Business context and reporting period
Core & Main, Inc. distributes water, wastewater, storm drainage and fire-protection products and related services through approximately 300 branches across 48 states. This 10-Q covers the 13 weeks ended May 1, 2022, compared with the 13 weeks ended May 2, 2021. The request labels the period “2019 Q1,” but the filing is for 2022 Q1.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $1,598 million | $1,055 million |
| Gross profit / margin | $421 million / 26.3% | $257 million / 24.3% |
| Operating income | $180 million | $69 million |
| Net income | $137 million | $27 million |
| Net income attributable to Core & Main | $86 million | Not presented comparably; pre-IPO EPS deemed not meaningful |
| Adjusted EBITDA | $219 million | $109 million |
| Operating cash flow | $(37) million | $(44) million |
Basic and diluted EPS were $0.51 and $0.50, respectively. SG&A was $206 million, or 12.9% of sales, versus $154 million, or 14.6%, a year earlier. Interest expense declined to $13 million from $36 million; the effective tax rate was 18.0% versus 18.2%.
Cash was $1 million at May 1, 2022. Total debt was $1,546 million, including $57 million drawn on the asset-based revolving facility; approximately $784 million of additional ABL borrowing capacity remained, subject to borrowing-base availability. The company reported $2,202 million of current assets and $1,066 million of current liabilities. Operating cash use reflected working-capital investment, including increases in receivables and inventory, partly offset by higher earnings and lower interest payments.
Material changes versus prior comparable period
- Sales rose 51.5%; management attributed approximately three-fourths of the increase to price inflation, with the balance principally reflecting volume growth and acquisitions.
- Gross margin expanded 2.0 percentage points, which management attributed to inventory bought ahead of announced price increases, favorable pricing, margin initiatives and acquisitions.
- Net income increased by $110 million, supported by stronger operating income and lower interest expense.
- Net cash used in operations improved by $7 million, but remained negative. The company borrowed $57 million under its ABL facility, versus no such borrowing in the prior-year quarter.
- Net sales grew across product lines, but meter products increased only 5.9%, partly due to semiconductor-chip shortages.
Outlook, commentary and risks
Management said it expects year-over-year growth rates to moderate during the remainder of fiscal 2022, particularly in the second half, as prior-year inflation effects are lapped. It warned that improved product availability or lower commodity prices could lead to deflation or substantially slower sales growth. The filing provides no specific full-year revenue or earnings guidance.
Management cited the Infrastructure Investment and Jobs Act’s $55 billion for water infrastructure as a potential source of favorable funding and project demand. It also expects supply-chain pressures, inflation and product surcharges to persist in the near term. Risks include supplier delays, labor and freight availability, chip shortages, commodity-price volatility, customer order pull-forward, seasonality and weather, variable interest rates, and the ability to pass cost increases through to customers. A $1,000 million interest-rate swap effectively fixed the rate on that portion of term-loan borrowings at 3.24% as of May 1; the remaining debt exposure is variable-rate.
The company reported $1,930 million of purchase obligations, primarily inventory, generally expected to be paid during fiscal 2022. It 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 realized tax benefits; payments to former limited partners were expected to begin in fiscal 2023. Management believed available liquidity would meet working-capital and capital-expenditure needs for at least 12 months, while noting estimates depend on assumptions. No material change to previously disclosed risk factors, material legal proceeding, or off-balance-sheet arrangement was reported.
Important facts for investors to verify
- How much sales and margin growth came from price inflation versus underlying volume, and whether first-quarter orders were pulled forward.
- Whether negative operating cash flow and elevated receivables and inventory reverse as seasonal collections improve.
- How supply constraints, commodity-price declines, freight costs and customer pricing affect margins and second-half growth.
- Available ABL capacity under actual borrowing-base conditions, floating-rate exposure, debt covenants and future debt service.
- The timing and amount of tax-receivable payments and the integration and returns from recent acquisitions.
- Adjusted EBITDA is a non-GAAP measure; assess it alongside GAAP earnings and cash flow, since it excludes items including interest, taxes and certain expenses.