Income Taxes

12 Months Ended

Jan. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

As a result of the Reorganization Transactions, Core & Main became the general partner of Holdings, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Holdings is generally not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Holdings is passed through to and included in the taxable income or loss of its partners, including Core & Main, following the Reorganization Transactions. Core & Main is subject to U.S. federal income taxes, in addition to state and local income taxes, with respect to its allocable share of any taxable income of Holdings following the Reorganization Transactions.

As the Reorganization Transactions are accounted for as transactions between entities under common control, the financial statements for the periods prior to the IPO and the Reorganization Transactions reflect the combination of previously separate entities for presentation purposes. These entities include Core & Main, Holdings and its consolidated subsidiaries and the Blocker Companies. The Blocker Companies were holding companies with indirect investments in Holdings. They had no operations but did receive distributions from Holdings for their tax obligations as a corporation based on the taxable income allocated to them from Holdings. The consolidated financial statements for periods prior to the Reorganization Transactions reflect the provision for income taxes and related balances on the balance sheet for the Blocker Companies.

The Provision for Income Taxes consisted of the following:

	Fiscal Years Ended
	January 30, 2022		January 31, 2021		February 2, 2020
Current:
Federal	$	55	$	12	$	8
State	13		3		2
	68		15		10
Deferred:
Federal	(14)		(4)		(3)
State	(3)		(2)		(1)
	(17)		(6)		(4)
Total	$	51	$	9	$	6

The reconciliations of the provision for income taxes at the federal corporate statutory rate of 21% to the tax provision for fiscal 2021, fiscal 2020 and fiscal 2019 are as follows:

	Fiscal Years Ended
	January 30, 2022		January 31, 2021		February 2, 2020
Income taxes at federal statutory rate	21.0	%	21.0	%	21.0	%
State income taxes	3.8		3.6		3.2
Partnership income not subject to U.S. tax	(8.5)		(9.1)		(9.1)
Corporate subsidiary tax	1.3		—		—
Permanent differences	1.1		1.7		1.7
Other	(0.2)		2.4		(2.2)
Total provision	18.5	%	19.6	%	14.6	%

The variations between the Company's estimated effective tax rate and the U.S. statutory rate are primarily due to the portion of the Company's earnings attributable to non-controlling interests following the Reorganization Transactions partially offset by 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.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:

	January 30, 2022		January 31, 2021
Deferred Tax Assets:
Imputed interest on Tax Receivable Agreements	$	5	$	—
Deferred Tax Liabilities:
Intangibles	(1)		(1)
Basis difference in partnership investments	(39)		(231)
Deferred tax liabilities, net	$	(35)	$	(232)

The Company’s operations have resulted in income, and as such, the Company maintains no valuation allowance against its deferred tax assets, including tax attributes recognized in connection with the Reorganization Transactions as described below.

Tax Receivable Agreements and Reorganization Transactions

As discussed in Note 1, the Company entered into the Tax Receivable Agreements with the Former Limited Partners and the Continuing Limited Partners. Under these agreements, the Company expects to generate tax attributes that will reduce amounts that it would otherwise pay in the future to various tax authorities. The Tax Receivable Agreements provide for the payment to either the Former Limited Partners or Continuing Limited Partners, or their permitted transferees, of 85% of the tax benefits realized by the Company, or in some circumstances are deemed to realize.

In connection with the Reorganization Transactions, the Former Limited Partners exchanged Partnership Interests, together with the retirement of a corresponding number of shares of Class B common stock, for shares of Class A common stock of Core & Main. As a result of this exchange, the Company acquired certain tax attributes held by the Former Limited Partners. The Company expects that these tax attributes will reduce future payments to taxing authorities. As such, the Company recorded a payable associated with the Former Limited Partners Tax Receivable Agreement that represents their 85% share of these anticipated tax savings. As of January 30, 2022, the Company had recorded a $92 million payable to related parties pursuant to the Former Limited Partners Tax Receivable Agreement.

The Company also entered into the Continuing Limited Partners Tax Receivable Agreement that provides for payment to the Continuing Limited Partners of 85% of the amount of tax savings, if any, that Core & Main realizes, or is deemed to realize, as a result of redemptions or exchanges of Partnership Interests pursuant to the Exchange Agreement. As part of the Secondary Offering, Continuing Limited Partners exchanged 7,455,242 Partnership Interests and shares of Class B common stock for an equal number of shares of Class A common stock. As of January 30, 2022, the Company had recorded a $61 million payable to related parties pursuant to the Continuing Limited Partners Tax Receivable Agreement.

The actual amount and timing of any payments under the Tax Receivable Agreements will vary depending upon a number of factors, including the timing of exchanges by the holders of Partnership Interests, the amount of gain recognized by such holders of Partnership Interests, the amount and timing of the taxable income the Company generates in the future and the federal tax rates then applicable. Assuming (i) that the Continuing Limited Partners exchanged all of their remaining Partnership Interests at $23.45 per share of our Class A common stock (the closing stock price on January 28, 2022), (ii) no material changes in relevant tax law, (iii) a constant corporate tax rate of 25.1%, which represents a pro forma tax rate that includes a provision for U.S. federal income taxes and assumes the highest statutory rate apportioned to each state and local jurisdiction and (iv) that the Company earns sufficient taxable income in each year to realize on a current basis all tax benefits that are subject to the Continuing Limited Partners Tax Receivable Agreement, the Company would recognize a deferred tax asset (subject to offset with existing deferred tax liabilities) of approximately $653 million and a Continuing Limited Partners Tax Receivable Agreement liability of approximately $555 million, payable to the Continuing Limited Partners over the life of the Continuing Limited Partners Tax Receivable Agreement. The full exchange by the Continuing Limited Partners will also decrease Core & Main's aforementioned deferred tax asset associated with its investment in Holdings by $153 million. These amounts are estimates only and are subject to change.

Reorganization Transactions and IPO Deferred Tax Asset

Prior to the Reorganization Transactions, the Blocker Companies were holding corporations for indirect investments in Holdings. The Blocker Companies had no operations but did receive distributions from Holdings associated with their tax obligations from allocations of Holdings taxable income. As such, the Blocker Companies' financial statements reflected a deferred tax liability associated with the difference between their financial reporting investment and tax basis in Holdings. In connection with the Blocker Mergers, Core & Main assumed the balance sheets of the Blocker Companies. The assumed deferred tax liability was adjusted to reflect the IPO, the IPO Overallotment Option Exercise and subsequent book-tax differences. As of January 30, 2022, the Company had a $3 million deferred tax asset associated with the difference between Core & Main's financial reporting basis and the tax basis of Core & Main’s investment in Holdings.

Core & Main Buyer, Inc. Deferred Tax Liability

As referenced in Note 4, on August 9, 2021 and March 11, 2020, the Company completed the acquisition of all the outstanding shares of Pacific Pipe and R&B, respectively, both corporations for income tax purposes. The acquisitions were completed through Core & Main Buyer, Inc. (“Buyer”), a wholly-owned subsidiary of the Company. Buyer subsequently contributed Pacific Pipe and R&B to Core & Main LP. As part of the opening balance sheet, Buyer recorded deferred tax liabilities of $12 million and $31 million for Pacific Pipe and R&B, respectively, related to the difference between Buyer’s financial reporting basis and tax basis of Buyer’s investment in Core & Main LP. The taxable income that is allocated to Buyer, for its contribution of Pacific Pipe and R&B to Core & Main LP, is subject to corporate federal and state income tax in substantially all fifty states. As of January 30, 2022, this deferred tax liability was $42 million.

Uncertain tax positions

Total gross unrecognized tax benefits as of January 30, 2022 and January 31, 2021, as well as activity within each of the years, were not material.