Business context and reporting period
Core & Main distributes water, wastewater, storm drainage and fire-protection products and services through approximately 300 branches in 48 states. The supplied filing is a Form 10-Q for the quarter ended October 31, 2021—not 2018 Q3 as stated in the request metadata. The three- and nine-month comparisons are against periods ended November 1, 2020. The company completed its IPO and related reorganization in July 2021, so some year-to-date comparisons and per-share figures span different reporting structures.
Financial performance and position
| Metric | Three months ended Oct. 31, 2021 | Nine months ended Oct. 31, 2021 |
|---|---|---|
| Net sales | $1,404.8 million; up 38.7% | $3,757.5 million; up 33.7% |
| Gross profit / margin | $370.6 million / 26.4%, versus 24.1% | $952.6 million / 25.4%, versus 24.0% |
| Operating income | $147.5 million, versus $64.7 million | $316.4 million, versus $152.9 million |
| Net income | $109.3 million, versus $21.6 million | $146.2 million, versus $36.5 million |
| Net income attributable to Core & Main | $64.4 million | $118.3 million; EPS is reported only for the post-reorganization period |
| Adjusted EBITDA | $189.1 million, versus $103.1 million | $453.4 million, versus $270.8 million |
Management attributed sales growth to inflation (approximately two-thirds of quarterly growth and half of year-to-date growth), market-volume gains, share gains amid product shortages, and acquisitions. Gross margin improvement reflected inventory bought ahead of price increases, favorable pricing, margin initiatives and acquisitions. Adjusted EBITDA is a non-GAAP measure.
For the nine months, operating cash flow was negative $66.2 million, versus positive $154.2 million, primarily because of increased receivables and inventory investment amid growth and strategic purchasing. Investing cash outflow was $188.9 million, including acquisitions; financing cash outflow was $120.9 million after IPO proceeds, debt refinancing and repayments. Cash declined $376.0 million to $4.9 million.
At October 31, 2021, debt carrying value was $1,474.0 million, comprising $15.0 million current and $1,459.0 million long-term; the senior term loan had $1,481.3 million principal outstanding. No ABL borrowings were outstanding. The $850 million ABL facility had approximately $841 million available after letters of credit, subject to borrowing-base availability. The company reported $2,622.1 million in total liabilities and $1,758.7 million in equity, including non-controlling interests.
Material changes versus the prior comparable period
- Quarterly sales rose 38.7%; gross margin increased 2.3 percentage points, and operating income more than doubled.
- Quarterly interest expense fell to $13.0 million from $35.6 million after refinancing. Year-to-date interest expense declined to $85.3 million from $103.8 million, but the company recorded a $50.7 million debt-modification and extinguishment loss.
- Year-to-date SG&A increased 27.5%, reflecting personnel and distribution costs, acquisitions, higher equity compensation and IPO expenses.
- The IPO and reorganization changed the ownership and tax structure. Continuing limited partners held 34.09% of partnership interests at quarter-end; their share of earnings is reflected as non-controlling interests.
Outlook, commentary and risks
No formal financial guidance is provided in the supplied filing. Management said current liquidity sources should cover working-capital and capital-expenditure needs for at least 12 months, while noting assumptions may prove incorrect. It expects lower cash interest payments in fiscal 2022 following the refinancing. Management viewed the Infrastructure Investment and Jobs Act’s $55 billion for water infrastructure as a potentially favorable source of project funding.
Management expected near-term supply-chain constraints and inflation to continue. Risks include labor, logistics, raw-material and semiconductor shortages; inability to pass higher costs through to customers; and possible deflation or slower sales growth if supply improves. The business is exposed to construction cycles, municipal funding, seasonality and weather. Variable-rate debt creates interest-rate risk; a swap fixed the rate on $1.0 billion of term debt at an effective 3.24% at quarter-end. The company also disclosed $1,292.0 million in generally cancelable purchase obligations, $10.2 million of deferred payroll taxes due across fiscal 2021 and 2022, and an $91.8 million payable under the Former Limited Partners Tax Receivable Agreement. Future tax-receivable payments are contingent on realizing tax benefits; the agreements generally pass 85% of realized benefits to former or continuing partners. Management said ordinary-course legal matters were not expected to have a material adverse effect. It warned that, if upheld, the OSHA COVID-19 rule could increase costs and disrupt operations.
Important facts for investors to verify
- Confirm the correct reporting period: the filing covers Q3 2021, not Q3 2018.
- Assess how much reported growth and margin expansion came from price inflation versus volume, acquisitions and share gains, and whether those effects persist.
- Track working-capital conversion, particularly receivables and inventory, given negative year-to-date operating cash flow and low reported cash.
- Review debt terms, variable-rate exposure, covenant thresholds and the adequacy of ABL availability; debt principal and balance-sheet carrying values differ.
- Evaluate the ongoing cash and ownership effects of the IPO structure, non-controlling interests, tax receivable agreements and equity compensation.