Business context and reporting period
Core & Main is a nationwide distributor of water, wastewater, storm drainage and fire-protection products and related services, operating approximately 320 branches across 48 states. This Form 10-Q covers the fiscal third quarter ended October 29, 2023 (13 weeks) and the first nine months of fiscal 2023 (39 weeks), compared with the corresponding 2022 periods. The filing period is 2023, notwithstanding the “2020 Q3” request metadata.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $1,827m | $1,818m | $5,262m | $5,277m |
| Gross profit | $494m | $500m | $1,434m | $1,422m |
| Gross margin | 27.0% | 27.5% | 27.3% | 26.9% |
| Operating income | $217m | $234m | $624m | $651m |
| Net income | $158m | $178m | $455m | $497m |
| Net income attributable to Core & Main | $112m | $111m | $308m | $312m |
| Diluted EPS | $0.65 | $0.65 | $1.80 | $1.82 |
| Adjusted EBITDA* | $260m | $275m | $750m | $771m |
For Q3, sales grew 0.5% year over year, while gross profit fell 1.2%, operating income fell 7.3% and net income fell 11.2%. For the nine-month period, sales declined 0.3%; gross profit increased 0.8%, but operating income declined 4.1% and net income declined 8.5%. SG&A rose 3.9% in Q3 and 5.1% year to date, reflecting personnel, inflation and acquisition-related costs. Interest expense rose to $20m for Q3 and $59m year to date, primarily due to higher rates on variable-rate debt.
Product trends were mixed: Q3 meter sales rose 22.9% and storm drainage 2.8%, while pipes, valves and fittings fell 1.3% and fire protection fell 5.6%. For the nine months, meter sales rose 14.8% and storm drainage 3.4%; pipes, valves and fittings declined 1.6% and fire protection declined 5.7%.
Operating cash flow was $775m for the first nine months, versus $94m in 2022, mainly reflecting inventory reduction as product lead times improved. Investing cash outflow was $182m, including $151m for acquisitions and $34m for capital expenditures. Financing cash outflow was $669m, including $618m for share/partnership-interest repurchases. Cash declined $76m to $101m.
At October 29, 2023, total assets were $5,067m; current assets were $2,171m and current liabilities $921m. Debt principal was $1,466m, including $1,451m under the term loan and $15m current maturities. No ABL borrowings were outstanding; reported borrowing capacity was approximately $1,234m after letters of credit, subject to borrowing-base availability. The term loan’s stated weighted-average rate, before the swap, was 7.97%; a $900m interest-rate swap effectively fixed that portion at 3.293%. The company reported covenant compliance.
Material changes, outlook and risks
- Gross margin improved year to date due to margin initiatives, but Q3 margin was lower than the prior year, partly because prior-year results benefited more from strategic inventory purchases amid inflation.
- Five acquisitions closed in the first nine months, with aggregate transaction value of $161m. Management said acquired-business financial performance could not practicably be isolated.
- Three 2023 repurchase transactions used $618m in total. A further $152m repurchase closed after quarter-end. Secondary-offering proceeds went to selling stockholders, not the company.
- Management expects recent year-over-year growth rates to moderate as prior-year inflation effects are lapped. It cited expected federal water-infrastructure investment, including the Infrastructure Investment and Jobs Act, as a potential market tailwind. No specific numerical earnings or revenue guidance is provided.
- Management stated that cash, operating cash flow and available ABL capacity should fund working capital, capital expenditures and other commitments for at least the next 12 months, while noting estimates depend on assumptions. It may use equity or additional debt to fund larger acquisitions.
- Key risks include cyclical construction demand and municipal funding, supply and product-price volatility, competition and potential volume declines, freight and labor costs, customer credit, acquisition integration, and floating-rate debt. A 1 percentage-point rate change would affect annual term-loan interest expense by approximately $15m before swap effects.
- Tax Receivable Agreement liabilities totaled $310m; approximately $11m of payments were expected within 12 months. Supplier purchase obligations were $978m, generally cancelable but not expected to be canceled. The company reported no material legal proceedings, but disclosed ongoing asbestos-related litigation and ordinary-course claims.
- CD&R retained significant influence; the filing estimated its affiliates would hold approximately 33.3% of combined voting power as of November 15, 2023. The company ceased to qualify as a NYSE “controlled company” on September 19, 2023 and is in a governance transition period.
*Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results and cash flows.
Investor verification points
- Assess whether the strong operating cash flow is sustainable: the year-over-year improvement was substantially driven by inventory reduction and working-capital movements.
- Track end-market volumes, product pricing and gross-margin trends, particularly the continued softness in pipes, valves and fittings and fire protection.
- Review variable-rate debt exposure, swap coverage and future interest costs as the swap notional declines; confirm borrowing-base availability on the ABL.
- Monitor acquisition integration, returns on the $161m of 2023 acquisitions and capital allocation after the $618m repurchases.
- Evaluate the timing and amount of Tax Receivable Agreement payments, and the effect of further limited-partner exchanges on taxes, ownership and EPS.