Core & Main(CNM) - 2022 Q3 - Quarterly Report

Part I Item 1. Financial Statements (unaudited) The company's financial statements reflect significant changes post-IPO and Reorganization Transactions, with net sales growing 33.7% to $3.76 billion and long-term debt decreasing from $2.25 billion to $1.46 billion Condensed Consolidated Balance Sheets Total assets increased to $4.38 billion, liabilities decreased to $2.62 billion due to debt reduction, and equity rose to $1.76 billion post-IPO Condensed Consolidated Balance Sheet Highlights (in millions) | Account | Oct 31, 2021 | Jan 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Total current assets | $1,696.9 | $1,337.1 | | Goodwill | $1,515.4 | $1,452.7 | | Total Assets | $4,380.8 | $3,923.7 | | Liabilities & Equity | | | | Total current liabilities | $842.6 | $522.3 | | Long-term debt | $1,459.0 | $2,251.7 | | Total Liabilities | $2,622.1 | $3,123.0 | | Total Stockholders' Equity | $1,758.7 | $800.7 | Condensed Consolidated Statements of Operations Net sales grew 38.7% to $1.40 billion in Q3 and 33.7% to $3.76 billion year-to-date, with net income significantly increasing despite a $50.7 million debt extinguishment loss Statement of Operations Highlights (in millions, except per share data) | Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,404.8 | $1,012.5 | $3,757.5 | $2,810.5 | | Gross Profit | $370.6 | $244.4 | $952.6 | $674.2 | | Operating Income | $147.5 | $64.7 | $316.4 | $152.9 | | Net Income | $109.3 | $21.6 | $146.2 | $36.5 | | Diluted EPS | $0.39 | N/A | $0.26 | N/A | - A loss on debt modification and extinguishment of $50.7 million was recognized in the nine months ended October 31, 2021, due to refinancing activities[16] Condensed Consolidated Statements of Cash Flows Operating cash flow shifted to a $66.2 million use, while financing activities used $120.9 million despite $763.2 million in IPO proceeds, primarily due to debt repayments Cash Flow Summary (in millions) | Activity | Nine Months Ended Oct 31, 2021 | Nine Months Ended Nov 1, 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(66.2) | $154.2 | | Net cash used in investing activities | $(188.9) | $(225.3) | | Net cash (used in) provided by financing activities | $(120.9) | $223.1 | | (Decrease) increase in cash | $(376.0) | $152.0 | - Financing activities included $763.2 million in proceeds from the IPO and underwriters' option, which were used alongside new debt issuance of $1.5 billion to repay $2.31 billion of existing long-term debt[28] Notes to the Condensed Consolidated Financial Statements (unaudited) Notes detail the July 2021 IPO, significant debt refinancing leading to a $50.7 million loss, $162.5 million in acquisitions, and the recording of a $91.8 million Tax Receivable Agreement payable - On July 27, 2021, the company completed its IPO of 34,883,721 shares at $20.00 per share, receiving net proceeds of approximately $663.7 million[31] - The company acquired L&M Bag & Supply for up to $60.0 million and Pacific Pipe for up to $102.5 million during the quarter[54][56] - In connection with the IPO, the company entered into Tax Receivable Agreements and recorded a $91.8 million payable to related parties under the Former Limited Partners Tax Receivable Agreement[43][85] - A loss on debt modification and extinguishment of $50.7 million was recorded for the nine months ended October 31, 2021, following significant refinancing transactions[73] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q3 2021 performance to price inflation and market growth, with net sales up 38.7% and Adjusted EBITDA increasing 83.4% to $189.1 million, while maintaining strong liquidity post-refinancing Results of Operations Q3 2021 net sales increased 38.7% to $1.40 billion, driven by price inflation and volume, with gross profit up 51.6% and operating income more than doubling to $147.5 million Quarterly Performance vs. Prior Year (Q3 2021 vs Q3 2020) | Metric | Q3 2021 | Q3 2020 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,404.8M | $1,012.5M | +$392.3M | +38.7% | | Gross Profit | $370.6M | $244.4M | +$126.2M | +51.6% | | Gross Margin | 26.4% | 24.1% | +230 bps | - | | Operating Income | $147.5M | $64.7M | +$82.8M | +128.0% | | Net Income | $109.3M | $21.6M | +$87.7M | +406.0% | | Adjusted EBITDA | $189.1M | $103.1M | +$86.0M | +83.4% | - Net sales growth was primarily driven by price inflation, which accounted for approximately two-thirds of the increase in the third quarter and about half of the increase for the nine-month period[158][174] - Gross margin expansion was attributed to strategic inventory investments ahead of price increases, a favorable pricing environment, and accretive acquisitions[161][177] Liquidity and Capital Resources The company maintains strong liquidity with $841.0 million available under its ABL Credit Facility, having used $755.4 million in IPO proceeds and new debt to refinance existing obligations - As of October 31, 2021, total liquidity was strong with $4.9 million in cash and $841.0 million of borrowing availability under the ABL Credit Facility[190] - Net cash used in operating activities was $66.2 million for the nine months ended Oct 31, 2021, primarily due to higher investment in working capital driven by strong sales growth and strategic inventory purchases[195] - The company entered into a new interest rate swap on July 27, 2021, to fix the rate on a notional amount of $1.0 billion of its variable-rate Senior Term Loan Facility, resulting in an effective fixed rate of 3.24%[202] Non-GAAP Financial Measures Adjusted EBITDA, a key non-GAAP metric, increased 83.4% to $189.1 million in Q3 2021 and 67.4% to $453.4 million year-to-date, reflecting strong operational performance Reconciliation of Net Income to Adjusted EBITDA (in millions) | Line Item | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $109.3 | $21.6 | $146.2 | $36.5 | | D&A | $36.1 | $35.5 | $105.2 | $105.2 | | Provision for income taxes | $24.9 | $7.5 | $34.2 | $12.6 | | Interest expense | $13.0 | $35.6 | $85.3 | $103.8 | | EBITDA | $183.3 | $100.2 | $370.9 | $258.1 | | Loss on debt modification | $0.3 | $— | $50.7 | $— | | Equity-based compensation | $2.7 | $1.1 | $22.2 | $3.1 | | Acquisition expenses | $2.8 | $1.8 | $6.0 | $9.6 | | IPO expenses | $— | $— | $3.6 | $— | | Adjusted EBITDA | $189.1 | $103.1 | $453.4 | $270.8 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company faces interest rate risk on its $1.5 billion variable-rate debt, commodity price risk, and manages credit risk through a diverse customer base - The company is exposed to interest rate risk on its $1,496.3 million of variable-rate debt; a 1% change in interest rates would impact annual interest expense by approximately $15.0 million, excluding the effect of its interest rate swap[230] - Price risk from commodity-based products (e.g., PVC, ductile iron, HDPE) is a key exposure, mitigated through purchasing economies, inventory management, and passing price changes to customers[232] - Credit risk is considered low due to a diverse customer base of approximately 60,000, with the 50 largest customers making up only 10% of fiscal 2020 net sales[231][150] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of October 31, 2021, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of October 31, 2021, the company's disclosure controls and procedures were effective at the reasonable assurance level[234] - No changes occurred during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[235] Part II Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings, none of which are expected to have a material adverse effect on its financial condition or operations - The company states that it does not expect any existing legal claims or proceedings, individually or in aggregate, to have a material adverse effect on its business, financial condition, or results of operations[239] Item 1A. Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Prospectus - No material changes have been made to the risk factors disclosed in the company's Prospectus[240] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered equity sales, detailing the use of $755.4 million in IPO net proceeds for debt redemption and general corporate purposes, consistent with its prospectus - The company sold a total of 40,116,279 shares of Class A common stock in its IPO and the underwriters' overallotment option exercise, generating aggregate net proceeds of approximately $755.4 million[242] - The net proceeds were used to redeem the Senior 2024 and 2025 Notes, repay the Prior Term Loan Facility, and for general corporate purposes, with no material change from the use of proceeds described in the Prospectus[242]