10-Q: Core & Main Reports Strong Q1 Growth Driven by Acquisitions and Volume Increases

Core & Main, a leading specialty distributor of water and wastewater products, announced a significant increase in net sales and net income for the first quarter of fiscal year 2025, primarily fueled by strategic acquisitions and higher product volumes.

Summary

• Core & Main reported net sales of $1,911 million for the three months ended May 4, 2025, an increase of 9.8% from $1,741 million in the prior year period.
• Gross profit increased by 9.0% to $510 million, though gross profit as a percentage of net sales slightly decreased to 26.7% from 26.9%.
• Net income attributable to Core & Main, Inc. rose by 5.3% to $100 million, up from $95 million in the comparable period.
• Diluted earnings per share (EPS) increased by 6.1% to $0.52, compared to $0.49 in the previous year.
• Adjusted EBITDA grew by 3.2% to $224 million, from $217 million in the prior year.
• The company repurchased 837,268 shares of Class A common stock for $39 million during the quarter, with $285 million remaining under the authorized $500 million program.
• Cash used in investing activities significantly decreased to $16 million from $574 million in the prior year, primarily due to lower acquisition spending in the current quarter.
• The company's debt obligations include a $1,245 million Senior Term Loan due July 2028 and a $939 million Senior Term Loan due February 2031, with variable interest rates partially hedged by interest rate swaps.
• Payments under Tax Receivable Agreements are expected to be $41 million within the next 12 months.

Sentiment

Score: 7

Explanation: The company demonstrated strong top-line and bottom-line growth, driven by strategic acquisitions and volume increases. EPS and Adjusted EBITDA also saw healthy gains. While gross margin percentage slightly declined and SG&A as a percentage of sales increased, the overall financial performance is positive, and the company maintains a strong liquidity position and compliance with debt covenants. The active share repurchase program is also a positive signal for shareholders.

Positives

• Net sales increased by 9.8% to $1,911 million, driven by higher volumes and the positive impact of prior-year acquisitions.
• Gross profit increased by $42 million, or 9.0%, to $510 million.
• Net income attributable to Core & Main, Inc. increased by 5.3% to $100 million.
• Basic EPS increased by 8.2% to $0.53, and diluted EPS increased by 6.1% to $0.52, benefiting from increased net income and lower Class A share counts due to repurchases.
• Adjusted EBITDA increased by 3.2% to $224 million, indicating improved operational performance.
• Interest expense decreased by $4 million, primarily due to lower interest rates and reduced average borrowings under the Senior ABL Credit Facility.
• The company is in compliance with all debt covenants as of May 4, 2025.
• The share repurchase program is actively reducing outstanding Class A common stock, with $285 million still available for future repurchases.

Negatives

• Gross profit as a percentage of net sales slightly decreased to 26.7% from 26.9%, primarily due to a higher average cost of inventory.
• Selling, general and administrative (SG&A) expenses increased by 14.0% to $293 million, and as a percentage of net sales, rose to 15.3% from 14.8%, mainly due to acquisitions and inflationary cost impacts.
• Net cash provided by operating activities slightly decreased to $77 million from $78 million, attributed to a higher investment in working capital.

Risks

• Declines, volatility, and cyclicality in the U.S. residential and non-residential construction markets could adversely affect demand for products.
• Slowdowns in municipal infrastructure spending and potential delays or reductions in federal funds, such as from the Infrastructure Investment and Jobs Act (IIJA), could impact business.
• Price fluctuations in product costs, including effects of tariffs and petroleum costs for distribution, may impact financial performance if not passed on to customers.
• Inability to effectively manage inventory, especially during supply chain disruptions, could lead to loss of sales or customer claims.
• Risks associated with acquisitions, including the ability to identify, acquire, close, or successfully integrate targets, may prevent anticipated benefits from being realized.
• The fragmented and highly competitive markets, along with industry consolidation, could intensify competition and impact pricing and volumes.
• The company's ability to hire, engage, and retain key personnel, including sales representatives and managers, is crucial for operations.
• Exposure to product liability, construction defect, and warranty claims, including ongoing asbestos-related litigation, poses potential liabilities.
• Interruptions in the proper functioning of information technology systems, including from cybersecurity threats, could disrupt operations.
• Indebtedness and variable interest rates expose the company to increased debt service obligations if interest rates rise.
• The organizational structure and payment obligations under Tax Receivable Agreements may be significant and vary based on future taxable income and tax rates.

Future Outlook

Core & Main anticipates continued benefits from increased federal infrastructure investment, particularly in municipal waterworks systems, driven by the Infrastructure Investment and Jobs Act. The company expects a favorable funding environment and accelerated project investment. Management will continue to evaluate capital allocation strategies, including potential future acquisitions, debt reduction, stock repurchases, and dividend payments. The company also expects to generate additional tax attributes with future exchanges of Partnership Interests, which will reduce future tax payments.

Management Comments

• The increase in operating income was primarily attributable to higher gross profit partially offset by higher SG&A and D&A expenses.
• The decrease in interest expense was primarily attributable to a decrease in interest rates and decreased average borrowings under the Senior ABL Credit Facility.
• The increase in net income attributable to Core & Main, Inc. was primarily attributable to a 4.0% increase in net income and a decreased allocation to non-controlling interest holders following exchanges of Partnership Interests.
• The basic earnings per share increased due to an increase in net income attributable to Core & Main, Inc. and lower Class A share counts following the share repurchase transactions executed throughout fiscal 2024 and fiscal 2025.
• We believe that our current sources of liquidity, which include cash generated from operations, existing cash and cash equivalents and available borrowing capacity under the Senior ABL Credit Facility, will be sufficient to meet our working capital, capital expenditures and other cash commitments, including obligations relating to our indebtedness and the Tax Receivable Agreements, over the next 12 months, at minimum.

Industry Context

Core & Main operates in a market tied to municipal infrastructure spending and U.S. residential and non-residential construction, with an estimated exposure of 42% municipal, 38% non-residential, and 20% residential based on fiscal year 2024 net sales. The industry is subject to cyclical market pressures, influenced by credit availability, interest rates, and general economic conditions. The Infrastructure Investment and Jobs Act (IIJA) is expected to drive significant investment in water infrastructure, although a temporary pause in some IIJA funding disbursements was noted (not impacting water/road projects). The company faces volatile product costs and is exposed to fluctuations in petroleum costs due to its distribution model. Supply chain improvements in fiscal 2023 and greater product availability in fiscal 2024 have led to some price stability and slight selling price reductions in certain product lines, indicating increased competition.

Management Changes

Legal Proceedings

• The company is not currently party to any material legal proceedings.
• The company is from time to time involved in litigation incidental to the ordinary conduct of its business, including personal injury, workers compensation, and business operations.
• The company faces an inherent risk of exposure to product liability claims, including allegations of defects in manufacturing, design, failure to warn, negligence, strict liability, or breach of warranties.
• The company has been and continues to be a defendant in asbestos-related litigation matters.

Related Party Transactions

• The company is party to Tax Receivable Agreements with certain stockholders affiliated with Clayton, Dublier & Rice (CD&R) and Core & Main Management Feeder, LLC.
• The company has an Exchange Agreement, dated July 22, 2021, with related parties.
• No significant changes to these related party agreements were noted.

Stakeholder Impact

• Shareholders benefit from increased net income, EPS, and the ongoing share repurchase program, which enhances shareholder value.
• Employees see higher personnel expenses, partly due to acquisitions and inflation, and are subject to equity-based compensation plans and new employment agreements for key executives.
• Customers benefit from expanded product offerings and geographic reach through acquisitions, though they may experience price fluctuations due to volatile product costs.
• Suppliers' relationships are critical, with potential impacts from changes in rebates, freight availability, and manufacturing capacity.
• Creditors are positively impacted by the company's compliance with all debt covenants and a decrease in interest expense, indicating sound financial management of its debt obligations.

Next Steps

• Continue to execute the share repurchase program, with $285 million remaining authorized.
• Pursue opportunistic strategic asset and business acquisitions to grow the business.
• Potentially initiate dividend payments to shareholders.
• Make expected payments of $41 million under Tax Receivable Agreements within the next 12 months.

Key Dates

Recommendation

Keywords

Water infrastructure, Wastewater, Storm drainage, Fire protection products, Pipes, Valves, Fittings, Meter products, Specialty distribution, Municipal spending, Construction market, SEC filing, 10-Q, Financial results, Earnings, Acquisitions, Share repurchase, Debt management, Supply chain, Infrastructure Investment and Jobs Act