Core & Main, Inc. — Form 10-Q Summary
Reporting-period note: The request metadata says “2021 Q1,” but the supplied filing is for the three months ended April 28, 2024 (fiscal 2024 first quarter), compared with the three months ended April 30, 2023. The filing was signed June 4, 2024.
Business context and reporting period
Core & Main distributes water, wastewater, storm drainage and fire protection products and related services. It serves municipal, non-residential and residential markets through approximately 350 branches in 49 states. The unaudited quarter covered 13 weeks.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $1,741 million | $1,574 million | +10.6% |
| Gross profit / margin | $468 million / 26.9% | $439 million / 27.9% | Profit +6.6%; margin down 1.0 percentage point |
| Operating income | $168 million | $181 million | −7.2% |
| Interest expense | $34 million | $17 million | +$17 million |
| Net income | $101 million | $133 million | −24.1% |
| Net income attributable to Core & Main | $95 million | $86 million | +10.5% |
| Basic and diluted EPS | $0.49 | $0.50 | −2.0% |
| Adjusted EBITDA | $217 million | $220 million | −1.4% |
| Operating cash flow | $78 million | $120 million | −$42 million |
Sales growth was primarily acquisition-driven, with slight improvement in end markets. Meter products rose 31.0%, storm drainage 17.7%, and pipes, valves and fittings 8.8%; fire protection sales declined 1.2%. Management attributed the lower gross margin to larger prior-year benefits from strategic inventory investments during inflation, partly offset by margin initiatives and accretive acquisitions. Higher personnel, acquisition-related and inflationary costs increased SG&A to $257 million from $223 million.
Cash used in investing was $574 million, principally reflecting $564 million of acquisition outflows; financing provided $525 million. Cash increased from $1 million to $30 million. Receivables were $1.200 billion and inventory $945 million at quarter-end. Capital expenditures were $7 million.
At April 28, 2024, principal debt was $2.449 billion: $1.459 billion on the 2028 term loan, $749 million on the 2031 term loan and $241 million under the asset-based revolving facility. The balance-sheet carrying amount, net of unamortized discounts and issuance costs, was $2.424 billion. The ABL facility has capacity of up to $1.250 billion subject to borrowing-base availability; approximately $993 million remained available after letters of credit. Cash was $30 million. The company reported covenant compliance.
Material changes versus the prior comparable period
- Three acquisitions closed in the quarter for aggregate transaction value of $585 million: Dana Kepner, Eastern Supply and ACF West. Acquisition cash outflow was $564 million, net of cash acquired. Purchase-price allocations were preliminary.
- A new $750 million term loan due 2031 was issued in February 2024; proceeds supported, among other things, repayment of ABL borrowings and acquisition funding. The ABL maturity was extended to February 2029.
- Interest expense nearly doubled, reflecting new and increased borrowings and higher rates. The effective tax rate rose to 24.6% from 18.9%, primarily as a smaller non-controlling ownership share increased income allocated to taxable entities.
- Net income declined, while income attributable to Core & Main increased as exchanges of partnership interests reduced the share allocated to non-controlling interests. Diluted weighted-average shares fell to 202.6 million from 243.7 million.
- Operating cash flow declined amid higher tax and interest payments and working-capital investment. Receivables and inventory increased from the fiscal year-end balances.
Outlook, commentary, risks and unusual items
- No specific full-year revenue, earnings or margin guidance is provided in the supplied filing text. Management believes cash, operating cash flows and available ABL capacity should cover working capital, capital expenditures and other commitments for at least the next 12 months, subject to assumptions that may prove incorrect.
- Management sees potential support from municipal infrastructure funding, including the Infrastructure Investment and Jobs Act, and expanding municipal budgets. Residential and non-residential activity remains sensitive to interest rates, credit and economic conditions; municipal demand depends in part on project funding.
- Management cites seasonality: sales typically weaken in the first and fourth quarters, while first- and second-quarter operating cash flow is generally lower due to working capital and incentive payments. Weather, product-cost volatility, supply availability, freight and the ability to pass costs through to customers may affect results.
- Variable-rate debt exposes the company to higher interest expense. Interest-rate swaps hedge portions of the term debt; management reported $2.449 billion of variable-rate debt before swap effects. After quarter-end, on May 21, 2024, the 2028 term loan’s Term SOFR margin was reduced from 2.60% to 2.00%.
- Tax Receivable Agreement liabilities were $697 million on the balance sheet, with $19 million of payments expected within 12 months. Payments generally represent 85% of realized or deemed tax benefits.
- The filing reports no material legal proceedings, but notes ordinary-course litigation, including asbestos-related matters and potential product-liability claims. The company reported no material changes to its previously disclosed risk factors and no off-balance-sheet arrangements.
- Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP results or cash flow; it excludes items including interest, taxes and certain acquisition-related expenses.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied document is Q1 fiscal 2024, not 2021 Q1.
- Review acquisition integration, final purchase-price allocations and the contribution of acquired businesses to reported sales and margins.
- Track gross-margin and SG&A trends, operating cash flow, receivables and inventory as acquisition-related growth continues.
- Assess debt service and refinancing exposure, variable-rate sensitivity, swap coverage, ABL availability and covenant headroom.
- Monitor tax payments and Tax Receivable Agreement obligations, as well as infrastructure funding, construction demand and product-cost pass-through.