Business context and reporting period
Core & Main, Inc. distributes water, wastewater, storm drainage and fire protection products and related services through approximately 300 branches in 48 states. This summary reflects the 10-Q for the quarter ended October 30, 2022—not 2019 Q3 as stated in the request metadata. The quarter comprised 13 weeks; the year-to-date period comprised 39 weeks.
Financial results and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Quarter ended Oct. 30, 2022 | Prior-year quarter | Nine months ended Oct. 30, 2022 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $1,818 | $1,405 | $5,277 | $3,758 |
| Gross profit / margin | $500 / 27.5% | $371 / 26.4% | $1,422 / 26.9% | $953 / 25.4% |
| Operating income | $234 | $147 | $651 | $316 |
| Net income | $178 | $109 | $497 | $146 |
| Net income attributable to Core & Main | $111 | $64 | $312 | $118 |
| Basic / diluted EPS | $0.65 / $0.65 | $0.41 / $0.39 | $1.85 / $1.82 | $0.27 / $0.26* |
| Adjusted EBITDA (non-GAAP) | $275 | $189 | $771 | $453 |
Quarterly sales rose 29.4%; gross profit rose 34.8%, and operating income rose 59.2%. Year-to-date sales rose 40.4%; gross profit rose 49.2%, and operating income more than doubled. Gross-margin expansion reflected strategic inventory purchases ahead of price increases, favorable pricing/product mix and margin initiatives. SG&A grew, but declined as a share of sales: 12.7% versus 13.4% for the quarter and 12.6% versus 14.2% year to date.
Operating cash flow was $94 million for the nine months, versus cash used of $66 million a year earlier. Higher operating income and lower cash interest helped; increased working-capital investment, strategic inventory purchases and higher tax payments were offsets. Investing cash outflow was $133 million, including acquisitions and $20 million of capital expenditures. Financing provided $38 million. Cash was approximately zero at October 30.
Total debt was $1.571 billion, comprising $1.466 billion of term-loan principal and $90 million drawn on the ABL facility, less $19 million of unamortized discount and issuance costs on the term loan. The term loan matures in July 2028; the ABL facility matures in July 2026. The company reported approximately $1.151 billion of ABL borrowing capacity available, subject to borrowing-base availability. A $1 billion interest-rate swap fixed the effective rate on that portion of term debt at 3.24%; the reported term-loan weighted-average rate excluding the swap was 6.53%. The company stated existing liquidity sources should meet working-capital and capital-expenditure needs for at least 12 months.
Drivers, outlook, risks and notable items
- Management attributed about three-fourths of quarterly and year-to-date sales growth to price inflation; volume growth and acquisitions also contributed. Meter-product growth was constrained year to date by semiconductor shortages, though quarterly volumes improved as supply availability recovered.
- Management expects recent year-over-year growth rates to moderate as the company compares against prior-year inflation. It cautioned that improved product availability, customer orders pulled forward earlier in the year, seasonality and possible commodity-price declines could pressure fourth-quarter sales. No quantified earnings or revenue guidance is provided in the supplied filing text.
- Risks include commodity-price deflation or volatility, supply-chain and product-availability constraints, freight and fuel costs, cyclical construction activity, municipal funding, higher interest rates and seasonal/weather effects. The company said infrastructure investment under the Infrastructure Investment and Jobs Act may support future waterworks demand.
- Fiscal 2022 acquisitions included Trumbull (transaction value up to $45 million), Earthsavers (up to $25 million) and other acquisitions valued at $40 million in total, generally funded with cash on hand. The company cautioned anticipated acquisition benefits may not be realized as expected.
- Tax Receivable Agreement liabilities totaled $179 million at quarter-end; payments to former limited partners are expected to begin in fiscal 2023 and to continuing limited partners in fiscal 2024, subject to realization of tax benefits. Supplier purchase obligations were $1.485 billion, generally expected to be paid during fiscal 2022 and 2023. The company also expected repayment by December 31, 2022 of $5 million of deferred employer Social Security taxes.
- The 2021 nine-month EPS comparator is not directly comparable: it reflects only the period after the July 2021 reorganization and IPO, whereas reported year-to-date attributable net income includes pre- and post-reorganization periods. The 2021 period also included a $51 million debt-modification/extinguishment loss.
- The company reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and no legal proceedings expected to have a material adverse effect. Management concluded disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for the quarter ended October 30, 2022, not 2019 Q3.
- Assess how much recent sales and margin growth depended on inflation and strategic inventory timing, and the potential effect of price deflation or lower order volumes.
- Review the company’s working-capital needs, cash generation and ABL borrowing-base availability alongside its variable-rate debt and interest-rate exposure.
- Monitor acquisition integration and returns, future Tax Receivable Agreement payments, and the timing and cash cost of supplier commitments.
- Use caution comparing year-to-date EPS with 2021 because the reorganization makes the periods non-comparable.
*2021 year-to-date EPS shown for the post-reorganization period only.