Business context and reporting period
Core & Main distributes water, wastewater, storm drainage and fire-protection products and related services through approximately 300 branches in 48 states. The filing is a Form 10-Q for the quarter ended July 31, 2022, covering the three- and six-month periods compared with periods ended August 1, 2021. The request metadata says “2019 Q2,” which conflicts with the filing; the summary below reflects the 2022 filing.
Financial performance
| Metric | Three months ended July 31, 2022 | Six months ended July 31, 2022 |
|---|---|---|
| Net sales | $1.861 billion, up 43.4% | $3.459 billion, up 47.0% |
| Gross profit / margin | $501 million / 26.9% (prior: 25.0%) | $922 million / 26.7% (prior: 24.7%) |
| Operating income | $237 million (prior: $100 million) | $417 million (prior: $169 million) |
| Net income | $182 million (prior: $10 million) | $319 million (prior: $37 million) |
| Net income attributable to Core & Main | $115 million (prior: $27 million) | $201 million (prior: $54 million) |
| Adjusted EBITDA | $277 million (prior: $155 million) | $496 million (prior: $264 million) |
For the six months, operating cash flow was negative $60 million, investing cash flow negative $56 million, and financing cash flow positive $115 million; cash ended at approximately zero. Working-capital investment, including higher receivables and inventory, weighed on operating cash flow. Capital expenditures were $15 million and acquisition outlays were $42 million.
At July 31, 2022, total debt principal was $1.627 billion: $1.485 billion under the term loan and $142 million under the ABL facility. Cash was approximately zero. The amended ABL facility provides commitments of up to $1.25 billion, subject to borrowing-base availability; approximately $1.099 billion remained available after borrowings and letters of credit. The term loan’s weighted-average rate was 4.64% before the swap; the ABL rate was 3.61%. A $1.0 billion interest-rate swap effectively fixed that portion of term-loan borrowings at 3.24% at period end.
Material changes versus prior comparable period
- Sales growth was driven mainly by price inflation, which represented approximately three-fourths of the increase, alongside volume growth, market-share gains and acquisitions. All product categories grew; meter products grew more slowly amid semiconductor shortages.
- Gross margin increased, attributed to strategic inventory purchases ahead of price increases, favorable pricing, margin initiatives and acquisitions. SG&A rose in dollars but declined as a share of sales, reflecting fixed-cost leverage and lower equity-compensation expense.
- Interest expense declined following the prior-year refinancing. The prior comparable period included a $50 million debt-modification and extinguishment loss, making year-over-year earnings comparisons less representative.
- Comparability is also affected by the 2021 IPO and reorganization. Prior-period EPS reflects only the post-reorganization period; reported prior-period net income attributable to the company should not be treated as a directly comparable full-quarter EPS measure.
- Debt increased from $1.493 billion of principal at January 30, 2022, while the ABL facility was expanded by $400 million to $1.25 billion. The company completed the Earthsavers acquisition and other smaller acquisitions during the half-year.
Outlook, commentary and risks
- Management said it expects recent year-over-year growth rates to moderate as the company laps prior-year inflation. It warned that easing supply constraints or declining commodity prices could cause greater deflation or substantially lower sales growth, and that customer orders may have been accelerated by shortages and inflation.
- The company expects its cash, operating cash generation and available ABL capacity to meet working-capital and capital-spending needs for at least the next 12 months, while noting that assumptions could prove incorrect. Future acquisitions could require additional equity or debt.
- Key exposures include construction-market cyclicality, municipal funding, commodity and product-price changes, supply-chain and labor disruptions, freight and energy costs, semiconductor shortages, weather, and customers’ ability to pay. Variable-rate debt exposes earnings and cash flows to rising rates.
- Purchase obligations totaled $1.842 billion, primarily for inventory, generally cancelable but not expected to be canceled. The company had deferred $5 million of employer Social Security taxes under the CARES Act, due by December 31, 2022.
- Tax Receivable Agreements require payment of 85% of specified tax benefits realized or deemed realized; recorded related-party payables totaled $148 million. No off-balance-sheet arrangements were reported. Management reported no material changes to risk factors, no material adverse effect expected from existing ordinary-course legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for the quarter ended July 31, 2022, not 2019 Q2.
- Assess how much sales and earnings growth came from inflation and acquisitions versus sustainable volume, and track any subsequent pricing or deflation effects.
- Monitor cash conversion and working-capital investment, especially receivables and inventory, alongside the company’s near-zero cash balance.
- Review floating-rate exposure, swap coverage, ABL availability and debt covenants as interest rates and borrowing needs change.
- Evaluate acquisition integration and returns, the timing and amount of Tax Receivable Agreement payments, and the fulfillment and cash demands of purchase obligations.