Core & Main, Inc. — Form 10-Q Summary
Period: The filing covers the 13 weeks ended April 30, 2023, compared with the 13 weeks ended May 1, 2022. The request metadata says “2020 Q1,” which conflicts with the filing; this is the 2023 first-quarter report.
Business context
Core & Main distributes water, wastewater, storm drainage and fire protection products and related services through approximately 320 branches in 48 states, serving municipal, non-residential and residential markets.
Financial and operating results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $1.574 billion | $1.598 billion |
| Gross profit / margin | $439 million / 27.9% | $421 million / 26.3% |
| SG&A | $223 million | $206 million |
| Operating income | $181 million | $180 million |
| Interest expense | $17 million | $13 million |
| Net income | $133 million | $137 million |
| Net income attributable to Core & Main | $86 million | $86 million |
| Basic / diluted EPS | $0.50 / $0.50 | $0.51 / $0.50 |
| Adjusted EBITDA | $220 million | $219 million |
| Operating cash flow | $120 million | $(37) million |
- Sales declined 1.5%, primarily due to weaker residential lot development and more typical seasonality, partly offset by higher selling prices and acquisitions. Meter products grew 8.4%; pipes, valves and fittings declined 3.2%.
- Gross margin increased 1.6 percentage points. Management attributed the improvement to strategic inventory investments ahead of price increases, margin initiatives and accretive acquisitions.
- SG&A rose 8.3%, reflecting higher labor and facility costs and acquisition-related headcount. Net income fell 2.9%, as higher SG&A and interest expense offset stronger gross profit.
- Operating cash flow improved by $157 million year over year, principally because inventory investment was lower. Investing cash outflow was $74 million, including $64 million for acquisitions and $10 million of capital expenditures.
Debt, liquidity and capital allocation
- At April 30, 2023, cash was $1 million. Debt principal totaled $1.604 billion ($1.586 billion net of unamortized discounts and issuance costs), including $130 million drawn on the ABL facility. The $1.25 billion ABL facility had approximately $1.108 billion of additional borrowing availability, subject to borrowing-base limits.
- The Senior Term Loan’s weighted-average rate, before the swap, was 7.63%; ABL borrowings averaged 6.30%. A swap effectively fixed the rate on $1.0 billion of term-loan borrowings at 3.293% including the applicable margin. The swap notional declines beginning July 2023.
- The company repurchased shares and redeemed partnership interests for $332 million in April. A separate secondary offering generated no proceeds for the company. The quarter-end cash decline to $1 million reflected this repurchase and other financing activity.
- The company reported compliance with debt covenants and said available operating cash flow and ABL capacity should meet requirements for at least the next 12 months. Tax Receivable Agreement payments are expected to increase when payments to Continuing Limited Partners commence; $12 million is expected within the next 12 months.
Outlook, risks and unusual items
- No quantified full-year earnings or sales guidance is provided in the supplied filing text. Management expects recent year-over-year growth rates to moderate as prior-year inflation effects are lapped, and cautions that greater product availability could lead to deflation or substantially lower sales growth.
- Management views federal water-infrastructure investment, including funding under the Infrastructure Investment and Jobs Act, and expanding municipal budgets as potential long-term demand supports. This is an expectation, not a quantified forecast.
- Key risks include construction-market cyclicality, municipal funding and project delays, product-cost and selling-price volatility, constrained supply or freight costs, interest-rate exposure, acquisition integration, customer credit, and the ability to service debt. The company had $1.604 billion of variable-rate debt, partly hedged by the swap.
- The UPSCO acquisition closed in April for a transaction value of $40 million; other first-quarter acquisitions had a combined transaction value of $32 million. The company also disclosed ongoing asbestos-related litigation, but no material legal proceedings; it reported no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the reporting period: the filing is for Q1 2023, not the “2020 Q1” stated in the request metadata.
- Track whether sales declines and management’s moderation/deflation concerns continue, and whether improved gross margin is sustained as pricing and product costs change.
- Monitor cash generation, very low quarter-end cash, ABL borrowing availability, variable-rate interest costs and covenant headroom.
- Assess acquisition integration and returns, future share repurchases, and the timing and amount of Tax Receivable Agreement payments.
- Review subsequent disclosures for developments in asbestos-related claims and other litigation.