Core & Main, Inc 10-Q for FY2024 Q3
Core & Main, Inc. (CNM)
10-Q
2023-12-05
For: 2023-10-29
View Original
Added on
April 07, 2026
About this 10-Q
Core & Main, Inc filed this 10-Q on December 5, 2023, covering the quarter ended October 29, 2023 (FY2024 Q3).
Headline figures
Quarter ended October 29, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.83B
- up 0.5% from $1.82B a year earlier
- Net income
- $112M
- up 0.9% from net income of $111M a year earlier
- Diluted EPS
- $0.65
- unchanged from $0.65 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended October 29, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For transition period from to
Commission File Number 001-40650
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
(314 ) 432-4700
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒
As of December 1, 2023, there were 179,075,072 shares of the registrant’s Class A common stock, par value $0.01 per share, and 37,149,622 shares of the registrant’s Class B common stock, par value $0.01 per share, outstanding.
Table of Contents
| PAGE | |||||
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include, without limitation, all statements other than statements of historical facts contained in this Quarterly Report, including statements relating to our intentions, beliefs, assumptions or current expectations concerning, among other things, our future results of operations and financial position, business strategy and plans and objectives of management for future operations, including, among others, statements regarding expected growth, future capital expenditures, capital allocation and debt service obligations, and the anticipated impact on our business.
Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “shall,” “should,” “would,” “could,” “seeks,” “aims,” “projects,” “is optimistic,” “intends,” “plans,” “estimates,” “anticipates” or the negative versions of these words or other comparable terms.
Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be outside our control. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes, including, without limitation, our actual results of operations, financial condition and liquidity, and the development of the market in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report on Form 10-Q. In addition, even if our results of operations, financial condition, cash flows and the development of the market in which we operate are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors, including, without limitation, the risks and uncertainties discussed under the captions “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 29, 2023 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q, could cause actual results and outcomes to differ materially from those reflected in the forward-looking statements. Furthermore, new risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. Factors that could cause actual results and outcomes to differ from those reflected in forward-looking statements include, without limitation:
•declines, volatility and cyclicality in the United States (“U.S.”) residential and non-residential construction markets;
•slowdowns in municipal infrastructure spending and delays in appropriations of federal funds;
•our ability to competitively bid for municipal contracts;
•price fluctuations in our product costs;
•our ability to manage our inventory effectively, including during periods of supply chain disruptions;
•risks involved with acquisitions and other strategic transactions, including our ability to identify, acquire, close or integrate acquisition targets successfully;
•the fragmented and highly competitive markets in which we compete and consolidation within our industry;
•the development of alternatives to distributors of our products in the supply chain;
•our ability to hire, engage and retain key personnel, including sales representatives, qualified branch, district and regional managers and senior management;
•our ability to identify, develop and maintain relationships with a sufficient number of qualified suppliers and the potential that our exclusive or restrictive supplier distribution rights are terminated;
•the availability and cost of freight;
•the ability of our customers to make payments on credit sales;
•changes in supplier rebates or other terms of our supplier agreements;
•our ability to identify and introduce new products and product lines effectively;
•the spread of, and response to public health crises and the inability to predict the ultimate impact on us;
•costs and potential liabilities or obligations imposed by environmental, health and safety laws and requirements;
•regulatory change and the costs of compliance with regulation;
•changes in stakeholder expectations in respect of environmental, social and governance (“ESG”) and sustainability practices;
3
•exposure to product liability, construction defect and warranty claims and other litigation and legal proceedings;
•potential harm to our reputation;
•difficulties with or interruptions of our fabrication services;
•safety and labor risks associated with the distribution of our products as well as work stoppages and other disruptions due to labor disputes;
•impairment in the carrying value of goodwill, intangible assets or other long-lived assets;
•interruptions in the proper functioning of our and our third-party service providers’ information technology systems, including from cybersecurity threats;
•our ability to continue our customer relationships with short-term contracts;
•risks associated with exporting our products internationally;
•our ability to maintain effective internal controls over financial reporting and remediate any material weaknesses;
•our indebtedness and the potential that we may incur additional indebtedness;
•the limitations and restrictions in the agreements governing our indebtedness, the Second Amended and Restated Agreement of Limited Partnership of Core & Main Holdings, LP, as amended, and the Tax Receivable Agreements (as defined herein);
•increases in interest rates and the impact of transitioning away from LIBOR, generally to Term SOFR (each as defined herein), as a benchmark rate in contracts;
•changes in our credit ratings and outlook;
•our ability to generate the significant amount of cash needed to service our indebtedness;
•our organizational structure, including our payment obligations under the Tax Receivable Agreements, which may be significant;
•our ability to sustain an active, liquid trading market for our Class A common stock;
•the significant influence that CD&R (as defined herein) has over us and potential conflicts between the interests of CD&R and other stockholders; and
•risks related to other factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 29, 2023.
You should read this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended January 29, 2023 completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this Quarterly Report on Form 10-Q are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this Quarterly Report on Form 10-Q, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise.
4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CORE & MAIN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Amounts in millions (except share and per share data), unaudited
| October 29, 2023 | January 29, 2023 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
Receivables, net of allowance for credit losses of $ | ||||||||||||||
| Inventories | ||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Current maturities of long-term debt | $ | $ | ||||||||||||
| Accounts payable | ||||||||||||||
| Accrued compensation and benefits | ||||||||||||||
| Current operating lease liabilities | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt | ||||||||||||||
| Non-current operating lease liabilities | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Payable to related parties pursuant to Tax Receivable Agreements | ||||||||||||||
| Other liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies | ||||||||||||||
Class A common stock, par value $ | ||||||||||||||
Class B common stock, par value $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Retained earnings | ||||||||||||||
| Accumulated other comprehensive income | ||||||||||||||
| Total stockholders’ equity attributable to Core & Main, Inc. | ||||||||||||||
| Non-controlling interests | ||||||||||||||
| Total stockholders’ equity | ||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
CORE & MAIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Amounts in millions (except share and per share data), unaudited
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | |||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Selling, general and administrative | ||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Total operating expenses | ||||||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||
| Income before provision for income taxes | ||||||||||||||||||||||||||
| Provision for income taxes | ||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||
| Less: net income attributable to non-controlling interests | ||||||||||||||||||||||||||
| Net income attributable to Core & Main, Inc. | $ | $ | $ | $ | ||||||||||||||||||||||
| Earnings per share | ||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||||||||||||
| Number of shares used in computing EPS | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
CORE & MAIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Amounts in millions, unaudited
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
Net interest rate swap (loss) gain, net of tax (expense) of $( | ( | ( | |||||||||||||||||||||
| Total comprehensive income | |||||||||||||||||||||||
| Less: comprehensive income attributable to non-controlling interests | |||||||||||||||||||||||
| Total comprehensive income attributable to Core & Main, Inc. | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
CORE & MAIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Amounts in millions (except share and per share data), unaudited
| Class A Common Stock | Class B Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional Paid In Capital | Accumulated Other Comprehensive Income | Retained Earnings | Non-Controlling Interests | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
Balances at January 29, 2023 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest rate swap loss, net of tax | — | — | — | — | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest holders | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase and Retirement of Class A and Class B shares and corresponding Partnership Interest | ( | — | ( | — | ( | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of Partnership Interests and Class B Shares for Class A Shares | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Establishment/adjustment of deferred tax asset associated with Core & Main investment in Core & Main Holdings, LP | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Establishment of Tax Receivable Agreement liabilities | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Activity under equity-based compensation plans, net of tax withholdings | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Balances at April 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest rate swap gain, net of tax | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest holders | — | — | — | — | ( | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase and Retirement of Class A and Class B shares and corresponding Partnership Interest | ( | — | ( | — | ( | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of Partnership Interests and Class B Shares for Class A Shares | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Establishment/adjustment of deferred tax asset associated with Core & Main investment in Core & Main Holdings, LP | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Establishment of Tax Receivable Agreement liabilities | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Activity under equity-based compensation plans, net of tax withholdings | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balances at July 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest rate swap loss, net of tax | — | — | — | — | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest holders | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase and Retirement of Class A and Class B shares and corresponding Partnership Interest | ( | — | ( | — | ( | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of Partnership Interests and Class B Shares for Class A Shares | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Establishment/adjustment of deferred tax asset associated with Core & Main investment in Core & Main Holdings, LP | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Establishment of Tax Receivable Agreement liabilities | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Activity under equity-based compensation plans, net of tax withholdings | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at October 29, 2023 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
8
| Class A Common Stock | Class B Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional Paid In Capital | Accumulated Other Comprehensive Income | Retained Earnings | Non-Controlling Interests | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
Balances at January 30, 2022 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest rate swap gain, net of tax | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest holders | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of Partnership Interests and Class B Shares for Class A Shares | — | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment of deferred tax liability associated with Core & Main investment in Core & Main Holdings, LP | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Activity under equity-based compensation plans, net of tax withholdings | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Forfeiture of Class A Shares and Partnership Interests | ( | — | ( | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Non-controlling interest adjustments for vesting of Core & Main Holdings, LP Partnership Interests held by non-controlling interests | — | — | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Balances at May 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest rate swap loss, net of tax | — | — | — | — | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest holders | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of Partnership Interests and Class B Shares for Class A Shares | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment of deferred tax liability associated with Core & Main investment in Core & Main Holdings, LP | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Impact of Tax Receivable Agreements | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Activity under equity-based compensation plans, net of tax withholdings | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at July 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest rate swap gain, net of tax | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest holders | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of Partnership Interests and Class B Shares for Class A Shares | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment of deferred tax liability associated with Core & Main investment in Core & Main Holdings, LP | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Impact of Tax Receivable Agreements | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Activity under equity-based compensation plans, net of tax withholdings | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Non-controlling interest adjustments for purchase of Partnership Interests and vesting of Core & Main Holdings, LP Partnership Interests held by non-controlling interests | — | — | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at October 30, 2022 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
CORE & MAIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in millions, unaudited
| Nine Months Ended | |||||||||||
| October 29, 2023 | October 30, 2022 | ||||||||||
| Cash Flows From Operating Activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net cash from operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Equity-based compensation expense | |||||||||||
| Other | ( | ||||||||||
| Changes in assets and liabilities: | |||||||||||
| (Increase) decrease in receivables | ( | ( | |||||||||
| (Increase) decrease in inventories | ( | ||||||||||
| (Increase) decrease in other assets | ( | ||||||||||
| Increase (decrease) in accounts payable | |||||||||||
| Increase (decrease) in accrued liabilities | |||||||||||
| Increase (decrease) in other liabilities | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash Flows From Investing Activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Acquisitions of businesses, net of cash acquired | ( | ( | |||||||||
| Proceeds from the sale of property and equipment | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash Flows From Financing Activities: | |||||||||||
| Repurchase and retirement of partnership interests | ( | ||||||||||
| Distributions to non-controlling interest holders | ( | ( | |||||||||
| Payments pursuant to Tax Receivable Agreements | ( | ||||||||||
| Borrowings on asset-based revolving credit facility | |||||||||||
| Repayments on asset-based revolving credit facility | ( | ( | |||||||||
| Repayments of long-term debt | ( | ( | |||||||||
| Debt issuance costs | ( | ||||||||||
| Other | ( | ||||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Decrease in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents at the beginning of the period | |||||||||||
| Cash and cash equivalents at the end of the period | $ | $ | |||||||||
| Cash paid for interest (excluding effects of interest rate swap) | $ | $ | |||||||||
| Cash paid for taxes | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
10
CORE & MAIN, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollars in millions, except as noted, unaudited
1) BASIS OF PRESENTATION & DESCRIPTION OF BUSINESS
Organization
Core & Main, Inc. (“Core & Main”) is a Delaware corporation that was incorporated on April 9, 2021 for the purpose of facilitating an initial public offering and other related transactions, as described below, in order to carry on the business of Core & Main Holdings, LP, a Delaware limited partnership (“Holdings”), and its consolidated subsidiaries. Core & Main is a holding company and its primary material asset is its ownership interest in Holdings, a portion of which is held indirectly through CD&R WW, LLC. Holdings has no operations and no material assets of its own other than its indirect ownership interest in Core & Main LP, a Florida limited partnership, the legal entity that conducts the operations of Core & Main. Core & Main, together with its wholly-owned subsidiaries, including Holdings and its consolidated subsidiaries, are referred to as the “Company”.
The Company is a leader in advancing reliable infrastructure with local service, nationwide. As a leading specialized distributor with a focus on water, wastewater, storm drainage and fire protection products and related services, the Company provides solutions to municipalities, private water companies and professional contractors across municipal, non-residential and residential end markets, nationwide. The Company’s specialty products and services are used in the maintenance, repair, replacement, and construction of water and fire protection infrastructure. The Company reaches customers through a nationwide network of approximately 320 branches across 48 states. The Company’s products include pipes, valves, fittings, storm drainage products, fire protection products, meter products and other products for use in the construction, maintenance and repair of water and wastewater systems as well as fire protection systems. The Company has complemented its core products through additional offerings, including smart meter systems, fusible high-density polyethylene (“fusible HDPE”) piping solutions, specifically engineered treatment plant products, geosynthetics and erosion control products. The Company’s services and capabilities allow for integration with customers and form part of their sourcing and procurement function. All of the Company’s long-lived assets are located within the United States (“U.S.”).
Secondary Offerings and Repurchase Transactions
On April 14, 2023, a secondary public offering of 5,000,000 shares of Class A common stock on behalf of certain selling stockholders affiliated with Clayton, Dubilier & Rice, LLC (the “Selling Stockholders”) was completed at a price to the public of $22.151 per share (the “April 2023 Secondary Offering”). As part of the April 2023 Secondary Offering, 1,874,272 limited partnership interests of Holdings (“Partnership Interests”) were exchanged, together with the retirement of a corresponding number of shares of Class B common stock, for an equal number of shares of Class A common stock, which were a portion of the shares sold by the Selling Stockholders. These shares were sold along with an existing 3,125,728 shares of Class A common stock held by the Selling Stockholders.
Concurrently with the completion of the April 2023 Secondary Offering, (i) the Company repurchased from the Selling Stockholders an aggregate of 9,377,183 shares of our Class A common stock, with Holdings redeeming from the Company a corresponding number of Partnership Interests, and (ii) Holdings redeemed from one of the Selling Stockholders 5,622,817 Partnership Interests, with the Company repurchasing a corresponding number of shares of our Class B common stock from such Selling Stockholder for no additional consideration, with each repurchase of Class A common stock and redemption of Partnership Interests at the same price per share of $22.151 paid by the underwriter to the Selling Stockholders in the April 2023 Secondary Offering for total consideration paid of $332 million (collectively, the "April 2023 Repurchase Transaction").
On June 12, 2023, a secondary public offering of 14,000,000 shares of Class A common stock on behalf of the Selling Stockholders was completed at a price to the public of $28.215 per share (the “June 2023 Secondary Offering”). As part of the June 2023 Secondary Offering, 5,247,962 Partnership Interests were exchanged, together with the retirement of a corresponding number of shares of Class B common stock, for an equal number of shares of Class A common stock, which were a portion of the shares sold by the Selling Stockholders. These shares were sold along with an existing 8,752,038 shares of Class A common stock held by the Selling Stockholders.
Concurrently with the completion of the June 2023 Secondary Offering, (i) the Company repurchased from the Selling Stockholders an aggregate of 3,125,728 shares of our Class A common stock, with Holdings redeeming from the Company a corresponding number of Partnership Interests, and (ii) Holdings redeemed from one of the Selling Stockholders 1,874,272 Partnership Interests, with the Company repurchasing a corresponding number of shares of our Class B common stock from such Selling Stockholder for no additional consideration, with each repurchase of Class A common stock and redemption of Partnership Interests at the same price per share of $28.215 paid by the underwriter to the Selling Stockholders in the June 2023 Secondary Offering for total consideration paid of $141 million (collectively, the "June 2023 Repurchase Transaction").
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On September 19, 2023, a secondary public offering of 18,000,000 shares of Class A common stock on behalf of the Selling Stockholders was completed at a price to the public of $29.015 per share (the “September 2023 Secondary Offering” and, together with the April 2023 Secondary Offering and the June 2023 Secondary Offering, the “Secondary Offerings”). As part of the September 2023 Secondary Offering, 6,747,380 Partnership Interests were exchanged, together with the retirement of a corresponding number of shares of Class B common stock, for an equal number of shares of Class A common stock, which were a portion of the shares sold by the Selling Stockholders. These shares were sold along with an existing 11,252,620 shares of Class A common stock held by the Selling Stockholders.
Concurrently with the completion of the September 2023 Secondary Offering, (i) the Company repurchased from the Selling Stockholders an aggregate of 3,125,728 shares of our Class A common stock, with Holdings redeeming from the Company a corresponding number of Partnership Interests, and (ii) Holdings redeemed from one of the Selling Stockholders 1,874,272 Partnership Interests, with the Company repurchasing a corresponding number of shares of our Class B common stock from such Selling Stockholder for no additional consideration, with each repurchase of Class A common stock and redemption of Partnership Interests at the same price per share of $29.015 paid by the underwriter to the Selling Stockholders in the September 2023 Secondary Offering for total consideration paid of $145 million (collectively, the "September 2023 Repurchase Transaction" and, together with the April 2023 Repurchase Transaction and the June 2023 Repurchase Transaction, the “Repurchase Transactions”).
The Company did not receive any of the proceeds from the Secondary Offerings. The Company paid the costs associated with the sale of shares by the Selling Stockholders in the Secondary Offerings, other than underwriting discounts and commissions.
Shareholder Ownership
The shareholder ownership as of October 29, 2023 includes the following:
•the shareholders of Core & Main, excluding the Continuing Limited Partners and Former Limited Partners (each as defined below), collectively held 111,576,293 shares of Class A common stock;
•the Former Limited Partners collectively held 61,762,345 shares of Class A common stock;
•Core & Main, directly or indirectly through our wholly-owned subsidiary, held 173,340,005 Partnership Interests; and
•the Continuing Limited Partners collectively held 1,367 shares of Class A common stock, 47,889,727 Partnership Interests and 47,889,727 shares of Class B common stock.
The Former Limited Partners are defined as CD&R Fund X Advisor Waterworks B, L.P., CD&R Fund X Waterworks B1, L.P., CD&R Fund X-A Waterworks B, L.P. and the other Original Limited Partners (as defined below) that transferred all or a portion of their Partnership Interests (including those held indirectly through the mergers of CD&R WW Advisor, LLC and CD&R WW Holdings, LLC (the “Blocker Companies”)) for shares of Class A common stock in connection with the consummation of a series of reorganization transactions that the Company undertook on July 22, 2021 to implement an “UP-C” capital structure in connection the initial public offering (the “Reorganization Transactions”) and the initial public offering of Class A common stock, which closed on July 27, 2021 (the “IPO”), and represent entities that transferred all of their Partnership Interests (including Partnership Interests held indirectly through certain “blocker” corporations) for shares of Class A common stock in connection with the Reorganization Transactions.
The Continuing Limited Partners are defined as CD&R Waterworks Holdings, LLC (“CD&R Waterworks Holdings”) and Core & Main Management Feeder, LLC (“Management Feeder”), and represent the Original Limited Partners that continued to own Partnership Interests after the Reorganization Transactions and that are entitled to exchange their Partnership Interests, together with the retirement of a corresponding number of shares of Class B common stock for shares of Class A common stock.
The Original Limited Partners are defined as CD&R Waterworks Holdings, the Former Limited Partners and Management Feeder and represent the direct and indirect owners of Holdings prior to the Reorganization Transactions and the IPO.
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Basis of Presentation
The accompanying unaudited condensed consolidated financial statements present the results of operations, financial position and cash flows of Core & Main and its subsidiaries, which includes the consolidated financial statements of Holdings and its consolidated subsidiary, Core & Main LP, as the legal entity that conducts the operations of the Company. Holdings is considered a variable interest entity. Core & Main is the primary beneficiary and general partner of Holdings and has decision making authority that significantly affects the economic performance of Holdings. As a result, Core & Main consolidates the consolidated financial statements of Holdings. All intercompany balances and transactions have been eliminated in consolidation. The Company records non-controlling interests related to Partnership Interests held by the Continuing Limited Partners in Holdings on its consolidated statements of operations and comprehensive income. The Partnership Interests held by the Continuing Limited Partners are reflected as non-controlling interests in Core & Main’s consolidated Balance Sheets.
In management’s opinion, the unaudited condensed consolidated financial information for the interim periods presented include all normal recurring adjustments necessary for a fair statement of the Company's results of operations, financial position and cash flows, which include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim unaudited condensed consolidated financial statements may not be the same as those for the full year. The January 29, 2023 condensed consolidated Balance Sheet was derived from audited financial statements as of that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the fiscal year ended January 29, 2023 included in our 2022 Annual Report on Form 10-K.
Fiscal Year
Estimates
Accounting Policies
The Company’s significant accounting policies are discussed in Note 2 to the audited consolidated financial statements in our 2022 Annual Report on Form 10-K. There have been no significant changes to these policies which have had a material impact on the Company’s interim unaudited condensed consolidated financial statements and related notes during the three and nine months ended October 29, 2023.
2) RECENT ACCOUNTING PRONOUNCEMENTS
Reference Rate Reform - In March 2020, the Financial Accounting Standards Board issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by ASU 2020-04 are effective for prospective contract modifications made and qualifying hedging relationships entered into as of March 12, 2020 through December 31, 2024.
In February 2023, the Company amended the terms of the Senior Term Loan Facility (as defined in Note 6) in order to implement a forward-looking rate based on the term secured overnight financing rate (“Term SOFR”) in lieu of LIBOR. In addition, in February 2023, the Company amended the terms of the related interest rate swap to adjust the fixed interest rate and receive payments based upon the one-month Term SOFR rate, based on notional amounts associated with borrowings under the Senior Term Loan Facility. There were no changes to the principal balances or maturity dates of these debt instruments. The amendments to the Senior Term Loan Facility and related interest rate swap are related to the replacement of the reference rate, therefore these amendments are subject to the practical expedients in ASU 2020-04.
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In July 2022, the Company amended the terms of the Senior ABL Credit Facility (as defined in Note 6) in order to, among other things, implement a forward-looking rate based on Term SOFR in lieu of LIBOR. The guidance of ASU 2020-04 did not have an impact on the assessment of the Senior ABL Credit Facility amendment.
At the time of a qualifying future transaction that replaces LIBOR with a new interest rate index, the Company will consider the application of ASU 2020-04.
3) REVENUE
Disaggregation of Revenue
The following table represents net sales disaggregated by product category:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| Product Category | October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | |||||||||||||||||||
| Pipes, valves & fittings products | $ | $ | $ | $ | |||||||||||||||||||
| Storm drainage products | |||||||||||||||||||||||
| Fire protection products | |||||||||||||||||||||||
| Meter products | |||||||||||||||||||||||
| Total net sales | $ | $ | $ | $ | |||||||||||||||||||
4) ACQUISITIONS
The Company made various acquisitions during the nine months ended October 29, 2023 (the “Fiscal 2023 Acquisitions”) and the nine months ended October 30, 2022 (the "Fiscal 2022 Acquisitions") with an aggregate transaction value of $161 million and $110 million, subject to working capital adjustments, respectively. These transactions were funded with cash.
Fiscal 2023 Acquisitions
•On July 12, 2023, the Company acquired all of the outstanding shares of J.W. D’Angelo Company, Inc. (“Dangelo”). Dangelo has three locations and is a full-service provider of fire protection and waterworks products.
•On July 10, 2023, the Company acquired certain assets and assumed certain liabilities of Foster Supply Inc. and R.P. Foster Inc. (collectively, “Foster Supply”). Foster Supply has seven locations and is a full-service provider of precast concrete structures, pipe, drainage materials and related geosynthetics products.
•On April 17, 2023, the Company acquired certain assets and assumed certain liabilities of Midwest Pipe Supply Inc. (“Midwest Pipe”). Midwest Pipe has one location and is a distributor of drainage and waterworks products.
•On April 10, 2023, the Company acquired certain assets and assumed certain liabilities of UPSCO Manufacturing & Distribution Company, UPSCO, Inc. and TMB Holdings, LLC (collectively, “UPSCO”). UPSCO is a provider of utility infrastructure products and services.
•On March 6, 2023, the Company acquired certain assets and assumed certain liabilities of Landscape & Construction Supplies LLC (“Landscape & Construction Supplies”). Landscape & Construction Supplies has two locations and is a provider of geosynthetics products.
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Fiscal 2022 Acquisitions
•On October 10, 2022, the Company acquired certain assets and assumed certain liabilities of Distributors, Inc. (“Distributors”). Distributors has one location and distributes fire protection products.
•On October 3, 2022, the Company acquired certain assets and assumed certain liabilities of the municipal waterworks division of Trumbull Industries, Inc., and acquired certain assets and assumed certain liabilities of an affiliated entity, Trumbull Manufacturing, Inc. (collectively “Trumbull”). Trumbull has three locations and distributes a variety of infrastructure products to the waterworks industry.
•On August 8, 2022, the Company acquired certain assets and assumed certain liabilities of Inland Water Works Supply, Co. (“Inland”). Inland has one location and distributes waterworks products.
•On June 28, 2022, the Company acquired certain assets and assumed certain liabilities of Earthsavers Erosion Control, LLC (“Earthsavers”). Earthsavers has three locations and produces and distributes a variety of geosynthetic materials, including wattles, erosion control blankets and a broad array of geotextile products.
•On May 2, 2022, the Company acquired certain assets and assumed certain liabilities of Lock City Supply, Inc. (“Lock City”). Lock City has one location and distributes waterworks products.
•On March 21, 2022, the Company acquired certain assets and assumed certain liabilities of Dodson Engineered Products, Inc. (“Dodson”). Dodson has one location and distributes waterworks products.
The following table represents the preliminary allocation of the transaction price to the fair value of identifiable assets acquired and liabilities assumed in the Fiscal 2023 Acquisitions and final allocation of the transaction price to the fair value of identifiable assets acquired and liabilities assumed in the Fiscal 2022 Acquisitions:
| Fiscal 2023 Acquisitions | Fiscal 2022 Acquisitions | |||||||||||||
| Cash | $ | $ | ||||||||||||
| Receivables | ||||||||||||||
| Inventories | ||||||||||||||
| Intangible assets | ||||||||||||||
| Goodwill | ||||||||||||||
| Property, plant and equipment | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Other assets, current and non-current | ||||||||||||||
| Total assets acquired | ||||||||||||||
| Accounts payable | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Operating lease liabilities, current and non-current | ||||||||||||||
| Deferred consideration | ||||||||||||||
| Other liabilities, current and non-current | ||||||||||||||
| Net assets acquired | $ | $ | ||||||||||||
The net outflow of cash in respect of the purchase of businesses is as follows:
| Fiscal 2023 Acquisitions | Fiscal 2022 Acquisitions | |||||||||||||||||||||||||
| Net assets acquired | $ | $ | ||||||||||||||||||||||||
| Less: Working capital adjustment | ( | |||||||||||||||||||||||||
Less: Cash acquired in acquisition | ( | |||||||||||||||||||||||||
| Total consideration, net of cash; investing cash outflow | $ | $ | ||||||||||||||||||||||||
In the above transactions, to the extent applicable, the excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents the assembled workforce and anticipated long-term growth in new markets, customers and products. Goodwill of $3 million and $20 million associated with the Fiscal 2023 Acquisitions and Fiscal 2022 Acquisitions, respectively, are fully deductible by the Company for U.S. income tax purposes.
15
Intangible Assets
For the Fiscal 2023 Acquisitions and Fiscal 2022 Acquisitions discussed above, the Company valued the customer relationships as intangible assets acquired.
The customer relationship intangible assets represent the value associated with those customer relationships in place at the date of the Fiscal 2023 Acquisitions and Fiscal 2022 Acquisitions. The Company valued the customer relationships using an excess earnings method using various inputs such as customer attrition rate, revenue growth rate, gross margin percentage and discount rate. Cash flows associated with the existing relationships are expected to diminish over time due to customer turnover. The Company reflected this expected diminishing cash flow through the utilization of an annual customer attrition rate assumption and in its method of amortization.
A summary of the intangible asset acquired and assumptions utilized in the valuation for the Fiscal 2023 Acquisitions and Fiscal 2022 Acquisitions is as follows:
| Intangible Asset Amount | Weighted Average Amortization Period | Weighted Average Discount Rate | Weighted Average Attrition Rate | ||||||||||||||||||||
| Customer Relationships | |||||||||||||||||||||||
| Fiscal 2023 Acquisitions | $ | % | % | ||||||||||||||||||||
| Fiscal 2022 Acquisitions | % | % | |||||||||||||||||||||
As a result of integration of the Fiscal 2023 Acquisitions and Fiscal 2022 Acquisitions, including the consolidation of certain acquired and existing branches, it is impracticable to identify the explicit financial performance associated with the Fiscal 2023 Acquisitions and Fiscal 2022 Acquisitions. As such, the Company has not presented the post-acquisition net sales and net income for the Fiscal 2023 Acquisitions and Fiscal 2022 Acquisitions.
5) GOODWILL AND INTANGIBLE ASSETS
Goodwill
The carrying amount of the Company’s goodwill included in its Balance Sheets is as follows:
| October 29, 2023 | January 29, 2023 | ||||||||||
| Gross Goodwill | $ | $ | |||||||||
| Accumulated Impairment | |||||||||||
| Net Goodwill | $ | $ | |||||||||
The changes in the carrying amount of goodwill are as follows:
| Nine Months Ended | |||||
| October 29, 2023 | |||||
| Beginning Balance | $ | ||||
| Goodwill acquired during the year | |||||
| Ending balance | $ | ||||
Goodwill acquired during the nine months ended October 29, 2023 was related to the Fiscal 2023 Acquisitions, as further described in Note 4.
Goodwill represents the excess of purchase price over the fair value of net assets acquired. The Company does not amortize goodwill, but does assess the recoverability of goodwill on an annual basis during the fourth quarter. If an event occurs or circumstances change that would “more likely than not” reduce the fair value of a reporting unit below its carrying value, an interim impairment test would be performed between annual tests.
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Intangible Assets
The Company’s intangible assets included in its Balance Sheets consist of the following:
| October 29, 2023 | January 29, 2023 | ||||||||||||||||||||||||||||||||||
| Gross Intangible | Accumulated Amortization | Net Intangible | Gross Intangible | Accumulated Amortization | Net Intangible | ||||||||||||||||||||||||||||||
| Customer relationships | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Other intangible assets | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Amortization expense related to intangible assets was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | ||||||||||||||||||||
| Amortization expense | $ | $ | $ | $ | |||||||||||||||||||
The estimated aggregate amortization expense on intangible assets owned by the Company for the remainder of fiscal 2023 and the next four full fiscal years is expected to be as follows:
Fiscal 2023 | $ | ||||
Fiscal 2024 | |||||
Fiscal 2025 | |||||
Fiscal 2026 | |||||
Fiscal 2027 | |||||
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6) DEBT
Debt consisted of the following:
| October 29, 2023 | January 29, 2023 | ||||||||||||||||||||||
| Principal | Unamortized Discount and Debt Issuance Costs | Principal | Unamortized Discount and Debt Issuance Costs | ||||||||||||||||||||
| Current maturities of long-term debt: | |||||||||||||||||||||||
| Senior Term Loan due July 2028 | $ | $ | — | $ | $ | — | |||||||||||||||||
| Long-term debt: | |||||||||||||||||||||||
| Senior ABL Credit Facility due July 2026 | |||||||||||||||||||||||
| Senior Term Loan due July 2028 | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The Company’s debt obligations as of October 29, 2023 included the following debt agreements:
Senior Term Loan Facility
On February 26, 2023, Core & Main LP amended the terms of the $1,500 million seven-year senior term loan which matures on July 27, 2028 (as amended, the “Senior Term Loan Facility”) in order to implement a forward-looking rate based on Term SOFR in lieu of LIBOR. The Senior Term Loan Facility requires quarterly principal payments, payable on the last business day of each fiscal quarter in an amount equal to approximately 0.25 % of the original principal amount of the Senior Term Loan Facility. The remaining balance is payable upon final maturity of the Senior Term Loan Facility on July 27, 2028. The Senior Term Loan Facility bears interest at a rate equal to (i) Term SOFR plus, in each case, an effective applicable margin of 2.60 % or (ii) the base rate, which will be the highest of (x) the corporate base rate established by the administrative agent as its prime rate in effect at its principal office in New York City from time to time, (y) the overnight federal funds rate plus 0.50 % per annum and (z) one-month Term SOFR (adjusted for maximum reserves) plus 1.00 % per annum, plus, in each case, an applicable margin of 1.50 %. The Senior Term Loan Facility is subject to a Term SOFR “floor” of 0.00 %. The weighted average interest rate, excluding the effect of the interest rate swap, of Core & Main LP’s outstanding borrowings under the Senior Term Loan Facility as of October 29, 2023 was 7.97 %. See further discussion of the interest rate swap below. Based on quotes from financial institutions (i.e., level 2 of the fair value hierarchy), the fair value of the Senior Term Loan Facility was $1,461 million as of October 29, 2023.
Asset-Based Credit Facility
Core & Main LP has a senior asset-based revolving credit facility with a borrowing capacity of up to $1,250 million, subject to borrowing base availability, with a maturity date of July 27, 2026 (the “Senior ABL Credit Facility”). Borrowings under the Senior ABL Credit Facility bear interest at either a Term SOFR rate plus an applicable margin ranging from 1.25 % to 1.75 %, or an alternate base rate plus an applicable margin ranging from 0.25 % to 0.75 %, depending on the borrowing capacity under the Senior ABL Credit Facility. Additionally, Core & Main LP pays a fee of 0.25 % on unfunded commitments under the Senior ABL Credit Facility. There were no amounts outstanding under the Senior ABL Credit Facility as of October 29, 2023 and January 29, 2023.
The aforementioned debt agreements include customary affirmative and negative covenants, which include, among other things, restrictions on Core & Main LP’s ability to make distributions, pay dividends, create liens, incur additional indebtedness, make investments, dispose of assets and merge or consolidate with any other person. The Senior Term Loan Facility may require accelerated repayment based upon cash flows generated in excess of operating and investing requirements when the Consolidated Secured Leverage Ratio (as defined in the agreement governing the Senior Term Loan Facility) is greater than or equal to 3.25 . In addition, the Senior ABL Credit Facility requires Core & Main LP to comply with a consolidated fixed charge coverage ratio of greater than or equal to 1.00 when availability under the Senior ABL Credit Facility is less than 10.0 % of the lesser of (i) the then applicable borrowing base or (ii) the then aggregate effective commitments. The Company was in compliance with all debt covenants as of October 29, 2023.
Substantially all of Core & Main LP’s assets are pledged as collateral for the Senior Term Loan Facility and the Senior ABL Credit Facility.
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The aggregate amount of debt payments for the remainder of fiscal 2023 and the next four full fiscal years are as follows:
Fiscal 2023 | $ | ||||
Fiscal 2024 | |||||
Fiscal 2025 | |||||
Fiscal 2026 | |||||
Fiscal 2027 | |||||
Interest Rate Swaps
On February 26, 2023, Core & Main LP amended the terms of the instrument to adjust the fixed interest rate to 0.693 % and receive payments based upon the one-month Term SOFR rate, based on notional amounts associated with borrowings under the Senior Term Loan Facility. The interest rate swap has a notional amount of $900 million as of October 29, 2023. The notional amount decreases to $800 million on July 27, 2024 and $700 million on July 27, 2025 through the instrument maturity on July 27, 2026. This instrument is intended to reduce the Company's exposure to variable interest rates under the Senior Term Loan Facility. As of October 29, 2023, this instrument resulted in an effective fixed rate of 3.293 %, based upon the 0.693 % fixed rate plus an effective applicable margin of 2.60 %.
The fair value of this cash flow interest rate swap was an $82 million and $84 million asset as of October 29, 2023 and January 29, 2023, respectively, which is included within other assets in the Balance Sheet. The cash flows related to settlement of the interest rate swap are classified in the consolidated statements of cash flows based on the nature of the underlying hedged items. Fair value is based upon the present value of future cash flows under the terms of the contract and observable market inputs (level 2). Significant inputs used in determining fair value include forward-looking one-month Term SOFR rates and the discount rate applied to projected cash flows.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| Accumulated Other Comprehensive Income | October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | |||||||||||||||||||
| Beginning of period balance | $ | $ | $ | $ | |||||||||||||||||||
| Measurement adjustment gain (loss) for interest rate swap | |||||||||||||||||||||||
| Reclassification of (income) to interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Tax benefit (expense) on interest rate swap adjustments | |||||||||||||||||||||||
| Measurement adjustment gain (loss) for interest rate swap | ( | ( | ( | ( | |||||||||||||||||||
| Reclassification of (income) to interest expense | |||||||||||||||||||||||
| End of period balance | $ | $ | $ | $ | |||||||||||||||||||
As of October 29, 2023, the Company estimates $41 million of the cash flow interest rate swap gains will be reclassified from accumulated other comprehensive income into earnings over the next 12 months.
7) INCOME TAXES
For the three months ended October 29, 2023 and October 30, 2022, the Company’s effective tax rate was 19.8 % and 18.3 %, respectively. For the nine months ended October 29, 2023 and October 30, 2022, the Company's effective tax rate was 19.5 % and 17.9 %, respectively. The variations between the Company's estimated effective tax rate and the U.S. and state statutory rates are primarily due to the portion of the Company's earnings attributable to non-controlling interests following the Reorganization Transactions.
Tax Receivable Agreements and Reorganization Transactions
In connection with the Reorganization Transactions and the IPO, Core & Main entered into a tax receivable agreement with the Former Limited Partners (the “Former Limited Partners Tax Receivable Agreement”) and a tax receivable agreement with the Continuing Limited Partners (the “Continuing Limited Partners Tax Receivable Agreement”) (collectively, the “Tax Receivable Agreements”). Core & Main expects to generate additional tax attributes, associated with future exchanges of Partnership Interests by Continuing Limited Partners, that will reduce amounts that it would otherwise pay in the future to various taxing authorities. The Tax Receivable Agreements provide for the payment to either the Former Limited Partners or Continuing Limited Partners, or their permitted transferees, of 85 % of the tax benefits realized by the Company, or in some circumstances are deemed to realize.
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The Company recorded payables to related parties pursuant to the Tax Receivable Agreements of $310 million and $185 million as of October 29, 2023 and January 29, 2023, respectively. In fiscal 2023, the Company had a financing cash outflow related to the payment of $5 million under the Former Limited Partner Tax Receivable Agreements. Payments under the Tax Receivable Agreements within the next 12 months are expected to be $11 million, which is included within other current liabilities in the Balance Sheet.
The actual amount and timing of any payments under the Tax Receivable Agreements will vary depending upon a number of factors, including the timing of exchanges by the holders of Partnership Interests, the amount of gain recognized by such holders of Partnership Interests, the amount and timing of the taxable income the Company generates in the future and the federal tax rates then applicable. Assuming (i) that the Continuing Limited Partners exchanged all of their Partnership Interests at $29.43 per share of our Class A common stock (the closing stock price on October 27, 2023), (ii) no material changes in relevant tax law, (iii) a constant corporate tax rate of 25.1 %, which represents a pro forma tax rate that includes a provision for U.S. federal income taxes and assumes the highest statutory rate apportioned to each state and local jurisdiction and (iv) that the Company earns sufficient taxable income in each year to realize on a current basis all tax benefits that are subject to the Continuing Limited Partners Tax Receivable Agreement, the Company would recognize a deferred tax asset (subject to offset with existing deferred tax liabilities) of approximately $472 million and a Continuing Limited Partners Tax Receivable Agreement liability of approximately $401 million, payable to the Continuing Limited Partners over the life of the Continuing Limited Partners Tax Receivable Agreement. The full exchange by the Continuing Limited Partners will also decrease Core & Main's aforementioned deferred tax asset associated with its investment in Holdings by $127 million. The foregoing amounts are estimates and subject to change.
8) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Receivables
Receivables consisted of the following:
| October 29, 2023 | January 29, 2023 | ||||||||||
| Trade receivables, net of allowance for credit losses | $ | $ | |||||||||
| Supplier rebate receivables | |||||||||||
| Receivables, net of allowance for credit losses | $ | $ | |||||||||
Depreciation Expense
Depreciation expense is classified within cost of sales and depreciation and amortization within the Statement of Operations. Depreciation expense related to property, plant and equipment, including capitalized software, was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | ||||||||||||||||||||
| Depreciation expense | $ | $ | $ | $ | |||||||||||||||||||
Accrued Compensation and Benefits
Accrued compensation and benefits consisted of the following:
| October 29, 2023 | January 29, 2023 | ||||||||||
| Accrued bonuses and commissions | $ | $ | |||||||||
| Other compensation and benefits | |||||||||||
| Accrued compensation and benefits | $ | $ | |||||||||
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Leases
The table below presents cash and non-cash impacts associated with leases:
| Nine Months Ended | ||||||||||||||
| October 29, 2023 | October 30, 2022 | |||||||||||||
| Operating cash flow payments for operating lease liabilities | $ | $ | ||||||||||||
| Operating cash flow payments for non-lease components | ||||||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | $ | ||||||||||||
9) NON-CONTROLLING INTERESTS
Core & Main is the general partner of Holdings and operates and controls all of the business and affairs of Holdings and, through Holdings and its subsidiaries, conducts the Company's business. Accordingly, Core & Main consolidates the consolidated financial statements of Holdings and attributes a portion of net income and equity of Holdings to non-controlling interests related to the vested Partnership Interests held by the Continuing Limited Partners. Income or loss is attributed to the non-controlling interests based on the weighted average percentage of Partnership Interests held by Continuing Limited Partners, excluding unvested Partnership Interests held by Management Feeder, relative to all Partnership Interests of Holdings during the period following the Reorganization Transactions. Holdings equity is attributed to non-controlling interests based on the Partnership Interests held by Continuing Limited Partners, excluding unvested Partnership Interests held by Management Feeder, relative to all Partnership Interests as of the balance sheet date. The non-controlling interests’ ownership percentage may fluctuate over time as the Continuing Limited Partners exchange Partnership Interests, together with the retirement of a corresponding number of shares of Class B common stock, for shares of Class A common stock and Partnership Interests held by Management Feeder vest. The following table summarizes the ownership of Partnership Interests of Holdings (excluding unvested Partnership Interests held by Management Feeder):
| Partnership Interests | Ownership Percentage | |||||||||||||||||||||||||||||||||||||
| Core & Main | Continuing Limited Partners | Total | Core & Main | Continuing Limited Partners | Total | |||||||||||||||||||||||||||||||||
Balances as of January 29, 2023 | % | % | % | |||||||||||||||||||||||||||||||||||
| Retirement of Partnership Interests | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Issuance of Partnership Interests | ( | |||||||||||||||||||||||||||||||||||||
| Exchange of Partnership Interests | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Vesting of Partnership Interests | ( | |||||||||||||||||||||||||||||||||||||
Balances as of October 29, 2023 | % | % | % | |||||||||||||||||||||||||||||||||||
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10) BASIC AND DILUTED EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per share for the three and nine months ended October 29, 2023 and October 30, 2022.
Basic earnings per share is computed by dividing net income attributable to Core & Main for the period by the weighted average number of shares of Class A common stock outstanding during the same period. Shares of Class A common stock issued or redeemed during the period were weighted for the portion of the period in which the shares of Class A common stock were outstanding. The Company did not apply the two-class method because shares of Class B common stock do not participate in earnings or losses of Core & Main. As a result, the shares of Class B common stock are not considered participating securities and are not included in the weighted average shares outstanding for purposes of earnings per share. Net income allocated to holders of non-controlling interests was excluded from net income available to the Class A common stock. There were no preferred dividends and no shares of preferred stock outstanding for the period.
The diluted earnings per share calculation includes the basic weighted average number of shares of Class A common stock outstanding plus the dilutive impact of potential outstanding shares of Class A common stock that would be issued upon exchange of Partnership Interests, together with the retirement of a corresponding number of shares of Class B common stock, under the if-converted method, if dilutive. The treasury stock method is applied to outstanding awards, including unvested Partnership Interests and outstanding stock appreciation rights, restricted stock units and stock options.
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| Basic earnings per share: | October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | ||||||||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income attributable to non-controlling interests | ||||||||||||||||||||||||||
| Net income available to Class A common stock | ||||||||||||||||||||||||||
| Weighted average shares outstanding | ||||||||||||||||||||||||||
| Net income per share | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted earnings per share: | ||||||||||||||||||||||||||
| Net income available to common shareholders - basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Increase to net income attributable to dilutive instruments | ||||||||||||||||||||||||||
| Net income available to common shareholders - diluted | ||||||||||||||||||||||||||
| Weighted average shares outstanding - basic | ||||||||||||||||||||||||||
| Incremental shares of common stock attributable to dilutive instruments | ||||||||||||||||||||||||||
| Weighted average shares outstanding - diluted | ||||||||||||||||||||||||||
| Net income per share - diluted | $ | $ | $ | $ | ||||||||||||||||||||||
11) RELATED PARTIES
CD&R affiliates
During each of the three and nine months ended October 29, 2023, the Company had less than $1 million and $2 million of purchases of product, respectively, from affiliates of Clayton, Dubilier & Rice, LLC (“CD&R”), including other companies invested in by funds affiliated with or managed by CD&R (the “CD&R Funds”). During the three and nine months ended October 30, 2022, the Company had less than $1 million and $1 million in purchases of product, respectively, from affiliates of CD&R, including other companies invested in by funds affiliated with the CD&R Funds. There were no 1 million and $8 million in sales to affiliates of CD&R for the three and nine months ended October 29, 2023, respectively. There was less than $1 million and $2 million in sales to affiliates of CD&R for the three and nine months October 30, 2022, respectively. The Company had $1 million and $2 million amounts receivable from affiliates of CD&R at October 29, 2023 and January 29, 2023, respectively.
Tax Receivable Agreements
In connection with the Reorganization Transactions, Core & Main entered into the Former Limited Partners Tax Receivable Agreement with the Former Limited Partners and the Continuing Limited Partners Tax Receivable Agreement with the Continuing Limited Partners. See further discussion in Note 7.
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Exchange Agreement
In connection with the Reorganization Transactions, Core & Main entered into the Exchange Agreement, dated as of July 22, 2021 (as amended, the “Exchange Agreement”), by and among Core & Main Holdings, LP and Core & Main Management Feeder, LLC. Pursuant to the Exchange Agreement, the Continuing Limited Partners (or their permitted transferees) will have the right, subject to the terms of the Exchange Agreement, to exchange their Partnership Interests, together with the retirement of a corresponding number of shares of Class B common stock, for shares of Class A common stock generally on a one-for-one basis or for cash in limited circumstances as specified in the Exchange Agreement. Holders of Partnership Interests will not have the right to exchange Partnership Interests if Core & Main determines that such exchange would be prohibited by law or regulation or would violate other agreements with Core & Main or its subsidiaries to which the holder of Partnership Interests may be subject. Core & Main may also refuse to honor any request to effect an exchange if it determines such exchange would pose a material risk that Holdings would be treated as a “publicly traded partnership” for U.S. federal income tax purposes. Notwithstanding the foregoing, the Continuing Limited Partners are generally permitted to exchange Partnership Interests, subject to the terms of the Exchange Agreement.
The Exchange Agreement also provides that, in connection with any such exchange, to the extent that Holdings has, since consummation of the Reorganization Transactions and the IPO, made distributions to the applicable Continuing Limited Partner that are proportionately lesser or greater than the distributions made to Core & Main, on a pro rata basis, the number of shares of Class A common stock to be issued or cash to be paid to such Continuing Limited Partner will be adjusted to take into account the amount of such discrepancy that is allocable to the Partnership Interests, and Class B common stock, subject to such exchange. As of October 29, 2023, the Company had shareholder receivables of $8 million recorded within additional paid in capital related to distributions in excess of shareholders’ pro rata share. Core & Main expects to cause Holdings to make distributions to its partners in such a manner as generally to limit increases to the number of shares of Class A common stock to be issued or cash to be paid to exchanging Continuing Limited Partners in connection with the adjustment described in the preceding sentence.
12) SUBSEQUENT EVENTS
Management has evaluated events or transactions that may have occurred that would merit recognition or disclosure in the condensed consolidated financial statements.
Secondary Offering and Repurchase Transaction
On November 9, 2023, a secondary public offering of 19,000,000 shares of Class A common stock on behalf of the Selling Stockholders was completed at a price to the public of $30.440 per share (the “November 2023 Secondary Offering”). As part of the November 2023 Secondary Offering, the underwriters were granted an option to purchase an additional 2,850,000 shares of Class A common stock (the “November Underwriter Option Exercise”). As part of the November 2023 Secondary Offering, 7,122,234 limited partner interests of Holdings (“Partnership Interests”) were exchanged, together with the retirement of a corresponding number of shares of Class B common stock, for an equal number of shares of Class A common stock, which were a portion of the shares sold by the Selling Stockholders. These shares were sold along with an existing 11,877,766 shares of Class A common stock held by the Selling Stockholders. On November 15, 2023 the underwriters exercised their option and purchased an additional 2,850,000 shares of Class A common stock from the Selling Stockholders.
Concurrently with the completion of the November 2023 Secondary Offering, (i) the Company repurchased from the Selling Stockholders an aggregate of 3,125,728 shares of our Class A common stock, with Holdings redeeming from the Company a corresponding number of Partnership Interests, and (ii) Holdings redeemed from one of the Selling Stockholders 1,874,272 Partnership Interests, with the Company repurchasing a corresponding number of shares of our Class B common stock from such Selling Stockholder for no additional consideration, with each repurchase of Class A common stock and redemption of Partnership Interests at the same price per share of $30.440 paid by the underwriter to the Selling Stockholders in the November 2023 Secondary Offering for total consideration paid of $152 million (collectively, the "November 2023 Repurchase Transaction").
The Company did not receive any of the proceeds from the November 2023 Secondary Offering or November Underwriter Option Exercise. The Company paid the costs associated with the sale of shares by the Selling Stockholders in the November 2023 Secondary Offering and November Underwriter Option Exercise, other than underwriting discounts and commissions.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto of Core & Main, Inc. for the fiscal year ended January 29, 2023 included in our 2022 Annual Report on Form 10-K. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed below and elsewhere in this Quarterly Report on Form 10-Q for a number of important factors, particularly those described under the caption “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in Part I, Item 1A of the 2022 Annual Report on Form 10-K.
Overview
Core & Main is a leader in advancing reliable infrastructure with local service, nationwide. As a leading specialized distributor with a focus on water, wastewater, storm drainage and fire protection products, and related services, we provide solutions to municipalities, private water companies and professional contractors across municipal, non-residential and residential end markets, nationwide. Our specialty products and services are used primarily in the maintenance, repair, replacement and new construction of water, wastewater, storm drainage and fire protection infrastructure. We reach customers through a nationwide network of approximately 320 branches across 48 states. Our products include pipes, valves, fittings, storm drainage products, fire protection products, meter products and other products for use in the construction, maintenance and repair of water and wastewater systems as well as fire protection systems. We complement our core products through additional offerings, including smart meter systems, fusible HDPE piping solutions, specifically engineered treatment plant products, geosynthetics and erosion control products. Our services and capabilities allow for integration with customers and form part of their sourcing and procurement function.
Basis of Presentation
The Company is a holding company and its primary material asset is its direct and indirect ownership interest in Core & Main Holdings, LP, a Delaware limited partnership (“Holdings”). Holdings has no operations and no material assets of its own other than its indirect ownership interest in Core & Main LP, a Florida limited partnership, the legal entity that conducts the operations of Core & Main. Because Core & Main is the general partner of Holdings, it operates and controls all of the business and affairs of Holdings and, through Holdings and its subsidiaries, conducts our business. Accordingly, the condensed consolidated financial information of Core & Main presented herein, including the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, includes the consolidated financial information of Holdings and its subsidiaries. The limited partner interests of Holdings (“Partnership Interests”) held by the Continuing Limited Partners are reflected as non-controlling interests in Core & Main’s condensed consolidated financial statements.
Fiscal Year
The Company’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31st. Quarters within the fiscal year include 13-week periods, unless a fiscal year includes a 53rd week, in which case the fourth quarter of the fiscal year will be a 14-week period. Each of the three months ended October 29, 2023 and three months ended October 30, 2022 included 13 weeks and each of the nine months ended October 29, 2023 and nine months ended October 30, 2022 included 39 weeks. The current fiscal year ending January 28, 2024 (“fiscal 2023”) will include 52 weeks.
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Significant Events During Fiscal 2023
Secondary Offerings and Repurchase Transactions
During fiscal 2023, secondary public offerings of Class A common stock were completed by certain selling stockholders affiliated with Clayton, Dubilier & Rice, LLC (the “Selling Stockholders”). As part the secondary public offerings the Selling Stockholders sold existing shares of Class A common stock along with exchanged Partnership Interests, together with the retirement of a corresponding number of shares of Class B common stock, for an equal number of shares of Class A common stock. Below is a summary of the secondary public offerings completed during and subsequent to the nine months ended October 29, 2023 (the “Fiscal 2023 Secondary Offerings”).
| Secondary Offering Date | Existing Shares of Class A Common Stock | Partnership Interests Exchanged | Total Shares of Class A Common Stock | Price Per Share | ||||||||||||||||||||||
November 9, 2023(1) | 13,659,431 | 8,190,569 | 21,850,000 | $30.440 | ||||||||||||||||||||||
| September 19, 2023 | 11,252,620 | 6,747,380 | 18,000,000 | $29.015 | ||||||||||||||||||||||
| June 12, 2023 | 8,752,038 | 5,247,962 | 14,000,000 | $28.215 | ||||||||||||||||||||||
| April 14, 2023 | 3,125,728 | 1,874,272 | 5,000,000 | $22.151 | ||||||||||||||||||||||
(1)Inclusive of full exercise of the underwriters’ option.
Concurrently with the completion of the Fiscal 2023 Secondary Offerings, (i) the Company repurchased from the Selling Stockholders shares of our Class A common stock, with Holdings redeeming from the Company a corresponding number of Partnership Interests, and (ii) Holdings redeemed from one of the Selling Stockholders Partnership Interests, with the Company repurchasing a corresponding number of shares of our Class B common stock from such Selling Stockholder for no additional consideration. Below is a summary of the repurchase transactions completed during and subsequent to the nine months ended October 29, 2023 (the “Fiscal 2023 Repurchase Transactions”).
| Repurchase Transaction Date | Shares of Class A Common Stock | Partnership Interests | Total Shares Repurchased | Price Per Share | Total Consideration Paid (in millions) | |||||||||||||||||||||||||||
| November 9, 2023 | 3,125,728 | 1,874,272 | 5,000,000 | $30.440 | $152 | |||||||||||||||||||||||||||
| September 19, 2023 | 3,125,728 | 1,874,272 | 5,000,000 | $29.015 | $145 | |||||||||||||||||||||||||||
| June 12, 2023 | 3,125,728 | 1,874,272 | 5,000,000 | $28.215 | $141 | |||||||||||||||||||||||||||
| April 14, 2023 | 9,377,183 | 5,622,817 | 15,000,000 | $22.151 | $332 | |||||||||||||||||||||||||||
The Company did not receive any of the proceeds from the Fiscal 2023 Secondary Offerings. The Company paid the costs associated with the sale of shares by the Selling Stockholders in the Fiscal 2023 Secondary Offerings, other than underwriting discounts and commissions.
For a further description of the Fiscal 2023 Secondary Offerings and the Fiscal 2023 Repurchase Transactions, refer to Note 1 and Note 12 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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Key Factors Affecting Our Business
End-Markets and General Economic Conditions
Historically, demand for our products has been closely tied to municipal infrastructure spending, non-residential construction and residential construction in the U.S. We estimate that, based on net sales for the fiscal year ended January 29, 2023 (“fiscal 2022”), our exposure by end market was approximately 39% municipal, 39% non-residential and 22% residential. Infrastructure spending and the non-residential and residential construction markets are subject to cyclical market pressures. Municipal demand has been relatively steady over the long term due to the consistent and immediate need to replace broken infrastructure; however, activity levels are subject to the availability of funding for municipal projects. Non-residential and residential construction activities are primarily driven by availability of credit, interest rates, general economic conditions, consumer confidence and other factors that are beyond our control. The length and magnitude of these cycles have varied over time and by market. Cyclicality can also have an impact on the products we procure for our customers or our related services, as further discussed under “—Price Fluctuations” below. Interest rate increases, in fiscal 2022 and continuing into fiscal 2023, slowed home buying and new lot development, which was a contributing factor to a decline in the residential end market compared with prior year.
In November 2021, the IIJA was signed into law, which includes $55 billion to invest in water infrastructure across the United States. In the coming years, including as a result of the IIJA, we expect increased federal infrastructure investment to have a core focus on the upgrade, repair and replacement of municipal waterworks systems and to address demographic shifts and serve the growing population. We believe these dynamics, coupled with expanding municipal budgets, create the backdrop for a favorable funding environment and accelerated investment in projects that will benefit our business.
Seasonality
Our operating results within a fiscal year are typically impacted by seasonality. Although weather patterns affect our operating results throughout the year, colder weather and shorter daylight hours historically have reduced construction, maintenance and repair activity. As a result, net sales are typically lower in our first and fourth fiscal quarters, especially in northern geographic regions. Abnormal levels of precipitation may negatively impact our operating results as it may result in the delay of construction projects. Our operating results may also be adversely affected by hurricanes, which typically occur during our third fiscal quarter. Our cash flows from operating activities are typically lower during the first and second fiscal quarters due to investment in working capital and annual incentive compensation payments and are typically higher during the third and fourth fiscal quarters due to cash inflows associated with receivable collections and reduced inventory purchases.
Price Fluctuations
Our financial performance is impacted by price fluctuations in the cost to procure substantially all the products we sell and our ability to reflect these changes, in a timely manner, in our customer pricing.
The cost to procure the products we sell are historically volatile and subject to fluctuations arising from changes in supply and demand, national and international economic conditions, labor costs, competition, market speculation, government regulation, weather events, trade policies and periodic delays in the delivery of our products. If we are able to pass through price increases to our customers, our net sales will increase; conversely, during periods of deflation, our customer pricing may decrease to remain competitive, resulting in decreased net sales. During fiscal 2022, we experienced significant price inflation and product surcharges with respect to certain of our products we sell and supply chain disruption. The supply chain disruption was due to several factors, including, but not limited to, unpredictable lead times and delays from our suppliers, labor availability, global logistics and the availability of raw materials, in part due to the impact of COVID-19 on the global economy and the conflict in Ukraine that limited product availability and further exacerbated the effects of inflation. To date in fiscal 2023, we have seen improvements in the supply chain and more predictable lead times for certain products, but there are other products where the supply chain remains constrained. This has led to price stability in fiscal 2023 compared to the price inflation we experienced during fiscal 2022. Depending on the ultimate scope and duration of supply chain disruptions, we may experience increases in product costs which we may not be able to pass on to our customers, loss of sales due to lack of product availability or potential customer claims from the inability to provide products in accordance with contractual terms. Greater product availability from supply chain improvements may lead to increased competition along with price and volume declines. For fiscal 2023, we expect recent year-over-year growth rates to moderate as we anniversary the effects of inflation in fiscal 2022. As we have experienced significant inflation over a relatively short period, there is increased risk that we may experience lower levels of inflation, deflation or substantially lower net sales growth than in recent periods, particularly as a result of greater product availability for certain suppliers and product lines. We continue to proactively monitor the situation and our supply chain and assess further possible implications to our business.
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We are also exposed to fluctuations in costs for petroleum as we distribute a substantial portion of our products by truck. Petroleum prices have fluctuated as a result of the conflict in Ukraine and other factors. In addition, we are exposed to fluctuations in prices for imported products due to logistical challenges and changes in labor, fuel, container and other importation-related costs. We may also face price fluctuations on other products due to constrained labor availability and manufacturing capacity of our suppliers. Our ability to reflect these changes, in a timely manner, in our customer pricing may impact our financial performance.
Interest Rates
Certain of our indebtedness, including borrowings under the Senior Term Loan Facility and the Senior ABL Credit Facility (each as defined in Note 6 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q), are subject to variable rates of interest and expose us to interest rate risk. The Senior Term Loan Facility and the Senior ABL Credit Facility each bear interest based on Term SOFR. If interest rates further increase, our debt service obligations on our variable-rate indebtedness will further increase and our net income would decrease, even though the amount borrowed under the facilities remains the same. As of October 29, 2023, we had $1,466 million of outstanding variable-rate debt. We seek to mitigate our exposure to interest rate volatility through the entry into interest rate swap instruments, such as our current interest rate swap, associated with borrowings under the Senior Term Loan Facility, which effectively converts $900 million of our variable rate debt to fixed rate debt, which notional amount decreases to $800 million on July 27, 2024 and $700 million on July 27, 2025 through the instrument maturity on July 27, 2026. Despite these efforts, unfavorable movement in interest rates may further result in higher interest expense and cash payments.
Acquisitions
In addition to our organic growth strategy, we opportunistically pursue strategic asset and business acquisitions to grow our business. Below is a summary of the acquisitions that closed during the nine months ended October 29, 2023 (the “Fiscal 2023 Acquisitions”) and the nine months ended October 30, 2022 (the "Fiscal 2022 Acquisitions") with an aggregate transaction value of $161 million and $110 million, subject to working capital adjustments, respectively.
| Name | Product Lines | Closing Date | |||||||||||||||
J.W. D’Angelo Co. (“Dangelo”) | Pipes, Valves & Fittings; Fire Protection; Storm Drainage | July 2023 | |||||||||||||||
Foster Supply, Inc. (“Foster Supply”) | Pipes, Valves & Fittings; Storm Drainage | July 2023 | |||||||||||||||
Midwest Pipe Supply Inc. (“Midwest Pipe”) | Pipes, Valves & Fittings; Storm Drainage | April 2023 | |||||||||||||||
UPSCO, Inc. (“UPSCO”) | Pipes, Valves & Fittings; Meter products | April 2023 | |||||||||||||||
Landscape & Construction Supplies LLC (“Landscape & Construction Supplies”) | Storm Drainage | March 2023 | |||||||||||||||
Distributors, Inc. (“Distributors”) | Fire Protection | October 2022 | |||||||||||||||
Trumbull Industries, Inc. (“Trumbull”) | Pipes, Valves & Fittings | October 2022 | |||||||||||||||
Inland Water Works Supply Co. (“Inland”) | Pipes, Valves & Fittings; Storm Drainage | August 2022 | |||||||||||||||
Earthsavers Erosion Control, LLC (“Earthsavers”) | Storm Drainage | June 2022 | |||||||||||||||
Lock City Supply, Inc. (“Lock City”) | Pipes, Valves & Fittings; Storm Drainage; Meter products | May 2022 | |||||||||||||||
Dodson Engineered Products, Inc. (“Dodson”) | Pipes, Valves & Fittings; Storm Drainage; Meter products | March 2022 | |||||||||||||||
As we integrate these and other acquisitions into our existing operations, we may not be able to identify the specific financial statement impacts associated with these acquisitions. There can be no assurance that the anticipated benefits of the acquisitions will be realized on the timeline we expect, or at all.
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Key Business Metrics
Net Sales
We generate net sales primarily from the sale of water, wastewater, storm drainage and fire protection products and the provision of related services to approximately 60,000 customers, as of January 29, 2023, including municipalities, private water companies and professional contractors. We recognize sales, net of sales tax, customer incentives, returns and discounts. Net sales fluctuate as a result of changes in product costs and tariffs. We seek to reflect these changes in our customer pricing in a timely manner, which will increase net sales if we are able to pass along price increases and decrease net sales if we are required to reduce our customer prices as a result of competitive dynamics.
We categorize our net sales into pipes, valves & fittings, storm drainage products, fire protection products and meter products:
•Pipe, valves, hydrants, fittings include these products and other complementary products and services. Pipe includes PVC, ductile iron, fusible HDPE, and copper tubing.
•Storm drainage products primarily include corrugated piping systems, retention basins, manholes, grates, geosynthetics, erosion control and other related products.
•Fire protection products primarily include fire protection pipe, sprinkler heads and devices as well as custom fabrication services.
•Meter products primarily include smart meter products, meter sets, meter accessories, installation, software and other services.
Gross Profit
Gross profit represents the difference between the product cost from suppliers (net of earned rebates and discounts and including the cost of inbound freight) and the net sale price to our customers. Gross profit may be impacted by the time between changes in supplier costs, tariffs and changes in our customer pricing. Gross profit may not be comparable to those of other companies, as other companies may include all of the costs related to their distribution network in cost of sales.
Operating Expenses
Operating expenses are primarily comprised of selling, general and administrative costs, which include personnel expenses (salaries, wages, incentive compensation, associate benefits and payroll taxes), rent, insurance, utilities, professional fees, freight out, fuel and repair and maintenance.
Net Income
Net income represents net sales less cost of sales, operating expenses, depreciation and amortization, interest expense, other expense and the provision for income taxes.
Net Income Attributable to Core & Main, Inc.
Net income attributable to Core & Main, Inc. represents net income less income attributable to non-controlling interests. Non-controlling interests represent owners of Partnership Interests of Holdings other than Core & Main.
Adjusted EBITDA
We define Adjusted EBITDA as EBITDA further adjusted for certain items management believes are not reflective of the underlying operations of our business, including (a) loss on debt modification and extinguishment, (b) equity-based compensation, (c) expenses associated with the public offerings and (d) expenses associated with acquisition activities. Adjusted EBITDA includes amounts otherwise attributable to non-controlling interests as we manage the consolidated company and evaluate operating performance in a similar manner. We use Adjusted EBITDA to assess the operating results and effectiveness of our business. See “—Non-GAAP Financial Measures” for further discussion of Adjusted EBITDA and a reconciliation to net income or net income attributable to Core & Main, Inc., the most directly comparable measure under U.S. generally accepted accounting principles (“GAAP”), as applicable.
Earnings Per Share
Earnings per share represents the Class A common stock basic and diluted earnings per share. For a further description of basic and diluted earnings per share, refer to Note 10 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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Results of Operations
Three Months Ended October 29, 2023 Compared with Three Months Ended October 30, 2022
Amounts in millions (except per share data)
| Three Months Ended | |||||||||||
| October 29, 2023 | October 30, 2022 | ||||||||||
Net sales | $ | 1,827 | $ | 1,818 | |||||||
Cost of sales | 1,333 | 1,318 | |||||||||
| Gross profit | 494 | 500 | |||||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative | 240 | 231 | |||||||||
Depreciation and amortization | 37 | 35 | |||||||||
Total operating expenses | 277 | 266 | |||||||||
Operating income | 217 | 234 | |||||||||
Interest expense | 20 | 16 | |||||||||
Income before provision for income taxes | 197 | 218 | |||||||||
Provision for income taxes | 39 | 40 | |||||||||
Net income | 158 | 178 | |||||||||
| Less: net income attributable to non-controlling interests | 46 | 67 | |||||||||
| Net income attributable to Core & Main, Inc. | $ | 112 | $ | 111 | |||||||
| Earnings per share: | |||||||||||
| Basic | $ | 0.65 | $ | 0.65 | |||||||
| Diluted | $ | 0.65 | $ | 0.65 | |||||||
| Non-GAAP Financial Data: | |||||||||||
| Adjusted EBITDA | $ | 260 | $ | 275 | |||||||
Net Sales
Net sales for the three months ended October 29, 2023 increased $9 million, or 0.5%, to $1,827 million compared with $1,818 million for the three months ended October 30, 2022. Net sales increased primarily due to acquisitions partially offset by comparably lower end-market volumes. Net sales declines for pipes, valves & fittings were due to lower end-market volume partially offset by acquisitions. Net sales growth for storm drainage products benefited from higher volume primarily related to acquisitions. Net sales for fire protection products declined due to lower selling prices and lower volume on steel pipe. Net sales of meter products benefited from acquisitions and higher volumes due to an increasing adoption of smart meter technology.
| Three Months Ended | |||||||||||||||||
| October 29, 2023 | October 30, 2022 | Percentage Change | |||||||||||||||
Pipes, valves & fittings products | $ | 1,222 | $ | 1,238 | (1.3) | % | |||||||||||
Storm drainage products | 290 | 282 | 2.8 | % | |||||||||||||
Fire protection products | 170 | 180 | (5.6) | % | |||||||||||||
Meter products | 145 | 118 | 22.9 | % | |||||||||||||
Total net sales | $ | 1,827 | $ | 1,818 | |||||||||||||
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Gross Profit
Gross profit for the three months ended October 29, 2023 decreased $6 million, or 1.2%, to $494 million compared with $500 million for the three months ended October 30, 2022. Gross profit as a percentage of net sales for the three months ended October 29, 2023 was 27.0% compared with 27.5% for the three months ended October 30, 2022. The overall decline in gross profit as a percentage of net sales was primarily attributable to larger prior year benefits from strategic inventory investments during an inflationary environment, partially offset by favorable impacts from the execution of our gross margin initiatives.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses for the three months ended October 29, 2023 increased $9 million, or 3.9%, to $240 million compared with $231 million during the three months ended October 30, 2022. The increase was primarily attributable to an increase of $3 million in personnel expenses along with higher facility and other distribution costs related to inflation and acquisitions. SG&A expenses as a percentage of net sales were 13.1% for the three months ended October 29, 2023 compared with 12.7% for the three months ended October 30, 2022. The increase was attributable to inflationary cost impacts.
Depreciation and Amortization Expense
Depreciation and amortization (“D&A”) expense for the three months ended October 29, 2023 was $37 million compared with $35 million during the three months ended October 30, 2022. The increase was primarily attributable to recent acquisitions partially offset by lower amortization on existing customer relationship intangible assets.
Operating Income
Operating income for the three months ended October 29, 2023 decreased $17 million, or 7.3%, to $217 million compared with $234 million during the three months ended October 30, 2022. The decrease in operating income was primarily attributable to lower gross profit and higher SG&A expenses.
Interest Expense
Interest expense was $20 million for the three months ended October 29, 2023 compared with $16 million for the three months ended October 30, 2022. The increase was primarily attributable to an increase in interest rates on our variable-rate debt.
Provision for Income Taxes
The provision for income taxes for the three months ended October 29, 2023 decreased $1 million, or 2.5%, to $39 million compared with $40 million for the three months ended October 30, 2022. For the three months ended October 29, 2023 and October 30, 2022, our effective tax rate was 19.8% and 18.3%, respectively. The effective tax rate for each period reflects only the portion of net income that is attributable to taxable entities. The increase in the effective tax rate was attributable to exchanges of Partnership Interests by non-controlling interest holders that increased the allocation of net income to taxable entities.
Net Income
Net income for the three months ended October 29, 2023 decreased $20 million, or 11.2%, to $158 million compared with $178 million for the three months ended October 30, 2022. The decrease in net income was primarily attributable to a decrease in operating income.
Net Income Attributable to Non-controlling Interests
Net income attributable to non-controlling interests for the three months ended October 29, 2023 decreased $21 million, or 31.3%, to $46 million compared with $67 million for the three months ended October 30, 2022. The decrease was primarily attributable to exchanges of Partnership Interests by non-controlling interest holders and an 11.2% decline in net income.
Net Income Attributable to Core & Main, Inc.
Net income attributable to Core & Main, Inc. for the three months ended October 29, 2023 increased $1 million, or 0.9%, to $112 million compared with $111 million for the three months ended October 30, 2022. The increase was attributable to decreased allocation to non-controlling interest holders following exchanges of Partnership Interests partially offset by an 11.2% decline in net income.
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Earnings Per Share
The Class A common stock basic earnings per share for the three months ended October 29, 2023 and the three months ended October 30, 2022 was $0.65 in each period. The Class A common stock diluted earnings per share for the three months ended October 29, 2023 and the three months ended October 30, 2022 was $0.65 in each period. The basic earnings per share was flat due to an increase in net income attributable to Core & Main, Inc. offset by higher Class A share counts from exchanges of Partnership Interests. The diluted earnings per share was flat due to lower share counts following the Repurchase Transactions and was offset by a decline in net income.
Adjusted EBITDA
Adjusted EBITDA for the three months ended October 29, 2023 decreased $15 million, or 5.5%, to $260 million compared with $275 million for the three months ended October 30, 2022. The decrease in Adjusted EBITDA was primarily attributable to lower gross profit and higher SG&A expenses. For a reconciliation of Adjusted EBITDA to net income or net income attributable to Core & Main, Inc., the most comparable GAAP financial metric, as applicable, see “—Non-GAAP Financial Measures.”
Nine Months Ended October 29, 2023 Compared with Nine Months Ended October 30, 2022
Amounts in millions (except per share data)
| Nine Months Ended | |||||||||||
| October 29, 2023 | October 30, 2022 | ||||||||||
Net sales | $ | 5,262 | $ | 5,277 | |||||||
Cost of sales | 3,828 | 3,855 | |||||||||
| Gross profit | 1,434 | 1,422 | |||||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative | 701 | 667 | |||||||||
Depreciation and amortization | 109 | 104 | |||||||||
Total operating expenses | 810 | 771 | |||||||||
Operating income | 624 | 651 | |||||||||
Interest expense | 59 | 46 | |||||||||
Income before provision for income taxes | 565 | 605 | |||||||||
Provision for income taxes | 110 | 108 | |||||||||
Net income | 455 | 497 | |||||||||
| Less: net income attributable to non-controlling interests | 147 | 185 | |||||||||
| Net income attributable to Core & Main, Inc. | $ | 308 | $ | 312 | |||||||
| Earnings per share: | |||||||||||
| Basic | $ | 1.81 | $ | 1.85 | |||||||
| Diluted | $ | 1.80 | $ | 1.82 | |||||||
| Non-GAAP Financial Data: | |||||||||||
| Adjusted EBITDA | $ | 750 | $ | 771 | |||||||
Net Sales
Net sales for the nine months ended October 29, 2023 decreased $15 million, or 0.3%, to $5,262 million compared with $5,277 million for the nine months ended October 30, 2022. The decrease in net sales was primarily attributable to a reduction in volume from comparably lower end-market volumes partially offset by higher selling prices and acquisitions. Net sales declines for pipes, valves & fittings were due to lower end-market volume partially offset by higher selling prices and acquisitions. Net sales growth for storm drainage products benefited from higher selling prices and acquisitions. Net sales for fire protection products declined due to lower selling prices and lower volume on steel pipe. Net sales of meter products benefited from higher selling prices, higher volumes due to an increasing adoption of smart meter technology by municipalities and acquisitions.
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| Nine Months Ended | |||||||||||||||||
| October 29, 2023 | October 30, 2022 | Percentage Change | |||||||||||||||
Pipes, valves & fittings products | $ | 3,579 | $ | 3,639 | (1.6) | % | |||||||||||
Storm drainage products | 783 | 757 | 3.4 | % | |||||||||||||
Fire protection products | 513 | 544 | (5.7) | % | |||||||||||||
Meter products | 387 | 337 | 14.8 | % | |||||||||||||
Total net sales | $ | 5,262 | $ | 5,277 | |||||||||||||
Gross Profit
Gross profit for the nine months ended October 29, 2023 increased $12 million, or 0.8%, to $1,434 million compared with $1,422 million for the nine months ended October 30, 2022. Gross profit increased, despite a net sales decline, due to an increase in gross profit as a percentage of net sales. Gross profit as a percentage of net sales for the nine months ended October 29, 2023 was 27.3% compared with 26.9% for the nine months ended October 30, 2022. The overall increase in gross profit as a percentage of net sales was primarily attributable to execution of our gross margin initiatives partially offset by larger prior year benefits from strategic inventory investments during an inflationary environment.
Selling, General and Administrative Expenses
SG&A expenses for the nine months ended October 29, 2023 increased $34 million, or 5.1%, to $701 million compared with $667 million during the nine months ended October 30, 2022. The increase was primarily attributable to an increase of $13 million in personnel expenses along with higher facility and other distribution costs related to inflation and acquisitions. SG&A expenses as a percentage of net sales were 13.3% for the nine months ended October 29, 2023 compared with 12.6% for the nine months ended October 30, 2022. The increase was primarily attributable to inflationary cost impacts.
Depreciation and Amortization Expense
D&A expense was $109 million for the nine months ended October 29, 2023 compared with $104 million for the nine months ended October 30, 2022. D&A increased due to recent acquisitions and was partially offset by lower amortization on existing customer relationship intangible assets.
Operating Income
Operating income for the nine months ended October 29, 2023 decreased $27 million, or 4.1%, to $624 million compared with $651 million during the nine months ended October 30, 2022. The decrease in operating income was attributable to higher SG&A expense partially offset by higher gross profit.
Interest Expense
Interest expense was $59 million for the nine months ended October 29, 2023 compared with $46 million for the nine months ended October 30, 2022. The increase was primarily attributable to an increase in interest rates on our variable-rate debt.
Provision for Income Taxes
The provision for income taxes for the nine months ended October 29, 2023 increased $2 million, or 1.9%, to $110 million compared with $108 million for the nine months ended October 30, 2022. For the nine months ended October 29, 2023 and October 30, 2022, our effective tax rate was 19.5% and 17.9%, respectively. The effective tax rate for each period reflects only the portion of net income that is attributable to taxable entities. The increase in the effective tax rate was attributable to exchanges of Partnership Interests by non-controlling interest holders that increased the allocation of net income to taxable entities.
Net Income
Net income for the nine months ended October 29, 2023 decreased $42 million, or 8.5%, to $455 million compared with $497 million for the nine months ended October 30, 2022. The decrease in net income was primarily attributable to a decrease in operating income and higher interest expense.
Net Income Attributable to Non-controlling Interests
Net income attributable to non-controlling interests for the nine months ended October 29, 2023 decreased $38 million, or 20.5%, to $147 million compared with $185 million for the nine months ended October 30, 2022. The decrease was attributable to exchanges of Partnership Interests by non-controlling interest holders and an 8.5% decline in net income.
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Net Income Attributable to Core & Main, Inc.
Net income attributable to Core & Main, Inc. for the nine months ended October 29, 2023 decreased $4 million, or 1.3%, to $308 million compared with $312 million for the nine months ended October 30, 2022. The decrease was primarily attributable to an 8.5% decline in net income partially offset by decreased allocation to non-controlling interest holders following exchanges of Partnership Interests.
Earnings Per Share
The Class A common stock basic earnings per share for the nine months ended October 29, 2023 decreased 2.2% to $1.81 compared with $1.85 for the nine months ended October 30, 2022. The Class A common stock diluted earnings per share for the nine months ended October 29, 2023 decreased 1.1% to $1.80 compared with $1.82 for the nine months ended October 30, 2022. The decrease in basic earnings per share was attributable to a decline in net income attributable to Core & Main, Inc. and higher Class A share counts from exchanges of Partnership Interests. Diluted earnings per share decreased due to a decline in net income partially offset by lower share counts following the Repurchase Transactions.
Adjusted EBITDA
Adjusted EBITDA for the nine months ended October 29, 2023 decreased $21 million, or 2.7%, to $750 million compared with $771 million for the nine months ended October 30, 2022. The decrease in Adjusted EBITDA was primarily attributable to higher SG&A expenses partially offset by higher gross profit. For a reconciliation of Adjusted EBITDA to net income or net income attributable to Core & Main, Inc., the most comparable GAAP financial metric, as applicable, see “—Non-GAAP Financial Measures.”
Liquidity and Capital Resources
Historically, we have financed our liquidity requirements through cash flows from operating activities, borrowings under our credit facilities, issuances of equity and debt securities and working capital management activities. Our principal historical liquidity requirements have been for working capital, capital expenditures, acquisitions servicing indebtedness and the Fiscal 2023 Repurchase Transactions.
As of October 29, 2023, our cash and cash equivalents totaled $101 million. We maintain our cash deposits according to a banking policy that requires diversification across a variety of highly-rated financial institutions. However, this could result in a concentration of cash and cash equivalents across these financial institutions in excess of Federal Deposit Insurance Corporation-insured limits.
As of October 29, 2023, we had no outstanding borrowings on our Senior ABL Credit Facility, which provides for borrowings of up to $1,250 million, subject to borrowing base availability. As of October 29, 2023, after giving effect to approximately $16 million of letters of credit issued under the Senior ABL Credit Facility, Core & Main LP would have been able to borrow approximately $1,234 million under the Senior ABL Credit Facility, subject to borrowing base availability. Our short term debt obligations of $15 million are related to quarterly amortization principal payments on the Senior Term Loan Facility.
We commenced payments under the Tax Receivable Agreements in fiscal year 2023, as the Company had a financing cash outflow related to the payment of $5 million under the Tax Receivable Agreements. The total payments under the Tax Receivable Agreements are expected to increase as a result of exchanges, including those exchanges made as part of the Fiscal 2023 Secondary Offerings. Payments under the Tax Receivable Agreements are only required to be made to the extent that we utilize the corresponding tax deductions to reduce payments to federal, state and local taxing authorities. These payments are in an amount that represents 85% of the reduction in payments to federal, state and local taxing authorities. As such, the cash savings from the incremental tax deductions are expected to exceed the payments under the Tax Receivable Agreements over the life of these arrangements. Based on the anticipated filing date of income tax returns and contractual payment terms in the Tax Receivable Agreements, we expect these payments to occur two fiscal years after we utilize the corresponding tax deductions.
Further exchanges will result in additional tax deductions to us and require additional payables pursuant to Tax Receivable Agreements. The actual amount and timing of the additional payments under the Tax Receivable Agreements will vary depending upon a number of factors as discussed further in Note 7 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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In addition to making distributions to Core & Main, Inc. to fund tax obligations and payments under the Tax Receivable Agreements, in accordance with the Partnership Agreement, Holdings also makes distributions to the Continuing Limited Partners representing the non-controlling interests of Core & Main, Inc. to fund their income tax obligations with various taxing authorities. The amount of these payments are dependent upon various factors, including the amount of taxable income allocated to them from Holdings, changes in the ownership percentage of the non-controlling interest holders, changes in tax rates and the timing of distributions relative to the corresponding tax year. Tax distributions to non-controlling interest holders were $33 million for the nine months ended October 29, 2023. Further exchanges by the Continuing Limited Partners may result in lower tax distributions subject to any changes to income before provision to income taxes.
We believe that our current sources of liquidity, which include cash generated from operations, existing cash and cash equivalents and available borrowing capacity under the Senior ABL Credit Facility, will be sufficient to meet our working capital, capital expenditures and other cash commitments, including obligations relating to our indebtedness and the Tax Receivable Agreements, over at least the next 12 months. We have based these estimates on assumptions that may differ from actual results, and we could utilize our available capital resources sooner than we expect. Our growth strategy contemplates future acquisitions for which we will need sufficient access to capital. To finance future acquisitions, particularly larger acquisitions, we may issue additional equity or incur additional indebtedness. Any such additional indebtedness would increase our debt leverage. See “Risk Factors” in Part I, Item 1A of the 2022 Annual Report on Form 10-K.
Additionally, we continuously evaluate our approach to our capital allocation, which may include acquisitions, greenfields, debt reduction (including through open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and opportunistic refinancing of debt), stock repurchases, dividends or other distributions. During the nine months ended October 29, 2023, we completed the Repurchase Transactions for total consideration of $618 million. For further details, refer to Note 1 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. We may continue to return capital to our shareholders through share repurchases and/or dividends. The execution of these, and other, capital allocation activities may be at the discretion of, and subject to the approval by, our board of directors and will depend on our financial condition, earnings, liquidity and capital requirements, market conditions, level of indebtedness, contractual restrictions, compliance with our debt covenants, restrictions imposed by Delaware law, general business conditions and any other factors that our board of directors deems relevant in making any such determination. Therefore, there can be no assurance that we will engage in any or all of these actions or to what amount of capital we will allocate to each option. Our affiliates may also purchase our debt from time to time, through open market purchases or other transactions. In such cases, our debt may not be retired, in which case we would continue to pay interest in accordance with the terms of such debt and we would continue to reflect the debt as outstanding in our consolidated Balance Sheets.
The execution of certain initiatives under our capital allocation policy may require distributions by Holdings and Core & Main LP. These entities’ ability to make distributions may be limited as a practical matter by our growth plans as well as Core & Main LP’s Senior Term Loan Facility and Senior ABL Credit Facility. The Senior Term Loan Facility may require accelerated repayment based upon cash flows generated in excess of operating and investing requirements when Core & Main LP’s net total leverage ratio is greater than or equal to 3.25. In addition, the Senior ABL Credit Facility requires us to comply with a consolidated fixed charge coverage ratio of greater than or equal to 1.00 when availability is less than 10.0% of the lesser of (i) the then applicable borrowing base and (ii) the then aggregate effective commitments under the Senior ABL Credit Facility. Substantially all of Core & Main LP’s assets secure the Senior Term Loan Facility and the Senior ABL Credit Facility.
Information about our cash flows, by category, is presented in the Condensed Consolidated Statements of Cash Flows and is summarized as follows:
| Nine Months Ended | |||||||||||
| October 29, 2023 | October 30, 2022 | ||||||||||
| Cash flows provided by operating activities | $ | 775 | $ | 94 | |||||||
| Cash flows used in investing activities | (182) | (133) | |||||||||
| Cash flows (used in) provided by financing activities | (669) | 38 | |||||||||
| Decrease in cash and cash equivalents | $ | (76) | $ | (1) | |||||||
Operating Activities
Net cash provided by operating activities was $775 million for the nine months ended October 29, 2023 compared with $94 million for the nine months ended October 30, 2022. The $681 million improvement in operating cash flows was primarily driven by a reduction in inventory due to more predictable product lead times in fiscal 2023, compared with inventory investments in fiscal 2022, partially offset by a $42 million increase in interest payments and a decrease in operating income.
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Investing Activities
Net cash used in investing activities increased by $49 million to $182 million for the nine months ended October 29, 2023 compared with $133 million for the nine months ended October 30, 2022, primarily attributable to a $37 million increase in cash outflows for acquisitions and a $14 million increase in capital expenditures during fiscal 2023.
Financing Activities
Net cash used in financing activities was $669 million for the nine months ended October 29, 2023 compared with net cash provided by financing activities of $38 million for the nine months ended October 30, 2022. The change of $707 million was primarily attributed to the cash outflows of $618 million for the Repurchase Transactions, a $90 million decrease in borrowings on the Senior ABL Credit Facility and a $5 million payment pursuant to the Tax Receivable Agreements. These factors were partially offset by a $6 million decrease in distributions to non-controlling interest holders during fiscal 2023.
Financing
Our debt obligations (in millions) consist of the following:
| Current Aggregate Principal/Borrowing Capacity | Maturity Date | Interest | ||||||||||||||||||
| Senior Term Loan | $1,466 | July 27, 2028 | (i) Term SOFR plus, in each case, an effective applicable margin of 2.60%, or (ii) the base rate, which will be the highest of (x) the corporate base rate established by the administrative agent as its prime rate in effect at its principal office in New York City from time to time, (y) the overnight federal funds rate plus 0.50% per annum and (z) one-month Term SOFR (adjusted for maximum reserves) plus 1.00% per annum, plus, in each case, an applicable margin of 1.50%. | |||||||||||||||||
Senior ABL Credit Facility(1) | 1,250 | July 27, 2026 | Term SOFR rate plus an applicable margin ranging from 1.25% to 1.75%, or an alternate base rate plus an applicable margin ranging from 0.25% to 0.75%, depending on the borrowing capacity under the Senior ABL Credit Facility. | |||||||||||||||||
Interest Rate Swap(2) | 900 | July 27, 2026 | Effective fixed rate of 3.293%, based upon the 0.693% fixed rate plus an effective applicable margin of 2.60% associated with the Senior Term Loan Facility. | |||||||||||||||||
(1)Aggregate amount of commitments under the asset-based revolving credit facility of $1,250 million overall, subject to borrowing base availability. There were no amounts outstanding under the Senior ABL Credit Facility as of October 29, 2023.
(2)Notional amount of $900 million as of October 29, 2023. The notional amount decreases to $800 million on July 27, 2024 and $700 million on July 27, 2025 through the instrument maturity on July 27, 2026.
Refer to Note 6 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a description of our debt obligations and the timing of future principal and interest payments including impacts from our interest rate swap.
Purchase Obligations
As of October 29, 2023, the Company had agreements in place with various suppliers to purchase goods and services, primarily inventory, in the aggregate amount of $978 million. These purchase obligations are generally cancelable, but the Company foresees no intent to cancel. Payments are generally expected to be made during fiscal 2023 and fiscal 2024 for these obligations.
Non-GAAP Financial Measures
In addition to providing results that are determined in accordance with GAAP, we present EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. These measures are not considered measures of financial performance or liquidity under GAAP and the items excluded therefrom are significant components in understanding and assessing our financial performance or liquidity. These measures should not be considered in isolation or as alternatives to GAAP measures such as net income or net income attributable to Core & Main, Inc., as applicable, cash provided by or used in operating, investing or financing activities or other financial statement data presented in our financial statements as an indicator of our financial performance or liquidity.
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We define EBITDA as net income, or net income attributable to Core & Main, Inc., as applicable, adjusted for non-controlling interests, depreciation and amortization, provision for income taxes and interest expense. We define Adjusted EBITDA as EBITDA as further adjusted for certain items management believes are not reflective of the underlying operations of our business, including (a) loss on debt modification and extinguishment, (b) equity-based compensation, (c) expenses associated with the public offerings and (d) expenses associated with acquisition activities. Net income attributable to Core & Main, Inc. is the most directly comparable GAAP measure to EBITDA and Adjusted EBITDA.
We use EBITDA and Adjusted EBITDA to assess the operating results and effectiveness and efficiency of our business, Adjusted EBITDA includes amounts otherwise attributable to non-controlling interests as we manage the consolidated company and evaluate operating performance in a similar manner. We present these non-GAAP financial measures because we believe that investors consider them to be important supplemental measures of performance, and we believe that these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Non-GAAP financial measures as reported by us may not be comparable to similarly titled metrics reported by other companies and may not be calculated in the same manner. These measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. For example, EBITDA and Adjusted EBITDA:
• do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on debt;
• do not reflect income tax expenses, the cash requirements to pay taxes or related distributions;
• do not reflect cash requirements to replace in the future any assets being depreciated and amortized; and
• exclude certain transactions or expenses as allowed by the various agreements governing our indebtedness.
EBITDA and Adjusted EBITDA are not alternative measures of financial performance or liquidity under GAAP and therefore should be considered in conjunction with net income, net income attributable to Core & Main, Inc. and other performance measures such as gross profit or net cash provided by or used in operating, investing or financing activities and not as alternatives to such GAAP measures. In evaluating Adjusted EBITDA, you should be aware that, in the future, we may incur expenses similar to those eliminated in this presentation.
The following table sets forth a reconciliation of net income or net income attributable to Core & Main, Inc. to EBITDA and Adjusted EBITDA for the periods presented:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 29, 2023 | October 30, 2022 | October 29, 2023 | October 30, 2022 | ||||||||||||||||||||
| Net income attributable to Core & Main, Inc. | $ | 112 | $ | 111 | $ | 308 | $ | 312 | |||||||||||||||
| Plus: net income attributable to non-controlling interest | 46 | 67 | 147 | 185 | |||||||||||||||||||
| Net income | 158 | 178 | 455 | 497 | |||||||||||||||||||
Depreciation and amortization (1) | 38 | 37 | 111 | 107 | |||||||||||||||||||
| Provision for income taxes | 39 | 40 | 110 | 108 | |||||||||||||||||||
| Interest expense | 20 | 16 | 59 | 46 | |||||||||||||||||||
| EBITDA | $ | 255 | $ | 271 | $ | 735 | $ | 758 | |||||||||||||||
| Equity-based compensation | 3 | 2 | 8 | 9 | |||||||||||||||||||
Acquisition expenses (2) | 1 | 1 | 4 | 3 | |||||||||||||||||||
Offering expenses (3) | 1 | 1 | 3 | 1 | |||||||||||||||||||
| Adjusted EBITDA | $ | 260 | $ | 275 | $ | 750 | $ | 771 | |||||||||||||||
(1)Includes depreciation of certain assets which is reflected in “cost of sales” in our Statement of Operations.
(2)Represents expenses associated with acquisition activities, including transaction costs, post-acquisition employee retention bonuses, severance payments, expense recognition of purchase accounting fair value adjustments (excluding amortization) and contingent consideration adjustments.
(3)Represents costs related to the Secondary Offerings (as defined in Note 1 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q) reflected in SG&A expenses in our Statement of Operations.
Recently Issued and Adopted Accounting Pronouncements and Accounting Pronouncements Issued But Not Yet Adopted
Refer to Note 2 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on form 10-Q.
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Critical Accounting Policies and Estimates
A summary of our significant accounting policies are discussed in Note 2 to the audited consolidated financial statements in our 2022 Annual Report on Form 10-K. The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Our estimates and assumptions are based on historical experiences and changes in the business environment. However, actual results may differ from estimates under different conditions, sometimes materially. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results of operations and require management judgment. There have been no significant changes to these policies which have had a material impact on the Company’s interim unaudited condensed consolidated financial statements and related notes during the three and nine months ended October 29, 2023.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of October 29, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of conducting business, we are exposed to certain risks associated with potential changes in market conditions. These risks include fluctuations in interest rates and prices, including price fluctuations related to substantially all of our products.
Interest Rate Risk
Our credit facilities bear interest at a floating rate. Both the Senior Term Loan Facility and the Senior ABL Credit Facility bear interest generally equal to Term SOFR plus an applicable margin. As a result, we are exposed to fluctuations in interest rates to the extent of our net borrowings under the Senior Term Loan Facility and the Senior ABL Credit Facility. As of October 29, 2023, our net borrowings under the Senior Term Loan Facility and Senior ABL Credit Facility were $1,466 million. As such, excluding the impact of any interest rate swap, each one percentage point change in interest rates would result in an approximately $15 million change in the annual interest expense on the Senior Term Loan Facility. As of October 29, 2023, assuming availability under our Senior ABL Credit Facility was fully utilized, each one percentage point change in interest rates would result in an approximately $12 million change in annual interest expense. See “Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Key Factors Affecting Our Business—Interest Rates.”
Credit Risk
We are exposed to credit risk on accounts receivable balances. This risk is mitigated due to our large, diverse customer base. In fiscal 2022, our 50 largest customers accounted for approximately 12% of our net sales, with our largest customer accounting for less than 1% of net sales. We maintain provisions for potential credit losses and such losses to date have normally been within our expectations. We evaluate the solvency of our customers on an ongoing basis to determine if additional allowances for doubtful accounts receivable need to be recorded. We have historically not been exposed to a material amount of uncollectible receivable balances.
Price Risk
We are exposed to price fluctuations in the cost to procure substantially all the products we sell and our ability to reflect these changes, in a timely manner, in our customer pricing. Our operating performance may be affected by both upward and downward price fluctuations. We have a limited ability to control the timing an amount of changes in the cost to procure our products. We seek to recover increases in our product costs by passing product cost increases on to our customers. Conversely, decreases in our product costs can correspondingly lower the price levels of the products we sell in order to remain competitive in our markets. Changes to product costs may lead to a risk of a reduction to our margins, which we seek to minimize through strategic inventory investments ahead of announced price increases, the execution of our gross margin initiatives and accretive acquisitions. We are also exposed to fluctuations in petroleum costs as we deliver a substantial portion of the products we sell by truck and fluctuations in prices for imported products due to logistical challenges. We seek to minimize the effects of changing prices through economies of purchasing, inventory management based on the predictability of product lead teams and recovering product costs by passing cost increases on to customers. Such price fluctuations have from time to time produced volatility in our financial performance and could do so in the future.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports under the Exchange Act that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) concluded that, as of October 29, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost–effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently party to any material legal proceedings. Nevertheless, we are from time to time involved in litigation incidental to the ordinary conduct of our business, including personal injury, workers’ compensation and business operations. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Like other companies in our industry, we have been subject to personal injury and property damage claims arising from the types of products that we distribute. As a distributor in this industry, we face an inherent risk of exposure to product liability claims in the event that the use of the products we have distributed in the past or may in the future distribute is alleged to have resulted in economic loss, personal injury or property damage or violated environmental, health or safety or other laws. Such product liability claims in the past have included, and may in the future include, allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. In particular, we have been and continue to be a defendant in asbestos-related litigation matters. See Item 1A. “Risk Factors—Risks Related to Our Business—The nature of our business exposes us to product liability, construction defect and warranty claims and other litigation and legal proceedings” in our Fiscal 2022 Annual Report on Form 10-K.
Item 1A. Risk Factors
Except as set forth below, there have been no material changes from the risk factors disclosed in Part I, Item1A "Risk Factors” in our Fiscal 2022 Annual Report on Form 10-K.
The CD&R Investors continue to have significant control over us and may have conflicts of interest with other stockholders.
As of November 15, 2023, the CD&R Investors will beneficially own shares of our common stock representing approximately 33.3% of the combined voting power of our common stock through its ownership of Class A common stock and Class B common stock. As a result, the CD&R Investors will continue to have significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could reduce the market price of our Class A common stock.
Because the CD&R Investors’ interests may differ from your interests, actions the CD&R Investors take as significant stockholders may not be favorable to you. For example, the concentration of voting power held by the CD&R Investors could delay, defer or prevent a change of control of us, impede a merger, takeover or other business combination that another stockholder may otherwise view favorably or cause us to enter into transactions or agreements that are not in the best interests of all stockholders. Other potential conflicts could arise, for example, over matters such as associate retention or recruiting, or our dividend policy.
The CD&R Investors have the right to designate for nomination for election to our board of directors at least 30% of our directors and to designate the Chair of our board of directors as long as the CD&R Investors (together with their affiliates) collectively beneficially own shares of our common stock and our other equity securities representing at least 30% and 25%, respectively, of the total voting power of the outstanding shares of our common stock and our other equity securities.
Anti-takeover provisions in our Certificate of Incorporation and our amended and restated by-laws (the “By-laws”) could discourage, delay or prevent a change of control of our company and may affect the trading price of our Class A common stock.
Our Certificate of Incorporation and By-laws include a number of provisions that may discourage, delay or prevent a change in our management or control over us even if our stockholders might consider such changes to be favorable. For example, our Certificate of Incorporation and By-laws collectively:
•authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a takeover attempt;
•provide for a classified board of directors, which divides our board of directors into three classes, with members of each class serving staggered three-year terms, which prevents stockholders from electing an entirely new board of directors at an annual meeting;
•limit the ability of stockholders to remove directors without cause;
•provide that vacancies on our board of directors, including vacancies resulting from an enlargement of our board of directors, may be filled only by a majority vote of directors then in office;
•prohibit stockholders from calling special meetings of stockholders;
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•prohibit stockholder action by consent in writing or electronic transmission, thereby requiring all actions to be taken at a meeting of the stockholders;
•opt out of Section 203 of the Delaware General Corporation Law (the “DGCL”), which prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years following the time the person became an interested stockholder, or any successor provision to Section 203, until Section 203 by its terms would, but for the applicable provisions of our Certificate of Incorporation, apply to us and the CD&R Investors (together with their affiliates) cease to beneficially own shares of our common stock representing at least 5% of the total voting power of the outstanding shares of our common stock;
•establish advance notice requirements for nominations of candidates for election as directors or to bring other business before an annual meeting of our stockholders; and
•require the approval of holders of at least 66 2/3% of the voting power of the outstanding shares of our common stock then entitled to vote thereon to amend our By-laws and certain provisions of our Certificate of Incorporation.
These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our Class A common stock offered by a bidder in a takeover context or from changing our management and board of directors. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our Class A common stock if the provisions are viewed as discouraging takeover attempts in the future.
Our Certificate of Incorporation and By-laws may also make it difficult for stockholders to replace or remove our management. Furthermore, the existence of the foregoing provisions, as well as the significant amount of the total voting power that the CD&R Investors have, could limit the price that investors might be willing to pay in the future for shares of our Class A common stock. These provisions may facilitate management entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not be in the best interests of our stockholders.
We are no longer a “controlled company” within the meaning of the NYSE rules. However, we may continue to rely on exemptions from certain corporate governance requirements during a one-year transition period.
As of September 19, 2023, we are no longer a “controlled company” within the meaning of the NYSE corporate governance standards. The NYSE rules require that (i) we have at least a majority of independent directors on each of the Talent and Compensation and Nominating and Governance Committees within 90 days of the date that we no longer qualify as a “controlled company”; and (ii) that the Talent and Compensation and Nominating and Governance Committees be composed entirely of independent directors within one year of the date that we no longer qualify as a “controlled company.” Accordingly, during the transition period, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE. Furthermore, a change in our board of directors and committee membership may result in a change in our operation philosophies and deviations from our current corporate strategy.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
a. Sales of Unregistered Securities
None.
b. Use of Proceeds from Public Offering of Common Stock
None.
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c. Issuer Purchases of Equity Securities
The following is a summary of our repurchases of shares of Class A common stock during the three months ended October 29, 2023:
| Period | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) or Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
July 31 - August 31(1) | 5,090 | $ | 32.11 | N/A | N/A | |||||||||||||||||||||
September 1 - September 30(1)(2) | 3,125,974 | 29.02 | N/A | N/A | ||||||||||||||||||||||
October 1 - October 29(1) | 10,329 | 31.03 | N/A | N/A | ||||||||||||||||||||||
| 3,141,393 | $ | 29.03 | — | — | ||||||||||||||||||||||
(1) Reflects repurchases by the Company of shares of our Class A common stock pursuant to employee tax withholding obligations and strike price settlement upon exercise of unit appreciation rights and vesting of restricted stock units pursuant to terms of the Company’s 2021 Omnibus Equity Incentive Plan, except for the transaction described in footnote (2) below.
(2) Includes the repurchase by the Company of 3,125,728 shares of our Class A common stock for a price per share of $29.015 on September 19, 2023 in connection with the September 2023 Repurchase Transaction (as defined in Note 1 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q). The Company also repurchased 1,874,272 shares of our Class B common stock in connection with the September 2023 Repurchase Transaction for no additional consideration.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 408(a) of Regulation S-K requires the Company to disclose whether any of its directors or officers have adopted or terminated (i) any trading arrangement that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c); and/or (ii) any written trading arrangement that meets the requirements of a “non-Rule 10b5-1 trading arrangement” as defined in Item 408(c) of Regulation S-K. During the quarter ended October 29, 2023, the following activity occurred requiring disclosure under Item 408(a) of Regulation S-K.
Each of the above trading arrangements is intended to satisfy the affirmative defense of Rule 10b5-1 (c) under the Exchange Act and the Company’s Policy on Trading in Securities.
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Item 6. Exhibits
Exhibit Number | Description | |||||||
| 10.1 | ||||||||
31.1 | ||||||||
31.2 | ||||||||
32.1 | ||||||||
32.2 | ||||||||
101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.* | |||||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document.* | |||||||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.* | |||||||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document.* | |||||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document.* | |||||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document.* | |||||||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document).* | |||||||
* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: December 5, 2023 | CORE & MAIN, INC. | |||||||
By: | /s/ Stephen O. LeClair | |||||||
Name: Stephen O. LeClair | ||||||||
Title: Chief Executive Officer | ||||||||
(Principal Executive Officer) | ||||||||
By: | /s/ Mark R. Witkowski | |||||||
Name: Mark R. Witkowski | ||||||||
Title: Chief Financial Officer | ||||||||
(Principal Financial Officer) | ||||||||
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Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen O. LeClair, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Core & Main, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: December 5, 2023 | /s/ Stephen O. LeClair | ||||
| Stephen O. LeClair | |||||
| Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark R. Witkowski, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Core & Main, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: December 5, 2023 | /s/ Mark R. Witkowski | ||||
| Mark R. Witkowski | |||||
| Chief Financial Officer | |||||
| (Principal Financial Officer) | |||||
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Core & Main, Inc. (the “Company”) on Form 10-Q for the quarter ended October 29, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen O. LeClair, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: December 5, 2023 | /s/ Stephen O. LeClair | ||||
Stephen O. LeClair | |||||
Chief Executive Officer | |||||
(Principal Executive Officer) | |||||
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Core & Main, Inc. (the “Company”) on Form 10-Q for the quarter ended October 29, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark R. Witkowski, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: December 5, 2023 | /s/ Mark R. Witkowski | ||||
Mark R. Witkowski | |||||
Chief Financial Officer | |||||
(Principal Financial Officer) | |||||