LIBOR. The Senior ABL Credit Facility has a maturity date of July 27, 2026. Borrowings under the Senior ABL Credit Facility bear interest at either the SOFR rate plus an applicable margin ranging from 1.25% to 1.75%, or an alternate base rate plus an applicable margin ranging from 0.25% to 0.75%, depending on the borrowing capacity under the Senior ABL Credit Facility. Additionally, Core & Main LP pays a fee of 0.25% on unfunded commitments under the Senior ABL Credit Facility. As of July 31, 2022, there was $142 million outstanding under the Senior ABL Credit Facility with a weighted average interest rate of 3.61%. The book value of the Senior ABL Credit Facility approximates fair value due to the variable interest rate nature of these borrowings.
The aforementioned debt agreements include customary affirmative and negative covenants, which include, among other things, restrictions on Core & Main LP’s ability to pay dividends, create liens, incur additional indebtedness, make investments, dispose of assets and merge or consolidate with any other person. The Senior Term Loan Facility may require accelerated repayment based upon cash flows generated in excess of operating and investing requirements when the Consolidated Secured Leverage Ratio (as defined in the agreement governing the Senior Term Loan Facility) is greater than or equal to 3.25. In addition, the Senior ABL Credit Facility requires Core & Main LP to comply with a consolidated fixed charge coverage ratio of greater than or equal to 1.00 when availability under the Senior ABL Credit Facility is less than 10.0% of the lesser of (i) the then applicable borrowing base or (ii) the then aggregate effective commitments.
Substantially all of Core & Main LP’s assets are pledged as collateral for the Senior Term Loan Facility and the Senior ABL Credit Facility.
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The aggregate amount of debt payments for the remainder of fiscal 2022 and the next four full fiscal years are as follows:
Fiscal 2022 | $ | 7 | |||
Fiscal 2023 | 15 | ||||
Fiscal 2024 | 15 | ||||
Fiscal 2025 | 15 | ||||
Fiscal 2026 | 157 |
Interest Rate Swaps
On February 28, 2018, Core & Main LP entered into an instrument pursuant to which it made payments to a third party based upon a fixed interest rate of 2.725% and received payments based upon the three-month LIBOR rate, based on a $500 million notional amount, which mirrored then outstanding borrowings under the Prior Term Loan Facility. On July 27, 2021, Core & Main LP repaid the approximately $1,258 million outstanding under the Prior Term Loan Facility and settled the interest rate swap.
Three Months Ended | Six Months Ended | ||||||||||
Accumulated Other Comprehensive Loss | August 1, 2021 | August 1, 2021 | |||||||||
Beginning of period balance | $ | (6) | $ | (8) | |||||||
Reclassification of expense to interest expense | 2 | 4 | |||||||||
Loss on debt modification and extinguishment | 5 | 5 | |||||||||
Tax expense on interest rate swap adjustments | |||||||||||
Reclassification of expense to interest expense | (1) | (1) | |||||||||
Loss on debt modification and extinguishment | — | — | |||||||||
End of period balance | $ | — | $ | — |
On July 27, 2021, Core & Main LP entered into an instrument in which it makes payments to a third-party based upon a fixed interest rate of 0.74% and receives payments based upon the one-month LIBOR rate, based on notional amounts associated with borrowings under the Senior Term Loan Facility. The measurement period of the interest rate swap commenced on July 27, 2021 with a notional amount of $1,000 million. The notional amount decreases to $900 million on July 27, 2023, $800 million on July 27, 2024, and $700 million on July 27, 2025 through the instrument maturity on July 27, 2026. This instrument is intended to reduce the Company's exposure to variable interest rates under the Senior Term Loan Facility. As of July 31, 2022, this instrument resulted in an effective fixed rate of 3.24%, based upon the 0.74% fixed rate plus an applicable margin of 2.50%, on $1,000 million of borrowings under the Senior Term Loan Facility.
The fair value of this cash flow interest rate swap was a $65 million and $31 million asset as of July 31, 2022 and January 30, 2022, respectively, which is included within other assets in the Balance Sheet. Fair value is based upon the present value of future cash flows under the terms of the contract and observable market inputs (level 2). Significant inputs used in determining fair value include forward-looking one-month LIBOR rates and the discount rate applied to projected cash flows.
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
Accumulated Other Comprehensive Income | July 31, 2022 | August 1, 2021 | July 31, 2022 | August 1, 2021 | |||||||||||||||||||
Beginning of period balance | $ | 63 | $ | — | $ | 26 | $ | — | |||||||||||||||
Measurement adjustment (loss) gain for interest rate swap | (10) | (2) | 34 | (2) | |||||||||||||||||||
Reclassification of (income) to interest expense | (1) | — | — | — | |||||||||||||||||||
Tax benefit (expense) on interest rate swap adjustments | |||||||||||||||||||||||
Measurement adjustment (loss) gain for interest rate swap | 2 | — | (6) | — | |||||||||||||||||||
Reclassification of (income) to interest expense | — | — | — | — | |||||||||||||||||||
End of period balance | $ | 54 | $ | (2) | $ | 54 | $ | (2) |
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7) INCOME TAXES
For the three months ended July 31, 2022 and August 1, 2021, the Company's effective tax rate was 17.3% and 24.6%, respectively. For the six months ended July 31, 2022 and August 1, 2021, the Company's effective tax rate was 17.6% and 20.1%, respectively. The variations between the Company's estimated effective tax rate and the U.S. statutory rate are primarily due to the portion of the Company's earnings attributable to non-controlling interests following the Reorganization Transactions partially offset by certain permanent book-tax differences.
Tax Receivable Agreements and Reorganization Transactions
In connection with the Reorganization Transactions and the IPO, Core & Main entered into a tax receivable agreement with the Former Limited Partners (the “Former Limited Partners Tax Receivable Agreement”) and a tax receivable agreement with the Continuing Limited Partners (the “Continuing Limited Partners Tax Receivable Agreement”) (collectively, the “Tax Receivable Agreements”). Under these agreements, Core & Main expects to generate tax attributes that will reduce amounts that it would otherwise pay in the future to various tax authorities. The Tax Receivable Agreements provide for the payment to either the Former Limited Partners or Continuing Limited Partners, or their permitted transferees, of 85% of the tax benefits realized by the Company, or in some circumstances are deemed to realize.
The Company had recorded $92 million and $62 million payables to related parties pursuant to the Former Limited Partners Tax Receivable Agreement and the Continuing Limited Partners Tax Receivable Agreement, respectively, as of July 31, 2022. As of January 30, 2022, the Company had recorded $92 million and $61 million payables to related parties pursuant to the Former Limited Partners Tax Receivable Agreement and the Continuing Limited Partners Tax Receivable Agreement, respectively. Payments to the Former Limited Partners are expected to commence in fiscal year 2023 for which $6 million is included within other current liabilities in the Balance Sheet.
The actual amount and timing of any payments under the Tax Receivable Agreements will vary depending upon a number of factors, including the timing of exchanges by the holders of Partnership Interests, the amount of gain recognized by such holders of Partnership Interests, the amount and timing of the taxable income the Company generates in the future and the federal tax rates then applicable. Assuming (i) that the Continuing Limited Partners exchanged all of their Partnership Interests at $24.14 per share of our Class A common stock (the closing stock price on July 29, 2022), (ii) no material changes in relevant tax law, (iii) a constant corporate tax rate of 25.1%, which represents a pro forma tax rate that includes a provision for U.S. federal income taxes and assumes the highest statutory rate apportioned to each state and local jurisdiction and (iv) that the Company earns sufficient taxable income in each year to realize on a current basis all tax benefits that are subject to the Continuing Limited Partners Tax Receivable Agreement, the Company would recognize a deferred tax asset (subject to offset with existing deferred tax liabilities) of approximately $629 million and a Continuing Limited Partners Tax Receivable Agreement liability of approximately $535 million, payable to the Continuing Limited Partners over the life of the Continuing Limited Partners Tax Receivable Agreement. The full exchange by the Continuing Limited Partners will also decrease Core & Main's aforementioned deferred tax asset associated with its investment in Holdings by $151 million. The foregoing amounts are estimates and subject to change.
8) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Receivables
Receivables consisted of the following:
July 31, 2022 | January 30, 2022 | ||||||||||
Trade receivables, net of allowance for credit losses | $ | 1,178 | $ | 784 | |||||||
Supplier rebate receivables | 86 | 100 | |||||||||
Receivables, net of allowance for credit losses | $ | 1,264 | $ | 884 |
Depreciation Expense
Depreciation expense is classified within cost of sales and depreciation and amortization. Depreciation expense related to property, plant and equipment, including capitalized software, was as follows:
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
July 31, 2022 | August 1, 2021 | July 31, 2022 | August 1, 2021 | ||||||||||||||||||||
Depreciation expense | $ | 5 | $ | 5 | $ | 11 | $ | 11 |
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Accrued Compensation and Benefits
Accrued compensation and benefits consisted of the following:
July 31, 2022 | January 30, 2022 | ||||||||||
Accrued bonuses and commissions | $ | 66 | $ | 85 | |||||||
Other compensation and benefits | 24 | 24 | |||||||||
Accrued compensation and benefits | $ | 90 | $ | 109 |
Other Current Liabilities
Other current liabilities consisted of the following:
July 31, 2022 | January 30, 2022 | ||||||||||
Accrued non-income taxes | $ | 32 | $ | 19 | |||||||
Accrued income taxes | 26 | 12 | |||||||||
Other | 38 | 27 | |||||||||
Other current liabilities | $ | 96 | $ | 58 |
Leases
The table below presents cash and non-cash impacts associated with leases:
Six Months Ended | ||||||||||||||
July 31, 2022 | August 1, 2021 | |||||||||||||
Cash paid for amounts included in the measurements of lease liabilities | ||||||||||||||
Operating cash flows from operating leases | $ | 33 | $ | 28 | ||||||||||
Right-of-use assets obtained in exchange for new lease liabilities | ||||||||||||||
Operating leases | $ | 34 | $ | 37 |
The non-cash impact related to right-of-use assets obtained in exchange for new operating lease liabilities in the table above excludes the impact from acquisitions. Right-of-use assets acquired as part of the Pacific Pipe and L&M acquisitions are presented in Note 4.
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9) NON-CONTROLLING INTERESTS
Core & Main is the general partner of Holdings and operates and controls all of the business and affairs of Holdings and, through Holdings and its subsidiaries, conducts the Company's business. Accordingly, Core & Main consolidates the consolidated financial statements of Holdings and attributes a portion of net income and equity of Holdings to non-controlling interests related to the vested Partnership Interests held by the Continuing Limited Partners. Income or loss is attributed to the non-controlling interests based on the weighted average percentage of Partnership Interests held by Continuing Limited Partners, excluding unvested Partnership Interests held by Management Feeder, relative to all Partnership Interests of Holdings during the period following the Reorganization Transactions. Holdings equity is attributed to non-controlling interests based on the Partnership Interests held by Continuing Limited Partners, excluding unvested Partnership Interests held by Management Feeder, relative to all Partnership Interests as of the balance sheet date. The non-controlling interests’ ownership percentage may fluctuate over time as the Continuing Limited Partners exchange Partnership Interests, together with the retirement of a corresponding number of shares of Class B common stock, for shares of Class A common stock and Partnership Interests held by Management Feeder vest. The following table summarizes the ownership of Partnership Interests of Holdings (excluding unvested Partnership Interests held by Management Feeder):
Partnership Interests | Ownership Percentage | |||||||||||||||||||||||||||||||||||||
Core & Main | Continuing Limited Partners | Total | Core & Main | Continuing Limited Partners | Total | |||||||||||||||||||||||||||||||||
Balances at January 30, 2022 | 167,522,403 | 75,344,408 | 242,866,811 | 69.0 | % | 31.0 | % | 100.0 | % | |||||||||||||||||||||||||||||
Issuance of Partnership Interests | 8,276 | — | 8,276 | — | — | — | ||||||||||||||||||||||||||||||||
Exchange of Partnership Interests | 432,916 | (433,034) | (118) | 0.2 | (0.2) | — | ||||||||||||||||||||||||||||||||
Forfeiture of Partnership Interests | (20) | — | (20) | — | — | — | ||||||||||||||||||||||||||||||||
Vesting of Partnership Interests | — | 296,007 | 296,007 | (0.1) | 0.1 | — | ||||||||||||||||||||||||||||||||
Balances at July 31, 2022 | 167,963,575 | 75,207,381 | 243,170,956 | 69.1 | % | 30.9 | % | 100.0 | % |
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10) BASIC AND DILUTED EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per share for the three and six months ended July 31, 2022 and from July 23, 2021 to August 1, 2021, the period following the Reorganization Transactions.
Basic earnings per share is computed by dividing net income attributable to Core & Main for the period by the weighted average number of shares of Class A common stock outstanding during the same period. Shares of Class A common stock issued during the period were weighted for the portion of the period in which the shares of Class A common stock were outstanding. The Company did not apply the two-class method because shares of Class B common stock do not participate in earnings or losses of Core & Main. As a result, the shares of Class B common stock are not considered participating securities and are not included in the weighted average shares outstanding for purposes of earnings per share. Net income allocated to holders of non-controlling interests was excluded from net income available to the Class A common stock. There were no preferred dividends and no shares of preferred stock outstanding for the period.
The diluted net earnings per share calculation includes the basic weighted average number of shares of Class A common stock outstanding plus the dilutive impact of potential outstanding shares of Class A common stock that would be issued upon exchange of Partnership Interests, together with the retirement of a corresponding number of shares of Class B common stock, under the if-converted method, if dilutive. The treasury stock method is applied to outstanding awards, including unvested Partnership Interests and outstanding stock appreciation rights, restricted stock units and stock options.
Three Months Ended | Six Months Ended | July 23, 2021 through | ||||||||||||||||||
Basic earnings (loss) per share: | July 31, 2022 | July 31, 2022 | August 1, 2021 | |||||||||||||||||
Net income (loss) | $ | 182 | $ | 319 | $ | (37) | ||||||||||||||
Net income (loss) attributable to non-controlling interests | 67 | 118 | (17) | |||||||||||||||||
Net income (loss) available to Class A common stock | 115 | 201 | (20) | |||||||||||||||||
Weighted average shares outstanding | 167,876,179 | 167,708,034 | 138,978,366 | |||||||||||||||||
Net income (loss) per share | $ | 0.69 | $ | 1.20 | $ | (0.14) | ||||||||||||||
Diluted earnings (loss) per share: | ||||||||||||||||||||
Net income (loss) available to common shareholders - basic | $ | 115 | $ | 201 | $ | (20) | ||||||||||||||
Increase to net income (loss) attributable to dilutive instruments | 50 | 88 | — | |||||||||||||||||
Net income (loss) available to common shareholders - diluted | 165 | 289 | (20) | |||||||||||||||||
Weighted average shares outstanding - basic | 167,876,179 | 167,708,034 | 138,978,366 | |||||||||||||||||
Incremental shares of common stock attributable to dilutive instruments | 78,299,699 | 78,452,777 | — | |||||||||||||||||
Weighted average shares outstanding - diluted | 246,175,878 | 246,160,811 | 138,978,366 | |||||||||||||||||
Net income (loss) per share - diluted | $ | 0.67 | $ | 1.17 | $ | (0.14) |
The following table details shares, each weighted for the portion of the period for which they were outstanding, that were not included in the computation of diluted earnings (loss) per share because the effect would have been anti-dilutive:
Three Months Ended | Six Months Ended | July 23, 2021 through | ||||||||||||||||||
July 31, 2022 | July 31, 2022 | August 1, 2021 | ||||||||||||||||||
Partnership Interest/Class B Shares | — | — | 84,135,621 | |||||||||||||||||
Stock appreciation rights | — | — | 633,683 | |||||||||||||||||
Total | — | — | 84,769,304 |
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11) RELATED PARTIES
CD&R affiliates
During the three and six months ended July 31, 2022, the Company had less than $1 million and $1 million, respectively, in purchases of product from affiliates of Clayton, Dubilier & Rice, LLC (“CD&R”), including other companies invested in by funds affiliated with or managed by CD&R (the “CD&R Funds”). During the three and six months ended August 1, 2021, the Company had less than $1 million and $1 million, respectively, in purchases of product from affiliates of CD&R, including other companies invested in by CD&R Funds. There were no amounts payable to affiliates of CD&R at July 31, 2022 and January 30, 2022. There were $1 million and $2 million in sales to affiliates of CD&R for the three and six months ended July 31, 2022, respectively. There was less than $1 million and $5 million in sales to affiliates of CD&R for the three and six months ended August 1, 2021, respectively. The Company had no amounts receivable from affiliates of CD&R at July 31, 2022 and January 30, 2022.
Tax Receivable Agreements
In connection with the Reorganization Transactions, Core & Main entered into the Former Limited Partners Tax Receivable Agreement with the Former Limited Partners and the Continuing Limited Partners Tax Receivable Agreement with the Continuing Limited Partners. See further discussion in Note 7.
Exchange Agreement
In connection with the Reorganization Transactions, Core & Main entered into the Exchange Agreement, dated as of July 22, 2021 (as amended, the “Exchange Agreement”), by and among Core & Main Holdings, LLC and Core & Main Management Feeder, LLC. Pursuant to the Exchange Agreement, the Continuing Limited Partners (or their permitted transferees) will have the right, subject to the terms of the Exchange Agreement, to exchange their Partnership Interests, together with the retirement of a corresponding number of shares of Class B common stock, for shares of Class A common stock generally on a one-for-one basis or for cash in limited circumstances as specified in the Exchange Agreement. The Exchange Agreement also provides that in connection with any such exchange, to the extent that Holdings has, since consummation of the Reorganization Transactions and the IPO, made distributions to the applicable Continuing Limited Partner that are proportionately lesser or greater than the distributions made to Core & Main, on a pro rata basis, the number of shares of Class A common stock to be issued or cash to be paid to such Continuing Limited Partner will be adjusted to take into account the amount of such discrepancy that is allocable to the Partnership Interests, and Class B common stock, subject to such exchange. Holders of Partnership Interests will not have the right to exchange Partnership Interests if Core & Main determines that such exchange would be prohibited by law or regulation or would violate other agreements with Core & Main or its subsidiaries to which the holder of Partnership Interests may be subject. Core & Main may also refuse to honor any request to effect an exchange if it determines such exchange would pose a material risk that Holdings would be treated as a “publicly traded partnership” for U.S. federal income tax purposes. Notwithstanding the foregoing, the Continuing Limited Partners are generally permitted to exchange Partnership Interests, subject to the terms of the Exchange Agreement.
The Exchange Agreement also provides that, in connection with any such exchange, to the extent that Holdings has, since consummation of the Reorganization Transactions and the IPO, made distributions to the applicable Continuing Limited Partner that are proportionately lesser or greater than the distributions made to Core & Main, on a pro rata basis, the number of shares of Class A common stock to be issued or cash to be paid to such Continuing Limited Partner will be adjusted to take into account the amount of such discrepancy that is allocable to the Partnership Interests, and Class B common stock, subject to such exchange. Core & Main expects to cause Holdings to make distributions to its partners in such a manner as generally to limit increases to the number of shares of Class A common stock to be issued or cash to be paid to exchanging Continuing Limited Partners in connection with the adjustment described in the preceding sentence.
12) SUBSEQUENT EVENTS
Management has evaluated events or transactions that may have occurred that would merit recognition or disclosure in the condensed consolidated financial statements. No subsequent events were identified.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto of Core & Main, Inc. for the fiscal year ended January 30, 2022 included in our 2021 Annual Report on Form 10-K. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed below and elsewhere in this Quarterly Report on Form 10-Q for a number of important factors, particularly those described under the caption “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in Part I, Item 1A of the 2021 Annual Report on Form 10-K.
Overview
We are a leading specialized distributor of water, wastewater, storm drainage and fire protection products and related services to municipalities, private water companies and professional contractors across municipal, non-residential and residential end markets nationwide. Our specialty products and services are used in the maintenance, repair, replacement, and construction of water and fire protection infrastructure. We reach customers through a nationwide network of approximately 300 branches across 48 states. Our products include pipes, valves, fittings, storm drainage products, fire protection products, meter products and other products for use in the construction, maintenance and repair of water and waste-water systems as well as fire protection systems. We complemented our core products through additional offerings, including smart meter systems, fusible high-density polyethylene (“fusible HDPE”) piping solutions and specifically engineered treatment plant products, services and geosynthetics used in erosion control. Our services and capabilities allow for integration with customers and form part of their sourcing and procurement function.
Basis of Presentation
Core & Main, Inc. (“Core & Main” and collectively with its subsidiaries, the “Company,” “we,” “our” or “us”) is a holding company and its primary material asset is its direct and indirect ownership interest in Core & Main Holdings, LP, a Delaware limited partnership (“Holdings”). Holdings has no operations and no material assets of its own other than its indirect ownership interest in Core & Main LP, a Florida limited partnership, the legal entity that conducts the operations of Core & Main. Because Core & Main is the general partner of Holdings, it operates and controls all of the business and affairs of Holdings and, through Holdings and its subsidiaries, conducts our business. Accordingly, the condensed consolidated financial information of Core & Main presented herein, including the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, includes the consolidated financial information of Holdings and its subsidiaries. The ownership interest of the Continuing Limited Partners related to Partnership Interests (each as defined in Note 1 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q) held by the Continuing Limited Partners is reflected as non-controlling interests in Core & Main’s condensed consolidated financial statements.
Fiscal Year
Our fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31st. Quarters within the fiscal year include 13-week periods, unless a fiscal year includes a 53rd week, in which case the fourth quarter of the fiscal year will be a 14-week period. Each of the three months ended July 31, 2022 and three months ended August 1, 2021 included 13 weeks and each of the six months ended July 31, 2022 and six months ended August 1, 2021 included 26 weeks. The current fiscal year ending January 29, 2023 (“fiscal 2022”) will include 52 weeks.
Key Factors Affecting Our Business
End-Markets and General Economic Conditions
Historically, demand for our products has been closely tied to municipal infrastructure spending, non-residential construction and residential construction in the U.S. We estimate that, based on net sales for the fiscal year ended January 30, 2022 (“fiscal 2021”) , our exposure by end market was approximately 39% municipal, 39% non-residential and 22% residential. Infrastructure spending and the non-residential and residential construction markets are subject to cyclical market pressures. Municipal demand has been relatively steady over the long term due to the consistent and immediate need to replace broken infrastructure, however activity levels are subject to the availability of funding for municipal projects. Non-residential and residential construction activities are primarily driven by availability of credit, interest rates, general economic conditions, consumer confidence and other factors that are beyond our control. The length and magnitude of these cycles have varied over time and by market. Cyclicality can also have an impact on the products we procure for our customers or our related services, as further discussed under “—Price Fluctuations” below.
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In November 2021, President Biden signed into law the Infrastructure Investment and Jobs Act (the “Infrastructure Investment and Jobs Act”), which includes $55 billion to invest in water infrastructure across the United States. In the coming years, including as a result of the Infrastructure Investment and Jobs Act, we expect increased federal infrastructure investment to have a core focus on the upgrade, repair and replacement of municipal waterworks systems and to address demographic shifts and serve the growing population. We believe these dynamics create the backdrop for a favorable funding environment and accelerated investment in projects that will benefit our business.
In August 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”), which includes a 15% book-income alternative minimum tax on corporations with average applicable financial statement income over $1 billion for any 3-year period ending with 2022 or later and a 1% excise tax on the fair market value of stock that is repurchased by publicly traded U.S. corporations or their specified affiliates. The alternative minimum tax and the excise tax are effective in taxable years beginning after December 31, 2022. Currently, we do not qualify for the alternative minimum tax. As part of our approach to our capital allocation, we will evaluate any impact related to the excise tax on stock repurchases by the Company.
Seasonality
Our operating results within a fiscal year are typically impacted by seasonality. Although weather patterns affect our operating results throughout the year, adverse winter weather historically has reduced construction, maintenance and repair activity. As a result, net sales are typically lower in our first and fourth fiscal quarters, especially in northern geographic regions. Abnormal levels of precipitation may negatively impact our operating results as it may result in the delay of construction projects. Our operating results may also be adversely affected by hurricanes, which typically occur during our third fiscal quarter. Our cash flows from operating activities are typically lower during the first and second fiscal quarters due to investment in working capital and annual incentive compensation payments and are typically higher during the third and fourth fiscal quarters due to cash inflows associated with receivable collections and reduced inventory purchases. Product availability constraints and inflation may have impacted the typical seasonality of operating results for the first half of fiscal 2022 as certain orders may have been accelerated by our customers. This may increase the risk of lower net sales during the remainder of fiscal 2022 if customer orders are lower and commodity prices decline, as further discussed under “—Price Fluctuations” below.
Price Fluctuations
Our financial performance is impacted by price fluctuations in commodity-based products and our ability to reflect these changes, in a timely manner, in our customer pricing. Such commodity-based products include PVC, ductile iron, fusible HDPE and steel and copper pipe and tubing products, which collectively accounted for approximately 32% of our net sales in fiscal 2021.
We are also exposed to fluctuations in costs for petroleum as we distribute a substantial portion of our products by truck. Petroleum prices have recently experienced significant increases as a result of the conflict in Ukraine and other factors. In addition, we are exposed to fluctuations in prices for imported products due to logistical challenges and changes in labor, fuel, container and other importation-related costs. We may also face price fluctuations on other products due to constrained labor availability and manufacturing capacity of our suppliers. Our ability to reflect these changes, in a timely manner, in our customer pricing may impact our financial performance.
If we are able to pass through price increases to our customers, our net sales will increase; conversely, during periods of deflation, our customer pricing may decrease to remain competitive, resulting in decreased net sales. The cost to procure the products we sell are historically volatile and subject to fluctuations arising from changes in supply and demand, national and international economic conditions, labor costs, competition, market speculation, government regulation, weather events, trade policies and periodic delays in the delivery of our products. During fiscal 2021 and continuing into fiscal 2022, we experienced significant price inflation and product surcharges in respect of certain of our commodity-based products, as well as other product categories, and supply chain, which we expect to continue to experience in the near-term and have sought to mitigate through inventory management, effective sourcing and customer pricing. Over the course of fiscal 2021 and continuing into fiscal 2022, we experienced increasing pressure on our supply chain due to several factors, including, but not limited to, delays from our suppliers, labor availability, global logistics and the availability of raw materials, in part due to the impact of COVID-19 on the global economy and the conflict in Ukraine that limited product availability and further exacerbated the effects of inflation. For example, access to certain meter products that we sell is dependent on the ability of our suppliers to obtain semi-conductor chips. The global supply shortage of semi-conductor chips has impacted various industries and companies, including us, and there is no certainty as to when availability will return to historic levels. For the remainder of fiscal 2022, we expect recent year-over-year growth rates to moderate as we anniversary the initial effects of inflation in fiscal 2021. As we have experienced significant inflation over a relatively short period, there is increased risk that we may experience a higher level of deflation or substantially lower net sales growth than in recent periods to the extent there are improvements in the availability of labor, transportation and products.
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Interest Rates
Certain of our indebtedness, including borrowings under the $1,500 million seven-year senior term loan (the “Senior Term Loan Facility”) and the asset-based revolving credit facility with a borrowing capacity of up to $1,250 million and a maturity date of July 27, 2026 (the “Senior ABL Credit Facility”), are subject to variable rates of interest and expose us to interest rate risk. The Senior Term Loan Facility bears interest based on the London Interbank Offered Rate (“LIBOR”) and the Senior ABL Credit Facility bears interest based on the secured overnight financing rate (“SOFR”). If interest rates increase, our debt service obligations on our variable-rate indebtedness would increase and our net income would decrease, even though the amount borrowed under the facilities remained the same. As of July 31, 2022, we had $1,627 million of outstanding variable-rate debt. We seek to mitigate our exposure to interest rate volatility through the entry into interest rate swap instruments, such as our current interest rate swap, associated with borrowings under the Senior Term Loan Facility, that effectively converts $1,000 million of our variable rate debt to fixed rate debt, which notional amount decreases to $900 million on July 27, 2023, $800 million on July 27, 2024, and $700 million on July 27, 2025 through the instrument maturity on July 27, 2026. Despite these efforts, unfavorable movement in interest rates may result in higher interest expense and cash payments.
Acquisitions
In addition to our organic growth strategy, we opportunistically pursue strategic asset and business acquisitions to grow our business. Below is a summary of the acquisitions that closed during the six months ended July 31, 2022 and fiscal 2021 and the related transaction value (in each case, excluding working capital and other purchase price adjustments, unless otherwise noted).
Name | Product Lines | Closing Date | Transaction Value (in millions) | ||||||||||||||||||||
Earthsavers Erosion Control, LLC (“Earthsavers”) | Storm Drainage | June 2022 | $25 | ||||||||||||||||||||
Other 2022 Acquisitions | Pipes, Valves & Fittings | Various | 17 | ||||||||||||||||||||
L&M Bag & Supply Co., Inc. (“L&M”) | Storm Drainage | August 2021 | 60 | ||||||||||||||||||||
Pacific Pipe Company, Inc. (“Pacific Pipe”) | Pipes, Valves & Fittings; Storm Drainage | August 2021 | 103 | ||||||||||||||||||||
As we integrate these and other acquisitions into our existing operations, we may not be able to identify the specific financial statement impacts associated with these acquisitions. There can be no assurance that the anticipated benefits of the acquisitions will be realized on the timeline we expect, or at all.
COVID-19 Pandemic Supply Chain Impacts
As we monitor the ongoing impact of the COVID-19 pandemic, including the effects of recent notable variants of the virus, we have continued to operate as an essential business, providing products and services to our customers needed to invest in and maintain our nation’s infrastructure. During fiscal 2021 and continuing in fiscal 2022, we have experienced increasing pressure on our supply chain due to several factors, including, but not limited to, longer lead times from our suppliers, labor availability, global logistics and availability of raw materials that are in part due to the impact of COVID-19 on the global economy. Depending on the ultimate scope and duration of supply chain disruptions, we may experience increases in product costs which we may not be able to pass on to our customers, loss of sales due to lack of product availability or potential customer claims from the inability to provide products in accordance with contractual terms. We continue to proactively monitor the situation and our supply chain and assess further possible implications to our business.
CARES Act
On March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act allowed for the deferral of the employer share of social security taxes for the period from March 27, 2020 through December 31, 2020. As of July 31, 2022, we have deferred payment of $5 million in employer share of social security taxes in accordance with the CARES Act that are required to be repaid by December 31, 2022, which are expected to result in additional operating cash outflows during fiscal 2022.
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Key Business Metrics
Net Sales
We generate net sales primarily from the sale of water, wastewater, storm drainage and fire protection products and the provision of related services to approximately 60,000 customers, as of January 30, 2022, including municipalities, private water companies and professional contractors. We recognize sales, net of sales tax, customer incentives, returns and discounts. Net sales fluctuate as a result of changes in commodity-based product costs and tariffs. We seek to reflect these changes in our customer pricing in a timely manner, which will increase net sales if we are able to pass along price increases and decrease net sales if we are required to reduce our customer prices as a result of competitive dynamics.
We categorize our net sales into pipes, valves & fittings, storm drainage products, fire protection products and meter products:
•Pipe, valves, hydrants, fittings include these products and other complementary products and services. Pipe includes PVC, ductile iron, fusible HDPE, steel and copper tubing.
•Storm drainage products primarily include corrugated piping systems, retention basins, manholes, grates, geosynthetics used in erosion control and other related products.
•Fire protection products primarily include fire protection pipe, sprinkler heads and devices as well as custom fabrication services.
•Meter products primarily include smart meter products, installation, software and other services.
Gross Profit
Gross profit represents the difference between the product cost from suppliers (net of earned rebates and discounts and including the cost of inbound freight) and the net sale price to our customers. Gross profit may be impacted by the time between changes in supplier costs and tariffs and changes in our customer pricing. Gross profit may not be comparable to those of other companies, as other companies may include all of the costs related to their distribution network in cost of sales.
Operating Expenses
Operating expenses are primarily comprised of selling, general and administrative costs, which include personnel expenses (salaries, wages, incentive compensation, associate benefits and payroll taxes), rent, insurance, utilities, professional fees, freight out, fuel and repair and maintenance.
Net Income
Net income represents our net sales less our cost of sales, operating expenses, depreciation and amortization, interest expense, other expense and our provision for income taxes for Core & Main and the consolidation of Holdings and its subsidiaries.
Net Income Attributable to Core & Main, Inc.
Net income attributable to Core & Main, Inc. represents net income less income attributable to non-controlling interests. Non-controlling interests represent owners of Partnership Interests of Holdings other than Core & Main.
Adjusted EBITDA
We define Adjusted EBITDA as EBITDA further adjusted for certain items management believes are not reflective of the underlying operations of our business, including (a) loss on debt modification and extinguishment, (b) equity-based compensation, (c) expenses associated with the initial public offering of 34,883,721 shares of Class A common stock at a price to the public of $20.00 per share (the “IPO”) and subsequent secondary offerings and (d) expenses associated with acquisition activities. Adjusted EBITDA includes amounts otherwise attributable to non-controlling interests as we manage the consolidated company and evaluate operating performance in a similar manner. We use Adjusted EBITDA to assess the operating results and effectiveness of our business. See “—Non-GAAP Financial Measures” for further discussion of Adjusted EBITDA and a reconciliation to net income or net income attributable to Core & Main, Inc., the most directly comparable measure under U.S. generally accepted accounting principles (“GAAP”), as applicable.
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Results of Operations
Three Months Ended July 31, 2022 Compared with Three Months Ended August 1, 2021
Amounts in millions (except per share data)
Three Months Ended | |||||||||||
July 31, 2022 | August 1, 2021 | ||||||||||
Net sales | $ | 1,861 | $ | 1,298 | |||||||
Cost of sales | 1,360 | 973 | |||||||||
Gross profit | 501 | 325 | |||||||||
Operating expenses: | |||||||||||
Selling, general and administrative | 230 | 192 | |||||||||
Depreciation and amortization | 34 | 33 | |||||||||
Total operating expenses | 264 | 225 | |||||||||
Operating income | 237 | 100 | |||||||||
Interest expense | 17 | 37 | |||||||||
Loss on debt modification and extinguishment | — | 50 | |||||||||
Income before provision for income taxes | 220 | 13 | |||||||||
Provision for income taxes | 38 | 3 | |||||||||
Net income | 182 | 10 | |||||||||
Less: net income (loss) attributable to non-controlling interests | 67 | (17) | |||||||||
Net income attributable to Core & Main, Inc. | $ | 115 | $ | 27 | |||||||
Earnings (loss) per share: | |||||||||||
Basic | $ | 0.69 | $ | (0.14) | |||||||
Diluted | $ | 0.67 | $ | (0.14) | |||||||
Non-GAAP Financial Data: | |||||||||||
Adjusted EBITDA | $ | 277 | $ | 155 |
Net Sales
Net sales for the three months ended July 31, 2022 increased $563 million, or 43.4%, to $1,861 million compared with $1,298 million for the three months ended August 1, 2021. The increase in net sales was primarily attributable to price inflation, volume growth and acquisitions, with price inflation representing approximately three-fourths of the net sales increase. The volume increases were driven by market volume growth and share gains in part due to preferred access to products during a period of material shortages, which helped drive growth across all product lines. Net sales growth for pipes, valves & fittings and storm drainage products benefited from price inflation, end-market growth and acquisitions. Net sales growth for fire protection products also benefited from price inflation and end-market growth. Net sales of meter products grew at a slower pace primarily due to continued shortages of semi-conductor chips that are components of certain smart meter products.
Three Months Ended | |||||||||||||||||
July 31, 2022 | August 1, 2021 | Percentage Change | |||||||||||||||
Pipes, valves & fittings products | $ | 1,291 | $ | 888 | 45.4 | % | |||||||||||
Storm drainage products | 266 | 173 | 53.8 | % | |||||||||||||
Fire protection products | 192 | 138 | 39.1 | % | |||||||||||||
Meter products | 112 | 99 | 13.1 | % | |||||||||||||
Total net sales | $ | 1,861 | $ | 1,298 |
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Gross Profit
Gross profit for the three months ended July 31, 2022 increased $176 million, or 54.2%, to $501 million compared with $325 million for the three months ended August 1, 2021. The increase in net sales contributed an additional $141 million of gross profit and the increase in gross profit as a percentage of net sales contributed $35 million. Gross profit as a percentage of net sales for the three months ended July 31, 2022 was 26.9% compared with 25.0% for the three months ended August 1, 2021. The overall increase in gross profit as a percentage of net sales was primarily attributable to strategic inventory investments ahead of announced price increases, a favorable pricing environment, the execution of our gross margin initiatives and accretive acquisitions.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses for the three months ended July 31, 2022 increased $38 million, or 19.8%, to $230 million compared with $192 million during the three months ended August 1, 2021. The increase was primarily attributable to an increase of $39 million in personnel expenses, which was primarily driven by higher variable compensation costs and headcount from acquisitions. In addition, distribution and facility costs increased related to volume, inflation and acquisitions. These factors were partially offset by a $15 million decrease related to equity-based compensation expense due to accounting for a modification to equity awards in the prior year period. SG&A expenses as a percentage of net sales was 12.4% for the three months ended July 31, 2022 compared with 14.8% for the three months ended August 1, 2021. The decrease was attributable to our ability to leverage our fixed costs and lower equity-based compensation expense during fiscal 2022.
Depreciation and Amortization Expense
Depreciation and amortization (“D&A”) expense for the three months ended July 31, 2022 was $34 million compared with $33 million during the three months ended August 1, 2021. The increase primarily was attributable to amortization related to the Earthsavers, Pacific Pipe and L&M acquisitions, partially offset by lower amortization on existing customer relationship intangible assets.
Operating Income
Operating income for the three months ended July 31, 2022 was $237 million compared with $100 million during the three months ended August 1, 2021. The increase in operating income was attributable to higher net sales and gross profit, primarily from price inflation, volume growth and acquisitions, and lower equity-based compensation expense during fiscal 2022. These factors were partially offset by higher variable compensation costs and higher personnel expenses due to increased headcount from acquisitions.
Interest Expense
Interest expense was $17 million for the three months ended July 31, 2022 compared with $37 million for the three months ended August 1, 2021. The decrease was primarily attributable to the redemption of the Senior 2024 Notes and the Senior 2025 Notes (each as defined in Note 1 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q) completed on July 27, 2021.
Loss on Debt Modification and Extinguishment
For the three months ended August 1, 2021, we recognized a loss on debt modification and extinguishment of $50 million. The loss on debt modification and extinguishment included (i) a write off of $8 million in deferred financing fees associated with the redemption of the Senior 2024 Notes, (ii) a write off of $13 million in deferred financing fees associated with the redemption of the Senior 2025 Notes, (iii) a write off of $5 million in deferred financing fees associated with the settlement of the Prior Term Loan Facility (as defined in Note 1 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q), (iv) redemption premiums of $6 million and $12 million for the Senior 2024 Notes and Senior 2025 Notes, respectively, (v) the settlement of the cash flow interest rate swap of $5 million, and (vi) third party expenses for the Senior Term Loan Facility of $1 million.
Provision for Income Taxes
The provision for income taxes for the three months ended July 31, 2022 increased $35 million to $38 million compared with $3 million for the three months ended August 1, 2021. For the three months ended July 31, 2022 and August 1, 2021, our effective tax rate was 17.3% and 24.6%, respectively. The effective tax rate for each period reflects only the portion of net income that is attributable to taxable entities. The lower effective tax rate is attributable to lower permanent differences and fixed tax amounts coupled with higher income before provision for income taxes in fiscal 2022.
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Net Income
Net income for the three months ended July 31, 2022 increased $172 million to $182 million compared with $10 million for the three months ended August 1, 2021. The increase in net income was primarily attributable to higher operating income, the $50 million loss on debt modification and extinguishment and equity award modification expense, both of which occurred in fiscal 2021, and lower interest expense, partially offset by an increase in income taxes.
Net Income (Loss) Attributable to Non-controlling Interests
Net income attributable to non-controlling interests for the three months ended July 31, 2022 was $67 million compared with a net loss attributable to non-controlling interests of $17 million for the three months ended August 1, 2021. This represents the allocation of the Holdings’ net income for the three months ended July 31, 2022 to holders of Partnership Interests other than Core & Main. For the three months ended August 1, 2021, the allocation of Holdings’ net loss to holders of Partnership Interests other than Core & Main for the period from July 23, 2021 through August 1, 2021, which was primarily attributable to the $50 million loss on debt modification and extinguishment that occurred on July 27, 2021.
Net Income Attributable to Core & Main, Inc.
Net income attributable to Core & Main, Inc. for the three months ended July 31, 2022 was $115 million compared with $27 million for the three months ended August 1, 2021. This represents the allocation of Holdings’ net income for the three months ended July 31, 2022 to Core & Main. For the three months ended August 1, 2021, the allocation of Holdings’ net income to Core & Main, Inc. includes net income of Holdings for the period from May 3, 2021 to July 22, 2021.
Earnings (Loss) Per Share
The Class A common stock basic earnings per share and diluted earnings per share for the three months ended July 31, 2022 were $0.69 and $0.67, respectively. The Class A common stock basic loss per share and diluted loss per share for the three months ended August 1, 2021 represent the period from July 23, 2021 through August 1, 2021, the period following the Reorganization Transactions. The Class A common stock basic loss per share and diluted loss per share for the period from July 23, 2021 through August 1, 2021 were $0.14 and $0.14, respectively. The net loss attributable to Core & Main, Inc. for the period from July 23, 2021 through August 1, 2021 primarily reflects Core & Main's share of the $50 million loss on debt modification and extinguishment that occurred on July 27, 2021.
Adjusted EBITDA
Adjusted EBITDA for the three months ended July 31, 2022 increased $122 million, or 78.7%, to $277 million compared with $155 million for the three months ended August 1, 2021. Growth in Adjusted EBITDA was primarily attributable to higher net sales, improved gross profit margins, and leveraging our cost structure on the increase in net sales. For a reconciliation of Adjusted EBITDA to net income or net income attributable to Core & Main, Inc., the most comparable GAAP financial metric, as applicable, see “—Non-GAAP Financial Measures.”
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Six Months Ended July 31, 2022 Compared with Six Months Ended August 1, 2021
Amounts in millions (except per share data)
Six Months Ended | |||||||||||
July 31, 2022 | August 1, 2021 | ||||||||||
Net sales | $ | 3,459 | $ | 2,353 | |||||||
Cost of sales | 2,537 | 1,771 | |||||||||
Gross profit | 922 | 582 | |||||||||
Operating expenses: | |||||||||||
Selling, general and administrative | 436 | 346 | |||||||||
Depreciation and amortization | 69 | 67 | |||||||||
Total operating expenses | 505 | 413 | |||||||||
Operating income | 417 | 169 | |||||||||
Interest expense | 30 | 73 | |||||||||
Loss on debt modification and extinguishment | — | 50 | |||||||||
Income before provision for income taxes | 387 | 46 | |||||||||
Provision for income taxes | 68 | 9 | |||||||||
Net income | 319 | 37 | |||||||||
Less: net income (loss) attributable to non-controlling interests | 118 | (17) | |||||||||
Net income attributable to Core & Main, Inc. | $ | 201 | $ | 54 | |||||||
Earnings (loss) per share: | |||||||||||
Basic | $ | 1.20 | $ | (0.14) | |||||||
Diluted | $ | 1.17 | $ | (0.14) | |||||||
Non-GAAP Financial Data: | |||||||||||
Adjusted EBITDA | $ | 496 | $ | 264 |
Net Sales
Net sales for the six months ended July 31, 2022 increased $1,106 million, or 47.0%, to $3,459 million compared with $2,353 million for the six months ended August 1, 2021. The increase in net sales was primarily attributable to price inflation, volume growth and acquisitions, with price inflation representing approximately three-fourths of the net sales increase. The volume increases were driven by market volume growth and share gains in part due to preferred access to products during a period of material shortages, which helped drive growth across all product lines. Net sales growth for pipes, valves & fittings and storm drainage products benefited from price inflation, end-market growth and acquisitions. Net sales growth for fire protection products also benefited from price inflation and end-market growth. Net sales of meter products grew at a slower pace primarily due to continued shortages of semi-conductor chips that are components of certain smart meter products.
Six Months Ended | |||||||||||||||||
July 31, 2022 | August 1, 2021 | Percentage Change | |||||||||||||||
Pipes, valves & fittings products | $ | 2,401 | $ | 1,593 | 50.7 | % | |||||||||||
Storm drainage products | 475 | 303 | 56.8 | % | |||||||||||||
Fire protection products | 364 | 257 | 41.6 | % | |||||||||||||
Meter products | 219 | 200 | 9.5 | % | |||||||||||||
Total net sales | $ | 3,459 | $ | 2,353 |
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Gross Profit
Gross profit for the six months ended July 31, 2022 increased $340 million, or 58.4%, to $922 million compared with $582 million for the six months ended August 1, 2021. The increase in net sales contributed an additional $273 million of gross profit and the increase in gross profit as a percentage of net sales contributed $67 million. Gross profit as a percentage of net sales for the six months ended July 31, 2022 was 26.7% compared with 24.7% for the six months ended August 1, 2021. The overall increase in gross profit as a percentage of net sales was primarily attributable to strategic inventory investments ahead of announced price increases, a favorable pricing environment, the execution of our gross margin initiatives and accretive acquisitions.
Selling, General and Administrative Expenses
SG&A expenses for the six months ended July 31, 2022 increased $90 million, or 26.0%, to $436 million compared with $346 million during the six months ended August 1, 2021. The increase was primarily attributable to an increase of $76 million in personnel expenses, which was primarily driven by higher variable compensation costs and headcount from acquisitions. In addition, distribution and facility costs increased related to volume, inflation and acquisitions. These factors were partially offset by a $13 million decrease related to equity-based compensation expense due to accounting for a modification to equity awards in the prior year period. SG&A expenses as a percentage of net sales was 12.6% for the six months ended July 31, 2022 compared with 14.7% for the six months ended August 1, 2021. The decrease was attributable to our ability to leverage our fixed costs and lower equity-based compensation expense during fiscal 2022.
Depreciation and Amortization Expense
D&A expense for the six months ended July 31, 2022 was $69 million compared with $67 million during the six months ended August 1, 2021. The increase primarily was attributable to amortization related to the Earthsavers, Pacific Pipe and L&M acquisitions, partially offset by lower amortization on existing customer relationship intangible assets.
Operating Income
Operating income for the six months ended July 31, 2022 was $417 million compared with $169 million during the six months ended August 1, 2021. The increase in operating income was attributable to higher net sales and gross profit, primarily from price inflation, volume growth and acquisitions, and lower equity-based compensation expense in fiscal 2022. These factors were partially offset by higher variable compensation costs and higher personnel expenses due to increased headcount from acquisitions.
Interest Expense
Interest expense was $30 million for the six months ended July 31, 2022 compared with $73 million for the six months ended August 1, 2021. The decrease was primarily attributable to the redemption of the Senior 2024 Notes and the Senior 2025 Notes completed on July 27, 2021.
Loss on Debt Modification and Extinguishment
For the six months ended August 1, 2021, we recognized a loss on debt modification and extinguishment of $50 million. The loss on debt modification and extinguishment included (i) a write off of $8 million in deferred financing fees associated with the redemption of the Senior 2024 Notes, (ii) a write off of $13 million in deferred financing fees associated with the redemption of the Senior 2025 Notes, (iii) a write off of $5 million in deferred financing fees associated with the settlement of the Prior Term Loan Facility, (iv) redemption premiums of $6 million and $12 million for the Senior 2024 Notes and Senior 2025 Notes, respectively, (v) the settlement of the cash flow interest rate swap of $5 million, and (vi) third-party expenses for the Senior Term Loan Facility of $1 million.
Provision for Income Taxes
The provision for income taxes for the six months ended July 31, 2022 increased $59 million to $68 million compared with $9 million for the six months ended August 1, 2021. For the six months ended July 31, 2022 and August 1, 2021, our effective tax rate was 17.6% and 20.1%, respectively. The effective tax rate for each period reflects only the portion of net income that is attributable to taxable entities. The lower effective tax rate is attributable to lower permanent differences and fixed tax amounts coupled with higher income before provision for income taxes in fiscal 2022.
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Net Income
Net income for the six months ended July 31, 2022 increased $282 million to $319 million compared with $37 million for the six months ended August 1, 2021. The increase in net income was primarily attributable to higher operating income, the $50 million loss on debt modification and extinguishment and equity award modification expense, both of which occurred in fiscal 2021, and lower interest expense, partially offset by an increase in income taxes.
Net Income (Loss) Attributable to Non-controlling Interests
Net income attributable to non-controlling interests for the six months ended July 31, 2022 was $118 million compared with a net loss attributable to non-controlling interests of $17 million for the six months ended August 1, 2021. This represents the allocation of the Holdings’ net income for the six months ended July 31, 2022 to holders of Partnership Interests other than Core & Main. For the six months ended August 1, 2021, the allocation of Holdings’ net loss to holders of Partnership Interests other than Core & Main is for the period from July 23, 2021 through August 1, 2021, which was primarily attributable to the $50 million loss on debt modification and extinguishment that occurred on July 27, 2021.
Net Income Attributable to Core & Main, Inc.
Net income attributable to Core & Main, Inc. for the six months ended July 31, 2022 was $201 million compared with $54 million for the six months ended August 1, 2021. This represents the allocation of Holdings’ net income for the six months ended July 31, 2022 to Core & Main. For the six months ended August 1, 2021, the allocation of Holdings’ net income to Core & Main, Inc. includes net income of Holdings for the period from February 1, 2021 to July 22, 2021.
Earnings (Loss) Per Share
The Class A common stock basic earnings per share and diluted earnings per share for the six months ended July 31, 2022 were $1.20 and $1.17, respectively. The Class A common stock basic loss per share and diluted loss per share for the six months ended August 1, 2021 represent the period from July 23, 2021 through August 1, 2021, the period following the Reorganization Transactions. The Class A common stock basic loss per share and diluted loss per share for the period from July 23, 2021 through August 1, 2021 were $0.14 and $0.14, respectively. The net loss attributable to Core & Main, Inc. for the period from July 23, 2021 through August 1, 2021 primarily reflects Core & Main's share of the $50 million loss on debt modification and extinguishment that occurred on July 27, 2021.
Adjusted EBITDA
Adjusted EBITDA for the six months ended July 31, 2022 increased $232 million, or 87.9%, to $496 million compared with $264 million for the six months ended August 1, 2021. Growth in Adjusted EBITDA was primarily attributable to higher net sales, improved gross profit margins, and leveraging our cost structure on the increase in net sales. For a reconciliation of Adjusted EBITDA to net income or net income attributable to Core & Main, Inc., the most comparable GAAP financial metric, as applicable, see “—Non-GAAP Financial Measures.”
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Liquidity and Capital Resources
Historically, we have financed our liquidity requirements through cash flows from operating activities, borrowings under our credit facilities and issuances of equity and debt securities. Our principal historical liquidity requirements have been for working capital, capital expenditures, acquisitions and servicing indebtedness.
As of July 31, 2022, our cash and cash equivalents was approximately zero and we had $142 million outstanding borrowings on our Senior ABL Credit Facility, which provides for borrowings of up to $1,250 million, subject to borrowing base availability. As of July 31, 2022, after giving effect to approximately $9 million of letters of credit issued under the Senior ABL Credit Facility and outstanding borrowings under the Senior ABL Credit Facility, Core & Main LP would have been able to borrow approximately $1,099 million under the Senior ABL Credit Facility, subject to borrowing base availability. Our short term debt obligations of $15 million are related to quarterly amortization principal payments on the Senior Term Loan Facility.
We are required to make cash payments in future periods under the Tax Receivable Agreements. Payments to the Former Limited Partners are expected to commence in fiscal year 2023 and payments to the Continuing Limited Partner are expected to commence in fiscal year 2024. Payments under the Tax Receivable Agreements are only required to be made to the extent that we utilize the corresponding new or existing tax assets to reduce payments to federal, state and local taxing authorities. These payments are in an amount that represents 85% of the reduction in payments to federal, state and local taxing authorities. As such, the cash savings from the incremental tax deductions are expected to exceed the payments under the Tax Receivable Agreements over the life of these arrangements. Based on the anticipated filing date of income tax returns and contractual payment terms in the Tax Receivable Agreements, we expect these payments to occur two fiscal years after we utilize the corresponding tax deductions. For additional information related to the impacts to deferred tax asset and Tax Receivable Agreement liability balances for future exchanges of Partnership Interests, see Note 7 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
We believe that our current sources of liquidity, which include cash generated from operations, existing cash and cash equivalents and available borrowing capacity under the Senior ABL Credit Facility, will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. Our growth strategy contemplates future acquisitions for which we will need sufficient access to capital. To finance future acquisitions, particularly larger acquisitions, we may issue additional equity or incur additional indebtedness. Any such additional indebtedness would increase our debt leverage. See “Risk Factors” in Part I, Item 1A of the 2021 Annual Report on Form 10-K.
Additionally, we continuously evaluate our approach to our capital allocation, which may include acquisitions, greenfields, debt reduction (including through open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and opportunistic refinancing of debt), stock repurchases and dividends or other distributions. The execution of these, and other, capital allocation activities may be at the discretion of, and subject to the approval by, our board of directors and will depend on our financial condition, earnings, liquidity and capital requirements, market conditions, level of indebtedness, contractual restrictions, compliance with our debt covenants, restrictions imposed by Delaware law, general business conditions and any other factors that our board of directors deems relevant in making any such determination. Therefore, there can be no assurance that we will engage in any or all of these actions or to what amount of capital we will allocate to each option. Our affiliates may also purchase our debt from time to time, through open market purchases or other transactions. In such cases, our debt may not be retired, in which case we would continue to pay interest in accordance with the terms of such debt and we would continue to reflect the debt as outstanding in our consolidated Balance Sheets.
Holdings’ ability to pay dividends may be limited as a practical matter by our growth plans as well as our credit agreements and other debt instruments insofar as we may seek to pay dividends out of funds made available to us by Core & Main LP, because our credit agreements directly or indirectly restrict Core & Main LP’s ability to pay dividends or make loans to Holdings. The Senior Term Loan Facility may require accelerated repayment based upon cash flows generated in excess of operating and investing requirements when Core & Main LP’s net total leverage ratio is greater than or equal to 3.25. In addition, the Senior ABL Credit Facility requires us to comply with a consolidated fixed charge coverage ratio of greater than or equal to 1.00 when availability is less than 10.0% of the lesser of (i) the then applicable borrowing base and (ii) the then aggregate effective commitments under the Senior ABL Credit Facility. Substantially all of Core & Main LP’s assets secure the Senior Term Loan Facility and the Senior ABL Credit Facility.
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Information about our cash flows, by category, is presented in the Condensed Consolidated Statements of Cash Flows and is summarized as follows:
Six Months Ended | |||||||||||
July 31, 2022 | August 1, 2021 | ||||||||||
Cash flows used in operating activities | $ | (60) | $ | (99) | |||||||
Cash flows used in investing activities | (56) | (13) | |||||||||
Cash flows provided by (used in) financing activities | 115 | (202) | |||||||||
Decrease in cash and cash equivalents | $ | (1) | $ | (314) |
Operating Activities
Net cash used in operating activities was $60 million for the six months ended July 31, 2022 compared with $99 million for the six months ended August 1, 2021. The improvement in operating cash flows was primarily driven by higher operating income from price inflation and volume growth and $75 million in lower cash interest payments due to the redemption of the Senior 2024 Notes and Senior 2025 Notes completed on July 27, 2021. These factors were partially offset by a higher investment in working capital based on strong net sales growth, driven by inflation and volume growth, strategic inventory purchases and a $47 million increase in tax payments due to higher income before provision for income taxes.
Investing Activities
Net cash used in investing activities increased by $43 million to $56 million for the six months ended July 31, 2022 compared with $13 million for the six months ended August 1, 2021, primarily attributable to the fiscal 2022 cash outflows of $42 million related to the Earthsavers Acquistion and the Other 2022 Acquisitions and a $7 million increase in capital expenditures, partially offset by the payment for the settlement of an interest rate swap in fiscal 2021.
Financing Activities
Net cash provided by financing activities was $115 million for the six months ended July 31, 2022 compared with net cash used in financing activities of $202 million for the six months ended August 1, 2021. The change of $317 million was primarily attributable to a $974 million decrease in outflows for debt repayments, net of debt issuances, discounts, issuance costs, and modification costs, and a $3 million decrease in distributions to non-controlling interest holders during fiscal 2022. This was partially offset by fiscal 2021 inflows related to net IPO proceeds of approximately $660 million, after deducting underwriting discounts, commissions and offering expenses paid.
Financing
Senior Term Loan Facility
Core & Main LP’s Senior Term Loan Facility has an original aggregate principal amount of $1,500 million, which matures on July 27, 2028. The Senior Term Loan Facility requires quarterly principal payments, payable on the last business day of each fiscal quarter in an amount equal to approximately 0.25% of the original principal amount of the Senior Term Loan Facility. The remaining balance is payable upon final maturity of the Senior Term Loan Facility on July 27, 2028. The Senior Term Loan Facility bears interest at a rate equal to (i) LIBOR plus, in each case, an applicable margin of 2.50% or (ii) the base rate, which will be the highest of (x) the corporate base rate established by the administrative agent as its prime rate in effect at its principal office in New York City from time to time, (y) the overnight federal funds rate plus 0.50% per annum and (z) one-month LIBOR (adjusted for maximum reserves) plus 1.00% per annum, plus, in each case, an applicable margin of 1.50%. The Senior Term Loan Facility is subject to a LIBOR “floor” of 0.00%. The weighted average interest rate, excluding the effect of the interest rate swap, of Core & Main LP's outstanding borrowings under the Senior Term Loan Facility as of July 31, 2022 was 4.64%. See further discussion of the interest rate swap below. Based on quotes from financial institutions (i.e., level 2 of the fair value hierarchy) the fair value of the Senior Term Loan Facility was $1,431 million at July 31, 2022.
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Asset-Based Credit Facility
On July 29, 2022, Core & Main LP amended the terms of the Senior ABL Credit Facility in order to, among other things, increase the aggregate amount of commitments by $400 million to $1,250 million overall, subject to borrowing base availability, and implement a rate based on SOFR in lieu of LIBOR. The Senior ABL Credit Facility has a maturity date of July 27, 2026. Borrowings under the Senior ABL Credit Facility bear interest at either the SOFR rate plus an applicable margin ranging from 1.25% to 1.75%, or an alternate base rate plus an applicable margin ranging from 0.25% to 0.75%, depending on the borrowing capacity under the Senior ABL Credit Facility. Additionally, Core & Main LP pays a fee of 0.25% on unfunded commitments under the Senior ABL Credit Facility. As of July 31, 2022, there was $142 million outstanding under the Senior ABL Credit Facility with a weighted average interest rate of 3.61%. The book value of the Senior ABL Credit Facility approximates fair value due to the variable interest rate nature of these borrowings.
Interest Rate Swap
On July 27, 2021, Core & Main LP entered into an interest rate swap in which it makes payments to a third-party based upon a fixed interest rate of 0.74% and receives payments based upon the one-month LIBOR rate, based on notional amounts associated with borrowings under the Senior Term Loan Facility. The measurement period of the instrument commenced on July 27, 2021 with a notional amount of $1,000 million. The notional amount decreases to $900 million on July 27, 2023, $800 million on July 27, 2024, and $700 million on July 27, 2025 through the instrument maturity on July 27, 2026. This instrument is intended to reduce our exposure to variable interest rates under the Senior Term Loan Facility. As of July 31, 2022, this instrument resulted in an effective fixed rate of 3.24%, based upon the 0.74% fixed rate plus an applicable margin of 2.50%, on $1,000 million of borrowings under the Senior Term Loan Facility.
The fair value of this cash flow interest rate swap was a $65 million and $31 million asset as of July 31, 2022 and January 30, 2022, respectively, which is included within other assets in the Balance Sheet. Fair value is based upon the present value of future cash flows under the terms of the contract and observable market inputs (level 2). Significant inputs used in determining fair value include forward looking one-month LIBOR rates and the discount rate applied to projected cash flows.
Purchase Obligations
As of July 31, 2022, the Company had agreements in place with various vendors to purchase goods and services, primarily inventory, in the aggregate amount of $1,842 million. These purchase obligations are generally cancelable, but the Company foresees no intent to cancel. Payment is dependent on lead times from our suppliers, and could be extended due to supply chain disruptions. Payments are generally expected to be made during fiscal 2022 and fiscal 2023 for these obligations.
Non-GAAP Financial Measures
In addition to providing results that are determined in accordance with GAAP, we present EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. These measures are not considered measures of financial performance or liquidity under GAAP and the items excluded therefrom are significant components in understanding and assessing our financial performance or liquidity. These measures should not be considered in isolation or as alternatives to GAAP measures such as net income or net income attributable to Core & Main, Inc., as applicable, cash provided by or used in operating, investing or financing activities or other financial statement data presented in our financial statements as an indicator of our financial performance or liquidity.
We define EBITDA as net income, or net income attributable to Core & Main, Inc., as applicable, adjusted for non-controlling interests, depreciation and amortization, provision for income taxes and interest expense. We define Adjusted EBITDA as EBITDA as further adjusted for certain items management believes are not reflective of the underlying operations of our business, including (a) loss on debt modification and extinguishment, (b) equity-based compensation, (c) expenses associated with the IPO and subsequent secondary offerings and (d) expenses associated with acquisition activities. Net income attributable to Core & Main, Inc. is the most directly comparable GAAP measure to EBITDA and Adjusted EBITDA.
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We use EBITDA and Adjusted EBITDA to assess the operating results and effectiveness and efficiency of our business, Adjusted EBITDA includes amounts otherwise attributable to non-controlling interests as we manage the consolidated company and evaluate operating performance in a similar manner. We present these non-GAAP financial measures because we believe that investors consider them to be important supplemental measures of performance, and we believe that these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Non-GAAP financial measures as reported by us may not be comparable to similarly titled metrics reported by other companies and may not be calculated in the same manner. These measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. For example, EBITDA and Adjusted EBITDA:
• do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on debt;
• do not reflect income tax expenses, the cash requirements to pay taxes or related distributions;
• do not reflect cash requirements to replace in the future any assets being depreciated and amortized; and
• exclude certain transactions or expenses as allowed by the various agreements governing our indebtedness.
EBITDA and Adjusted EBITDA are not alternative measures of financial performance or liquidity under GAAP and therefore should be considered in conjunction with net income, net income attributable to Core & Main, Inc. and other performance measures such as gross profit or net cash provided by or used in operating, investing or financing activities and not as alternatives to such GAAP measures. In evaluating Adjusted EBITDA, you should be aware that, in the future, we may incur expenses similar to those eliminated in this presentation.
The following table sets forth a reconciliation of net income or net income attributable to Core & Main, Inc. to EBITDA and Adjusted EBITDA for the periods presented:
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
July 31, 2022 | August 1, 2021 | July 31, 2022 | August 1, 2021 | ||||||||||||||||||||
Net income attributable to Core & Main, Inc. | $ | 115 | $ | 27 | $ | 201 | $ | 54 | |||||||||||||||
Less: net income (loss) attributable to non-controlling interest | 67 | (17) | 118 | (17) | |||||||||||||||||||
Net income | 182 | 10 | 319 | 37 | |||||||||||||||||||
Depreciation and amortization (1) | 34 | 34 | 70 | 69 | |||||||||||||||||||
Provision for income taxes | 38 | 3 | 68 | 9 | |||||||||||||||||||
Interest expense | 17 | 37 | 30 | 73 | |||||||||||||||||||
EBITDA | $ | 271 | $ | 84 | $ | 487 | $ | 188 | |||||||||||||||
Loss on debt modification and extinguishment | — | 50 | — | 50 | |||||||||||||||||||
Equity-based compensation | 4 | 19 | 7 | 20 | |||||||||||||||||||
Acquisition expenses (2) | 2 | 1 | 2 | 3 | |||||||||||||||||||
Offering expenses (3) | — | 1 | — | 3 | |||||||||||||||||||
Adjusted EBITDA | $ | 277 | $ | 155 | $ | 496 | $ | 264 | |||||||||||||||
(1)Includes depreciation of certain assets which are reflected in “cost of sales” in our Statement of Operations.
(2)Represents expenses associated with acquisition activities, including transaction costs, post-acquisition employee retention bonuses, severance payments, expense recognition of purchase accounting fair value adjustments (excluding amortization) and contingent consideration adjustments.
(3)Represents costs related to the IPO and Secondary Offering reflected in SG&A expenses in our Statement of Operations.
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Recently Issued and Adopted Accounting Pronouncements and Accounting Pronouncements Issued But Not Yet Adopted
See Note 2 of our unaudited condensed consolidated financial statements.
Critical Accounting Policies and Estimates
A summary of our significant accounting policies are discussed in Note 2 to the audited consolidated financial statements in our 2021 Annual Report on Form 10-K. The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Our estimates and assumptions are based on historical experiences and changes in the business environment. However, actual results may differ from estimates under different conditions, sometimes materially. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results of operations and require management judgment. There have been no significant changes to these policies which have had a material impact on the Company’s interim unaudited condensed consolidated financial statements and related notes during the three and six months ended July 31, 2022.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of July 31, 2022.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of conducting business, we are exposed to certain risks associated with potential changes in market conditions. These risks include fluctuations in interest rates and prices, including price fluctuations related to our commodity-based products.
Interest Rate Risk
Our credit facilities bear interest at a floating rate. The Senior Term Loan Facility bears interest generally equal to LIBOR plus an applicable margin. The Senior ABL Credit Facility bears interest generally equal to SOFR plus an applicable margin. As a result, we are exposed to fluctuations in interest rates to the extent of our net borrowings under the Senior Term Loan Facility and the Senior ABL Credit Facility, which were $1,627 million at July 31, 2022. As of July 31, 2022, excluding the impact of any interest rate swap, each one percentage point change in interest rates would result in an approximately $15 million change in the annual interest expense on the Senior Term Loan Facility. As of July 31, 2022, assuming availability was fully utilized and excluding the impact of any interest rate swap instruments, each one percentage point change in interest rates would result in an approximately $13 million change in annual interest expense on the Senior ABL Credit Facility. See “Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Key Factors Affecting Our Business—Interest Rates.”
Credit Risk
We are exposed to credit risk on accounts receivable balances. This risk is mitigated due to our large, diverse customer base. In fiscal 2021, our 50 largest customers accounted for approximately 12% of our net sales, with our largest customer accounting for less than 1% of net sales. We maintain provisions for potential credit losses and such losses to date have normally been within our expectations. We evaluate the solvency of our customers on an ongoing basis to determine if additional allowances for doubtful accounts receivable need to be recorded. We have historically not been exposed to a material amount of uncollectible receivable balances.
Price Risk
We are exposed to price fluctuations in our products and our ability to reflect these changes, in a timely manner, in our customer pricing. These price fluctuations may be more volatile in commodity-based products, including PVC, ductile iron, fusible HDPE and steel and copper pipe and tubing products. Our operating performance may be affected by both upward and downward price fluctuations. To the extent we are able to pass price increases on to our customers in a timely manner, increases in our product costs correspondingly increase the price levels of the products we sell. Conversely, decreases in our product costs can correspondingly lower the price levels of the products we sell in order to remain competitive in our markets. Changes to product costs may lead to a risk of a reduction to our margins, which we seek to minimize through strategic inventory investments ahead of announced price increases, the execution of our gross margin initiatives and accretive acquisitions. We are also exposed to fluctuations in petroleum costs as we deliver a substantial portion of the products we sell by truck and fluctuations in prices for imported products due to logistical challenges. We seek to minimize the effects of inflation and changing prices through economies of purchasing and inventory management resulting in cost reductions and productivity improvements as well as price increases to maintain reasonable gross margins. Such price fluctuations have from time to time produced volatility in our financial performance and could do so in the future.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) concluded that, as of July 31, 2022, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost–effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, party to various claims and legal proceedings arising in the ordinary course of our business. We do not believe that any existing claims or proceedings, individually or in the aggregate, will have a material adverse effect on our business, consolidated financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed in Part I, Item1A "Risk Factors” in our Fiscal 2021 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
a. Sales of Unregistered Securities
None.
b. Use of Proceeds from Public Offering of Common Stock
None.
c. Issuer Purchases of Equity Securities
The following is a summary of our repurchases of shares of Class A common stock during the three months ended July 31, 2022:
Period | Total Number of Shares (or Units) Purchased(1) | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) or Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
May 2 - May 31 | 2,050 | $ | 22.74 | N/A | N/A | |||||||||||||||||||||
June 1 - June 30 | 643 | 21.82 | N/A | N/A | ||||||||||||||||||||||
July 1 - July 31 | 3,673 | 22.23 | N/A | N/A | ||||||||||||||||||||||
6,366 | $ | 22.35 | — | — |
(1) The repurchases of CNM common stock during the quarter were pursuant to shares of Class A common stock withheld to cover employee tax withholding obligations upon issuance of unit appreciation rights and vesting of restricted stock units pursuant to terms of the Company’s Equity Incentive Plan.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit Number | Description | |||||||
10.1† | ||||||||
10.2† | ||||||||
10.3 | ||||||||
31.1 | ||||||||
31.2 | ||||||||
32.1 | ||||||||
32.2 | ||||||||
101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.* | |||||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document.* | |||||||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.* | |||||||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document.* | |||||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document.* | |||||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document.* | |||||||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document).* |
* Filed herewith.
** Furnished herewith.
† Identifies each management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: September 13, 2022 | CORE & MAIN, INC. | |||||||
By: | /s/ Stephen O. LeClair | |||||||
Name: Stephen O. LeClair | ||||||||
Title: Chief Executive Officer | ||||||||
(Principal Executive Officer) | ||||||||
By: | /s/ Mark R. Witkowski | |||||||
Name: Mark R. Witkowski | ||||||||
Title: Chief Financial Officer | ||||||||
(Principal Financial Officer) |
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