CORE & MAIN, INC. 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 ofCore & Main Holdings, LP for the fiscal year endedJanuary 31, 2021 included in our Prospectus. 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." Overview We are a leading specialized distributor of water, wastewater, storm drainage and fire protection products and related services to municipalities, private water companies and professional contractors across municipal, non-residential and residential end markets nationwide. Our specialty products and services are used in the maintenance, repair, replacement, and construction of water and fire protection infrastructure. We reach customers through a nationwide network of more than 285 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 waste-water systems as well as fire protection systems. We complemented our core products through additional offerings, including smart meter systems, fusible high density polyethylene ("fusible HDPE") piping solutions and specifically engineered treatment plant products, services and geosynthetics used in erosion control. Our services and capabilities allow for integration with customers and form part of their sourcing and procurement function. Basis of PresentationCore & Main, Inc. ("Core & Main" and collectively with its subsidiaries, the "Company," "we," "our" or "us") is a holding company and its sole material asset is its direct and indirect ownership interest inCore & Main Holdings, LP , aDelaware limited partnership ("Holdings"). Holdings has no operations and no material assets of its own other than its indirect ownership interest inCore & Main LP , aFlorida limited partnership, the legal entity that conducts the operations ofCore & Main . BecauseCore & 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 ofCore & 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 ownership interest of theContinuing Limited Partners related to Partnership Interests (each as defined below under "-Recent Developments") held by theContinuing Limited Partners is reflected as non-controlling interests inCore & Main's condensed consolidated financial statements. As the Reorganization Transactions (as defined below under "-Recent Developments") are accounted for as transactions between entities under common control, the financial statements for the periods prior to our initial public offering ("IPO") and Reorganization Transactions have been adjusted to combine previously separate entities for presentation purposes. These entities includeCore & Main , Holdings and its consolidated subsidiaries and the Blocker Companies (as defined below under "-Recent Developments"). Prior to the Reorganization Transactions,Core & Main had no operations. Fiscal Year Our fiscal year is a 52- or 53-week period ending on the Sunday nearest toJanuary 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. Both the three months endedAugust 1, 2021 and three months endedAugust 2, 2020 included 13 weeks, and both the six months endedAugust 1, 2021 and six months endedAugust 2, 2020 included 26 weeks. The current fiscal year endingJanuary 30, 2022 ("fiscal 2021") will include 52 weeks. 32
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Recent Developments
Initial Public OfferingCore & Main is aDelaware corporation that was incorporated onApril 9, 2021 for the purpose of facilitating an IPO and other related transactions, as described below, in order to carry on the business of Holdings and its consolidated subsidiaries. OnJuly 27, 2021 , we completed our initial public offering of 34,883,721 shares of Class A common stock at a price to the public of$20.00 per share (the "IPO Transaction"). We received net proceeds of approximately$663.7 million , after deducting underwriting discounts and commissions. All of the net proceeds from the IPO Transaction, less$7.8 million of transaction costs directly attributable to the IPO Transaction, were utilized to purchase 34,883,721 newly issued limited partner interests of Holdings ("Partnership Interests") for approximately$655.9 million in the aggregate. Holdings and its consolidated subsidiaries used the amount received fromCore & Main , the proceeds from the Refinancing Transactions (as defined below) and cash on hand to repay certain existing indebtedness. Exercise of Underwriters' Option OnAugust 20, 2021 , we issued 5,232,558 shares of Class A common stock pursuant to the full exercise of the underwriters' option to purchase additional shares of Class A common stock in connection with the IPO Transaction at the initial public offering price of$20.00 per share before underwriting discounts and commissions. We received net proceeds of approximately$99.5 million after deducting underwriting discounts and commissions. All of the net proceeds were utilized to purchase 5,232,558 newly issued Partnership Interests of Holdings at a price per unit equal to the public offering price per share less underwriting discounts and commissions. Holdings and its consolidated subsidiaries intend to use the net proceeds received fromCore & Main for general corporate purposes. Reorganization Transactions In connection with the IPO, we completed the following transactions (collectively the "Reorganization Transactions"): •the formation ofCore & Main as aDelaware corporation to function as the direct and indirect parent of Holdings and a publicly traded entity; •the amendment and restatement of the limited partnership agreement of Holdings to, among other things first, modify the capital structure of Holdings and second, admitCore & Main as the general partner and a limited partner of Holdings; •Core & Main's acquisition of the Partnership Interests held by certainFormer Limited Partners (as defined below) and the issuance of Class A common stock to theFormer Limited Partners , pursuant to the mergers ofCD&R WW Advisor, LLC andCD&R WW Holdings, LLC (the "Blocker Companies") with and intoCore & Main via merger subsidiaries ofCore & Main (the "Blocker Mergers"); and •entry into a Master Reorganization Agreement, dated as ofJuly 22, 2021 (the "Master Reorganization Agreement") with Holdings, theContinuing Limited Partners , the Blocker Companies, CD&R Waterworks Holdings GP,CD&R Associates X Waterworks, L.P. ,CD&R WW Holdings, L.P. ,Core & Main GP, LLC ,CD&R Plumb Buyer, LLC ,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. ,CD&R WW, LLC , Brooks Merger Sub 1, Inc. and Brooks Merger Sub 2, Inc. Pursuant to the Master Reorganization Agreement, theFormer Limited Partners received Partnership Interests in exchange for their existing indirect ownership interests in Holdings and exchanged these Partnership Interests for shares of Class A common stock ofCore & Main prior to the consummation of the IPO Transaction.The Former Limited Partners are defined asCD&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 otherOriginal Limited Partners (as defined below) that transferred all or a portion of their Partnership Interests (including those held indirectly through the Blocker Companies) for shares of Class A common stock in connection with the Reorganization Transactions and the IPO Transaction, 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 consummation of the Reorganization Transactions.The Continuing Limited Partners are defined asCD&R Waterworks Holdings, LLC ("CD&R Waterworks Holdings ") andCore & Main Management Feeder, LLC ("Management Feeder"), and represent theOriginal Limited Partners that continued to own Partnership Interests after the Reorganization Transactions and that are entitled to exchange their Partnership Interests and shares of Class B common stock for shares of Class A common stock.The Original Limited Partners are defined asCD&R Waterworks Holdings , theFormer Limited Partners and Management Feeder and represent the direct and indirect owners of Holdings prior to the Reorganization Transactions and the IPO Transaction. 33 -------------------------------------------------------------------------------- Immediately following and as a result of the IPO Transaction and Reorganization Transactions and the use of proceeds therefrom as described above: •the investors in the IPO Transaction collectively held 34,883,721 shares of Class A common stock and, following the closing of the issuance and sale of an additional 5,232,558 shares of Class A common stock onAugust 20, 2021 pursuant to the full exercise of the underwriters' option to purchase additional shares of Class A common stock in connection with the IPO, collectively held 40,116,279 shares of Class A common stock; •theFormer Limited Partners collectively held 119,950,882 shares of Class A common stock; •we, directly or indirectly through our wholly-owned subsidiary, held 154,834,603 Partnership Interests and, following the closing of the issuance and sale of an additional 5,232,558 shares of Class A common stock described above and the issuance of an additional 5,232,558 from Holdings to us, held 160,067,161 Partnership Interests; and •theContinuing Limited Partners collectively held 85,853,383 Partnership Interests and 85,853,383 shares of Class B common stock. Refinancing Transactions OnJuly 27, 2021 ,Core & Main LP : (i) amended the terms of the credit agreement governing the senior term loan facility in an aggregate principal amount of$1,300.0 million maturing onAugust 1, 2024 issued byCore & Main LP (the "Senior Term Loan") in order to, among other things, enter into a new$1,500.0 million seven-year senior term loan (the "New Senior Term Loan") and (ii) amended the terms of the credit agreement governing the senior asset-based revolving credit facility in order to, among other things, increase the aggregate amount of commitments by$150.0 million to$850.0 million overall and extend the maturity date fromJuly 2024 toJuly 2026 (as amended, the "ABL Credit Facility").Core & Main LP and Holdings utilized the net proceeds from the IPO Transaction, together with the net proceeds from borrowings under the New Senior Term Loan and cash on hand, to redeem (i) all$300.0 million aggregate principal amount of the senior unsecured notes dueSeptember 15, 2024 issued by Holdings (the "Senior 2024 Notes") then outstanding at a redemption price equal to 102.000% of the aggregate principal amount thereof and (ii) all$750.0 million aggregate principal amount of the senior unsecured notes dueAugust 15, 2025 issued byCore & Main LP (the "Senior 2025 Notes") then outstanding at a redemption price equal to 101.531% of the aggregate principal amount thereof, plus, in each case, accrued and unpaid interest, by satisfying and discharging the indenture governing the Senior 2025 Notes at the closing of the IPO and redeeming the Senior 2025 Notes onAugust 15, 2021 .Additionally, Core & Main LP repaid$1,257.8 million outstanding under the Senior Term Loan, plus accrued and unpaid interest, and settled the interest rate swap associated with the Senior Term Loan (collectively, the "Refinancing Transactions"). Public Company Costs In connection with the IPO Transaction, we incurred one-time costs of approximately$11.4 million . We recorded$7.8 million as a reduction to additional paid in capital during the three and six months endedAugust 1, 2021 . Additionally, we recorded$1.3 million and$3.6 million within selling, general and administrative expenses during the three and six months endedAugust 1, 2021 , respectively. Following the IPO Transaction, we have incurred and will continue to incur additional legal, accounting and other expenses that we did not previously incur, including costs associated with public company director and officer liability insurance,SEC reporting and corporate governance requirements, which expenses we estimate to be approximately$10.0 million annually on an ongoing basis. These requirements include compliance with the Sarbanes-Oxley Act and the listing standards of theNew York Stock Exchange . Our financial statements following the IPO Transaction reflect the impact of these expenses. 34
-------------------------------------------------------------------------------- Post-Offering Taxation and Expenses We are subject toU.S. federal, state and local income taxes with respect to our allocable share of any taxable income of Holdings and will be taxed at the prevailing corporate tax rates. In connection with the Reorganization Transactions and the IPO Transaction, we entered into a tax receivable agreement with theFormer Limited Partners (the "Former Limited Partners Tax Receivable Agreement") and a tax receivable agreement with theContinuing Limited Partners (the "Continuing Limited Partners Tax Receivable Agreement") (collectively, the "Tax Receivable Agreements"). Prior and future exchanges of Partnership Interests in Holdings are expected to be treated as direct purchases of Partnership Interests forU.S. federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. We will receive the full benefit in tax savings and under the Tax Receivable Agreements will provide payment of 85% of the amount of any tax benefits we actually realize to theFormer Limited Partners or theContinuing Limited Partners , as applicable, or their permitted transferees. We expect to benefit from the remaining 15% of any cash savings that we realize. For the Tax Receivable Agreements, we will assess the tax attributes to determine if it is more likely than not that the benefit of any deferred tax assets will be realized. Following that assessment, we will recognize a liability under the Tax Receivable Agreements, reflecting approximately 85% of the expected future realization of such tax benefits. Amounts payable under the Tax Receivable Agreements are contingent upon, among other things, (i) generation of sufficient future taxable income during the term of the Tax Receivable Agreements and (ii) future changes in tax laws. Historically, Holdings has made distributions to its partners to fund their obligations to various taxing authorities. Following the Reorganization Transactions, Holdings expects to continue making pro rata distributions based on Partnership Interests, including distributions to us. Acquisitions OnAugust 9, 2021 , we completed the acquisition of all of the outstanding shares ofPacific Pipe Company, Inc. ("Pacific Pipe") in a transaction valued up to$102.5 million , subject to working capital adjustments. Pacific Pipe has four locations and serves municipalities and contractors in the water, wastewater, storm drainage and irrigation industries throughoutHawaii with a broad product offering. OnAugust 30, 2021 , we completed the acquisition of certain assets and assumption of certain liabilities ofL&M Bag & Supply Co., Inc. ("L&M") in a transaction valued up to$60.0 million , subject to working capital adjustments. L&M is a specialized supplier of geotextile fabrics and geogrids, as well as silt fences, turbidity barriers and safety fences, weed control fabric, and sod staples. Key Factors Affecting Our Business End-Markets and General Economic Conditions Historically, demand for our products has been closely tied to municipal infrastructure spending, residential construction and non-residential construction in theU.S. We estimate that, based on fiscal 2020 net sales, our exposure by end market was approximately 45% municipal, 37% non-residential and 18% 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. Seasonality Our operating results within a fiscal year are typically impacted by seasonality. Although weather patterns affect our operating results throughout the year, adverse winter weather historically has 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. 35 -------------------------------------------------------------------------------- Price Fluctuations Our financial performance is impacted by price fluctuations in commodity-based products and our ability to reflect these changes, in a timely manner, in our customer pricing. Such commodity-based products include PVC, ductile iron, fusible HDPE and steel and copper pipe and tubing products, which accounted for approximately 24% of our net sales in fiscal 2020. We are also exposed to fluctuations in costs for petroleum as we distribute a substantial portion of our products by truck. 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. Our ability to reflect these changes, in a timely manner, in our customer pricing may impact our financial performance. 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. 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. Certain commodity-based products have recently experienced price inflation due to a decline in supply related to impacts of adverse weather conditions and increases in demand. Beginning in the first half of fiscal 2021, we experienced significant price inflation in respect of both certain of our commodity-based products as well as other product categories and supply chain disruptions, which we expect to continue to experience in the near-term and have sought to mitigate through management of our sourcing and customer pricing. Interest Rates Certain of our indebtedness, including the New Senior Term Loan and borrowings under the ABL Credit Facility, are subject to variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on our variable-rate indebtedness would increase and our net income would decrease, even though the amount borrowed under the facilities remained the same. As ofAugust 1, 2021 , we had$1,500.0 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 that effectively converts$1,000.0 million of our variable rate debt to fixed rate debt, which notional amount decreases to$900.0 million onJuly 27, 2023 ,$800.0 million onJuly 27, 2024 , and$700.0 million onJuly 27, 2025 through the instrument maturity onJuly 27, 2026 . Despite these efforts, unfavorable movement in interest rates may 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 six months endedAugust 1, 2021 and fiscal 2020 and the related transaction value (in each case, excluding working capital and other purchase price adjustments, unless otherwise noted). Transaction Value Name Product Lines Closing Date (in millions)
Water Works Supply Co. Pipes, Valves & August 2020$12.0 Fittings Storm Drainage R&B Co. ("R&B") Pipes, Valves & March 2020 215.0 Fittings Storm Drainage 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. See "-Recent Developments-Acquisitions" above for information regarding acquisitions that closed subsequent toAugust 1, 2021 . 36
-------------------------------------------------------------------------------- COVID-19 Pandemic Governmental authorities nationally and in affected regions have responded (and continue to respond) to COVID-19 and related variants by mandating various restrictions in an effort to slow the spread of the virus. We have continued to operate as an essential business, providing products and services to our customers that they need to invest in and maintain our nation's infrastructure. We have implemented preparedness plans to help keep our team safe while we work, including new physical distancing processes and procedures, associate quarantine procedures, expanded "work from home" protocols and the use of additional personal protective equipment. Despite certain temporary branch closures during fiscal 2020 and the first quarter of fiscal 2021, all of our facilities currently are operational and able to fill orders, and our teams have worked effectively to address the few temporary closures we have experienced. The public health crisis caused by the COVID-19 pandemic, as well as the related government measures taken in response, have adversely affected (and could continue to adversely affect) some of the markets in which we operate. We experienced reduced demand for our products in the second and third quarters of fiscal 2020, and in response we deferred non-essential capital expenditures and other discretionary spending and temporarily paused acquisition-related activities, though we have since resumed these activities. In addition, the ability of certain of our associates to travel or otherwise perform their jobs was restricted and the ability of our customers to travel, conduct their business and pay or otherwise access credit was impaired. Following these government-instituted restrictions, we experienced temporary delays in certain construction and infrastructure projects primarily during the second quarter of fiscal 2020. Our business stabilized during the third quarter of fiscal 2020 as the substantial majority of construction and infrastructure activities resumed and sales volume returned to near pre-pandemic levels during the fourth quarter of fiscal 2020. During the first half of fiscal 2021, we experienced supply chain disruption related to COVID-19 and/or other supply chain constraints in certain product categories, including meters, and we expect to continue facing further supply chain disruptions as a result of the ongoing and dynamic COVID-19 pandemic. We continue to proactively monitor the situation and our supply chain and assess further possible implications to our business. CARES Act OnMarch 27, 2020 , theU.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act allowed for the deferral of the employer share of social security taxes for the period fromMarch 27, 2020 throughDecember 31, 2020 , and requires repayment of 50% of the deferred amount byDecember 31, 2021 and the remaining 50% byDecember 31, 2022 . As ofAugust 1, 2021 , we have deferred payment of$10.2 million in employer share of social security taxes in accordance with the CARES Act. The payments of the deferred payroll taxes in fiscal 2021 and fiscal 2022 are expected to result in additional operating cash outflows during these periods. The CARES Act also modified certain provisions in theU.S. Internal Revenue Code of 1986, as amended (the "Code") , including provisions regarding interest deductibility. As Holdings is a partnership, it is generally not subject toU.S. federal or state income tax; however, Holdings makes distributions to partners associated with potential tax consequences based on their allocation of taxable income. As such, the CARES Act-related changes did not impact Holdings' tax liabilities, but did reduce partner distributions. For fiscal 2020, these changes did not materially impact our results of operations but did result in improved operating and financing cash flows. We expect that the expiration of certain CARES Act provisions with respect to the Code will result in increased partner distributions by Holdings and tax payments byCore & Main in fiscal 2021. 37 -------------------------------------------------------------------------------- Key Business MetricsNet 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 ofJanuary 31, 2021 , 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 commodity-based 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, HDPE, steel and copper tubing. •Storm drainage products primarily include corrugated piping systems, retention basins, manholes, grates, geosynthetics used in 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, 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 and 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 our net sales less our cost of sales, operating expenses, depreciation and amortization, interest expense, other expense and our provision for income taxes forCore & Main and the consolidation of Holdings and its subsidiaries. Net Income Attributable toCore & Main, Inc. Net income attributable toCore & Main, Inc. represents net income less income attributable to non-controlling interests. Non-controlling interests represent owners of Partnership Interests of Holdings other thanCore & 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 IPO Transaction 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 attributable toCore & Main, Inc. , the most directly comparable measure underU.S. generally accepted accounting principles ("GAAP"). 38 --------------------------------------------------------------------------------
Results of Operations
Three Months EndedAugust 1, 2021 Compared with Three Months EndedAugust 2, 2020 Three Months Ended
(dollars in millions)
Net sales $ 1,297.6 $ 955.9
Cost of sales 972.4 725.3
Gross profit 325.2 230.6
Operating expenses:
Selling, general and administrative 191.8 136.8
Depreciation and amortization 33.6 34.3
Total operating expenses 225.4 171.1
Operating income 99.8 59.5
Interest expense 36.8 35.0
Loss on debt modification and extinguishment 50.4 -
Income before provision for income taxes 12.6 24.5
Provision for income taxes 3.1 6.4
Net income 9.5 $ 18.1
Less: net loss attributable to non-controlling interests (17.0)
Net income attributable to Core & Main, Inc. $ 26.5 Loss per share: Basic $ (0.14) Diluted $ (0.14) Non-GAAP Financial Data: Adjusted EBITDA $ 155.2 $ 99.0 Net Sales Net sales for the three months endedAugust 1, 2021 increased$341.7 million , or 35.7%, to$1,297.6 million compared with$955.9 million for the three months endedAugust 2, 2020 . The increase in net sales was primarily attributable to strong volume growth and price inflation, with price inflation representing approximately half of the net sales increase, which helped drive growth in all product lines. Net sales growth in pipes, valves & fitting products and storm drainage products benefited from end-market growth and higher price inflation across all product categories. Net sales of meter products grew at a slower pace primarily due to supply chain constraints for certain meter products. Three Months Ended August 1, 2021 August 2, 2020
Percentage Change
(dollars in millions)
Pipes, valves & fittings products $ 887.8
42.8 % Storm drainage products 172.8 142.6 21.2 % Fire protection products 137.9 101.0 36.5 % Meter products 99.1 90.6 9.4 % Total net sales$ 1,297.6 $ 955.9 39
-------------------------------------------------------------------------------- Gross Profit Gross profit for the three months endedAugust 1, 2021 increased$94.6 million , or 41.0%, to$325.2 million compared with$230.6 million for the three months endedAugust 2, 2020 . The increase in net sales contributed an additional$82.3 million of gross profit and the increase in gross profit as a percentage of net sales contributed$12.3 million . Gross profit as a percentage of net sales for the three months endedAugust 1, 2021 was 25.1% compared with 24.1% for the three months endedAugust 2, 2020 . The overall increase in gross profit as a percentage of net sales was primarily attributable to product sourcing and pricing improvements. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses for the three months endedAugust 1, 2021 increased$55.0 million , or 40.2%, to$191.8 million compared with$136.8 million during the three months endedAugust 2, 2020 . The increase was primarily attributable to an increase of$28.9 million in personnel expenses, which was primarily driven by higher variable compensation costs as a result of higher sales volume and increased headcount due to furloughs and headcount reductions in response to COVID-19 in the prior year, and lower discretionary spending in response to COVID-19 in the prior year. In addition, SG&A expenses increased by$17.2 million related to higher equity-based compensation expense due to accounting for equity awards and$1.3 million related to one-time costs in connection with the IPO Transaction. While we expect to incur ongoing equity-based compensation expense from the modification, the expense will be at levels substantially lower than the amounts recognized during the three months endedAugust 1, 2021 . Awards that were fully vested as ofAugust 1, 2021 represented$15.1 million of the modification expense recorded during the three months endedAugust 1, 2021 . Depreciation and Amortization Expense Depreciation and amortization ("D&A") expense for the three months endedAugust 1, 2021 was$33.6 million compared with$34.3 million during the three months endedAugust 2, 2020 . The decrease primarily was attributable to lower amortization of customer relationship intangible assets. Operating Income Operating income for the three months endedAugust 1, 2021 was$99.8 million compared with$59.5 million during the three months endedAugust 2, 2020 . The increase in operating income was attributable to higher net sales and gross profit, primarily from volume growth and price inflation. These factors were partially offset by higher variable compensation costs and higher equity-based compensation expense during the period and lower SG&A expenses in the prior year due to COVID-19-related decreases in headcount and discretionary spending. Interest Expense Interest expense was$36.8 million for the three months endedAugust 1, 2021 compared with$35.0 million for the three months endedAugust 2, 2020 . The increase was attributable to additional interest expense related to the now redeemed Senior 2025 Notes. The increase was partially offset by lower interest rates on the New Senior Term Loan due to the Refinancing Transactions and prior year borrowings on the ABL Credit Facility. We expect ongoing interest expense to be lower than the amount recognized during the three months endedAugust 1, 2021 due to the Refinancing Transactions and lower interest rates on the New Term Loan Facility. Loss on Debt Modification and Extinguishment For the three months endedAugust 1, 2021 , we recognized a loss on debt modification and extinguishment of$50.4 million . The loss on debt modification and extinguishment included (i) a write off of$7.7 million in deferred financing fees associated with the redemption of the Senior 2024 Notes, (ii) a write off of$13.2 million in deferred financing fees associated with the redemption of the Senior 2025 Notes, (iii) a write off of$4.8 million in deferred financing fees associated with the settlement of the Senior Term Loan, (iv) redemption premiums of$6.0 million and$11.5 million for the Senior 2024 Notes and Senior 2025 Notes, respectively, (v) the settlement of the cash flow interest rate swap of$5.2 million , and (vi) third-party expenses for the New Senior Term Loan of$2.0 million . 40
-------------------------------------------------------------------------------- Provision for Income Taxes The provision for income taxes for the three months endedAugust 1, 2021 decreased$3.3 million to$3.1 million compared with$6.4 million for the three months endedAugust 2, 2020 . For the three months endedAugust 1, 2021 andAugust 2, 2020 our effective tax rate was 24.6% and 26.1%, respectively. The effective tax rate for each period reflects only the portion of net income that is attributable to taxable entities (which are comprised ofCore & Main following the Reorganization Transactions and the Blocker Companies before the Reorganization Transactions) and the impact of certain permanent book-tax differences. Net Income Net income for the three months endedAugust 1, 2021 decreased$8.6 million to$9.5 million compared with$18.1 million for the three months endedAugust 2, 2020 . The decrease in net income was primarily attributable to the$50.4 million loss on debt modification and extinguishment and a$17.2 million equity modification charge, partially offset by higher operating income. Net Loss Attributable to Non-controlling Interests Net loss attributable to non-controlling interests for the three months endedAugust 1, 2021 was$17.0 million . This represents the allocation of Holdings net loss for the period fromJuly 23, 2021 throughAugust 1, 2021 to holders of Partnership Interests other thanCore & Main . Holdings loss during the period fromJuly 23, 2021 throughAugust 1, 2021 was primarily attributable to the$50.4 million loss on debt modification and extinguishment in connection with the Refinancing Transactions. Net Income Attributable toCore & Main, Inc. Net income attributable toCore & Main, Inc. for the three months endedAugust 1, 2021 was$26.5 million . The net income attributable toCore & Main, Inc. includes net income of Holdings for the period fromMay 3, 2021 toJuly 22, 2021 . Loss Per Share The Class A common stock basic loss per share and diluted loss per share for the three months endedAugust 1, 2021 were$0.14 and$0.14 , respectively. The Class A common stock basic loss per share and diluted loss per share were calculated for the period fromJuly 23, 2021 throughAugust 1, 2021 , the period following the Reorganization Transactions. The net loss attributable toCore & Main, Inc. for the period fromJuly 23, 2021 toAugust 1, 2021 primarily reflectsCore & Main's share of the$50.4 million loss on debt modification and extinguishment that occurred onJuly 27, 2021 . Adjusted EBITDA Adjusted EBITDA for the three months endedAugust 1, 2021 increased$56.2 million , or 56.8%, to$155.2 million compared with$99.0 million for the three months endedAugust 2, 2020 . Growth in Adjusted EBITDA was primarily attributable to higher net sales and improved gross profit, partially offset by higher SG&A expenses, primarily attributable to higher variable compensation costs during the period and lower SG&A expenses in the prior year due to COVID-19-related decreases in headcount and discretionary spending. For a reconciliation of Adjusted EBITDA to net income attributable toCore & Main, Inc. , the most comparable GAAP financial metric, see "-Non-GAAP Financial Measures." 41 -------------------------------------------------------------------------------- Six Months EndedAugust 1, 2021 Compared with Six Months EndedAugust 2, 2020 Six Months Ended August 1, 2021 August 2, 2020 (dollars in millions) Net sales$ 2,352.7 $ 1,798.0 Cost of sales 1,770.7 1,368.2 Gross profit 582.0 429.8 Operating expenses: Selling, general and administrative 345.7 273.8 Depreciation and amortization 67.4 67.8 Total operating expenses 413.1 341.6 Operating income 168.9 88.2 Interest expense 72.3 68.2 Loss on debt modification and extinguishment 50.4 - Income before provision for income taxes 46.2 20.0 Provision for income taxes 9.3 5.1 Net income 36.9 $ 14.9 Less: net loss attributable to non-controlling interests
(17.0)
Net income attributable to Core & Main, Inc. $ 53.9 Loss per share: Basic $ (0.14) Diluted $ (0.14) Non-GAAP Financial Data: Adjusted EBITDA $ 264.3 $ 167.7 Net Sales Net sales for the six months endedAugust 1, 2021 increased$554.7 million , or 30.9%, to$2,352.7 million compared with$1,798.0 million for the six months endedAugust 2, 2020 . The increase in net sales was primarily attributable to strong volume growth and price inflation, which helped drive growth in all product lines. Net sales growth in pipes, valves & fitting products and storm drainage products benefited from end-market growth and higher price inflation across all product categories. Net sales also benefited from the acquisition of R&B inMarch 2020 . Net sales of meter products grew at a slower pace primarily due to supply chain constraints of certain meter products. Six Months Ended August 1, 2021 August 2, 2020 Percentage Change (dollars in millions) Pipes, valves & fittings products$ 1,592.8 $ 1,160.3 37.3 % Storm drainage products 302.5 246.6 22.7 % Fire protection products 256.6 209.2 22.7 % Meter products 200.8 181.9 10.4 % Total net sales$ 2,352.7 $ 1,798.0 42
-------------------------------------------------------------------------------- Gross Profit Gross profit for the six months endedAugust 1, 2021 increased$152.2 million , or 35.4%, to$582.0 million compared with$429.8 million for the six months endedAugust 2, 2020 . The increase in net sales contributed an additional$132.6 million of gross profit and the increase in gross profit as a percentage of net sales contributed$19.6 million . Gross profit as a percentage of net sales for the six months endedAugust 1, 2021 was 24.7% compared with 23.9% for the six months endedAugust 2, 2020 . The overall increase in gross profit as a percentage of net sales was primarily attributable to product sourcing and pricing improvements. Selling, General and Administrative Expenses SG&A expenses for the six months endedAugust 1, 2021 increased$71.9 million , or 26.3%, to$345.7 million compared with$273.8 million during the six months endedAugust 2, 2020 . The increase was primarily attributable to an increase of$42.4 million in personnel expenses, which was primarily driven by higher variable compensation costs as a result of higher sales volume and increased headcount due to furloughs and headcount reductions in response to COVID-19 in the prior year, lower discretionary spending in response to COVID-19 in the prior year, and incremental costs from acquisitions. In addition, during the six months endedAugust 1, 2021 , SG&A expenses increased by$17.2 million related to higher equity-based compensation expense due to accounting for equity awards and$3.6 million related to one-time costs in connection with the IPO Transaction. Awards that were fully vested as ofAugust 1, 2021 represented a majority of the modification expense recorded during the six months endedAugust 1, 2021 . Depreciation and Amortization Expense D&A expense for the six months endedAugust 1, 2021 was$67.4 million compared with$67.8 million during the six months endedAugust 2, 2020 . The decrease was primarily attributable to lower amortization of customer relationship intangible assets. Operating Income Operating income for the six months endedAugust 1, 2021 was$168.9 million compared with$88.2 million during the six months endedAugust 2, 2020 . The increase in operating income was attributable to higher net sales and gross profit, primarily from volume growth, price inflation, and acquisitions. These factors were partially offset by higher variable compensation costs, higher equity-based compensation expense and incremental costs from acquisitions during the period and lower SG&A expenses in the prior year due to COVID-19-related decreases in headcount and discretionary spending. Interest Expense Interest expense was$72.3 million for the six months endedAugust 1, 2021 compared with$68.2 million for the six months endedAugust 2, 2020 . The increase was attributable to the$250.0 million aggregate principal amount of incremental Senior 2025 Notes issued onJune 5, 2020 . The increase was partially offset by lower interest rates on our variable-rate debt and prior year borrowings on the ABL Credit Facility. Loss on Debt Modification and Extinguishment For the six months endedAugust 1, 2021 , we recognized a loss on debt modification and extinguishment of$50.4 million . The loss on debt modification and extinguishment included (i) a write off of$7.7 million in deferred financing fees associated with the redemption of the Senior 2024 Notes, (ii) a write off of$13.2 million in deferred financing fees associated with the redemption of the Senior 2025 Notes, (iii) a write off of$4.8 million in deferred financing fees associated with the settlement of the Senior Term Loan, (iv) redemption premiums of$6.0 million and$11.5 million for the Senior 2024 Notes and Senior 2025 Notes, respectively, (v) the settlement of the cash flow interest rate swap of$5.2 million which had its changes in fair value previously attributed to accumulated other comprehensive loss, and (vi) third-party expenses for the New Senior Term Loan of$2.0 million . Provision for Income Taxes The provision for income taxes for the six months endedAugust 1, 2021 increased$4.2 million to$9.3 million compared with$5.1 million for the six months endedAugust 2, 2020 . For the six months endedAugust 1, 2021 andAugust 2, 2020 , our effective tax rate was 20.1% and 25.5%, respectively. The effective tax rate for each period reflects only the portion of net income that is attributable to taxable entities (which are comprised ofCore & Main following the Reorganization Transactions and the Blocker Companies before the Reorganization Transactions) and the impact of certain permanent book-tax differences. 43 -------------------------------------------------------------------------------- Net Income Net income for the six months endedAugust 1, 2021 increased$22.0 million to$36.9 million compared with$14.9 million for the six months endedAugust 2, 2020 . The increase in net income was primarily attributable to higher net sales and improved gross profit, partially offset by higher variable SG&A expenses, the$50.4 million loss on debt modification and extinguishment and a$17.2 million equity modification charge. Net Loss Attributable to Non-controlling Interests Net loss attributable to non-controlling interests for the six months endedAugust 1, 2021 was$17.0 million . This represents the allocation of Holdings net loss for the period fromJuly 23, 2021 throughAugust 1, 2021 to holders of Partnership Interests other thanCore & Main . Holdings' loss during the period fromJuly 23, 2021 throughAugust 1, 2021 was primarily attributable to the$50.4 million loss on debt modification and extinguishment in connection with the Refinancing Transactions. Net Income Attributable toCore & Main, Inc. Net income attributable toCore & Main, Inc. for the six months endedAugust 1, 2021 was$53.9 million . The net income attributable toCore & Main, Inc. includes net income of Holdings for the period fromFebruary 1, 2021 toJuly 22, 2021 . Loss Per Share The Class A common stock basic loss per share and diluted loss per share for the six months endedAugust 1, 2021 were$0.14 and$0.14 , respectively. The Class A common stock basic loss per share and diluted loss per share were calculated for the period fromJuly 23, 2021 throughAugust 1, 2021 , the period following the Reorganization Transactions. The net loss attributable toCore & Main, Inc. for the period fromJuly 23, 2021 toAugust 1, 2021 , primarily reflectsCore & Main's share of the$50.4 million loss on debt modification and extinguishment that occurred onJuly 27, 2021 . Adjusted EBITDA Adjusted EBITDA for the six months endedAugust 1, 2021 increased$96.6 million , or 57.6%, to$264.3 million compared with$167.7 million for the six months endedAugust 2, 2020 . Growth in Adjusted EBITDA was primarily attributable to higher net sales and improved gross profit, partially offset by higher SG&A expenses, primarily attributable to higher variable compensation costs and costs from acquisitions during the period and lower SG&A expenses in the prior year due to COVID-19-related decreases in headcount and discretionary spending. For a reconciliation of Adjusted EBITDA to net income attributable toCore & Main, Inc. , the most comparable GAAP financial metric, 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 and servicing indebtedness. As ofAugust 1, 2021 , our cash and cash equivalents totaled$66.6 million and we had no outstanding borrowings on our ABL Credit Facility, which provides for borrowings of up to$850.0 million , subject to borrowing base availability. As ofAugust 1, 2021 , after giving effect to approximately$9.1 million of letters of credit issued under theABL Credit Facility, Core & Main LP would have been able to borrow approximately$840.9 million under the ABL Credit Facility. Our short term debt obligations of$15.0 million are related to quarterly amortization principal payments on the New Senior Term Loan. 44
-------------------------------------------------------------------------------- In connection with our IPO, we used the net proceeds of approximately$655.9 million , after deducting underwriting discounts, commissions and transaction costs directly attributable to the IPO Transaction, from the issuance of 34,883,721 shares of Class A common stock onJuly 27, 2021 to purchase an equivalent number of newly issued Partnership Interests from Holdings. In turn, Holdings andCore & Main LP used the net proceeds directly or indirectly received from us, together with the net proceeds from the New Senior Term Loan and cash on hand, to redeem all$300.0 million aggregate principal amount of the Senior 2024 Notes, plus accrued and unpaid interest, at a redemption price equal to 102.000% of the aggregate principal amount thereof, to redeem all$750.0 million aggregate principal amount of the Senior 2025 Notes, plus accrued and unpaid interest, at a redemption price equal to 101.531% of the aggregate principal amount thereof by satisfying and discharging the indenture governing the Senior 2025 Notes at the closing of the IPO and redeeming the Senior 2025 Notes onAugust 15, 2021 , and to prepay$1,257.8 million outstanding under the Senior Term Loan, plus accrued and unpaid interest. In connection with the underwriters' exercise in full of their option to purchase additional shares of Class A common stock, we used the net proceeds of approximately$99.5 million , after deducting underwriting discounts and commissions, from the issuance of 5,232,558 additional shares of Class A common stock onAugust 20, 2021 to purchase an equivalent number of newly issued Partnership Interests from Holdings. In turn, Holdings andCore & Main LP intend to use the net proceeds directly or indirectly received from us for general corporate purposes. We are required to make cash payments in future periods under the Tax Receivable Agreements. Payments to theFormer Limited Partners are expected to commence in fiscal year 2023, and the timing of payments to theContinuing Limited Partners is uncertain as it is dependent on the timing of their exchange of Partnership Interests and a corresponding number of shares of Class B common stock for shares of Class A common stock. 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. 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 we generate in the future and the federal tax rates then applicable. Assuming (i) that theContinuing Limited Partners exchanged all of their Partnership Interests at$26.50 per share of our Class A common stock (the closing stock price onJuly 30, 2021 ), (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 forU.S. federal income taxes and assumes the highest statutory rate apportioned to each state and local jurisdiction and (iv) that we earn 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, we would recognize a deferred tax asset (subject to offset with existing deferred tax liabilities) of approximately$827.3 million and a Continuing Limited Partners Tax Receivable Agreement liability of approximately$703.2 million , payable to theContinuing Limited Partners over the life of the Continuing Limited Partners Tax Receivable Agreement. The full exchange by theContinuing Limited Partners will also increaseCore & Main's deferred tax liability associated with its investment in Holdings by$84.5 million . The foregoing amounts are estimates only and are subject to change. Based on our planned operations, we believe our existing cash and cash equivalents, as well as available borrowing capacity under the ABL Credit Facility, will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months. We have based these estimates on assumptions that may prove to be wrong, 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 the Prospectus. Our ability to pay dividends may be limited as a practical matter by our growth plans as well as our credit agreements and other debt instruments insofar as we may seek to pay dividends out of funds made available to us byCore & Main LP , because our credit agreements directly or indirectly restrictCore & Main LP's ability to pay dividends or make loans to Holdings. The New Senior Term Loan may require accelerated repayment based upon cash flows generated in excess of operating and investing requirements whenCore & Main LP's net total leverage ratio is greater than or equal to 3.25. In addition, the 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 ABL Credit Facility. Substantially all ofCore & Main LP's assets secure the New Senior Term Loan and the ABL Credit Facility. 45 --------------------------------------------------------------------------------
Information about our cash flows, by category, is presented in the consolidated Statements of Cash Flows and is summarized as follows:
Six Months Ended
August
1, 2021
(dollars in millions)
Cash flows (used in) provided by operating activities $ (99.1) $ 93.2
Cash flows (used in) investing activities (12.9) (211.7)
Cash flows (used in) provided by financing activities (202.3) 229.4
(Decrease) increase in cash and cash equivalents $
(314.3)
Operating Activities Cash flows used in operating activities was a$99.1 million outflow for the six months endedAugust 1, 2021 compared with a$93.2 million inflow for the six months endedAugust 2, 2020 . The change was primarily driven by a higher investment in working capital based on strong net sales growth during the six months endedAugust 1, 2021 and a net increase in cash interest payments of$43.6 million . The higher interest payments were associated with the repayment of all accrued and unpaid interest on the Senior Term Loan, Senior 2024 Notes, and Senior 2025 Notes as part of the Refinancing Transactions. These factors were partially offset by higher gross profit driven in part by volume growth and price inflation. We expect cash interest payments for the remainder of fiscal 2021 to be substantially lower than fiscal 2020 as the Senior 2024 Notes and Senior 2025 Notes are no longer outstanding. Investing Activities Net cash used in investing activities decreased by$198.8 million to$12.9 million for the six months endedAugust 1, 2021 compared with$211.7 million for the six months endedAugust 2, 2020 , primarily attributable to the acquisition of R&B in fiscal 2020, partially offset by the payment for the settlement of an interest rate swap in fiscal 2021. Financing Activities Net cash used in financing activities was a$202.3 million outflow for the six months endedAugust 1, 2021 compared with a$229.4 million inflow for the six months endedAugust 2, 2020 . The change of$431.7 million was primarily attributable to a$1,076.8 million increase in outflows for debt repayments, net of debt issuances, discounts, issuance costs, and modification costs, and a$12.7 million increase in distributions to partners. The outflows were partially offset by net IPO proceeds of approximately$658.6 million , after deducting underwriting discounts, commissions and offering expenses paid.
Financing
New Senior Term LoanCore & Main LP entered into the New Senior Term Loan that matures onJuly 27, 2028 , with an original aggregate principal amount of$1,500.0 million . The New Senior Term Loan 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 New Senior Term Loan. The first quarterly principal payment is due onOctober 29, 2021 . The remaining balance is payable upon final maturity of the New Senior Term Loan onJuly 27, 2028 . The New Senior Term Loan bears interest at a LIBOR rate plus an applicable margin of 2.50%. The weighted average interest rate, excluding the effect of the interest rate swap, ofCore & Main LP's outstanding borrowings under the New Senior Term Loan as ofAugust 1, 2021 was 2.59%. 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 New Senior Term Loan was$1,485.0 million atAugust 1, 2021 . For additional information related to the New Senior Term Loan, see Note 6 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. 46 -------------------------------------------------------------------------------- Asset-Based Credit FacilityCore & Main LP has an asset-based revolving credit facility with a borrowing capacity of up to$850.0 million , subject to borrowing base availability, with a maturity date ofJuly 27, 2026 . Borrowings under the ABL Credit Facility bear interest at either a LIBOR 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 ABL Credit Facility.Additionally, Core & Main LP pays a fee of 0.25% on unfunded commitments under the ABL Credit Facility. The book value of the ABL Credit Facility approximates fair value due to the variable interest rate nature of these borrowings; however there were no amounts outstanding as ofAugust 1, 2021 . For additional information related to the ABL Credit Facility, see Note 6 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Potential for Future Debt Repurchases We may repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our financial position. These actions could include open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and opportunistic refinancing of debt. The amount of debt that may be repurchased or otherwise retired, if any, will depend on market conditions, trading levels of our debt, cash position, compliance with debt covenants and other considerations. Our affiliates may also purchase 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 the debt, and we would continue to reflect the debt as outstanding in our consolidated balance sheets. Interest Rate Swap OnJuly 27, 2021 ,Core & Main LP entered into an interest rate swap in which it makes payments to a third-party based upon a fixed interest rate of 0.74% and receives payments based upon the one-month LIBOR rate, based on notional amounts associated with borrowings under the New Senior Term Loan. The measurement period of the instrument commenced onJuly 27, 2021 with a notional amount of$1,000.0 million . The notional amount decreases to$900.0 million onJuly 27, 2023 ,$800.0 million onJuly 27, 2024 , and$700.0 million onJuly 27, 2025 through the instrument maturity onJuly 27, 2026 . This instrument is intended to reduce the Company's exposure to variable interest rates under the New Senior Term Loan. As ofAugust 1, 2021 this resulted in an effective fixed rate of 3.24%, based upon the 0.74% fixed rate plus an applicable margin of 2.50%, on$1,000.0 million of borrowings under the New Senior Term Loan. The fair value of this cash flow interest rate swap was a$1.5 million liability as ofAugust 1, 2021 which is included within other liabilities in the Balance Sheet. 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 LIBOR rates and the discount rate applied to projected cash flows. Purchase Obligations As ofAugust 1, 2021 , the Company had agreements in place with various vendors to purchase goods and services, primarily inventory, in the aggregate amount of$916.8 million . These purchase obligations are generally cancelable, but the Company foresees no intent to cancel. Payment is generally expected to be made during fiscal 2021 for these obligations.
Leases
The Company occupies certain facilities and operates certain equipment and vehicles under operating leases that expire at various dates through the year 2036. Future aggregate rental payments under non-cancelable operating leases as ofAugust 1, 2021 were as follows:$27.8 million in the remainder of fiscal 2021,$44.1 million in fiscal 2022,$34.9 million in fiscal 2023,$24.6 million in fiscal 2024,$15.7 million in fiscal 2025 and$19.5 million thereafter. 47
-------------------------------------------------------------------------------- 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 attributable toCore & Main, Inc. , 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. We define EBITDA as net income attributable toCore & Main, Inc. 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 IPO Transaction and (d) expenses associated with acquisition activities. Net income attributable toCore & 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 attributable toCore & 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. 48
--------------------------------------------------------------------------------
The following table sets forth a reconciliation of net income attributable to
Three Months Ended Six Months Ended
August 1, 2021 August 2, 2020 August 1, 2021 August 2, 2020
Net income attributable to Core & Main,
Inc. $ 26.5 $ 53.9
Plus: net loss attributable to
non-controlling interests (17.0) (17.0)
Net income 9.5 $ 18.1 36.9 $ 14.9
Depreciation and amortization (1) 34.4 35.3 69.1 69.7
Provision for income taxes 3.1 6.4 9.3 5.1
Interest expense 36.8 35.0 72.3 68.2
EBITDA $ 83.8 $ 94.8 $ 187.6 $ 157.9
Loss on debt modification and
extinguishment 50.4 - 50.4 -
Equity-based compensation 18.5 1.0 19.5 2.0
Acquisition expenses (2) 1.2 3.2 3.2 7.8
IPO Transaction expenses (3) 1.3 - 3.6 -
Adjusted EBITDA $ 155.2 $ 99.0 $ 264.3 $ 167.7
(1)Includes depreciation of certain assets which are reflected in "cost of
sales" in our historical 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 IPO Transaction.
Recently Issued and Adopted Accounting Pronouncements and Accounting
Pronouncements Issued But Not Yet Adopted
See Note 2 of our unaudited condensed consolidated financial statements.
Critical Accounting Policies and Estimates
A summary of our significant accounting policies is included in Note 2 of our
unaudited condensed consolidated financial statements. 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. Our
critical accounting policies and estimates are described below.
Revenue Recognition
Our revenues are earned from contracts with customers. These contracts include
written agreements and purchase orders as well as arrangements that are implied
by customary business practices or law. The revenue contracts are primarily
single performance obligations for the sale of product or performance of
services for customers. Revenue is recognized when title is passed to the
customer in an amount that reflects the consideration we expect to be entitled
to in exchange for the products and services, which is net of sales tax,
customer incentives, returns and discounts. For product sales, the transfer of
title generally occurs at the point of destination for products shipped by
internal fleet and at the point of shipping for products shipped by third-party
carriers. Estimates for expected customer incentives, returns and discounts are
based on historical experience, anticipated performance and management's
judgment. Generally, our contracts do not contain significant financing as the
standard sales terms are short term in nature.
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--------------------------------------------------------------------------------Inventories
Inventories consist primarily of finished goods and are carried at the lower of
cost or net realizable value. The cost of substantially all inventories is
determined by the weighted average cost method. We evaluate our inventory value
at the end of each quarter to ensure that it is carried at the lower of cost or
net realizable value. This evaluation includes an analysis of historical
physical inventory results and a review of potential excess and obsolete
inventories based on inventory aging and anticipated future demand.
Periodically, perpetual inventory records are adjusted to reflect any declines
in net realizable value below inventory carrying cost. To the extent historical
physical inventory results are not indicative of future results and if future
events impact, either favorably or unfavorably, the salability of our products
or our relationship with certain key vendors, our inventory reserves could
differ significantly, resulting in either higher or lower future inventory
provisions. The carrying value of inventory includes the capitalization of
inbound freight costs and is net of vendor rebates and purchase discounts for
products not yet sold.
Consideration Received from Vendors
We enter into agreements with many of our vendors providing for inventory
purchase rebates ("vendor rebates") upon achievement of specified volume
purchasing levels. We accrue the receipt of vendor rebates as part of our cost
of sales for products sold based on progress towards earning the vendor rebates,
taking into consideration cumulative purchases of inventory to the measurement
date and projected purchases through the end of the year. An estimate of vendor
rebates is included in the carrying value of inventory at each period end for
vendor rebates to be received on products not yet sold. While we believe we will
continue to receive consideration from vendors in fiscal 2021 and thereafter,
there can be no assurance that vendors will continue to provide comparable
amounts of vendor rebates in the future.
Impairment of Long-Lived Assets
Long-lived assets, including property and equipment and finite-lived
intangibles, are reviewed for possible impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. Management periodically assesses for triggering events and
discusses any significant changes in the utilization of long-lived assets, which
may result from, but are not limited to, an adverse change in the asset's
physical condition or a significant adverse change in the business climate. To
analyze recoverability, we project undiscounted future cash flows over the
remaining life of the asset. If these projected cash flows are less than the
carrying amount, an impairment loss is recognized based on the fair value of the
asset less any costs of disposition. Our judgment regarding the existence of
impairment indicators are based on market and operational performance. Future
events could cause us to conclude that impairment indicators exist and that
assets are impaired. Evaluating the impairment also requires us to estimate
future operating results and cash flows that require judgment by management. If
different estimates were used, the amount and timing of asset impairments could
be affected.
Goodwill
In performing goodwill assessments, management relies on a number of factors
including operating results, business plans, economic projections, anticipated
future cash flows, transactions and market place data. There are inherent
uncertainties related to these factors and judgment in applying them to the
analysis of goodwill impairment. Since judgment is involved in performing
goodwill valuation analyses, there is risk that the carrying value of our
goodwill may be overstated. During the fiscal 2020 annual assessment, we tested
goodwill for impairment by performing a quantitative assessment that compared
the fair value of the reporting unit with its carrying value. We determined the
fair value of our reporting unit through a combination of an income approach
based on the present value of discounted cash flows and a market approach based
on the sales and EBITDA multiples from operations and purchase transaction of
comparable companies. Determining fair value in the income approach required
utilization of significant assumptions, including discount rate and sales growth
rates. Significant assumptions used in the market approach included EBITDA
multiples for the peer public companies. The cash flows employed in the
discounted cash flow analysis were based on our long-range forecasts and an
estimated terminal value. The discount rate used in the discounted cash flow
analysis was intended to reflect the risks inherent in the future cash flows of
the respective reporting unit. For the market approach, we evaluated comparable
company public trading values and recent transactions, using EBITDA multiples
and sales multiples that were used to value the reporting unit.
We test goodwill during the fourth quarter of each year for impairment, or more
frequently if certain indicators are present or changes in circumstances suggest
that impairment may exist. When the book value exceeds the fair value of the
goodwill, we record an impairment charge equal to this difference.
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--------------------------------------------------------------------------------Acquisitions
We enter into acquisitions to strategically expand in underpenetrated products and markets. When we acquire a business or assets that are determined to meet the definition of a business, we allocate the purchase consideration paid to acquire the business to the assets and liabilities acquired based on estimated fair values at the acquisition date, with the excess of purchase price over the estimated fair value of the net assets acquired recorded as goodwill. If during the measurement period (a period not to exceed 12 months from the acquisition date) we receive additional information that existed as of the acquisition date but at the time of the original allocation described above was unknown to us, we make the appropriate adjustments to the purchase price allocation in the reporting period that the amounts are determined. For each acquisition, we value intangible assets acquired which may include customer relationships, non-compete agreements and/or trademarks. Customer relationship intangible assets represent the value associated with those customer relationships in place at the date of the acquisition. We value 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. We reflect this expected diminishing cash flow through the utilization of an annual customer attrition rate assumption and in its method of amortization. Non-compete intangible assets represent the value associated with non-compete agreements for former executives in place at the date of the acquisition. Trademark intangible assets represent the value associated with the brand names in place at the date of the acquisition. Income Taxes As a result of the Reorganization Transactions,Core & Main became the general partner of Holdings, which is treated as a partnership forU.S. federal and most applicable state and local income tax purposes. As a partnership, Holdings is not generally subject toU.S. federal and certain state and local income taxes. Any taxable income or loss from Holdings is passed through to and included in the taxable income or loss of its partners, includingCore & Main , following the Reorganization Transactions.Core & Main is subject toU.S. federal income taxes, in addition to state and local income taxes, with respect toCore & Main's allocable share of any taxable income or loss of Holdings following the Reorganization Transactions. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If its determined that the Company is able to realize deferred tax assets in the future in excess of their net recorded amount, an adjustment would be made to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. Uncertain tax positions are recorded on the basis of a two-step process in which (1) it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We record interest and penalties related to uncertain tax positions in the provision for income taxes in the unaudited Condensed Consolidated Statements of Operations. Tax Receivable Agreements Under the Tax Receivable Agreements, we expect to generate tax attributes that will reduce amounts that we would otherwise pay in the future to various tax authorities. The Former Limited Partners Tax Receivable Agreement provides for the payment by us to certainFormer Limited Partners , or their permitted transferees, of 85% of the tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize, as a result of (i) certain tax attributes of the Partnership Interests we hold in respect of suchFormer Limited Partners' interest in us, including such attributes which resulted from suchFormer Limited Partners' prior acquisition of ownership interests in Holdings and our allocable share of existing tax basis acquired in connection with the IPO Transaction attributable to theFormer Limited Partners and (ii) certain other tax benefits. 51 -------------------------------------------------------------------------------- The Continuing Limited Partners Tax Receivable Agreement provides for the payment by us to theContinuing Limited Partners , or their permitted transferees, of 85% of the benefits, if any, that we realize, or in some circumstances are deemed to realize, as a result of (i) increases in tax basis or other similar tax benefits as a result of exchanges of Partnership Interests for cash or shares of our Class A common stock pursuant to the Exchange Agreement, dated as ofJuly 22, 2021 (the "Exchange Agreement"), by and amongCore & Main , Holdings,CD&R Waterworks Holdings, LLC and Core & Main Management Feeder ("Management Feeder"), (ii) our allocable share of existing tax basis acquired in connection with the IPO Transaction attributable to theContinuing Limited Partners and in connection with exchanges of Partnership Interests for cash or shares of our Class A common stock pursuant to the Exchange Agreement and (iii) our utilization of certain other tax benefits related to our entering into the Continuing Limited Partners Tax Receivable Agreement, including tax benefits attributable to payments under the Continuing Limited Partners Tax Receivable Agreement. We expect to obtain an increase in our share of the tax basis in the net assets of Holdings as Partnership Interests are exchanged byContinuing Limited Partners . We intend to treat any exchanges of Partnership Interests as direct purchases of Partnership Interests forU.S. federal income tax purposes. These increases in tax basis may reduce the amounts that it would otherwise pay in the future to various tax authorities. We will receive the full benefit in tax savings from relevant taxing authorities and provide payment of 85% of the amount of any tax benefits we actually realize to theFormer Limited Partners orContinuing Limited Partners , as applicable, or their permitted transferees. We expect to benefit from the remaining 15% of any cash tax savings that we realize. For the Tax Receivable Agreements, we will assess the tax attributes to determine if it is more likely than not that the benefit of any deferred tax assets will be realized. Following that assessment, we will recognize a liability under the applicable Tax Receivable Agreements, reflecting approximately 85% of the expected future realization of such tax benefits. Amounts payable under the Tax Receivable Agreements are contingent upon, among other things, (i) generation of sufficient future taxable income during the term of the applicable Tax Receivable Agreements and (ii) future changes in tax laws. The establishment of the$88.6 million liability as ofAugust 1, 2021 under the Former Limited Partners Tax Receivable Agreements did not impact earnings as the payments were recorded against equity sinceCore & Main entered into the Tax Receivable Agreements as part of common control transactions. Equity-Based Compensation We recognize the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those awards. That cost is recognized over the requisite service period (generally the vesting period), which is the period during which an employee is required to provide service in exchange for the award. In connection with the Reorganization Transactions, which included the recapitalization of Management Feeder and entry into the Exchange Agreement, the equity awards issued by Holdings and held by Management Feeder were deemed to be modified for accounting purposes. We calculated the incremental fair value associated with the modification and will recognize this incremental fair value immediately for each vested award with no remaining service period and over the remaining service period associated with each unvested award. The incremental fair value associated with previously vested awards was expensed immediately as there was no remaining service period. Basic and Diluted Loss per Share Basic loss per share is computed by dividing net loss attributable toCore & Main for the period following the Reorganization Transactions by the weighted average number of shares of Class A common stock outstanding during the same period. Shares of Class A common stock issued during that period, including shares of Class A common stock issued in the IPO Transaction, were weighted for the portion of that period in which the shares of Class A common stock were outstanding. We did not apply the two-class method because shares of Class B common stock do not participate in earnings or losses ofCore & Main . As a result, no earnings or loss per share of Class B common stock was presented. Losses allocated to holders of non-controlling interests were excluded from losses available to the Class A common stock. There were no preferred dividends and no shares of preferred stock outstanding for the period. The diluted net loss 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 and 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. 52
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Non-controlling Interests The non-controlling interests represent the Partnership Interests of Holdings held by theContinuing Limited Partners . Income or loss is attributed to the non-controlling interests based on the weighted average percentage of Partnership Interests held byContinuing Limited Partners , excluding unvested Partnership Interests held by Management Feeder, relative to all Partnership Interests of Holdings during the period following the Reorganization Transactions. The non-controlling interests' ownership percentage may fluctuate over time as theContinuing Limited Partners exchange Partnership Interests and shares of Class B common stock for shares of Class A common stock and Partnership Interests held by Management Feeder vest. Off-Balance Sheet Arrangements We had no off-balance sheet arrangements as ofAugust 1, 2021 .
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