Core & Main, Inc. (CNM) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed below and elsewhere in this Annual Report on Form 10-K for a number of important factors, particularly those described under the caption “Cautionary Note Regarding Forward-Looking Statements.”

Overview

Core & Main is a leader in advancing reliable infrastructure with local service, nationwide. As a leading specialized distributor with a focus on water, wastewater, storm drainage and fire protection products, and related services, we provide solutions to municipalities, private water companies and professional contractors across municipal, non-residential and residential end markets, nationwide. Our specialty products and services are used primarily in the maintenance, repair, replacement and new construction of water, wastewater, storm drainage and fire protection infrastructure. We reach customers through a nationwide network of approximately 320 branches across 48 states. Our products include pipes, valves, fittings, storm drainage products, fire protection products, meter products and other products for use in the construction, maintenance and repair of water and wastewater systems as well as fire protection systems. We complement our core products through additional offerings, including smart meter systems, fusible HDPE piping solutions, specifically engineered treatment plant products, geosynthetics and erosion control products. Our services and capabilities allow for integration with customers and form part of their sourcing and procurement function.

Basis of Presentation

The Company is a holding company and its primary material asset is its direct and indirect ownership interest in Holdings. Holdings has no operations and no material assets of its own other than its indirect ownership interest in Core & Main LP, a Florida limited partnership, the legal entity that conducts the operations of Core & Main. Because Core & Main is the general partner of Holdings, it operates and controls all of the business and affairs of Holdings and, through Holdings and its subsidiaries, conducts our business. Accordingly, the consolidated financial information of Core & Main presented herein, including the accompanying audited consolidated financial statements included in this Annual Report on Form 10-K, includes the consolidated financial information of Holdings and its subsidiaries. The Partnership Interests in Holdings held by the Continuing Limited Partners is reflected as non-controlling interests in Core & Main’s consolidated financial statements.

As the Reorganization Transactions (as defined in Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K) are accounted for as transactions between entities under common control, the financial statements for the periods prior to our IPO and Reorganization Transactions have been adjusted to combine previously separate entities for presentation purposes. These entities include Core & Main, Holdings and its consolidated subsidiaries and the Blocker Companies (as defined in Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K). 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 to January 31st. Quarters within the fiscal year include 13-week periods, unless a fiscal year includes a 53rd week, in which case the fourth quarter of the fiscal year will be a 14-week period. The fiscal years ended January 29, 2023, January 30, 2022 and January 31, 2021 included 52 weeks. The next fiscal year ending January 28, 2024 (“fiscal 2023”) will also include 52 weeks.

Initial Public Offering and Secondary Offerings

On July 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. We received net proceeds of approximately $664 million, after deducting underwriting discounts and commissions. All of the net proceeds from the IPO, less $8 million of transaction costs directly attributable to the IPO, were utilized to purchase 34,883,721 newly issued Partnership Interests of Holdings for approximately $656 million in the aggregate. In turn, Holdings and Core & Main LP utilized the net proceeds of the IPO directly or indirectly received from Core & Main, together with the net proceeds from borrowings under the Senior Term Loan Facility (as defined in Note 6 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K) and cash on hand to undertake the Refinancing Transactions (as defined in Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K).

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On August 20, 2021, we issued 5,232,558 shares of Class A common stock at the initial public offering price of $20.00 per share and we received net proceeds of approximately $100 million after deducting underwriting discounts and commissions as part of the IPO Overallotment Option Exercise (as defined in Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K).

On January 10, 2022 and September 19, 2022 secondary public offerings of 20,000,000 and 11,000,000 shares, respectively, of Class A common stock by certain selling stockholders affiliated with Clayton, Dubilier & Rice, LLC (the “Selling Stockholders”) were completed at a price to the public of $26.00 per share and $23.75 per share, respectively. The Company did not receive any of the proceeds from the sales.

For a further description of the IPO and Secondary Offerings, see Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Reorganization Transactions

To facilitate the completion of the IPO, we completed legal reorganization transactions which are described in Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Key Factors Affecting Our Business

End-Markets and General Economic Conditions

Historically, demand for our products has been closely tied to municipal infrastructure spending, non-residential construction and residential construction in the U.S. We estimate that, based on fiscal 2022 net sales, our exposure by end market was approximately 39% municipal, 39% non-residential and 22% residential. Infrastructure spending and the non-residential and residential construction markets are subject to cyclical market pressures. Municipal demand has been relatively steady over the long term due to the consistent and immediate need to replace broken infrastructure; however, activity levels are subject to the availability of funding for municipal projects. Non-residential and residential construction activities are primarily driven by availability of credit, interest rates, general economic conditions, consumer confidence and other factors that are beyond our control. The length and magnitude of these cycles have varied over time and by market. Cyclicality can also have an impact on the products we procure for our customers or our related services, as further discussed under “—Price Fluctuations” below. During fiscal 2022, interest rate increases slowed home buying and new lot development, which was a contributing factor to a decline in the residential end market in the fourth quarter of fiscal 2022 compared with the comparable prior year period.

In November 2021, the IIJA was signed into law, which includes $55 billion to invest in water infrastructure across the United States. In the coming years, including as a result of the IIJA, we expect increased federal infrastructure investment to have a core focus on the upgrade, repair and replacement of municipal waterworks systems and to address demographic shifts and serve the growing population. We believe these dynamics, coupled with expanding municipal budgets, create the backdrop for a favorable funding environment and accelerated investment in projects that will benefit our business.

In August 2022, the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”) was signed into law, which includes a 15% book-income alternative minimum tax on corporations with average applicable financial statement income over $1 billion for any consecutive 3-year period ending in 2022 or later and a 1% excise tax on the fair market value of stock that is repurchased by publicly traded U.S. corporations or their specified affiliates. The alternative minimum tax and the excise tax are effective in taxable years beginning after December 31, 2022. Currently, we do not qualify for the alternative minimum tax. As part of our approach to our capital allocation, we will evaluate any impact related to the excise tax on stock repurchases by the Company.

Seasonality

Our operating results within a fiscal year are typically impacted by seasonality. Although weather patterns affect our operating results throughout the year, colder weather and shorter daylight hours historically have reduced construction, maintenance and repair activity. As a result, net sales are typically lower in our first and fourth fiscal quarters, especially in northern geographic regions. Abnormal levels of precipitation may negatively impact our operating results as it may result in the delay of construction projects. Our operating results may also be adversely affected by hurricanes, which typically occur during our third fiscal quarter. Our cash flows from operating activities are typically lower during the first and second fiscal quarters due to investment in working capital and annual incentive compensation payments and are typically higher during the third and fourth fiscal quarters due to cash inflows associated with receivable collections and reduced inventory purchases. During the fourth quarter of fiscal 2021, we experienced a period where customers accelerated certain orders due to product availability constraints and inflation, diverging from typical seasonality trends.

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Price Fluctuations

Our financial performance is impacted by price fluctuations in the cost to procure substantially all the products we sell and our ability to reflect these changes, in a timely manner, in our customer pricing.

The cost to procure the products we sell are historically volatile and subject to fluctuations arising from changes in supply and demand, national and international economic conditions, labor costs, competition, market speculation, government regulation, weather events, trade policies and periodic delays in the delivery of our products. If we are able to pass through price increases to our customers, our net sales will increase; conversely, during periods of deflation, our customer pricing may decrease to remain competitive, resulting in decreased net sales. During fiscal 2022 and fiscal 2021, we experienced significant price inflation and product surcharges in respect of certain of our products we sell as well as other product categories, and supply chain, which we expect to continue to experience in the near-term and have sought to mitigate through inventory management, effective sourcing and customer pricing. Over the course of fiscal 2022 and fiscal 2021, we experienced increasing pressure on our supply chain due to several factors, including, but not limited to, unpredictable lead times and delays from our suppliers, labor availability, global logistics and the availability of raw materials, in part due to the impact of COVID-19 on the global economy and the conflict in Ukraine that limited product availability and further exacerbated the effects of inflation. Depending on the ultimate scope and duration of supply chain disruptions, we may experience increases in product costs which we may not be able to pass on to our customers, loss of sales due to lack of product availability or potential customer claims from the inability to provide products in accordance with contractual terms. We continue to proactively monitor the situation and our supply chain and assess further possible implications to our business. For example, access to certain meter products that we sell is dependent on the ability of our suppliers to obtain technology components, including semi-conductor chips. The global supply shortage of technology components has impacted various industries and companies, including us, and there is no certainty as to when availability will return to historic levels. For fiscal 2023, we expect recent year-over-year growth rates to moderate as we anniversary the effects of inflation in fiscal 2022. As we have experienced significant inflation over a relatively short period, there is increased risk that we may experience a higher level of deflation or substantially lower net sales growth than in recent periods, particularly as a result of greater product availability for certain suppliers and product lines.

We are also exposed to fluctuations in costs for petroleum as we distribute a substantial portion of our products by truck. Petroleum prices have fluctuated as a result of the conflict in Ukraine and other factors. In addition, we are exposed to fluctuations in prices for imported products due to logistical challenges and changes in labor, fuel, container and other importation-related costs. We may also face price fluctuations on other products due to constrained labor availability and manufacturing capacity of our suppliers. Our ability to reflect these changes, in a timely manner, in our customer pricing may impact our financial performance.

Interest Rates

Certain of our indebtedness, including borrowings under the Senior Term Loan Facility and the Senior ABL Credit Facility, are subject to variable rates of interest and expose us to interest rate risk. The Senior Term Loan Facility and the Senior ABL Credit Facility each bear interest based on Term SOFR. If interest rates further increase, our debt service obligations on our variable-rate indebtedness will further increase and our net income would decrease, even though the amount borrowed under the facilities remains the same. As of January 29, 2023, we had $1,478 million of outstanding variable-rate debt. We seek to mitigate our exposure to interest rate volatility through the entry into interest rate swap instruments, such as our current interest rate swap, associated with borrowings under the Senior Term Loan Facility, which effectively converts $1,000 million of our variable rate debt to fixed rate debt, with notional amount decreases to $900 million on July 27, 2023, $800 million on July 27, 2024, and $700 million on July 27, 2025 through the instrument maturity on July 27, 2026. Despite these efforts, unfavorable movement in interest rates may further result in higher interest expense and cash payments.

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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 in fiscal 2022, fiscal 2021 and fiscal 2020 and the related transaction value (in each case, excluding working capital and other purchase price adjustments, unless otherwise noted).

As we integrate these and other acquisitions into our existing operations, we may not be able to identify the specific financial statement impacts associated with these acquisitions. There can be no assurance that the anticipated benefits of the acquisitions will be realized on the timeline we expect, or at all.

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Key Business Metrics

Net Sales

We generate net sales primarily from the sale of water, wastewater, storm drainage and fire protection products and the provision of related services to approximately 60,000 customers, as of January 29, 2023, including municipalities, private water companies and professional contractors. We recognize sales, net of sales tax, customer incentives, returns and discounts. Net sales fluctuate as a result of changes in product costs as we seek to reflect these changes in our customer pricing in a timely manner. This will increase net sales if we are able to pass along price increases and decrease net sales if we are required to reduce our customer prices as a result of competitive dynamics.

We categorize our net sales into pipes, valves & fittings, storm drainage products, fire protection products and meter products:

•Pipe, valves, hydrants, fittings include these products and other complementary products and services. Pipe includes PVC, ductile iron, fusible HDPE, steel and copper tubing.

•Storm drainage products primarily include corrugated piping systems, retention basins, manholes, grates, geosynthetics, erosion control and other related products.

•Fire protection products primarily include fire protection pipe, sprinkler heads and devices as well as custom fabrication services.

•Meter products primarily include smart meter products, meter accessories, installation, software and other services.

Gross Profit

Gross profit represents the difference between the product cost from suppliers (net of earned rebates and discounts and including the cost of inbound freight) and the net sale price to our customers. Gross profit may be impacted by the time between changes in supplier costs 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.

Net Income Attributable to Core & Main, Inc.

Net income attributable to Core & Main, Inc. represents net income less income attributable to non-controlling interests. Non-controlling interests represent owners of Partnership Interests of Holdings other than Core & Main.

Adjusted EBITDA

We define Adjusted EBITDA as EBITDA further adjusted for certain items management believes are not reflective of the underlying operations of our business, including (a) loss on debt modification and extinguishment, (b) equity-based compensation, (c) expenses associated with the IPO and subsequent secondary offerings and (d) expenses associated with acquisition activities. Adjusted EBITDA includes amounts otherwise attributable to non-controlling interests as we manage the consolidated company and evaluate operating performance in a similar manner. We use Adjusted EBITDA to assess the operating results and effectiveness of our business. See “—Non-GAAP Financial Measures” for further discussion of Adjusted EBITDA and a reconciliation to net income or net income attributable to Core & Main, Inc., the most directly comparable measure under U.S. generally accepted accounting principles (“GAAP”), as applicable.

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Results of Operations

Fiscal Year Ended January 29, 2023 Compared with Fiscal Year Ended January 30, 2022

Net Sales

Net sales for fiscal 2022 increased $1,647 million, or 32.9%, to $6,651 million compared with $5,004 million for fiscal 2021. The increase in net sales was primarily attributable to higher selling prices, volume growth and acquisitions, with higher selling prices representing approximately three-fourths of the net sales increase. The volume increases were driven by market volume growth and share gains in part due to preferred access to products during a period of material shortages, which helped drive growth across all product lines, and execution of our sales initiatives. Net sales growth for pipes, valves & fittings and storm drainage products benefited from higher selling prices, end-market growth and acquisitions. Net sales growth for fire protection products also benefited from higher selling prices, share gains and end-market growth. Net sales of meter products benefited from higher volumes due to an increasing adoption of smart meter technology by municipalities and an improving supply chain.

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Gross Profit

Gross profit for fiscal 2022 increased $515 million, or 40.2%, to $1,795 million compared with $1,280 million for fiscal 2021. The increase in net sales contributed an additional $422 million of gross profit and the increase in gross profit as a percentage of net sales contributed $93 million. Gross profit as a percentage of net sales for fiscal 2022 was 27.0% compared with 25.6% for fiscal 2021. The overall increase in gross profit as a percentage of net sales was primarily attributable to strategic inventory investments ahead of announced price increases, a favorable pricing environment, the execution of our gross margin initiatives and accretive acquisitions.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses for fiscal 2022 increased $163 million, or 22.7%, to $880 million compared with $717 million during fiscal 2021. The increase was primarily attributable to an increase of $127 million in personnel expenses, which was primarily driven by higher variable compensation costs and increased headcount. In addition, distribution and facility costs increased due to volume, inflation and acquisitions. These factors were partially offset by a $14 million decrease related to equity-based compensation expense due to accounting for a modification to equity awards in the prior year period. SG&A expenses as a percentage of net sales was 13.2% for fiscal 2022 compared with 14.3% for fiscal 2021. The decrease was attributable to our ability to leverage our fixed costs and lower equity-based compensation expense during fiscal 2022.

Depreciation and Amortization Expense

Depreciation and amortization (“D&A”) expense for fiscal 2022 was $140 million compared with $138 million during fiscal 2021. The increase primarily was attributable to amortization related to recent acquisitions, partially offset by lower amortization on existing customer relationship intangible assets.

Operating Income

Operating income for fiscal 2022 increased $350 million, or 82.4%, to $775 million compared with $425 million during fiscal 2021. The increase in operating income was attributable to higher net sales and gross profit, primarily from higher selling prices, volume growth and acquisitions, and lower equity-based compensation expense in fiscal 2022. These factors were partially offset by higher variable compensation costs and higher personnel expenses and facility costs due to increased headcount and facilities from acquisitions.

Interest Expense

Interest expense was $66 million for fiscal 2022 compared with $98 million for fiscal 2021. The decrease was primarily attributable to the redemption of the Senior 2024 Notes and the Senior 2025 Notes (each as defined in Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K) completed on July 27, 2021, partially offset by borrowings on the Senior ABL Credit Facility and an increase in interest rates on our variable-rate debt.

Loss on Debt Modification and Extinguishment

For fiscal 2021, we recognized a loss on debt modification and extinguishment of $51 million. The loss on debt modification and extinguishment included (i) a write-off of $8 million in deferred financing fees associated with the redemption of the Senior 2024 Notes, (ii) a write-off of $13 million in deferred financing fees associated with the redemption of the Senior 2025 Notes, (iii) a write-off of $5 million in deferred financing fees associated with the settlement of the Prior Term Loan Facility, (iv) redemption premiums of $6 million and $12 million for the Senior 2024 Notes and Senior 2025 Notes, respectively, (v) the settlement of the cash flow interest rate swap of $5 million, and (vi) third-party expenses for the Senior Term Loan Facility of $2 million.

Provision for Income Taxes

The provision for income taxes for fiscal 2022 increased $77 million to $128 million compared with $51 million for fiscal 2021 due to increased income before provision for income taxes. For fiscal 2022 and fiscal 2021, our effective tax rates were 18.1% and 18.5%, respectively. The effective tax rate for each period reflects only the portion of net income that is attributable to taxable entities. The lower effective tax rate is attributable to lower permanent differences and fixed tax amounts coupled with higher income before provision for income taxes in fiscal 2022.

Net Income

Net income for fiscal 2022 increased $356 million, or 158.2%, to $581 million compared with $225 million for fiscal 2021. The increase in net income was primarily attributable to higher operating income, the $51 million loss on debt modification and extinguishment and equity award modification expense, both of which occurred in fiscal 2021, and lower interest expense, partially offset by increased income taxes.

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Net Income Attributable to Non-controlling Interests

Net income attributable to non-controlling interests for fiscal 2022 was $215 million compared with $59 million for fiscal 2021 due to increased net income. For fiscal 2021, the allocation of Holdings’ net income to holders of Partnership Interests other than Core & Main is for the period from July 23, 2021 through January 30, 2022, which was partially offset by Core & Main’s share of the $51 million loss on debt modification and extinguishment that occurred on July 27, 2021.

Net Income Attributable to Core & Main, Inc.

Net income attributable to Core & Main, Inc. for fiscal 2022 was $366 million compared with $166 million for fiscal 2021 due to increased net income. For fiscal 2021, the allocation of Holdings’ net income to Core & Main, Inc. includes net income of Holdings for the period from February 1, 2021 to July 22, 2021.

Earnings Per Share

The Class A common stock basic earnings per share and diluted earnings per share for fiscal 2022 were $2.16 and $2.13, respectively. The Class A common stock basic earnings per share and diluted earnings per share for fiscal 2021 represent the period from July 23, 2021 through January 30, 2022, the period following the Reorganization Transactions. The Class A common stock basic earnings per share and diluted earnings per share for the period from July 23, 2021 through January 30, 2022 were $0.57 and $0.55, respectively. The net income attributable to Core & Main, Inc. for the period from July 23, 2021 through January 30, 2022 was partially offset by Core & Main's share of the $51 million loss on debt modification and extinguishment that occurred on July 27, 2021.

Adjusted EBITDA

Adjusted EBITDA for fiscal 2022 increased $331 million, or 54.8%, to $935 million compared with $604 million for fiscal 2021. Growth in Adjusted EBITDA was primarily attributable to higher net sales, improved gross profit margins, and leveraging our cost structure on the increase in net sales. For a reconciliation of Adjusted EBITDA to net income or net income attributable to Core & Main, Inc., the most comparable GAAP financial metric, as applicable, see “—Non-GAAP Financial Measures.”

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Fiscal Year Ended January 30, 2022 Compared with Fiscal Year Ended January 31, 2021

Net Sales

Net sales for fiscal 2021 increased $1,362 million, or 37.4%, to $5,004 million compared with $3,642 million for fiscal 2020. The increase in net sales was primarily attributable to higher average selling prices, representing approximately half of the net sales increase, strong market volume growth and share gains resulting from sales initiatives and preferred access to products during a period of material shortages, which helped drive growth across all product lines. Net sales growth for pipes, valves & fittings and storm drainage products benefited from end-market growth, acquisitions and higher average selling prices. Net sales growth for fire protection products also benefited from end-market growth and higher average selling prices. Net sales of meter products grew at a slower pace, relative to other product lines, primarily due to shortages of semi-conductor chips that are components of certain smart meter products.

Gross Profit

Gross profit for fiscal 2021 increased $402 million, or 45.8%, to $1,280 million compared with $878 million for fiscal 2020. The increase in net sales contributed an additional $328 million of gross profit and the increase in gross profit as a percentage of net sales contributed $74 million. Gross profit as a percentage of net sales for fiscal 2021 was 25.6% compared with 24.1% for fiscal 2020. The overall increase in gross profit as a percentage of net sales was primarily attributable to strategic inventory investments ahead of announced price increases, a favorable pricing environment, the execution of our gross margin initiatives, achievement of growth based supplier incentives and accretive acquisitions.

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Selling, General and Administrative Expenses

SG&A expenses for fiscal 2021 increased $161 million, or 29.0%, to $717 million compared with $556 million during fiscal 2020. The increase was primarily attributable to an increase of $101 million in personnel expenses, which was primarily driven by higher variable compensation costs and increased headcount, lower discretionary spending in response to COVID-19 in fiscal 2020, a volume driven increase in distribution costs and incremental costs from acquisitions. In addition, during fiscal 2021, SG&A expenses increased by $21 million related to higher equity-based compensation expense, primarily due to accounting for equity awards, and $5 million of other one-time costs in connection with the IPO and Secondary Offering. SG&A expenses as a percentage of net sales was 14.3% for fiscal 2021 compared with 15.3% for fiscal 2020. The decrease was attributable to our ability to leverage our fixed costs, partially offset by higher equity-based compensation.

Depreciation and Amortization Expense

D&A expense for fiscal 2021 was $138 million compared with $137 million during fiscal 2020. The increase primarily was attributable to amortization related to the Pacific Pipe and L&M acquisitions, partially offset by lower amortization on existing customer relationship intangible assets.

Operating Income

Operating income for fiscal 2021 was $425 million compared with $185 million during fiscal 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 SG&A expenses.

Interest Expense

Interest expense was $98 million for fiscal 2021 compared with $139 million during fiscal 2020. The decrease was attributable to the redemption of the Senior 2024 Notes, the redemption of the Senior 2025 Notes and lower interest rates on the Senior Term Loan Facility as compared to the Prior Term Loan Facility due to the Refinancing Transactions completed on July 27, 2021.

Loss on Debt Modification and Extinguishment

For fiscal 2021, we recognized a loss on debt modification and extinguishment of $51 million. The loss on debt modification and extinguishment included (i) a write-off of $8 million in deferred financing fees associated with the redemption of the Senior 2024 Notes, (ii) a write-off of $13 million in deferred financing fees associated with the redemption of the Senior 2025 Notes, (iii) a write-off of $5 million in deferred financing fees associated with the settlement of the Prior Term Loan Facility, (iv) redemption premiums of $6 million and $12 million for the Senior 2024 Notes and Senior 2025 Notes, respectively, (v) the settlement of the cash flow interest rate swap of $5 million which had its changes in fair value previously attributed to accumulated other comprehensive loss, and (vi) third-party expenses for the Senior Term Loan Facility of $2 million.

Provision for Income Taxes

The provision for income taxes for fiscal 2021 increased $42 million to $51 million compared with $9 million for fiscal 2020. For fiscal 2021 and fiscal 2020, our effective tax rates were 18.5% and 19.6%, respectively. The effective tax rate for each period reflects only the portion of net income that is attributable to taxable entities (which are comprised of Core & Main following the Reorganization Transactions and the Blocker Companies before the Reorganization Transactions), the impact of certain permanent book-tax differences and incremental tax expense due to our legal entity structure. The effective tax rates in fiscal 2021 were lower than fiscal 2020 due to certain fixed tax expenses and permanent differences decreasing as a percentage of income before provision for income taxes.

Net Income

Net income for fiscal 2021 increased $188 million to $225 million compared with $37 million for fiscal 2020. The increase in net income was primarily attributable to higher operating income and lower interest expense due to the Refinancing Transactions, partially offset by the $51 million loss on debt modification and an increase in income taxes.

Net Income Attributable to Non-controlling Interests

Net income attributable to non-controlling interests for fiscal 2021 was $59 million. This represents the allocation of the Holdings’ net income for the period from July 23, 2021 through January 30, 2022, which included the $51 million loss on debt modification and extinguishment, to holders of Partnership Interests other than Core & Main.

Net Income Attributable to Core & Main, Inc.

Net income attributable to Core & Main, Inc. for fiscal 2021 was $166 million. The net income attributable to Core & Main, Inc. includes the net income of Holdings for the period from February 1, 2021 to July 22, 2021.

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Earnings Per Share

The Class A common stock basic earnings per share and diluted earnings per share for fiscal 2021 were $0.57 and $0.55, respectively. The Class A common stock basic earnings per share and diluted earnings per share were calculated for the period from July 23, 2021 through January 30, 2022, the period following the Reorganization Transactions, which included the $51 million loss on debt modification and extinguishment.

Adjusted EBITDA

Adjusted EBITDA for fiscal 2021 increased $262 million, or 76.6%, to $604 million compared with $342 million for fiscal 2020. Growth in Adjusted EBITDA was primarily attributable to higher net sales and improved gross profit margins. For a reconciliation of Adjusted EBITDA to net income or net income attributable to Core & Main, Inc., the most comparable GAAP financial metric, as applicable, see “—Non-GAAP Financial Measures.”

Liquidity and Capital Resources

Historically, we have financed our liquidity requirements through cash flows from operating activities, borrowings under our credit facilities, issuances of equity and debt securities and working capital management activities. Our principal historical liquidity requirements have been for working capital, capital expenditures, acquisitions and servicing indebtedness.

As of January 29, 2023, our cash and cash equivalents totaled $177 million. We maintain our cash deposits according to a banking policy that requires diversification across a variety of highly-rated financial institutions. However, this still results in concentration of cash and cash equivalents across these financial institutions in excess of FDIC-insured limits.

As of January 29, 2023, we had no outstanding borrowings on our Senior ABL Credit Facility, which provides for borrowings of up to $1,250 million, subject to borrowing base availability. As of January 29, 2023, after giving effect to approximately $12 million of letters of credit issued under the Senior ABL Credit Facility, Core & Main LP would have been able to borrow approximately $1,238 million under the Senior ABL Credit Facility, subject to borrowing base availability. Our short term debt obligations of $15 million are related to quarterly amortization principal payments on the Senior Term Loan Facility.

We are required to make cash payments in future periods under the Tax Receivable Agreements. Payments to the Former Limited Partners will commence in fiscal year 2023 and payments to the Continuing Limited Partner involved in the Secondary Offerings are expected to commence in fiscal year 2024. Payments under the Tax Receivable Agreements are only required to be made to the extent that we utilize the corresponding tax deductions to reduce payments to federal, state and local taxing authorities. These payments are in an amount that represents 85% of the reduction in payments to federal, state and local taxing authorities. As such, the cash savings from the incremental tax deductions are expected to exceed the payments under the Tax Receivable Agreements over the life of these arrangements. Based on the anticipated filing date of income tax returns and contractual payment terms in the Tax Receivable Agreements, we expect these payments to occur two fiscal years after we utilize the corresponding tax deductions. The timing of payments associated with the Tax Receivable Agreements are summarized below:

Further exchanges by the Continuing Limited Partners will result in additional tax deductions to us and require additional payables pursuant to Tax Receivable Agreements. The actual amount and timing of the additional payments under the Tax Receivable Agreements will vary depending upon a number of factors as discussed further in Note 7 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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In addition to making distributions to Core & Main, Inc. to fund tax obligations and payments under the Tax Receivable Agreements, in accordance with the Partnership Agreement, Holdings also makes distributions to the Continuing Limited Partners representing the non-controlling interests of Core & Main, Inc. to fund their income tax obligations with various taxing authorities. The amount of these payments are dependent upon various factors, including the amount of taxable income allocated to them from Holdings, changes in the ownership percentage of the non-controlling interest holders, changes in tax rates and the timing of distributions relative to the corresponding tax year. Tax distributions to non-controlling interest holders were $57 million in fiscal 2022. Further exchanges by the Continuing Limited Partners may result in lower tax distributions subject to any changes to income before provision to income taxes.

We believe that our current sources of liquidity, which include cash generated from operations, existing cash and cash equivalents and available borrowing capacity under the Senior ABL Credit Facility, will be sufficient to meet our working capital, capital expenditures and other cash commitments, including obligations relating to our indebtedness and the Tax Receivable Agreements, over at least the next 12 months. We have based these estimates on assumptions that may 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—Risks Related to Our Indebtedness” in this Annual Report on Form 10-K.

Additionally, we continuously evaluate our approach to our capital allocation, which may include acquisitions, greenfields, debt reduction (including through open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and opportunistic refinancing of debt), stock repurchases, dividends or other distributions. In fiscal 2023, we expect to return capital to our shareholders through dividends and/or share repurchases. The execution of these, and other, capital allocation activities may be at the discretion of, and subject to the approval by, our board of directors and will depend on our financial condition, earnings, liquidity and capital requirements, market conditions, level of indebtedness, contractual restrictions, compliance with our debt covenants, restrictions imposed by Delaware law, general business conditions and any other factors that our board of directors deems relevant in making any such determination. Therefore, there can be no assurance that we will engage in any or all of these actions or to what amount of capital we will allocate to each option. Our affiliates may also purchase our debt from time to time, through open market purchases or other transactions. In such cases, our debt may not be retired, in which case we would continue to pay interest in accordance with the terms of such debt and we would continue to reflect the debt as outstanding in our consolidated Balance Sheets.

Holdings’ ability to pay dividends, which is required to fund aspects of our capital allocation policy, 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 by Core & Main LP, because our credit agreements directly or indirectly restrict Core & Main LP’s ability to pay dividends or make loans to Holdings. The Senior Term Loan Facility may require accelerated repayment based upon cash flows generated in excess of operating and investing requirements when Core & Main LP’s net total leverage ratio is greater than or equal to 3.25. In addition, the Senior ABL Credit Facility requires us to comply with a consolidated fixed charge coverage ratio of greater than or equal to 1.00 when availability is less than 10.0% of the lesser of (i) the then applicable borrowing base and (ii) the then aggregate effective commitments under the Senior ABL Credit Facility. Substantially all of Core & Main LP’s assets secure the Senior Term Loan Facility and the Senior ABL Credit Facility.

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Information about our cash flows, by category, is presented in the consolidated Statements of Cash Flows and is summarized as follows:

Operating Activities

Net cash provided by operating activities increased by $432 million to $401 million of cash inflow for fiscal 2022 compared with cash used in operating activities of $31 million for fiscal 2021. The improvement in operating cash flows was primarily driven by higher operating income, a smaller investment in working capital due to more predictable product lead times in fiscal 2022 which allowed for lower strategic inventory purchases compared to the prior year and $52 million in lower cash interest payments due to the redemption of the Senior 2024 Notes and Senior 2025 Notes completed on July 27, 2021. These factors were partially offset by a $92 million increase in tax payments due to higher income before provision for income taxes.

Net cash used in operating activities was $31 million for fiscal 2021 compared with net cash from operating activities of $214 million for fiscal 2020. The change was primarily driven by a higher investment in working capital based on strong net sales growth, driven by inflation and volume growth, and strategic inventory purchases for fiscal 2021. During fiscal 2020, we had a lower investment in working capital due to the impacts of COVID-19. These factors were partially offset by higher gross profit driven in part by higher selling prices and volume growth.

Investing Activities

Net cash used in investing activities decreased by $51 million to $152 million for fiscal 2022 compared with $203 million for fiscal 2021, primarily attributable to a $51 million decrease in cash outflows for acquisitions and the fiscal 2021 cash outflow of $5 million for the payment for the settlement of an interest rate swap. These factors were partially offset by a $5 million increase in capital expenditures.

Net cash used in investing activities decreased by $26 million to $203 million for fiscal 2021 compared with $229 million for fiscal 2020. The decrease was attributable to a $38 million decrease in acquisitions partially offset by an $8 million increase in capital expenditures and a $5 million payment in fiscal 2021 for the settlement of an interest rate swap.

Financing Activities

Net cash used in financing activities was $73 million for fiscal 2022 compared with $146 million for fiscal 2021. The decrease of $73 million was primarily attributable to a $833 million decrease in outflows for debt repayments, net of debt issuances, discounts, issuance costs and modification costs; driven by the debt refinancing in conjunction with the IPO. This was partially offset by fiscal 2021 inflows related to net proceeds from the IPO and IPO Overallotment Option Exercise (as defined in Note 1 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K) of approximately $756 million, after deducting underwriting discounts, commissions and offering expenses paid.

Net cash used in financing activities was $146 million for fiscal 2021 compared with net cash from financing activities of $215 million for fiscal 2020. The change of $361 million was primarily attributable to a $1,079 million increase in outflows for debt repayments, net of debt issuances, discounts, issuance costs, and modification costs, and a $37 million increase in distributions to non-controlling interest holders. The outflows were partially offset by net proceeds from the IPO and the IPO Overallotment Option Exercise of approximately $756 million, after deducting underwriting discounts, commissions and offering expenses paid.

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Financing

Our debt obligations (in millions) consist of the following:

(1)Aggregate amount of commitments under the asset-based revolving credit facility of $1,250 million overall, subject to borrowing base availability. There were no amounts outstanding under the Senior ABL Credit Facility as of January 29, 2023.

(2)Notional amount of $1,000 million as of January 29, 2023. The notional amount decreases to $900 million on July 27, 2023, $800 million on July 27, 2024, and $700 million on July 27, 2025 through the instrument maturity on July 27, 2026.

Refer to Note 6 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of our debt obligations and the timing of future principal and interest payments including impacts from our interest rate swap.

Purchase Obligations

As of January 29, 2023, the Company had agreements in place with various suppliers to purchase goods and services, primarily inventory, in the aggregate amount of $1,423 million. These purchase obligations are generally cancellable, but the Company foresees no intent to cancel. Payment is generally expected to be made during fiscal 2023 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 2037. Future aggregate rental payments under non-cancelable operating leases as of January 29, 2023 were as follows: $57 million in fiscal 2023, $46 million in fiscal 2024, $36 million in fiscal 2025, $23 million in fiscal 2026, $15 million in fiscal 2027 and $21 million thereafter.

Non-GAAP Financial Measures

In addition to providing results that are determined in accordance with GAAP, we present EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. These measures are not considered measures of financial performance or liquidity under GAAP and the items excluded therefrom are significant components in understanding and assessing our financial performance or liquidity. These measures should not be considered in isolation or as alternatives to GAAP measures such as net income or net income attributable to Core & Main, Inc., as applicable, cash provided by or used in operating, investing or financing activities or other financial statement data presented in our financial statements as an indicator of our financial performance or liquidity.

We define EBITDA as net income, or net income attributable to Core & Main, Inc., as applicable, adjusted for non-controlling interests, depreciation and amortization, provision for income taxes and interest expense. We define Adjusted EBITDA as EBITDA as further adjusted for certain items management believes are not reflective of the underlying operations of our business, including (a) loss on debt modification and extinguishment, (b) equity-based compensation, (c) expenses associated with the IPO and subsequent secondary offerings and (d) expenses associated with acquisition activities. Net income attributable to Core & Main, Inc. is the most directly comparable GAAP measure to EBITDA and Adjusted EBITDA.

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We use EBITDA and Adjusted EBITDA to assess the operating results and effectiveness and efficiency of our business. Adjusted EBITDA includes amounts otherwise attributable to non-controlling interests as we manage the consolidated company and evaluate operating performance in a similar manner. We present these non-GAAP financial measures because we believe that investors consider them to be important supplemental measures of performance, and we believe that these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Non-GAAP financial measures as reported by us may not be comparable to similarly titled metrics reported by other companies and may not be calculated in the same manner. These measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. For example, EBITDA and Adjusted EBITDA:

• do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on debt;

• do not reflect income tax expenses, the cash requirements to pay taxes or related distributions;

• do not reflect cash requirements to replace in the future any assets being depreciated and amortized; and

• exclude certain transactions or expenses as allowed by the various agreements governing our indebtedness.

EBITDA and Adjusted EBITDA are not alternative measures of financial performance or liquidity under GAAP and therefore should be considered in conjunction with net income, net income attributable to Core & Main, Inc. and other performance measures such as gross profit or net cash provided by or used in operating, investing or financing activities and not as alternatives to such GAAP measures. In evaluating Adjusted EBITDA, you should be aware that, in the future, we may incur expenses similar to those eliminated in this presentation.

The following table sets forth a reconciliation of net income or net income attributable to Core & Main, Inc. to EBITDA and Adjusted EBITDA for the periods presented:

(1)Includes depreciation of certain assets which are reflected in “cost of sales” in our Statement of Operations.

(2)Represents expenses associated with acquisition activities, including transaction costs, post-acquisition employee retention bonuses, severance payments, expense recognition of purchase accounting fair value adjustments (excluding amortization) and contingent consideration adjustments.

(3)Represents costs related to the IPO and subsequent secondary offerings reflected in SG&A expenses in our Statement of Operations.

Recently Issued and Adopted Accounting Pronouncements and Accounting Pronouncements Issued But Not Yet Adopted

See Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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Critical Accounting Policies and Estimates

A summary of our significant accounting policies is included in Note 2 of our audited consolidated annual financial statements. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the 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.

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 suppliers, 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 supplier rebates and purchase discounts for an estimate of products not yet sold.

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.

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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 certain Former 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 such Former Limited Partners’ interest in us, including such attributes which resulted from such Former Limited Partners’ prior acquisition of ownership interests in Holdings and our allocable share of existing tax basis acquired in connection with the IPO attributable to the Former Limited Partners and (ii) certain other tax benefits.

The Continuing Limited Partners Tax Receivable Agreement provides for the payment by us to the Continuing 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 of July 22, 2021 (the “Exchange Agreement”), by and among Core & Main, Holdings, CD&R Waterworks Holdings, LLC and Management Feeder, (ii) our allocable share of existing tax basis acquired in connection with the IPO attributable to the Continuing 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 by Continuing Limited Partners. We intend to treat any exchanges of Partnership Interests as direct purchases of Partnership Interests for U.S. federal income tax purposes. These increases in tax basis are expected to reduce amounts owed to various tax authorities in the future.

Except to the extent that any benefits are deemed realized, we will receive the full benefit in tax savings from relevant taxing authorities and provide payment of 85% of the amount of any of our actual or deemed tax benefits to the Former Limited Partners or Continuing Limited Partners, as applicable, or their permitted transferees. We expect to benefit from the remaining 15% of any cash tax savings, except to the extent of any deemed realizations. For the Tax Receivable Agreements, we 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 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 $91 million liability under the Former Limited Partners Tax Receivable Agreements and the $94 million liability under the Continuing Limited Partners Tax Receivable Agreements as of January 29, 2023 did not impact earnings as the payments were recorded against equity since Core & Main entered into the Tax Receivable Agreements as part of common control transactions. Post establishment of the Tax Receivable Agreement liabilities we may remeasure the liabilities due to changes in estimates which could result in an impact to earnings.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of January 29, 2023.

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