Driven Brands Holdings Inc. - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 24, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-39898
![drvn-20220924_g1.jpg](https://www.sec.gov/Archives/edgar/data/0001804745/000162828022028468/drvn-20220924_g1.jpg)
Driven Brands Holdings Inc.
(Exact name of Registrant as specified in its charter)
Delaware | ||
(State or other jurisdiction of incorporation or organization) |
47-3595252 | ||
(I.R.S. Employer Identification No.) |
440 South Church Street, Suite 700 | ||
Charlotte, North Carolina | ||
(Address of principal executive offices) |
28202 | ||
(Zip Code) |
Registrant’s telephone number, including area code: (704) 377-8855
Title of each class | ||
Common Stock, $0.01 par value |
Trading Symbol | ||
DRVN |
Name of each exchange on which registered | ||
The Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | ||
Non-accelerated filer ☒ | ||
Accelerated filer ☐ | ||
Small reporting company ☐ | ||
Emerging growth company ☐ |
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of November 1, 2022, the Registrant had 167,404,047 shares of Common Stock outstanding.
Driven Brands Holdings Inc.
Table of Contents
Page | |||||
PART I. FINANCIAL INFORMATION | |||||
PART II. OTHER INFORMATION | |||||
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified by the use of forward-looking terminology, including the terms “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and, in each case, their negative or other various or comparable terminology. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management, and expected market growth are forward-looking statements. In particular, forward-looking statements include, among other things, statements relating to: (i) our strategy, outlook and growth prospects; (ii) our operational and financial targets and dividend policy; (iii) general economic trends and trends in the industry and markets; and (iv) the competitive environment in which we operate. Forward-looking statements are not based on historical facts, but instead represent our current expectations and assumptions regarding our business, the economy and other future conditions, and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. It is not possible to predict or identify all such risks. These risks include, but are not limited to, the risk factors that are described under the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 25, 2021, as supplemented by Item 1A Risk Factors section in our Quarterly Report on Form 10-Q for the three and six months ended June 25, 2022 and this Quarterly Report on Form 10-Q as well as in our other filings with the Securities and Exchange Commission, which are available on its website at www.sec.gov. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
Forward-looking statements represent our estimates and assumptions only as of the date on which they are made, and we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
DRIVEN BRANDS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended | Nine months ended | |||||||||||||||||||||||||
(in thousands, except per share amounts) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||
Franchise royalties and fees | $ | 45,562 | $ | 38,953 | $ | 128,300 | $ | 107,240 | ||||||||||||||||||
Company-operated store sales | 341,211 | 213,755 | 957,487 | 603,808 | ||||||||||||||||||||||
Independently-operated store sales | 40,469 | 47,941 | 158,500 | 160,483 | ||||||||||||||||||||||
Advertising contributions | 22,018 | 19,762 | 63,807 | 56,665 | ||||||||||||||||||||||
Supply and other revenue | 67,334 | 50,737 | 185,447 | 147,199 | ||||||||||||||||||||||
Total revenue | 516,594 | 371,148 | 1,493,541 | 1,075,395 | ||||||||||||||||||||||
Operating Expenses: | ||||||||||||||||||||||||||
Company-operated store expenses | 209,562 | 130,520 | 580,368 | 367,095 | ||||||||||||||||||||||
Independently-operated store expenses | 23,254 | 27,764 | 85,396 | 89,664 | ||||||||||||||||||||||
Advertising expenses | 22,018 | 19,762 | 63,807 | 56,665 | ||||||||||||||||||||||
Supply and other expenses | 41,042 | 28,330 | 109,616 | 80,417 | ||||||||||||||||||||||
Selling, general, and administrative expenses | 82,460 | 71,565 | 272,657 | 218,549 | ||||||||||||||||||||||
Acquisition costs | 2,325 | 636 | 9,981 | 2,674 | ||||||||||||||||||||||
Store opening costs | 753 | 666 | 1,925 | 1,360 | ||||||||||||||||||||||
Depreciation and amortization | 36,518 | 28,447 | 107,628 | 78,722 | ||||||||||||||||||||||
Trade name impairment charge | — | — | 125,450 | — | ||||||||||||||||||||||
Asset impairment charges and lease terminations | 2,894 | (270) | 2,910 | 3,161 | ||||||||||||||||||||||
Total operating expenses | 420,826 | 307,420 | 1,359,738 | 898,307 | ||||||||||||||||||||||
Operating income | 95,768 | 63,728 | 133,803 | 177,088 | ||||||||||||||||||||||
Other expenses, net: | ||||||||||||||||||||||||||
Interest expense, net | 27,323 | 17,688 | 78,946 | 52,390 | ||||||||||||||||||||||
Loss (gain) on foreign currency transactions | 15,582 | 1,074 | 30,490 | 6,356 | ||||||||||||||||||||||
Loss on debt extinguishment | — | — | — | 45,576 | ||||||||||||||||||||||
Other expense, net | 42,905 | 18,762 | 109,436 | 104,322 | ||||||||||||||||||||||
Income before taxes | 52,863 | 44,966 | 24,367 | 72,766 | ||||||||||||||||||||||
Income tax expense | 14,472 | 11,880 | 8,592 | 24,445 | ||||||||||||||||||||||
Net income | 38,391 | 33,086 | 15,775 | 48,321 | ||||||||||||||||||||||
Net income (loss) attributable to non-controlling interest | — | (38) | (15) | (68) | ||||||||||||||||||||||
Net income attributable to Driven Brands Holdings Inc. | $ | 38,391 | $ | 33,124 | $ | 15,790 | $ | 48,389 | ||||||||||||||||||
Earnings per share: | ||||||||||||||||||||||||||
Basic | $ | 0.23 | $ | 0.20 | $ | 0.10 | $ | 0.30 | ||||||||||||||||||
Diluted | $ | 0.23 | $ | 0.19 | $ | 0.09 | $ | 0.29 | ||||||||||||||||||
Weighted average shares outstanding | ||||||||||||||||||||||||||
Basic | 162,760 | 162,635 | 162,768 | 160,030 | ||||||||||||||||||||||
Diluted | 166,831 | 166,630 | 166,663 | 163,968 |
The accompanying notes are an integral part of these consolidated financial statements.
3
DRIVEN BRANDS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
Three months ended | Nine months ended | |||||||||||||||||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||||
Net income | $ | 38,391 | $ | 33,086 | $ | 15,775 | $ | 48,321 | ||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||
Foreign currency translation adjustment | (71,063) | (30,844) | (118,751) | (28,675) | ||||||||||||||||||||||
Unrealized gain from cash flow hedges | 8,606 | (1) | 8,513 | 29 | ||||||||||||||||||||||
Defined benefit pension plan actuarial gain | 5 | 3 | 12 | 131 | ||||||||||||||||||||||
Other comprehensive loss, net | (62,452) | (30,842) | (110,226) | (28,515) | ||||||||||||||||||||||
Total comprehensive income (loss) | (24,061) | 2,244 | (94,451) | 19,806 | ||||||||||||||||||||||
Comprehensive loss attributable to non-controlling interests | (15) | (47) | (36) | (8) | ||||||||||||||||||||||
Comprehensive income (loss) attributable to Driven Brands Holdings Inc. | $ | (24,046) | $ | 2,291 | $ | (94,415) | $ | 19,814 |
The accompanying notes are an integral part of these consolidated financial statements.
4
DRIVEN BRANDS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands, except share and per share amounts) | September 24, 2022 | December 25, 2021 | |||||||||
Assets | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 190,373 | $ | 523,414 | |||||||
Restricted cash | 792 | 792 | |||||||||
Accounts and notes receivable, net | 156,194 | 117,903 | |||||||||
Inventory | 62,569 | 46,990 | |||||||||
Prepaid and other assets | 53,456 | 24,326 | |||||||||
Income tax receivable | 5,070 | 6,867 | |||||||||
Assets held for sale | — | 3,275 | |||||||||
Advertising fund assets, restricted | 53,233 | 45,360 | |||||||||
Total current assets | 521,687 | 768,927 | |||||||||
Notes receivable, net | 6,636 | 3,182 | |||||||||
Property and equipment, net | 1,693,353 | 1,350,984 | |||||||||
Operating lease right-of-use assets | 1,089,693 | 995,625 | |||||||||
Deferred commissions | 9,607 | 10,567 | |||||||||
Intangibles, net | 717,959 | 816,183 | |||||||||
Goodwill | 2,082,572 | 1,910,392 | |||||||||
Deferred tax assets | 1,165 | 1,509 | |||||||||
Total assets | $ | 6,122,672 | $ | 5,857,369 | |||||||
Liabilities and shareholders' equity | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 79,392 | $ | 83,033 | |||||||
Accrued expenses and other liabilities | 266,223 | 297,620 | |||||||||
Income tax payable | 48,264 | 11,054 | |||||||||
Current portion of long term debt | 23,836 | 26,044 | |||||||||
Income tax receivable liability | 24,255 | 24,255 | |||||||||
Advertising fund liabilities | 26,738 | 26,441 | |||||||||
Total current liabilities | 468,708 | 468,447 | |||||||||
Long-term debt | 2,656,520 | 2,356,320 | |||||||||
Deferred tax liabilities | 211,554 | 257,067 | |||||||||
Operating lease liabilities | 1,024,694 | 931,604 | |||||||||
Income tax receivable liability | 131,715 | 131,715 | |||||||||
Deferred revenue | 42,024 | 37,576 | |||||||||
Long-term accrued expenses and other liabilities | 22,505 | 29,398 | |||||||||
Total liabilities | 4,557,720 | 4,212,127 | |||||||||
Commitments and contingencies | |||||||||||
Common stock, $0.01 par value, 900 million shares authorized: and 168 million and 167 million shares issued at June 25, 2022 and December 25, 2021. | 1,677 | 1,674 | |||||||||
Additional paid-in capital | 1,620,480 | 1,605,890 | |||||||||
Retained earnings | 57,397 | 41,607 | |||||||||
Accumulated other comprehensive loss | (115,233) | (5,028) | |||||||||
Total shareholders’ equity attributable to Driven Brands Holdings Inc. | 1,564,321 | 1,644,143 | |||||||||
Non-controlling interests | 631 | 1,099 | |||||||||
Total shareholders' equity | 1,564,952 | 1,645,242 | |||||||||
Total liabilities and shareholders' equity | $ | 6,122,672 | $ | 5,857,369 |
The accompanying notes are an integral part of these consolidated financial statements.
5
DRIVEN BRANDS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’/MEMBERS’ EQUITY (Unaudited)
in thousands | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Non-controlling interests | Total shareholders'/members' equity | |||||||||||||||||||||||||||||
Balance as of December 26, 2020 | $ | 565 | $ | 1,055,172 | $ | 31,975 | $ | 16,528 | $ | 2,120 | $ | 1,106,360 | |||||||||||||||||||||||
Net income (loss) | — | — | (19,939) | — | 7 | (19,932) | |||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | (9,085) | — | (9,085) | |||||||||||||||||||||||||||||
Equity-based compensation expense | — | 983 | — | — | — | 983 | |||||||||||||||||||||||||||||
Issuance of common stock upon initial public offering, net of underwriting discounts and commissions | 1,082 | 660,418 | — | — | — | 661,500 | |||||||||||||||||||||||||||||
Common stock issued upon underwriter's exercise of over-allotment | 48 | 99,177 | — | — | — | 99,225 | |||||||||||||||||||||||||||||
Repurchase of common stock | (21) | (42,956) | — | — | — | (42,977) | |||||||||||||||||||||||||||||
Exercise of stock options | — | 25 | — | — | — | 25 | |||||||||||||||||||||||||||||
Establishment of income tax receivable liability | — | (155,970) | — | — | — | (155,970) | |||||||||||||||||||||||||||||
IPO fees | — | (14,757) | — | — | — | (14,757) | |||||||||||||||||||||||||||||
Other | — | — | — | — | (63) | (63) | |||||||||||||||||||||||||||||
Balance as of March 27, 2021 | $ | 1,674 | $ | 1,602,092 | $ | 12,036 | $ | 7,443 | $ | 2,064 | $ | 1,625,309 | |||||||||||||||||||||||
Net income (loss) | — | — | 35,204 | — | (37) | 35,167 | |||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | 11,412 | — | 11,412 | |||||||||||||||||||||||||||||
Equity-based compensation expense | — | 1,028 | — | — | — | 1,028 | |||||||||||||||||||||||||||||
At-Pac divestiture | — | — | — | — | (948) | (948) | |||||||||||||||||||||||||||||
Other | — | (25) | — | (1) | — | (26) | |||||||||||||||||||||||||||||
Balance as of June 26, 2021 | $ | 1,674 | $ | 1,603,095 | $ | 47,240 | $ | 18,854 | $ | 1,079 | $ | 1,671,942 | |||||||||||||||||||||||
Net income (loss) | — | — | 33,124 | — | (38) | 33,086 | |||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | (30,902) | 60 | (30,842) | |||||||||||||||||||||||||||||
Equity-based compensation expense | — | 933 | — | — | — | 933 | |||||||||||||||||||||||||||||
Exercise of stock options | — | 314 | — | — | — | 314 | |||||||||||||||||||||||||||||
Other | — | — | — | 1 | 63 | 64 | |||||||||||||||||||||||||||||
Balance as of September 25, 2021 | $ | 1,674 | $ | 1,604,342 | $ | 80,364 | $ | (12,047) | $ | 1,164 | $ | 1,675,497 | |||||||||||||||||||||||
Balance as of December 25, 2021 | $ | 1,674 | $ | 1,605,890 | $ | 41,607 | $ | (5,028) | $ | 1,099 | $ | 1,645,242 | |||||||||||||||||||||||
Net income (loss) | — | — | 34,443 | — | $ | (15) | 34,428 | ||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | (5,455) | 13 | (5,442) | |||||||||||||||||||||||||||||
Equity based compensation expense | — | 2,618 | — | — | — | 2,618 | |||||||||||||||||||||||||||||
Stock issued related to Employee Stock Purchase Plan | 1 | 2,091 | — | — | — | 2,092 | |||||||||||||||||||||||||||||
Tax withholding on stock option exercises | — | (14) | — | — | — | (14) | |||||||||||||||||||||||||||||
Divestiture of Denmark car wash operations | — | — | — | — | (432) | (432) | |||||||||||||||||||||||||||||
Balance as of March 26, 2022 | $ | 1,675 | $ | 1,610,585 | $ | 76,050 | $ | (10,483) | $ | 665 | $ | 1,678,492 | |||||||||||||||||||||||
Net loss | — | — | (57,044) | — | — | (57,044) | |||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | (42,313) | (19) | (42,332) | |||||||||||||||||||||||||||||
Equity based compensation expense | — | 4,233 | — | — | — | 4,233 | |||||||||||||||||||||||||||||
Stock option exercised | 2 | 109 | — | — | — | 111 | |||||||||||||||||||||||||||||
Balance as of June 25, 2022 | $ | 1,677 | $ | 1,614,927 | $ | 19,006 | $ | (52,796) | $ | 646 | $ | 1,583,460 | |||||||||||||||||||||||
6
Net income | — | — | 38,391 | — | — | $ | 38,391 | ||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | (62,437) | (15) | $ | (62,452) | ||||||||||||||||||||||||||||
Equity based compensation expense | — | 5,308 | — | — | — | $ | 5,308 | ||||||||||||||||||||||||||||
Stock option exercised | — | 245 | — | — | — | $ | 245 | ||||||||||||||||||||||||||||
Balance as of September 24, 2022 | $ | 1,677 | $ | — | $ | 1,620,480 | $ | — | $ | 57,397 | $ | — | $ | (115,233) | $ | — | $ | 631 | — | $ | 1,564,952 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
DRIVEN BRANDS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended | |||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | |||||||||
Net income (loss) | $ | 15,775 | $ | 48,321 | |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 107,628 | 78,722 | |||||||||
Trade name impairment | 125,450 | — | |||||||||
Non-cash lease cost | 65,075 | 56,563 | |||||||||
Loss on foreign denominated transactions | 30,490 | 9,301 | |||||||||
Gain on foreign currency derivatives | — | (2,945) | |||||||||
Bad debt expense | 1,011 | 2,535 | |||||||||
Asset impairment costs | 2,910 | 3,161 | |||||||||
Amortization of deferred financing costs and bond discounts | 6,807 | 5,139 | |||||||||
Benefit (provision) for deferred income taxes | (38,216) | 15,898 | |||||||||
Loss on extinguishment of debt | — | 45,576 | |||||||||
Other, net | 312 | 4,257 | |||||||||
Changes in assets and liabilities, net of acquisitions: | |||||||||||
Accounts and notes receivable, net | (44,063) | (28,787) | |||||||||
Inventory | (17,898) | (3,279) | |||||||||
Prepaid and other assets | 850 | (18,414) | |||||||||
Advertising fund assets and liabilities, restricted | (4,612) | 5,818 | |||||||||
Deferred commissions | 917 | (1,205) | |||||||||
Deferred revenue | 2,222 | 3,983 | |||||||||
Accounts payable | (12,321) | (3,903) | |||||||||
Accrued expenses and other liabilities | (59,844) | 25,595 | |||||||||
Income tax receivable | 37,931 | (320) | |||||||||
Operating lease liabilities | (52,772) | (47,821) | |||||||||
Cash provided by operating activities | 167,652 | 198,195 | |||||||||
Cash flows from investing activities: | |||||||||||
Capital expenditures | (276,222) | (93,627) | |||||||||
Cash used in business acquisitions, net of cash acquired | (652,085) | (442,488) | |||||||||
Proceeds from sale-leaseback transactions | 150,112 | 66,391 | |||||||||
Proceeds from sale of company-operated stores | — | 1,532 | |||||||||
Proceeds from disposition of car wash operations | 1,551 | — | |||||||||
Proceeds from disposal of property and equipment | 4,876 | 5,471 | |||||||||
Cash used in investing activities | (771,768) | (462,721) | |||||||||
Cash flows from financing activities: | |||||||||||
Payment of debt extinguishment and issuance costs | — | (2,153) | |||||||||
Repayment of long-term debt | (15,772) | (716,542) | |||||||||
Proceeds from revolving lines of credit and short-term debt | 300,000 | 441,800 | |||||||||
Repayments of revolving lines of credit and short-term debt | — | (212,800) | |||||||||
Repayment of principal portion of finance lease liability | (2,229) | (1,760) | |||||||||
Proceeds from initial public offering, net of underwriting discounts | — | 661,500 | |||||||||
Net proceeds from underwriters' exercise of over-allotment option | — | 99,225 | |||||||||
Repurchases of common stock | — | (43,040) | |||||||||
Payment for termination of interest rate swaps | — | (21,826) | |||||||||
Stock option exercises | 651 | 339 | |||||||||
Other, net | (70) | 102 | |||||||||
Cash provided by financing activities | 282,580 | 204,845 |
8
Effect of exchange rate changes on cash | (7,705) | (2,285) | |||||||||
Net change in cash, cash equivalents, restricted cash, and cash included in advertising fund assets, restricted | (329,241) | (61,966) | |||||||||
Cash and cash equivalents, beginning of period | 523,414 | 172,611 | |||||||||
Cash included in advertising fund assets, restricted, beginning of period | 38,586 | 19,369 | |||||||||
Restricted cash, beginning of period | 792 | 15,827 | |||||||||
Cash, cash equivalents, restricted cash, and cash included in advertising fund assets, restricted, beginning of period | 562,792 | 207,807 | |||||||||
Cash and cash equivalents, end of period | 190,373 | 115,365 | |||||||||
Cash included in advertising fund assets, restricted, end of period | 42,386 | 30,341 | |||||||||
Restricted cash, end of period | 792 | 135 | |||||||||
Cash, cash equivalents, restricted cash, and cash included in advertising fund assets, restricted, end of period | $ | 233,551 | $ | 145,841 |
Supplemental cash flow disclosures - non-cash items: | |||||||||||
Accrued capital expenditures, end of period | $ | 8,539 | $ | 6,123 | |||||||
Supplemental cash flow disclosures - cash paid for: | |||||||||||
Interest | $ | 78,572 | $ | 53,842 | |||||||
Income taxes | $ | 9,184 | $ | 10,593 |
The accompanying notes are an integral part of these consolidated financial statements.
9
DRIVEN BRANDS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1—Description of Business
Description of Business
Driven Brands Holdings Inc. together with its subsidiaries (collectively, the “Company”) is a Delaware corporation and is the parent holding company of Driven Brands, Inc. and Shine Holdco (UK) Limited (collectively, “Driven Brands”). Driven Brands is the largest automotive services company in North America with a growing and highly-franchised base of more than 4,700 franchised, independently-operated, and company-operated locations across 49 U.S. states and 14 other countries. The Company has a portfolio of highly recognized brands, including Take 5 Oil Change®, Take 5 Car Wash®, Meineke Car Care Centers®, MAACO®, CARSTAR®, Auto Glass Now®, and 1-800-Radiator & A/C® that compete in the automotive services industry. Approximately 76% of the Company’s locations are franchised or independently-operated.
Initial Public Offering and Secondary Offerings
On January 14, 2021, the Company completed an initial public offering (the “IPO”) of approximately 32 million shares of common stock at $22 per share. On February 10, 2021, the Company’s underwriters exercised their over-allotment option to purchase approximately 5 million additional shares of common stock. The Company received total proceeds of $761 million from these transactions, net of the underwriting discounts and commissions.
The Company used the proceeds from the IPO, along with cash on hand, to fully repay the term loans and revolving credit facility assumed as part of the acquisition of International Car Wash Group (“ICWG”) in 2020 (collectively, the “Car Wash Senior Credit Facilities”), which totaled $725 million with interest and fees. The Company recognized a $46 million loss on debt extinguishment for nine months ended September 25, 2021 related to this settlement, primarily related to the write-off of the unamortized discount. The Company cancelled the interest rate and cross currency swaps associated with these debt agreements as part of the settlement. The Company also used $43 million in proceeds to purchase approximately 2 million shares of common stock from certain of our existing shareholders.
On August 2, 2021, the Company filed a Registration Statement on Form S-1 for a secondary offering of approximately 12 million shares of common stock at $29.50 per share by certain of the Company’s stockholders, Driven Equity LLC and RC IV Cayman ICW Holdings LLC, each of which is a related party of Roark Capital Management, LLC. The Company did not sell any common stock in the offering and did not receive any proceeds from the offering. On September 8, 2021, the underwriters for the secondary offering exercised a portion of their over-allotment option and purchased 881,393 additional shares of common stock. The Company did not receive any proceeds from the exercise of the over-allotment option.
On September 12, 2022, the Company filed a Registration Statement on Form 424B7 for an underwritten secondary offering of 7 million shares of common stock at $32.19 per share by certain of the Company’s stockholders, Driven Equity LLC and RC IV Cayman ICW Holdings LLC, each of which is a related party of Roark Capital Management, LLC. The Company did not sell any common stock in the offering and did not receive any proceeds from the offering.
Income Tax Receivable Agreement
The Company expects to be able to utilize certain tax benefits which are related to periods prior to the effective date of the Company’s IPO and are attributed to current and former shareholders. The Company previously entered into an income tax receivable agreement which provides our pre-IPO shareholders with the right to receive payment of 85% of the amount of cash savings, if any, in U.S. and Canadian federal, state, local and provincial income tax that the Company will actually realize. The income tax receivable agreement is effective as of the date of the Company’s IPO. The Company has recorded a total liability of $156 million as of September 24, 2022 and December 25, 2021, of which $24 million and $132 million are recorded under current and non-current liabilities, respectively.
Stock Split
On January 14, 2021, the Company’s shareholders approved an amendment to the Company’s certificate of incorporation (the "Amendment") to effect an implied 88,990-for-one stock split of shares of the Company’s outstanding
common stock. In addition, the Amendment increased the number of authorized shares of the Company's stock from 10,000 shares to 1 billion shares (900 million shares of common stock and 100 million shares of preferred stock). All share and per-share data in the consolidated financial statements and footnotes has been retroactively adjusted to reflect the stock split for all periods presented. The Company does not have any shares of preferred stock outstanding.
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Note 2— Summary of Significant Accounting Policies
Fiscal Year
The Company operates and reports financial information on a 52- or 53-week year with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The three and nine months ended September 24, 2022 and September 25, 2021, each consist of 13 weeks and 39 weeks, respectively. The Car Wash segment is currently consolidated based on a calendar month end.
Basis of Presentation
The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited interim financial data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of operations, balance sheet, cash flows and shareholders’ equity for the interim periods presented. The adjustments include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
These interim consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 25, 2021. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and nine months ended September 24, 2022 may not be indicative of the results to be expected for any other interim period or the year ending December 31, 2022.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to the consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its estimates and assumptions on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.
Deferred IPO costs
Costs incurred that are directly related to the IPO, such as legal and accounting fees, registration fees, printing expenses, and other similar fees and expenses, totaling $9 million were capitalized and included within prepaid and other assets as of December 26, 2020. Upon completion of the IPO, the Company reclassified these costs, as well as an additional $6 million of IPO costs incurred during the nine months ended September 25, 2021 to Additional paid-in capital within the statement of Shareholders’/members’ equity.
Fair Value of Financial Instruments
Financial assets and liabilities are categorized, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. Observable market data, when available, is required to be used in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:
•Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
•Level 2: Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; or
•Level 3: Inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
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Financial assets and liabilities measured at fair value on a recurring basis as of September 24, 2022 and December 25, 2021 are summarized as follows:
Items Measured at Fair Value at September 24, 2022 | |||||||||||||||||
(in thousands) | Level 1 | Level 2 | Total | ||||||||||||||
Mutual fund investments held in rabbi trust | $ | 711 | $ | — | $ | 711 | |||||||||||
Interest rate derivative assets designated as hedging instruments | $ | — | $ | 11,540 | $ | 11,540 | |||||||||||
Foreign currency derivative assets designated as hedging instruments | $ | — | $ | 2,282 | $ | 2,282 | |||||||||||
Foreign currency derivative liabilities designated as hedging instruments | $ | — | $ | 161 | $ | 161 | |||||||||||
Foreign currency derivative liabilities not designated as hedging instruments | $ | — | $ | 2,622 | $ | 2,622 | |||||||||||
Items Measured at Fair Value at December 25, 2021 | |||||||||||||||||
(in thousands) | Level 1 | Level 2 | Total | ||||||||||||||
Mutual fund investments held in rabbi trust | $ | 976 | $ | — | $ | 976 | |||||||||||
Foreign currency derivative liabilities designated as hedging instruments | $ | — | $ | 536 | $ | 536 | |||||||||||
The fair value of the Company’s foreign currency derivative instruments are derived from valuation models, which use Level 2 observable inputs such as quoted market prices, interest rates and forward yield curves. Derivative assets are included in Prepaid and other assets or Notes receivable, net in the consolidated balance sheet depending on the remaining period to maturity. Derivative liabilities not designated as a hedging instrument are included in Accrued expenses and other liabilities in the consolidated balance Sheet. Derivative liabilities designated as a hedging instrument are included in long-term accrued expenses and other liabilities in the consolidated balance sheet.
The carrying values of cash, restricted cash, and receivables included in the consolidated balance sheet approximate their fair value. The fair value of long-term debt is estimated based on Level 2 inputs using discounted cash flows and market-based expectations for interest rates, credit risk and contractual terms of the debt agreements.
The carrying value and estimated fair value of total long-term debt were as follows:
September 24, 2022 | December 25, 2021 | ||||||||||||||||||||||
(in thousands) | Carrying value | Estimated fair value | Carrying value | Estimated fair value | |||||||||||||||||||
Long-term debt | $ | 2,680,356 | $ | 2,494,221 | $ | 2,382,364 | $ | 2,411,987 |
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Accumulated Other Comprehensive Income (Loss)
The following tables present changes in each component of accumulated other comprehensive income (loss), net of tax:
Three months ended September 24, 2022 | |||||||||||||||||||||||
(in thousands) | Foreign currency translation adjustment | Cash flow hedges | Defined benefit pension plan | Accumulated other comprehensive income (loss) | |||||||||||||||||||
Balance as of June 25, 2022 | $ | (51,865) | $ | (851) | $ | (80) | $ | (52,796) | |||||||||||||||
Net change | (71,048) | 8,606 | 5 | (62,437) | |||||||||||||||||||
Balance as of September 24, 2022 | $ | (122,913) | $ | 7,755 | $ | (75) | $ | (115,233) |
Three months ended September 25, 2021 | |||||||||||||||||||||||
(in thousands) | Foreign currency translation adjustment | Cash flow hedges | Defined benefit pension plan | Accumulated other comprehensive income (loss) | |||||||||||||||||||
Balance at June 26, 2021 | $ | 19,002 | $ | (57) | $ | (91) | $ | 18,854 | |||||||||||||||
Net change | (30,903) | (1) | 3 | (30,901) | |||||||||||||||||||
Balance as of September 25, 2021 | $ | (11,901) | $ | (58) | $ | (88) | $ | (12,047) |
Nine months ended September 24, 2022 | |||||||||||||||||||||||
(in thousands) | Foreign currency translation adjustment | Cash flow hedges | Defined benefit pension plan | Accumulated other comprehensive income (loss) | |||||||||||||||||||
Balance as of December 25, 2021 | $ | (4,183) | $ | (758) | $ | (87) | $ | (5,028) | |||||||||||||||
Net change | (118,730) | 8,513 | 12 | (110,205) | |||||||||||||||||||
Balance as of September 24, 2022 | $ | (122,913) | $ | 7,755 | $ | (75) | $ | (115,233) |
Nine months ended September 25, 2021 | |||||||||||||||||||||||
(in thousands) | Foreign currency translation adjustment | Cash flow hedges | Defined benefit pension plan | Accumulated other comprehensive income (loss) | |||||||||||||||||||
Balance as of December 26, 2020 | $ | 16,834 | $ | (87) | $ | (219) | $ | 16,528 | |||||||||||||||
Net change | (28,735) | 29 | 131 | (28,575) | |||||||||||||||||||
Balance as of September 25, 2021 | $ | (11,901) | $ | (58) | $ | (88) | $ | (12,047) |
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates and, particularly, the risk of cessation of LIBOR, regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022. The Company is evaluating the impact of adopting this new accounting guidance and does not believe it will have a material impact on the Company’s consolidated financial statements.
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Note 3—Acquisitions and Dispositions
The Company strategically acquires companies and assets in order to increase its footprint and offer products and services that diversify its existing offerings. These acquisitions are accounted for as either business combinations or asset acquisitions, whereby the purchase price is allocated to the assets acquired and liabilities assumed, based on their fair values as of the date of the acquisition.
2022 Acquisitions
The Company completed 18 acquisitions in the Car Wash segment during the nine months ended September 24, 2022, representing 26 sites, which were deemed to be business combinations. The aggregate cash consideration for these acquisitions, net of cash acquired and liabilities assumed, was approximately $266.8 million. On June 14, 2022, the Car Wash segment acquired Jimmy Clean Car Wash, which was comprised of 3 sites for a total consideration of $31.9 million. On July 6, 2022, the Car Wash segment acquired Speedy Shine Express Car Wash, which was comprised of 2 sites for a total consideration of $33.5 million
The Company completed 5 acquisitions in the Maintenance segment during the nine months ended September 24, 2022, representing 10 sites, which were deemed to be business combinations. The aggregate cash consideration for these acquisitions, net of cash acquired and liabilities assumed, was $20.5 million.
In addition, the Company completed 7 acquisitions in the Paint, Collision & Glass segment during the nine months ended September 24, 2022 representing 156 sites, which were deemed to be business combinations. On December 30, 2021 the Company acquired Auto Glass Now (“AGN”). AGN had 79 sites at the time of the Company’s acquisition, and is included within the Company’s Paint, Collision & Glass segment. The aggregate cash consideration for this acquisition, net of cash acquired and liabilities assumed, was $170.6 million. On April 28, 2022, the Company acquired All Star Glass (“ASG”), which was comprised of 30 sites for a total consideration of $43.7 million. On July 6, 2022, the Company acquired K&K Glass, which was comprised of 8 sites for a total consideration of $39.9 million. On July 27, 2022, the Company acquired Jack Morris Auto Glass, which was comprised of 9 sites for a total consideration of $54.9 million. On September 8, 2022, the Company acquired Auto Glass Fitters Inc.(“AGF”), which was comprised of 24 sites for a total consideration of $70.8 million. The Company will amortize the acquired lease right of use assets, customer list intangibles, and definite lived trade name over their estimated remaining lives of 3 to 34 years, 13 years, and one year, respectively.
The Company estimated the fair value of acquired assets and liabilities as of the date of acquisition based on information currently available. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The provisional amounts for assets acquired and liabilities assumed for the 2022 acquisitions are as follows:
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Paint, Collision & Glass Segment
(in thousands) | Auto Glass Fitters Inc. | Jack Morris Auto Glass | K&K Glass | All Star Glass | Auto Glass Now | All Other Paint, Collision & Glass | Total PC&G | |||||||||||||||||||
Assets: | ||||||||||||||||||||||||||
Cash | — | 3 | — | 7,553 | 7 | 2 | 7,564 | |||||||||||||||||||
ROU Asset | — | — | — | — | 690 | — | 690 | |||||||||||||||||||
Operating lease ROU Asset | — | — | — | 734 | 10,003 | — | 10,738 | |||||||||||||||||||
Prepaid rent | — | — | — | — | 327 | 30 | 357 | |||||||||||||||||||
Land | — | — | — | — | 23 | — | 23 | |||||||||||||||||||
Equipment | — | 1,200 | 1,500 | 537 | 428 | 902 | 4,567 | |||||||||||||||||||
Vehicles | 417 | — | — | — | 453 | — | 870 | |||||||||||||||||||
Furniture and Fixtures | — | — | — | — | 40 | — | 40 | |||||||||||||||||||
Inventory | — | 1,067 | 500 | 546 | — | 27 | 2,140 | |||||||||||||||||||
Accounts and Notes receivable | — | 1,069 | — | 2,436 | — | — | 3,505 | |||||||||||||||||||
Prepaid expenses | — | — | — | 250 | — | — | 250 | |||||||||||||||||||
Other Assets | 974 | — | 56 | 5 | — | — | 1,035 | |||||||||||||||||||
Leasehold improvements | — | — | — | — | — | — | — | |||||||||||||||||||
Intangible asset - trade name | 800 | 400 | 400 | 600 | 36,800 | — | 39,000 | |||||||||||||||||||
Intangible - customer relationships | 19,800 | 15,700 | 16,200 | 8,100 | 12,200 | — | 72,000 | |||||||||||||||||||
Deferred tax assets | — | — | — | — | — | 71 | 71 | |||||||||||||||||||
Assets acquired | 21,991 | 19,439 | 18,656 | 20,761 | 60,971 | 1,032 | 142,850 | |||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||
Prepaid liability | 174 | 294 | 111 | — | — | — | 579 | |||||||||||||||||||
Trade Payable | — | — | — | 1,911 | — | — | 1,911 | |||||||||||||||||||
Accrued Expenses and other long-term liabilities | — | — | — | 303 | — | — | 303 | |||||||||||||||||||
Taxes Payable | — | — | — | 272 | — | — | 272 | |||||||||||||||||||
Long Term Debt- Current | — | — | — | 46 | — | — | 46 | |||||||||||||||||||
Long Term Debt | — | — | — | 59 | — | — | 59 | |||||||||||||||||||
Lease liability | — | — | — | 733 | — | — | 733 | |||||||||||||||||||
Operating lease liability - Current | — | — | — | — | 3,017 | — | 3,017 | |||||||||||||||||||
Operating lease liability - Non-current | — | — | — | — | 6,987 | — | 6,987 | |||||||||||||||||||
Total liabilities assumed | 174 | 294 | 111 | 3,324 | 10,004 | — | 13,907 | |||||||||||||||||||
Net assets acquired | 21,817 | 19,145 | 18,545 | 17,437 | 50,967 | 1,032 | 128,943 | |||||||||||||||||||
Total consideration | 70,826 | 54,853 | 39,945 | 43,740 | 170,636 | 9,382 | 389,382 | |||||||||||||||||||
Goodwill | 49,009 | 35,708 | 21,400 | 26,303 | 119,669 | 8,350 | 260,439 |
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Car Wash Segment
(in thousands) | Speedy Shine Express Car Wash | Jimmy Clean Car Wash | All Other Car Wash | Total Car Wash | |||||||||||||
Assets: | |||||||||||||||||
Cash | 4 | 6 | 49 | 59 | |||||||||||||
Land | 1,560 | 1,900 | 16,600 | 20,060 | |||||||||||||
Land improvements | — | — | — | — | |||||||||||||
Building | 12,060 | 9,290 | 104,630 | 125,980 | |||||||||||||
Car wash equipment | 2,580 | 2,210 | 17,808 | 22,598 | |||||||||||||
Deferred tax assets | 12 | 2,116 | 740 | 2,868 | |||||||||||||
Assets acquired | 16,216 | 15,522 | 139,827 | 171,565 | |||||||||||||
Liabilities: | |||||||||||||||||
Prepaid Liability | 8 | 110 | 423 | 541 | |||||||||||||
Total liabilities assumed | 8 | 110 | 423 | 541 | |||||||||||||
Net assets acquired | 16,208 | 15,412 | 139,404 | 171,024 | |||||||||||||
Total consideration | 33,496 | 31,896 | 201,401 | 266,793 | |||||||||||||
Goodwill | 17,288 | 16,484 | 61,997 | 95,769 |
Maintenance Segment
(in thousands) | Maintenance | |||||||
Assets: | ||||||||
Cash | $ | 1 | ||||||
Prepaid rent | $ | — | ||||||
Land | $ | 510 | ||||||
Land improvements | $ | — | ||||||
Building | $ | 3,845 | ||||||
Car wash equipment | $ | 485 | ||||||
Inventory | $ | 226 | ||||||
Prepaid expenses | $ | 71 | ||||||
Deferred tax assets | $ | 55 | ||||||
Assets acquired | $ | 5,193 | ||||||
Liabilities: | ||||||||
Total liabilities assumed | $ | 168 | ||||||
Net assets acquired | $ | 5,025 | ||||||
Total consideration | $ | 20,517 | ||||||
Goodwill | $ | 15,492 |
Goodwill represents the excess of the consideration paid over the fair value of net assets acquired and includes the expected benefit of synergies within the existing segments and intangible assets that do not qualify for separate recognition. Goodwill, which was allocated to the Car Wash, Maintenance and Paint, Collision & Glass segments, is substantially all deductible for income tax purposes.
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The following tables present financial information regarding the Car Wash and Glass acquisitions included in our consolidated statements of operations from the date of acquisition through September 24, 2022 under the column “Actual from acquisition date.” The following tables also present supplemental unaudited pro-forma information as if the acquisitions had occurred at the beginning of 2021. The pro-forma information does not necessarily reflect the results of operations that would have occurred had the acquisitions occurred at the beginning of 2021. Cost savings are also not reflected in the unaudited pro-forma amounts for the three and nine months ended September 24, 2022 and September 25, 2021.
Three months ended September 24, 2022 | Three months ended September 24, 2022 | Three months ended September 25, 2021 | |||||||||||||||||||||
Actual from acquisition date | |||||||||||||||||||||||
(in thousands) | Car Wash Acquisitions | Glass Acquisitions | Car Wash & Glass Acquisitions | Driven Brands Holdings Consolidated Pro-forma | Driven Brands Holdings Consolidated Pro-forma | ||||||||||||||||||
Revenue | $ | 7,357 | $ | 47,948 | $ | 55,305 | $ | 532,299 | $ | 442,287 | |||||||||||||
Net income attributable to Driven Brands Holdings Inc. | $ | 1,889 | $ | 7,703 | $ | 9,592 | $ | 39,398 | $ | 46,080 |
Nine months ended September 24, 2022 | Nine months ended September 24, 2022 | Nine months ended September 25, 2021 | |||||||||||||||||||||
Actual from acquisition date | |||||||||||||||||||||||
(in thousands) | Car Wash Acquisitions | Glass Acquisitions | Car Wash & Glass Acquisitions | Driven Brands Holdings Consolidated Pro-forma | Driven Brands Holdings Consolidated Pro-forma | ||||||||||||||||||
Revenue | $ | 11,629 | $ | 97,941 | $ | 109,570 | $ | 1,599,438 | $ | 1,280,691 | |||||||||||||
Net income attributable to Driven Brands Holdings Inc. | $ | 2,883 | $ | 13,780 | $ | 16,663 | $ | 34,793 | $ | 88,930 |
Deferred Consideration and Transaction Costs
Included in the total consideration amounts above for the Car Wash, Maintenance, and Paint, Collision & Glass acquisitions in 2022 was $20 million of consideration not paid on the closing date. The Company has $28 million of deferred consideration related to 2022 and 2021 acquisitions at September 24, 2022. The Company had $23 million of deferred consideration related to 2021 acquisitions at December 25, 2021. The Company paid $15 million of deferred consideration related to 2022 and 2021 acquisitions during the nine months ended September 24, 2022. Deferred consideration is typically paid six months to one-year after the acquisition closing date once all conditions related to representations, warranties and indemnification under the purchase agreement have been satisfied.
The Company incurred approximately $4 million of direct transaction costs during the nine months ended September 24, 2022 related to 2022 acquisitions.
2022 Disposition
On March 16, 2022, the Company disposed of its 75% owned subsidiary, IMO Denmark ApS, for consideration of $2 million. As a result of the sale, a $1 million loss was recognized within selling, general, and administrative expenses during the nine months ended September 24, 2022. Also, a noncontrolling interest of less than $1 million was derecognized.
2021 Acquisitions
2021 Car Wash Segment
The Company completed 38 acquisitions in the Car Wash segment, representing 110 car wash sites, (the “2021 Car Wash Acquisitions”), which were deemed to be business combinations, during the year ended December 25, 2021. The aggregate cash consideration for these acquisitions, net of cash acquired and liabilities assumed, was $732 million.
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On October 27, 2021, the Car Wash segment acquired Magic Tunnel Car Wash, which was comprised of 16 sites for total consideration of $88 million. On July 14, 2021, the Car Wash segment acquired Frank’s Car Wash, which was comprised of 18 sites for total consideration of $107 million. On May 20, 2021, the Car Wash segment acquired Racer Classic Car Wash, which was comprised of 10 sites for total consideration of $65 million.
The Company estimated the fair value of acquired assets and liabilities as of the date of acquisition based on information currently available. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The amounts for assets acquired and liabilities assumed for the 2021 Car Wash Acquisitions (which are provisional unless otherwise noted with an *) are as follows:
(in thousands) | Magic Tunnel Car Wash | Franks Car Wash Express* | Racer Classic Car Wash* | All Other | Total Car Wash | ||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||
Cash | $ | 26 | $ | 38 | $ | 18 | $ | 165 | $ | 247 | |||||||||||||||||||
Right of use assets | — | — | 2,587 | 12,277 | 14,864 | ||||||||||||||||||||||||
Land and improvements | 13,020 | 10,790 | 6,920 | 45,455 | 76,185 | ||||||||||||||||||||||||
Building | 48,380 | 48,570 | 31,490 | 270,155 | 398,595 | ||||||||||||||||||||||||
Equipment | 13,800 | 7,377 | 5,698 | 59,578 | 86,453 | ||||||||||||||||||||||||
Inventory | — | — | 311 | — | 311 | ||||||||||||||||||||||||
Intangibles, net | 700 | 800 | 550 | — | 2,050 | ||||||||||||||||||||||||
Deferred tax assets | — | 94 | — | 1,596 | 1,690 | ||||||||||||||||||||||||
Assets held for sale | — | — | — | 996 | 996 | ||||||||||||||||||||||||
Assets acquired | 75,926 | 67,669 | 47,574 | 390,222 | 581,391 | ||||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||
Accrued liability | — | 50 | 155 | 304 | 509 | ||||||||||||||||||||||||
Lease liability | — | — | 2,687 | 12,277 | 14,964 | ||||||||||||||||||||||||
Deferred tax liabilities | — | — | 758 | — | 758 | ||||||||||||||||||||||||
Liabilities assumed | — | 50 | 3,600 | 12,581 | 16,231 | ||||||||||||||||||||||||
Net assets acquired | 75,926 | 67,619 | 43,974 | 377,641 | 565,160 | ||||||||||||||||||||||||
Total consideration | 88,026 | 106,558 | 64,843 | 472,721 | 732,148 | ||||||||||||||||||||||||
Goodwill | $ | 12,100 | $ | 38,939 | $ | 20,869 | $ | 95,080 | $ | 166,988 |
Goodwill which was allocated to the Car Wash segment is substantially all deductible for income tax purposes.
The following table presents financial information regarding the 2021 Car Wash Acquisitions operations included in our consolidated statements of operations from the date of acquisition through December 25, 2021 under the column “Actual from acquisition date in 2021.” The following table presents supplemental unaudited pro-forma information as if the 2021 Car Wash Acquisitions had occurred at the beginning of 2020. The pro-forma information does not necessarily reflect the results of operations that would have occurred had the 2021 Car Wash Acquisitions occurred at the beginning of 2020. Cost savings are also not reflected in the unaudited pro-forma amounts for the year ended December 25, 2021 and December 26, 2020, respectively.
Actual from acquisition date in 2021 | Pro-forma for year ended | ||||||||||||||||
(in thousands) | December 25, 2021 | December 26, 2020 | |||||||||||||||
Revenue | $ | 48,648 | $ | 1,613,479 | $ | 1,026,012 | |||||||||||
Net income attributable to Driven Brands Holdings Inc. | $ | 11,693 | $ | 47,272 | $ | 20,558 |
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2021 Maintenance Segment
During the year ended December 25, 2021, the Company also completed 8 acquisitions in the Maintenance segment representing 13 maintenance sites, each individually immaterial (the “2021 Maintenance Acquisitions”), which were deemed to be business combinations. The aggregate cash consideration for these acquisitions, net of cash acquired and liabilities assumed, was $37 million.
The Company estimated the fair value of acquired assets and liabilities as of the date of acquisition based on information currently available. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The finalized amounts for assets acquired and liabilities assumed for the 2021 Maintenance Acquisitions are as follows:
(in thousands) | ||||||||
Assets: | ||||||||
Cash | $ | 2 | ||||||
Land and improvements | 4,425 | |||||||
Building | 13,220 | |||||||
Equipment | 1,450 | |||||||
Inventory | 200 | |||||||
Deferred tax assets | 90 | |||||||
Asset held for sale | 3,275 | |||||||
22,662 | ||||||||
Liabilities: | ||||||||
Prepaid liability | 52 | |||||||
Liabilities assumed | 52 | |||||||
Net assets acquired | 22,610 | |||||||
Total consideration | 37,271 | |||||||
Goodwill | $ | 14,661 |
2021 Paint, Collision & Glass Segment
During the year ended December 25, 2021, the Company completed two acquisitions in its Paint, Collision & Glass segment (the “2021 PC&G Acquisitions”) representing 12 collision sites, each individually immaterial, which were deemed to be business combinations. The aggregate cash consideration for these acquisitions, net of cash acquired and liabilities assumed, was $33 million.
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The Company estimated the fair value of acquired assets and liabilities as of the date of acquisition based on information currently available. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The finalized amounts for assets acquired and liabilities assumed for the 2021 PC&G Acquisitions are as follows:
(in thousands) | ||||||||
Assets: | ||||||||
Right of use asset | $ | 7,672 | ||||||
Equipment | 1,512 | |||||||
Inventory | 107 | |||||||
Intangibles, net | 6,707 | |||||||
Assets acquired | 15,998 | |||||||
Liabilities: | ||||||||
Accrued liability | 5 | |||||||
Lease liability | 7,664 | |||||||
Off-market lease component | 99 | |||||||
Liabilities assumed | 7,768 | |||||||
Net assets acquired | 8,230 | |||||||
Total consideration | 32,972 | |||||||
Goodwill | $ | 24,742 |
In addition, during the twelve months ended December 25, 2021, the Company completed 11 acquisitions composed of one site each, each individually immaterial, each of which were deemed to be asset acquisitions as the fair value of assets acquired is substantially all land and buildings. Two of these acquisitions were included in the Car Wash segment and nine were included in the Maintenance segment. The aggregate consideration paid for the Car Wash acquisitions and Maintenance assets acquisitions was $9 million and $7 million, respectively.
Deferred Consideration and Transaction Costs
Included in the total consideration amounts above for the Car Wash and Maintenance acquisitions in 2021 was $24 million of consideration not paid on the closing date. The Company had $23 million of deferred consideration related to 2021 and 2020 acquisitions at December 25, 2021. The Company had $5 million of deferred consideration related to 2020 acquisitions at December 26, 2020. The Company paid $6 million of deferred consideration related to 2021 and 2020 and prior acquisitions during the year ended December 25, 2021. Deferred consideration is typically paid six months to one-year after the acquisition closing date once all conditions under the purchase agreement have been satisfied.
The Company incurred approximately $3 million of transaction costs during the year ended December 25, 2021 related to 2021 acquisitions.
2021 Disposition
On April 27, 2021, the Company disposed of its 70% owned subsidiary, At-Pac Auto Parts Inc., for consideration of $2 million. As a result of the sale, a loss of less than $1 million was recognized within selling, general, and administrative expenses during the year ended December 25, 2021. Also, a noncontrolling interest of $1 million was derecognized.
Note 4— Revenue from Contracts with Customers
The Company records contract assets for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year and if such costs are material. Commission expenses, a primary cost associated with the sale of franchise licenses, are amortized to selling, general and administrative expenses in the consolidated statements of operations ratably over the life of the associated franchise agreement.
Capitalized costs to obtain a contract as of September 24, 2022 and December 25, 2021 were $10 million and $11 million respectively, and are presented within deferred commissions on the consolidated balance sheets. The Company recognized an immaterial amount of costs during the three and nine months ended September 24, 2022 and September 25, 2021 that were recorded as a contract asset at the beginning of the periods.
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The Company had Deferred Revenue of $42 million and $38 million as of September 24, 2022 and December 25, 2021, respectively, which includes contract liabilities, consisting primarily of deferred franchise fees and deferred development fees, of $40 million and $27 million as of September 24, 2022 and December 25, 2021, respectively. The Company recorded less than $1 million of revenue during the three months ended September 24, 2022 and September 25, 2021, and $3 million and $2 million of revenue during the nine months ended September 24, 2022 and September 25, 2021, respectively, that was recorded as a contract liability as of the beginning of the period.
Note 5—Segment Information
The Company’s worldwide operations are comprised of the following reportable segments: Maintenance; Car Wash; Paint, Collision & Glass; and Platform Services.
In addition to the reportable segments, the Company’s consolidated financial results include “Corporate and Other” activity. Corporate and Other incurs costs related to advertising fund revenues and expenses and shared service costs, which are related to finance, information technology, human resources, legal, supply chain and other support services. Corporate and Other activity includes the adjustments necessary to eliminate intercompany transactions, namely sales by the Platform Services segment to the Paint, Collision & Glass and Maintenance segments.
Segment results for the three and nine months ended September 24, 2022 and September 25, 2021 are as follows:
Three months ended September 24, 2022 | |||||||||||||||||||||||||||||||||||
(in thousands) | Maintenance | Car Wash | Paint, Collision & Glass | Platform Services | Corporate and Other | Total | |||||||||||||||||||||||||||||
Franchise royalties and fees | $ | 11,625 | $ | — | $ | 24,055 | $ | 9,882 | $ | — | $ | 45,562 | |||||||||||||||||||||||
Company-operated store sales | 172,162 | 98,235 | 69,413 | 1,431 | (30) | 341,211 | |||||||||||||||||||||||||||||
Independently-operated store sales | — | 40,469 | — | — | — | 40,469 | |||||||||||||||||||||||||||||
Advertising fund contributions | — | — | — | — | 22,018 | 22,018 | |||||||||||||||||||||||||||||
Supply and other revenue | 17,035 | 1,599 | 19,782 | 40,686 | (11,768) | 67,334 | |||||||||||||||||||||||||||||
Total revenue | $ | 200,822 | $ | 140,303 | $ | 113,250 | $ | 51,999 | $ | 10,220 | $ | 516,594 | |||||||||||||||||||||||
Segment Adjusted EBITDA | $ | 68,763 | $ | 39,098 | $ | 38,919 | $ | 19,765 | $ | (36,437) | $ | 130,108 |
Three months ended September 25, 2021 | |||||||||||||||||||||||||||||||||||
(in thousands) | Maintenance | Car Wash | Paint, Collision & Glass | Platform Services | Corporate and Other | Total | |||||||||||||||||||||||||||||
Franchise royalties and fees | $ | 9,635 | $ | — | $ | 20,280 | $ | 9,038 | $ | — | $ | 38,953 | |||||||||||||||||||||||
Company-operated store sales | 125,561 | 74,105 | 12,723 | 1,465 | (99) | 213,755 | |||||||||||||||||||||||||||||
Independently-operated store sales | — | 47,941 | — | — | — | 47,941 | |||||||||||||||||||||||||||||
Advertising fund contributions | — | — | — | — | 19,762 | 19,762 | |||||||||||||||||||||||||||||
Supply and other revenue | 9,261 | 1,516 | 17,572 | 31,558 | (9,170) | 50,737 | |||||||||||||||||||||||||||||
Total revenue | $ | 144,457 | $ | 123,562 | $ | 50,575 | $ | 42,061 | $ | 10,493 | $ | 371,148 | |||||||||||||||||||||||
Segment Adjusted EBITDA | $ | 47,894 | $ | 37,999 | $ | 22,039 | $ | 16,254 | $ | (25,558) | $ | 98,628 |
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Nine months ended September 24, 2022 | |||||||||||||||||||||||||||||||||||
(in thousands) | Maintenance | Car Wash | Paint, Collision & Glass | Platform Services | Corporate and Other | Total | |||||||||||||||||||||||||||||
Franchise royalties and fees | $ | 32,586 | $ | — | $ | 69,025 | $ | 26,689 | $ | — | $ | 128,300 | |||||||||||||||||||||||
Company-operated store sales | 497,638 | 294,526 | 161,531 | 3,975 | (183) | 957,487 | |||||||||||||||||||||||||||||
Independently-operated store sales | — | 158,500 | — | — | — | 158,500 | |||||||||||||||||||||||||||||
Advertising fund contributions | — | — | — | — | 63,807 | 63,807 | |||||||||||||||||||||||||||||
Supply and other revenue | 43,645 | 5,131 | 57,577 | 117,704 | (38,610) | 185,447 | |||||||||||||||||||||||||||||
Total revenue | $ | 573,869 | $ | 458,157 | $ | 288,133 | $ | 148,368 | $ | 25,014 | $ | 1,493,541 | |||||||||||||||||||||||
Segment Adjusted EBITDA | $ | 185,324 | $ | 148,495 | $ | 100,847 | $ | 54,471 | $ | (103,922) | $ | 385,215 |
Nine months ended September 25, 2021 | |||||||||||||||||||||||||||||||||||
(in thousands) | Maintenance | Car Wash | Paint, Collision & Glass | Platform Services | Corporate and Other | Total | |||||||||||||||||||||||||||||
Franchise royalties and fees | $ | 26,651 | $ | — | $ | 57,578 | $ | 23,011 | $ | — | $ | 107,240 | |||||||||||||||||||||||
Company-operated store sales | 365,735 | 196,858 | 37,672 | 3,911 | (368) | 603,808 | |||||||||||||||||||||||||||||
Independently-operated store sales | — | 160,483 | — | — | — | 160,483 | |||||||||||||||||||||||||||||
Advertising fund contributions | — | — | — | — | 56,665 | 56,665 | |||||||||||||||||||||||||||||
Supply and other revenue | 25,231 | 4,800 | 49,791 | 94,576 | (27,199) | 147,199 | |||||||||||||||||||||||||||||
Total revenue | $ | 417,617 | $ | 362,141 | $ | 145,041 | $ | 121,498 | $ | 29,098 | $ | 1,075,395 | |||||||||||||||||||||||
Segment Adjusted EBITDA | $ | 132,895 | $ | 115,223 | $ | 61,534 | $ | 44,864 | $ | (76,422) | $ | 278,094 |
The reconciliations of Income (loss) before taxes to Segment Adjusted EBITDA for the three and nine months ended September 24, 2022 and September 25, 2021 are as follows:
Three months ended | Nine months ended | ||||||||||||||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
Income (loss) before taxes | $ | 52,863 | $ | 44,966 | $ | 24,367 | $ | 72,766 | |||||||||||||||
Depreciation and amortization | 36,518 | 28,447 | 107,628 | 78,722 | |||||||||||||||||||
Interest expense, net | 27,323 | 17,688 | 78,946 | 52,390 | |||||||||||||||||||
Acquisition related costs(a) | 2,325 | 636 | 9,981 | 2,674 | |||||||||||||||||||
Non-core items and project costs, net(b) | 851 | 1,357 | 3,436 | 3,910 | |||||||||||||||||||
Store opening costs | 753 | 666 | 1,925 | 1,360 | |||||||||||||||||||
Straight-line rent adjustment(c) | 3,220 | 2,548 | 11,530 | 8,391 | |||||||||||||||||||
Equity-based compensation expense(d) | 5,308 | 933 | 12,159 | 2,944 | |||||||||||||||||||
Foreign currency transaction (gain) / loss, net(e) | 15,582 | 1,074 | 30,490 | 6,356 | |||||||||||||||||||
Bad debt expense | (449) | — | (449) | — | |||||||||||||||||||
Trade name impairment(f) | — | — | 125,450 | — | |||||||||||||||||||
Asset sale leaseback (gain) loss, impairment and closed store expenses(g) | (14,186) | 313 | (20,248) | 3,005 | |||||||||||||||||||
Loss on debt extinguishment(h) | — | — | — | 45,576 | |||||||||||||||||||
Segment Adjusted EBITDA | $ | 130,108 | $ | 98,628 | $ | 385,215 | $ | 278,094 |
(a) Consists of acquisition costs as reflected within the consolidated statements of operations, including legal, consulting and other fees and expenses incurred in connection with acquisitions completed during the applicable period, as well as inventory rationalization expenses incurred in connection with acquisitions. We expect to incur similar costs in connection
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with other acquisitions in the future and, under GAAP, such costs relating to acquisitions are expensed as incurred and not capitalized.
(b) Consists of discrete items and project costs, including (i) third party consulting and professional fees associated with strategic transformation initiatives and (ii) other miscellaneous expenses, including non-capitalizable expenses relating to the Company’s initial public offering and other strategic transactions.
(c) Consists of the non-cash portion of rent expense, which reflects the extent to which our straight-line rent expense recognized under GAAP exceeds or is less than our cash rent payments.
(d) Represents non-cash equity-based compensation expense.
(e) Represents foreign currency transaction net gains and losses primarily related to the remeasurement of our intercompany loans which are partially offset by unrealized gains and losses on remeasurement of cross currency swaps and forward contracts.
(f) Relates to an impairment of certain Car Wash trade names for which the Company elected to discontinue their use.
(g) Relates to (gain) loss on sale leasebacks, impairment of certain fixed assets and operating lease right-of-use assets related to closed locations. Also, represents lease exit costs and other costs associated with stores that were closed prior to the respective lease termination dates.
(h) Represents the write-off of unamortized discount associated with the repayment of the Car Wash Senior Credit Facilities.
Note 6 —Other Intangible Assets
The Company acquired a number of car wash businesses over the past two years. As part of those acquisitions, the Company determined a fair value for each of the associated intangible assets including trade names and customer relationships. During the quarter ended June 25 2022, the Company made the strategic decision to rebrand the majority of its U.S. car wash locations to operate under the name “Take 5 Car Wash”, and therefore will be discontinuing the use of certain car wash trade names that were previously determined to have indefinite lives. Using a projected discounted cash flow analysis based on the relief from royalty method, the fair value of the trade names was determined to be $6 million while their carrying value was $131.5 million. As a result, the Company recognized a $125.5 million impairment charge, which is reported as trade name impairment charge in the consolidated statement of operations. The transition will take approximately two and a half years to complete, and therefore the remaining carrying value will be amortized over 30 months.
Note 7—Long-Term Debt
The Company’s long-term debt obligations consist of the following:
(in thousands) | September 24, 2022 | December 25, 2021 | |||||||||
Series 2018-1 Securitization Senior Notes, Class A-2 | $ | 262,625 | $ | 264,688 | |||||||
Series 2019-1 Securitization Senior Notes, Class A-2 | 288,750 | 291,000 | |||||||||
Series 2019-2 Securitization Senior Notes, Class A-2 | 266,750 | 268,813 | |||||||||
Series 2019-3 Variable Funding Securitization Senior Notes, Class A-1 | — | — | |||||||||
Series 2020-1 Securitization Senior Notes, Class A-2 | 171,063 | 172,375 | |||||||||
Series 2020-2 Securitization Senior Notes, Class A-2 | 442,125 | 445,500 | |||||||||
Series 2021-1 Securitization Senior Notes, Class A-2 | 445,500 | 448,875 | |||||||||
Term Loan Facility | 498,750 | 500,000 | |||||||||
Revolving Credit Facility | 300,000 | — | |||||||||
Other debt (a) | 45,690 | 39,082 | |||||||||
Total debt | 2,721,253 | 2,430,333 | |||||||||
Less: unamortized debt issuance costs | (40,897) | (47,969) | |||||||||
Less: current portion of long-term debt | (23,836) | (26,044) | |||||||||
Total long-term debt, net | $ | 2,656,520 | $ | 2,356,320 |
Series 2019-3 Variable Funding Securitization Senior Notes
In December 2019, the Company issued Series 2019-3 Variable Funding Senior Notes, Class A-1 (the “2019 VFN”) in the revolving amount of $115 million. The 2019 VFN have a final legal maturity date of January 20, 2050. The commitment
23
under the 2019 VFN has an expiration date of July 20, 2023, and subject to two one year extensions at the election of the Company. The 2019 VFN is secured by substantially all assets of Driven Brands Funding LLC (the “Issuer”) and are guaranteed by the Securitization Entities. The Issuer may elect interest at the Base Rate plus an applicable margin or LIBOR plus an applicable margin (the LIBOR rate as the applicable interest rate). No amounts were outstanding under the 2019 VFN as of September 24, 2022 and no borrowings or repayments were made during the quarter or nine months ended September 24, 2022. As of September 24, 2022, there were $18 million of outstanding letters of credit which reduced the borrowing availability under the 2019 VFN.
Driven Holdings Revolving Credit Facility
In May 2021, the Company entered into a credit agreement to secure a revolving line of credit with a group of financial institutions (“Driven Holdings Revolving Credit Facility”), which provides for an aggregate principal amount of up to $300 million, and has a maturity date of May 27, 2026. Eurocurrency borrowings incur interest at an adjusted London Interbank Offered Rate (“LIBOR”) plus an applicable margin of 1.50%, which may increase to 1.75% based on the Net First Lien Leverage Ratio under the Driven Holdings Revolving Credit Facility. The Driven Holdings Revolving Credit Facility also includes periodic commitment fees based on the available unused balance and a quarterly administrative fee.
There was $300 million outstanding on the Driven Holdings Revolving Credit Facility as of September 24, 2022 with $300 million borrowings and no repayments made during the quarter or nine months ended September 24, 2022.
The Company’s debt agreements are subject to certain quantitative and qualitative covenants. As of September 24, 2022, the Company and its subsidiaries were in compliance with all covenants.
Note 8—Leases
The following table details our total investment in operating and finance leases where the Company is the lessee:
(in thousands) | September 24, 2022 | December 25, 2021 | |||||||||
Right-of-use assets | |||||||||||
Finance leases (a) | $ | 38,997 | $ | 29,766 | |||||||
Operating leases | 1,089,693 | 995,625 | |||||||||
Total right-of-use assets | $ | 1,128,690 | $ | 1,025,391 | |||||||
Current lease liabilities | |||||||||||
Finance leases (b) | $ | 4,018 | $ | 3,101 | |||||||
Operating leases (c) | 70,837 | 57,588 | |||||||||
Total current lease liabilities | $ | 74,855 | $ | 60,689 | |||||||
Long-term lease liabilities | |||||||||||
Finance leases (d) | $ | 37,296 | $ | 27,957 | |||||||
Operating leases | 1,024,694 | 931,604 | |||||||||
Total long-term lease liabilities | $ | 1,061,990 | $ | 959,561 |
(a) Finance lease right-of-use assets are included in P , net on the consolidated balance sheet.
(b) Current finance lease liabilities are included in C on the consolidated balance sheet.
(c) Current operating lease liabilities are included in A on the consolidated balance sheet.
(d) Long-term finance lease liabilities are included in L on the consolidated balance sheet.
The lease cost for operating and finance leases recognized in the consolidated statement of operations for the three and nine months ended September 24, 2022 and September 25, 2021 were as follows:
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Three months ended | Nine months ended | ||||||||||||||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
Finance lease expense: | |||||||||||||||||||||||
Amortization of right-of-use assets | $ | 1,338 | $ | 715 | $ | 3,730 | $ | 1,970 | |||||||||||||||
Interest on lease liabilities | 493 | 299 | 1,354 | 796 | |||||||||||||||||||
Operating lease expense | 31,858 | 29,028 | 95,066 | 85,564 | |||||||||||||||||||
Short-term lease expense | 431 | 523 | 1,408 | 1,619 | |||||||||||||||||||
Variable lease expense | 405 | 206 | 1,191 | 692 | |||||||||||||||||||
Total lease expense | $ | 34,525 | $ | 30,771 | $ | 102,749 | $ | 90,641 |
The Company also subleases certain facilities to franchisees as a component of supply and other revenue on the consolidated statements of operations. The Company recognized $2 million, $5 million, $2 million, and $5 million in sublease revenue in the three and nine months ended September 24, 2022 and September 25, 2021, respectively, as a component of Supply and other revenue on the consolidated statements of operations.
During the nine months ended September 24, 2022, the Company sold 30 car wash and seven maintenance properties in various locations throughout the United States for a total of $156 million, resulting in a net gain of $18 million. Concurrent with the closing of these sales, the Company entered into various operating lease agreements pursuant to which the Company leased back the properties. These lease agreements have terms of 15 years to 20 years and provide the Company with the option to extend the lease for up to an additional 20 years to 25 years. The Company does not include option periods in its determination of the lease term unless renewals are deemed reasonably certain to be exercised. The Company recorded an operating lease right-of-use asset and operating lease liability of $121 million and $121 million, respectively, related to these lease arrangements as of September 24, 2022.
Supplemental cash flow information related to the Company’s lease arrangements for the nine months ended September 24, 2022 and September 25, 2021, respectively, was as follows:
Nine months ended | |||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | |||||||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
Operating cash flows used in operating leases | $ | 86,423 | $ | 79,310 | |||||||
Operating cash flows used in finance leases | 1,214 | 736 | |||||||||
Financing cash flows used in finance leases | 1,185 | 921 | |||||||||
Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
Operating leases | $ | 72,395 | $ | 75,268 | |||||||
Finance leases | 6,583 | 7,249 |
Note 9 — Equity-based Compensation
The Company granted new awards during the three months ended September 24, 2022, consisting of 10,178 restricted stock units (“RSUs”) and 12,750 performance stock units (“PSUs”). The Company granted new awards during the nine months ended September 24, 2022, consisting of 264,652 RSUs and 488,488 PSUs.
Awards are eligible to vest provided that the employee remains in continuous service on each vesting date. The RSUs vest ratably in three installments on each of the first anniversaries of the grant date. The PSUs vest after a three-year performance period. The number of PSUs that vest is contingent on the Company achieving certain performance goals, one being a market condition and the other being a performance condition. The number of PSU shares that vest may range from zero to 200% of the original grant, based upon the level of performance. The awards are considered probable of meeting vesting requirements, and therefore, the Company has started recognizing expense.
25
The fair value of the RSUs, performance based PSUs and market based PSUs granted during the three months ended September 24, 2022 were less than $1 million each. The fair value of the total RSUs, performance based PSUs and market based PSUs granted during the nine months ended September 24, 2022 were $7 million, $8 million and $8 million, respectively. The Company based the fair value of the RSUs and performance based PSUs on the Company’s stock price on the grant date. The Company determined the fair value of the market based PSUs granted during the three months ended September 24, 2022 by using a Monte Carlo simulation, using the following assumptions: (i) an expected term of 3 years, (ii) an expected volatility of 41.00%, (iii) a correlation of the S&P Mid-cap Index peer group of 58.80%, and (iv) no expected dividend. The Company determined the fair value of the market based PSUs granted during the three months ended June 25, 2022 by using a Monte Carlo simulation, using the following assumptions: (i) an expected term of 3 years, (ii) an expected volatility of 43.90%, (iii) a correlation of the S&P Mid-cap Index peer group of 59.50%, and (iv) no expected dividend. The Company determined the fair value of the market based PSUs granted during the three months ended March 26, 2022 by using a Monte Carlo simulation, using the following assumptions: (i) an expected term of 3 years, (ii) an expected volatility of 40.90%, (iii) a correlation of the S&P Mid-cap Index peer group of 50.70%, and (iv) no expected dividend.
The Company recorded share-based compensation expense during the three and nine months ended September 24, 2022 and September 25, 2021 within selling, general and administrative expenses on the consolidated statements of operations as follows:
Three months ended | Nine months ended | ||||||||||||||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
Share-based compensation expense | $ | 5,000 | $ | 1,000 | $ | 12,000 | $ | 3,000 |
Note 10—Earnings per share
The Company calculates basic and diluted earnings per share using the two-class method. The following table sets forth the computation of basic and diluted earnings per share attributable to common shareholders:
Three months ended | Nine months ended | ||||||||||||||||||||||
(in thousands, except per share amounts) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
Basic earnings per share: | |||||||||||||||||||||||
Net income attributable to Driven Brands Holdings Inc. | $ | 38,391 | 33,124 | 15,790 | 48,389 | ||||||||||||||||||
Less: Net income attributable to participating securities, basic | 809 | 709 | 335 | 1,057 | |||||||||||||||||||
Net income after participating securities, basic | 37,583 | 32,415 | 15,455 | 47,332 | |||||||||||||||||||
Weighted-average common shares outstanding | 162,760 | 162,635 | 162,768 | 160,030 | |||||||||||||||||||
Basic earnings per share | $ | 0.23 | $ | 0.20 | $ | 0.10 | $ | 0.30 |
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Three months ended | Nine months ended | ||||||||||||||||||||||
(in thousands, except per share amounts) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
Diluted earnings per share: | |||||||||||||||||||||||
Net income attributable to Driven Brands Holdings Inc. | $ | 38,391 | $ | 33,124 | 15,790 | 48,389 | |||||||||||||||||
Less: Net income attributable to participating securities, diluted | 721 | 632 | 299 | 942 | |||||||||||||||||||
Net income after participating securities, diluted | $ | 37,670 | $ | 32,492 | 15,491 | 47,447 | |||||||||||||||||
Weighted-average common shares outstanding | 162,760 | 162,635 | 162,768 | 160,030 | |||||||||||||||||||
Dilutive effect of share-based awards | 4,071 | 3,995 | 3,895 | 3,938 | |||||||||||||||||||
Weighted-average common shares outstanding, as adjusted | 166,831 | 166,630 | 166,663 | 163,968 | |||||||||||||||||||
Diluted earnings per share | $ | 0.23 | $ | 0.19 | $ | 0.09 | $ | 0.29 | |||||||||||||||
Basic earnings per share is computed by dividing the net income attributable to Driven Brands Holdings Inc. by the weighted-average number of common shares outstanding for the period. In addition, the Company’s participating securities are related to certain restricted stock awards issued to Section 16 officers which include non-forfeitable dividend rights.
The Company has 4,687,354 shares of performance awards that are contingent on performance conditions which have not yet been met, and therefore have been excluded from the computation of weighted average shares for the three and nine months ended September 24, 2022.
The following securities were not included in the computation of diluted shares outstanding because the effect would be antidilutive:
Three months ended | Nine months ended | ||||||||||||||||||||||
Number of securities (in thousands) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
Restricted stock units | 28 | — | 28 | 2 | |||||||||||||||||||
Performance stock units | |||||||||||||||||||||||
Stock/IPO options | 2,000 | — | 2,000 | 36 | |||||||||||||||||||
Employee stock purchase plan | |||||||||||||||||||||||
Total | 2,028 | — | 2,028 | 38 |
Note 11—Income Taxes
The Company’s tax provision is comprised of the most recent estimated annual effective tax rate applied to year-to-date ordinary income before taxes. The tax impacts of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are recorded discretely in the interim period in which they occur.
Income tax expense was $14 million and $12 million for the three months ended September 24, 2022 and September 25, 2021, respectively. The effective income tax rate for the three months ended September 24, 2022 was 27.4% compared to 26.4% for the three months ended September 25, 2021. The increase in income tax expense and tax rate was primarily driven by foreign exchange rate adjustments for the three months ended September 24, 2022.
Income tax expense was $9 million and $24 million for the nine months ended September 24, 2022 and September 25, 2021, respectively. The effective income tax rate for the nine months ended September 24, 2022 was 35.3% compared to 33.6% for the nine months ended September 25, 2021. The net decrease in income tax expense was primarily driven by a favorable discrete tax adjustment related to the trade name impairment charge for the nine months ended September 24, 2022, and favorable discrete tax adjustments related to non-deductible loss on debt extinguishment as well as tax deductible costs incurred related to the initial public offering for the nine months ended September 25, 2021. The net increase in tax rate was primarily driven by foreign exchange rate adjustments.
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In August 2022, President Biden signed into law the Inflation Reduction Act (“IRA”) and the CHIPS and Science Act of 2022. The laws implement new tax provisions and provide for various incentives and tax credits. The IRA creates a 15% corporate alternative minimum tax (“CAMT”) on the adjusted financial statement income “(AFSI”) of corporations and is effective for tax years beginning after December 31, 2022. The IRA also creates an excise tax of 1% on stock repurchases by publicly traded U.S. corporations, effective for repurchases after December 31, 2022. The CAMT will be accounted for as a period cost when the related tax consequences arise, rather than through adjustments in deferred taxes, and the tax accounting consequences of the CAMT will not be recognized in the Company’s financial statements until the first period after its effective date. The Company is still evaluating the full impact of the tax effects of the newly enacted laws.
Note 12—Commitments and Contingencies
The Company is subject to various lawsuits, administrative proceedings, audits, and claims arising in the ordinary course of business. Some of these lawsuits purport to be class actions and/or seek substantial damages. The Company is required to record an accrual for litigation loss contingencies that are both probable and reasonably estimable. Legal fees and expenses associated with the defense of litigation are expensed as incurred.
While the Company does not presently believe that any of the legal proceedings to which it is currently a party will ultimately have a material adverse impact, there can be no assurance that the Company will prevail in all of the proceedings or that the Company will not incur material losses from them.
Note 13—Subsequent Events
On October 5, 2022, Driven Brands Funding, LLC and Driven Brands Canada Funding Corporation (together, the “Co-Issuers”), each wholly-owned subsidiaries of the Company, issued $365 million of 2022-1 Class A-2 Securitization Senior Notes, bearing a fixed interest rate of 7.393% per annum, a final legal maturity date of October 20, 2052, and an anticipated repayment date of October 20, 2027 (the “2022-1 Class A-2 Senior Notes”). The proceeds from the issuance of the 2022-1 Class A-2 Senior Notes were used for general corporate purposes, including the repayment of the revolving credit facilities creating capacity to invest in continued growth. In conjunction with the issuance of the 2022-1 Class A-2 Senior Notes, the Co-Issuers also issued up to $135 million of 2022-1 Class A-1 Securitization Senior Notes (the “2022-1 Class A-1 Senior Notes” and together with the 2022-1 Class A-2 Senior Notes, the “2022-1 Senior Notes”).
From September 25, 2022 through November 4, 2022, the Company acquired four car wash sites for approximately $38 million. The initial accounting for these acquisitions is incomplete as the valuation of the assets acquired and liabilities assumed and residual goodwill has not yet been performed.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis for Driven Brands Holdings Inc. and Subsidiaries (“Driven Brands”, “the Company”, “we”, “us” or “our”) should be read in conjunction with our consolidated financial statements and the related notes to our consolidated financial statements included elsewhere in this quarterly report. We operate on a 52/53-week fiscal year, which ends on the last Saturday in December. The three months ended September 24, 2022 and September 25, 2021 were both 13 week periods. The nine months ended September 24, 2022 and September 25, 2021 were both 39 week periods..
Overview of Operations
Driven Brands is the largest automotive services company in North America with a growing and highly-franchised base
of more than 4,700 locations across 49 U.S. states and 14 other countries. Our scaled, diversified platform fulfills an extensive range of core consumer and commercial automotive needs, including paint, collision, glass, repair, car wash, oil change and maintenance. Driven Brands provides a breadth of high quality and high-frequency services to a wide range of customers, who rely on their cars in all economic environments to get to work and in many other aspects of their daily lives. Our asset-light business model has generated consistent recurring revenue and strong operating margins with limited maintenance capital expenditures, which has resulted in significant cash flow generation and capital-efficient growth.
We have a diversified portfolio of highly-recognized brands, including Take 5 Oil Change®, Take 5 Car Wash®, Meineke Car Care Centers®, MAACO®, CARSTAR®, Auto Glass Now®, and 1-800-Radiator & A/C® that compete in the large, growing, needs-based and highly-fragmented automotive care industry. Our U.S. industry is underpinned by a large, growing population of more than 284 million vehicles in operation, and is expected to continue its long-term growth trajectory given (i) long-term increases in annual miles traveled; (ii) consumers more frequently outsourcing automotive services due to vehicle complexity; (iii) increases in average repair costs and (iv) average age of the car on the road getting older. We serve a diverse mix of customers, with sales coming from retail customers and commercial customers such as fleet operators and insurance carriers. Our success is driven in large part by our mutually beneficial relationships with more than 2,800 individual franchisees and independent operators.
We have driven sustained predictable growth and share gain through our robust pipeline of organic growth complemented by consistent and repeatable M&A, including more than 100 acquisitions since 2015. Notably, in August 2020 we acquired ICWG, the world’s largest conveyor car wash company by location count with more than 900 locations across 14 countries, demonstrating our continued ability to pursue and execute upon scalable and highly strategic acquisitions. We leveraged our significant M&A capabilities to drive growth of 112 acquired locations in 2021 while we built our greenfield pipeline. In 2022, we continued to leverage M&A as a strategic complement to growing greenfield openings in car wash to drive density in key target locations, including 26 locations in the first nine months of 2022. We entered the U.S. glass market in the first quarter of 2022 through the acquisition of Auto Glass Now and have quickly become the second largest player in the auto glass servicing category. We grew our service offerings through seven glass business acquisitions in the first nine months of 2022 (156 sites in aggregate).
Significant Factors Impacting Financial Results
Our acquisitions in both our Car Wash and Paint, Collision & Glass segments were a core driver of growth in our key performance indicators and our financial results for the three and nine months ended September 24, 2022, as compared to the three and nine months ended September 25, 2021. For additional information on our acquisitions, see Note 3 to the consolidated financial statements.
We recognized net income of $38 million, or $0.23 per diluted share for the three months ended September 24, 2022, compared to net income of $33 million, or $0.19 per diluted share, for the three months ended September 25, 2021. This increase was primarily due to an increase in revenue related to same store sales growth and significant unit growth from the U.S. glass business acquisitions (156 sites), a number of car wash acquisitions in the trailing twelve month period, and organic store count growth, partially offset by a $15 million increase in net loss on foreign currency transactions and higher operating, interest and income tax expenses associated with growth.
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Adjusted Net Income was $55 million for the three months ended September 24, 2022, an increase of $11 million, compared to $43 million for the three months ended September 25, 2021. The increase in Adjusted Net Income was primarily due to an increase in revenue related to same store sales growth and significant unit growth from the U.S. glass business acquisitions (156 sites), a number of car wash acquisitions in the trailing twelve month period, and organic store count growth, partially offset by higher operating, interest and income tax expenses associated with growth. See Note 3 to our consolidated financial statements for additional information regarding acquisitions.
Adjusted EBITDA was $129 million for the three months ended September 24, 2022, an increase of $31 million, compared to $98 million for the three months ended September 25, 2021. The increase in Adjusted EBITDA was primarily due to an increase in revenue related to same store sales growth and significant unit growth from the U.S. glass business acquisitions (156 sites), a number of car wash acquisitions in the trailing twelve month period, and organic store count growth, partially offset by higher operating, interest and income tax expenses associated with growth.
We recognized net income of $16 million, or $0.09 per diluted share for the nine months ended September 24, 2022, compared to net income of $48 million, or $0.29 per diluted share, for the nine months ended September 25, 2021. This decrease was primarily due to a $125 million non-cash impairment charge related to the change in intended use of certain existing Car Wash trade names migrating them to the Take 5 brand and a $24 million increase in net loss on foreign currency transactions. Also, for the nine months ended September 25, 2021 there was $45 million in debt extinguishment costs related to the repayment of the ICWG debt. This was partially offset by an an increase in revenue related to same store sales growth and significant unit growth from the U.S. glass business acquisitions (156 sites), a number of car wash acquisitions in the trailing twelve month period, and organic store count growth, partially offset by higher operating, interest and income tax expenses associated with growth.
Adjusted Net Income was $162 million for the nine months ended September 24, 2022, an increase of $47 million, compared to $116 million for the nine months ended September 25, 2021. The increase in Adjusted Net Income was primarily due to an increase in revenue related to same store sales growth and significant unit growth from the U.S. glass business acquisitions (156 sites), a number of car wash acquisitions in the trailing twelve month period, and organic store count growth, partially offset by higher operating, interest and income tax expenses associated with growth. See Note 3 to our consolidated financial statements for additional information regarding acquisitions.
Adjusted EBITDA was $383 million for the nine months ended September 24, 2022, an increase of $107 million, compared to $277 million for the nine months ended September 25, 2021. The increase in Adjusted EBITDA was primarily due to an an increase in revenue related to same store sales growth and significant unit growth from the U.S. glass business acquisitions (156 sites), a number of car wash acquisitions in the trailing twelve month period, and organic store count growth, partially offset by higher operating, interest and income tax expenses associated with growth.
Adjusted Net Income and Adjusted EBITDA are non-GAAP financial measures of performance. For a discussion of our use of these non-GAAP measures and a reconciliation from net income (loss) to Adjusted Net Income and Adjusted EBITDA, see “Reconciliation of Non-GAAP Financial Information”.
Strong operational execution, improving consumer and driving trends and acquisitions led to total system-wide sales of $1.5 billion and $4.1 billion during the three and nine months ended September 24, 2022, an increase of 22% and 23% from the three and nine months ended September 25, 2021.
Key Performance Indicators
Key measures that we use in assessing our business and evaluating our segments include the following:
System-wide sales. System-wide sales represent the total of net sales for our franchised, independently-operated and company-operated stores. This measure allows management to better assess the total size and health of each segment, our overall store performance and the strength of our market position relative to competitors. Sales at franchised stores are not included as revenue in our results from operations, but rather, we include franchise royalties and fees that are derived from sales at franchised stores. Franchise royalties and fees revenue represented 9% and 10% of our total revenue for the three months ended September 24, 2022 and September 25, 2021, respectively and 9% and 10% for the nine months ended September 24, 2022 and September 25, 2021, respectively. For the three months ended September 24, 2022 and September 25, 2021, approximately 95% and 98% respectively, of franchise royalties and fees revenue is attributable to royalties, with the remaining balance attributable to license and development fees. For the nine months ended September 24, 2022 and September 25, 2021, approximately 94% and 98%, respectively, of franchise royalties and fees revenue is attributable to royalties, with the remaining balance attributable to license and development fees. Revenue from company-operated stores represented 66% and 58% of total revenue for the three months ended September 24, 2022 and September 25, 2021, respectively, and 64% and 56%
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for the nine months ended September 24, 2022 and September 25, 2021, respectively. Revenue from independently-operated stores represented 8% and 13% of our total revenue for the three months ended September 24, 2022 and September 25, 2021, respectively. Revenue from independently-operated stores represented 11% and 15% of our total revenue for the nine months ended September 24, 2022 and September 25, 2021, respectively.
Store count. Store count reflects the number of franchised, independently-operated and company-operated stores open at the end of the reporting period. Management reviews the number of new, closed, acquired and divested stores to assess net unit growth and drivers of trends in system-wide sales, franchise royalties and fees revenue, company-operated store sales and independently-operated store sales.
Same store sales. Same store sales reflect the change in sales year-over-year for the same store base. We define the same store base to include all franchised, independently-operated and company-operated stores open for comparable weeks during the given fiscal period in both the current and prior year, which may be different from how others define similar terms. This measure highlights the performance of existing stores, while excluding the impact of new store openings and closures, and acquisitions and divestitures.
Segment Adjusted EBITDA. We define Segment Adjusted EBITDA as earnings before interest expense, net, income tax expense, and depreciation and amortization, with further adjustments for acquisition-related costs, straight-line rent, equity compensation, loss on debt extinguishment, foreign currency transaction related gains or losses, store opening costs, and certain non-recurring and non-core, infrequent or unusual charges. Segment Adjusted EBITDA is a supplemental measure of operating performance of our segments and may not be comparable to similar measures reported by other companies. Segment Adjusted EBITDA is a performance metric utilized by our Chief Operating Decision Maker to allocate resources to and assess performance of our segments. Refer to Note 5 in our consolidated financial statements for a reconciliation of income before taxes to Segment Adjusted EBITDA for the three and nine months ended September 24, 2022 and September 25, 2021.
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The following table sets forth our key performance indicators for the three and nine months ended September 24, 2022 and September 25, 2021:
Three months ended | Nine months ended | |||||||||||||||||||||||||
(in thousands, except store count or as otherwise noted) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||||
System-Wide Sales | ||||||||||||||||||||||||||
System-Wide Sales by Segment: | ||||||||||||||||||||||||||
Maintenance | $ | 411,452 | $ | 333,779 | $ | 1,167,717 | $ | 932,890 | ||||||||||||||||||
Car Wash | 138,704 | 122,046 | 453,026 | 357,341 | ||||||||||||||||||||||
Paint, Collision & Glass | 781,229 | 620,302 | 2,164,932 | 1,760,313 | ||||||||||||||||||||||
Platform Services | 130,751 | 120,290 | 352,865 | 307,120 | ||||||||||||||||||||||
Total | $ | 1,462,136 | $ | 1,196,417 | $ | 4,138,540 | $ | 3,357,664 | ||||||||||||||||||
System-Wide Sales by Business Model: | ||||||||||||||||||||||||||
Franchised Stores | $ | 1,080,426 | $ | 934,721 | $ | 3,022,370 | $ | 2,593,373 | ||||||||||||||||||
Company-Operated Stores | 341,241 | 213,755 | 957,670 | 603,808 | ||||||||||||||||||||||
Independently-Operated Stores | 40,469 | 47,941 | 158,500 | 160,483 | ||||||||||||||||||||||
Total | $ | 1,462,136 | $ | 1,196,417 | $ | 4,138,540 | $ | 3,357,664 | ||||||||||||||||||
Store Count | ||||||||||||||||||||||||||
Store Count by Segment: | ||||||||||||||||||||||||||
Maintenance | 1,597 | 1,506 | 1,597 | 1,506 | ||||||||||||||||||||||
Car Wash | 1,086 | 1,018 | 1,086 | 1,018 | ||||||||||||||||||||||
Paint, Collision & Glass | 1,822 | 1,647 | 1,822 | 1,647 | ||||||||||||||||||||||
Platform Services | 202 | 201 | 202 | 201 | ||||||||||||||||||||||
Total | 4,707 | 4,372 | 4,707 | 4,372 | ||||||||||||||||||||||
Store Count by Business Model: | ||||||||||||||||||||||||||
Franchised Stores | 2,849 | 2,809 | 2,849 | 2,809 | ||||||||||||||||||||||
Company-Operated Stores | 1,141 | 831 | 1,141 | 831 | ||||||||||||||||||||||
Independently-Operated Stores | 717 | 732 | 717 | 732 | ||||||||||||||||||||||
Total | 4,707 | 4,372 | 4,707 | 4,372 | ||||||||||||||||||||||
Same Store Sales % | ||||||||||||||||||||||||||
Maintenance | 14.4 | % | 17.0 | % | 16.0 | % | 24.4 | % | ||||||||||||||||||
Car Wash | (9.0 | %) | 6.2% | (1.8 | %) | 6.2 | % | |||||||||||||||||||
Paint, Collision & Glass | 15.7 | % | 10.8 | % | 17.5 | % | 12.2 | % | ||||||||||||||||||
Platform Services | 8.7 | % | 15.8 | % | 14.9 | % | 24.7 | % | ||||||||||||||||||
Total | 11.9 | % | 12.8 | % | 14.7 | % | 16.9 | % | ||||||||||||||||||
Segment Adjusted EBITDA | ||||||||||||||||||||||||||
Maintenance | $ | 68,763 | $ | 47,894 | $ | 185,324 | $ | 132,895 | ||||||||||||||||||
Car Wash | 39,098 | 37,999 | 148,495 | 115,223 | ||||||||||||||||||||||
Paint, Collision & Glass | 38,919 | 22,039 | 100,847 | 61,534 | ||||||||||||||||||||||
Platform Services | 19,765 | 16,254 | 54,471 | 44,864 |
Reconciliation of Non-GAAP Financial Information
To supplement our consolidated financial statements prepared and presented in accordance with GAAP, we use certain non-GAAP financial measures throughout this quarterly report, as described further below, to provide investors with additional useful information about our financial performance, to enhance the overall understanding of our past performance and future prospects and to allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making.
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Non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. In addition, non-GAAP financial measures may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. As a result, non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, our consolidated financial statements prepared and presented in accordance with GAAP.
Adjusted Net Income/Adjusted Earnings per Share. We define Adjusted Net Income as net income calculated in accordance with GAAP, adjusted for acquisition-related costs, straight-line rent, equity compensation, loss on debt extinguishment and certain non-recurring, non-core, infrequent or unusual charges, amortization related to acquired intangible assets and the tax effect of the adjustments. Adjusted Earnings Per Share is calculated by dividing Adjusted Net Income by the weighted average shares outstanding. Management believes this non-GAAP financial measure is useful because it is a key measure used by our management team to evaluate our operating performance, generate future operating plans and make strategic decisions.
The following table provides a reconciliation of Net Income (Loss) to Adjusted Net Income and Adjusted Earnings per Share:
Adjusted Net Income/Adjusted Earnings per Share
Three months ended | Nine months ended | |||||||||||||||||||||||||
(in thousands, except per share data) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||||
Net income (loss) | $ | 38,391 | $ | 33,086 | $ | 15,775 | $ | 48,321 | ||||||||||||||||||
Acquisition related costs(a) | 2,325 | 636 | 9,981 | 2,674 | ||||||||||||||||||||||
Non-core items and project costs, net(b) | 851 | 1,357 | 3,436 | 3,910 | ||||||||||||||||||||||
Straight-line rent adjustment(c) | 3,220 | 2,548 | 11,530 | 8,391 | ||||||||||||||||||||||
Equity-based compensation expense(d) | 5,308 | 933 | 12,159 | 2,944 | ||||||||||||||||||||||
Foreign currency transaction loss, net(e) | 15,582 | 1,074 | 30,490 | 6,356 | ||||||||||||||||||||||
Bad debt recovery(f) | (449) | — | (449) | — | ||||||||||||||||||||||
Trade name impairment(g) | — | — | 125,450 | — | ||||||||||||||||||||||
Asset sale leaseback (gain) loss, impairment and closed store expenses(h) | (14,186) | 313 | (20,248) | 3,005 | ||||||||||||||||||||||
Loss on debt extinguishment(i) | — | — | — | 45,576 | ||||||||||||||||||||||
Amortization related to acquired intangible assets(j) | 7,212 | 4,665 | 18,284 | 13,875 | ||||||||||||||||||||||
Provision for uncertain tax positions(k) | — | (251) | 76 | (251) | ||||||||||||||||||||||
Adjusted net income before tax impact of adjustments | 58,254 | 44,361 | 206,484 | 134,801 | ||||||||||||||||||||||
Tax impact of adjustments(l) | (3,290) | (886) | (44,086) | (18,968) | ||||||||||||||||||||||
Adjusted net income | 54,964 | 43,475 | 162,398 | 115,833 | ||||||||||||||||||||||
Net income (loss) attributable to non-controlling interest | — | (38) | (15) | (68) | ||||||||||||||||||||||
Adjusted net income attributable to Driven Brands Holdings Inc. | $ | 54,964 | $ | 43,513 | $ | 162,413 | $ | 115,901 | ||||||||||||||||||
Adjusted earnings per share | ||||||||||||||||||||||||||
Basic | $ | 0.33 | $ | 0.26 | $ | 0.98 | $ | 0.71 | ||||||||||||||||||
Diluted | $ | 0.32 | $ | 0.26 | $ | 0.96 | $ | 0.69 | ||||||||||||||||||
Weighted average shares outstanding | ||||||||||||||||||||||||||
Basic | 162,760 | 162,635 | 162,768 | 160,030 | ||||||||||||||||||||||
Diluted | 166,831 | 166,630 | 166,663 | 163,968 | ||||||||||||||||||||||
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Adjusted EBITDA. We define Adjusted EBITDA as earnings before interest expense, net, income tax expense, and depreciation and amortization, with further adjustments for acquisition-related costs, straight-line rent, equity compensation, loss on debt extinguishment and certain non-recurring, non-core, infrequent or unusual charges. Adjusted EBITDA may not be comparable to similarly titled metrics of other companies due to differences in methods of calculation. Management believes this non-GAAP financial measure is useful because it is a key measure used by our management team to evaluate our operating performance, generate future operating plans and make strategic decisions.
The following table provides a reconciliation of Net income to Adjusted EBITDA:
Adjusted EBITDA | ||||||||||||||||||||||||||
Three months ended | Nine months ended | |||||||||||||||||||||||||
September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||||||
Net income (loss) | $ | 38,391 | $ | 33,086 | $ | 15,775 | $ | 48,321 | ||||||||||||||||||
Income tax expense | 14,472 | 11,880 | 8,592 | 24,445 | ||||||||||||||||||||||
Interest expense, net | 27,323 | 17,688 | 78,946 | 52,390 | ||||||||||||||||||||||
Depreciation and amortization | 36,518 | 28,447 | 107,628 | 78,722 | ||||||||||||||||||||||
EBITDA | 116,704 | 91,101 | 210,941 | 203,878 | ||||||||||||||||||||||
Acquisition related costs(a) | 2,325 | 636 | 9,981 | 2,674 | ||||||||||||||||||||||
Non-core items and project costs, net(b) | 851 | 1,357 | 3,436 | 3,910 | ||||||||||||||||||||||
Straight-line rent adjustment(c) | 3,220 | 2,548 | 11,530 | 8,391 | ||||||||||||||||||||||
Equity-based compensation expense(d) | 5,308 | 933 | 12,159 | 2,944 | ||||||||||||||||||||||
Foreign currency transaction (gain) loss, net(e) | 15,582 | 1,074 | 30,490 | 6,356 | ||||||||||||||||||||||
Bad debt recovery(f) | (449) | — | (449) | — | ||||||||||||||||||||||
Trade name impairment(g) | — | — | 125,450 | — | ||||||||||||||||||||||
Asset impairment and closed store expenses(h) | (14,186) | 313 | (20,248) | 3,005 | ||||||||||||||||||||||
Loss on debt extinguishment(i) | — | — | — | 45,576 | ||||||||||||||||||||||
Adjusted EBITDA | $ | 129,355 | $ | 97,962 | $ | 383,290 | $ | 276,734 |
a.Consists of acquisition costs as reflected within the consolidated statements of operations, including legal, consulting and other fees and expenses incurred in connection with acquisitions completed during the applicable period, as well as inventory rationalization expenses incurred in connection with acquisitions. We expect to incur similar costs in connection with other acquisitions in the future and, under GAAP, such costs relating to acquisitions are expensed as incurred and not capitalized.
b.Consists of discrete items and project costs, including (i) third-party consulting and professional fees associated with strategic transformation initiatives and (ii) other miscellaneous expenses, including non-capitalizable expenses relating to the Company’s initial public offering and other strategic transactions.
c.Consists of the non-cash portion of rent expense, which reflects the extent to which our straight-line rent expense recognized under GAAP exceeds or is less than our cash rent payments.
d.Represents non-cash equity-based compensation expense.
e.Represents foreign currency transaction gains/losses, net that primarily related to the remeasurement of our intercompany loans. These losses are offset by unrealized gains/losses on remeasurement of cross currency swaps and forward contracts.
f.Represents the recovery of previously uncollectible receivables outside of normal operations.
g.Relates to an impairment of certain Car Wash trade names for the Company elected to discontinue their use.
h.Relates to (gain) loss on sale leasebacks, impairment of certain fixed assets and operating lease right-of-use assets related to closed locations. Also, represents lease exit costs and other costs associated with stores that were closed prior to the respective lease termination dates.
i.Represents the write-off of unamortized discount associated with early termination of debt.
j.Consists of amortization related to acquired intangible assets as reflected within depreciation and amortization in the consolidated statements of operations.
k.Represents uncertain tax positions recorded for tax positions inclusive of interest and penalties.
l.Represents the tax impact of adjustments associated with the reconciling items between net income and Adjusted Net Income, excluding the provision for uncertain tax positions and valuation allowance for certain deferred taxes. To determine the tax impact of the deductible
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reconciling items, we utilized statutory income tax rates ranging from 9% to 36%, depending upon the tax attributes of each adjustment and the applicable jurisdiction.
Results of Operations for the three months ended September 24, 2022 compared to the three months ended September 25, 2021
To facilitate review of our results of operations, the following tables set forth our financial results for the periods indicated. All information is derived from the Consolidated Statements of Operations.
Revenue
Three months ended | ||||||||||||||||||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Franchise royalties and fees | $ | 45,562 | $ | 38,953 | $ | 6,609 | 17 | % | ||||||||||||||||||
Company-operated store sales | 341,211 | 213,755 | 127,456 | 60 | % | |||||||||||||||||||||
Independently-operated store sales | 40,469 | 47,941 | (7,472) | (16) | % | |||||||||||||||||||||
Advertising fund contributions | 22,018 | 19,762 | 2,256 | 11 | % | |||||||||||||||||||||
Supply and other revenue | 67,334 | 50,737 | 16,597 | 33 | % | |||||||||||||||||||||
Total revenue | $ | 516,594 | $ | 371,148 | $ | 145,446 | 39 | % |
Franchise Royalties and Fees
Franchise royalties and fees increased $7 million primarily due to same store sales growth and benefited from a net increase of 40 franchise stores. Franchise system-wide sales increased by $146 million or 16%.
Company-operated Store Sales
Company-operated store sales increased $127 million of which $47 million, $24 million, and $57 million related to the Maintenance, Car Wash and Paint, Collision and Glass segments, respectively. The sales increase in Maintenance segment was primarily due to same store sales growth and 60 net new stores. The sales increase in Paint, Collision and Glass segment was primarily due to same store sales growth as well as net store growth from acquisitions. The acquisition of seven glass businesses, (which had 156 stores in aggregate) in the first nine months of 2022 and the acquisition of 10 CARSTAR franchise sites in the fourth quarter of 2021 generated $48 million and $7 million of sales for three months ended September 24, 2022, respectively. The sales increase in Car Wash segment was primarily due to the addition of 83 net new company-operated stores primarily from a number of acquisitions in the fourth quarter of 2021 and first nine months of 2022 and new greenfield store openings, which was partially offset by a decrease in same store sales. In aggregate, the Company added 310 company-operated stores year-over-year.
Independently-operated Store Sales
Independently-operated store sales (comprised entirely of sales from the international car wash locations) decreased by $7 million as the benefit of increased volume was more than offset by unfavorable currency translation.
Advertising Fund Contributions
Advertising fund contributions increased by $2 million primarily due to an increase in franchise system-wide sales of approximately $146 million or 16% from same store sales growth and additional net new franchise stores. Our franchise agreements typically require the franchisee to pay continuing advertising fund fees based on a percentage of franchisee gross sales.
Supply and Other Revenue
Supply and other revenue increased $17 million primarily from growth in product and service revenue within the Platform Services, Paint, Collision and Glass and Maintenance segments due to an increase in system wide sales.
35
Operating Expenses
Three months ended | ||||||||||||||||||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Company-operated store expenses | $ | 209,562 | $ | 130,520 | $ | 79,042 | 61 | % | ||||||||||||||||||
Independently-operated store expenses | 23,254 | 27,764 | (4,510) | (16) | % | |||||||||||||||||||||
Advertising fund expenses | 22,018 | 19,762 | 2,256 | 11 | % | |||||||||||||||||||||
Supply and other expenses | 41,042 | 28,330 | 12,712 | 45 | % | |||||||||||||||||||||
Selling, general, and administrative expenses | 82,460 | 71,565 | 10,895 | 15 | % | |||||||||||||||||||||
Acquisition costs | 2,325 | 636 | 1,689 | 266 | % | |||||||||||||||||||||
Store opening costs | 753 | 666 | 87 | 13 | % | |||||||||||||||||||||
Depreciation and amortization | 36,518 | 28,447 | 8,071 | 28 | % | |||||||||||||||||||||
Asset impairment charges and lease terminations | 2,894 | (270) | 3,164 | (1172) | % | |||||||||||||||||||||
Total operating expenses | $ | 420,826 | $ | 307,420 | $ | 113,406 | 37 | % |
Company-operated Store Expenses
Company-operated store expenses increased $79 million. The increase in expenses is driven by the increase in Company-operated store sales.
Independently-operated Store Expenses
Independently-operated store expenses, which are entirely related to the Car Wash segment, decreased $5 million due primarily to unfavorable foreign currency translation decreasing independently-operated store sales.
Advertising Fund Expenses
The $2 million increase in advertising fund expenses represents a commensurate increase to advertising fund contributions during the period. Advertising fund expenses generally trend consistent with advertising fund contributions.
Supply and Other Expenses
Supply and other expenses increased $13 million due to an increase in Supply and other revenue as well as higher oil and freight costs incurred in the Platform Services segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $11 million primarily due to an increase in employee compensation and other employee-related expenses resulting from increased headcount and acquisitions, infrastructure costs, travel costs and legal and professional fees.
Acquisition Costs
Acquisition costs increased by $2 million. The three months ended September 24, 2022 included costs associated with three glass acquisitions as well as several tuck-in car wash acquisitions while the three months ended September 25, 2021 included costs associated with several car wash tuck-in acquisitions.
Store Opening Costs
Store opening costs increased slightly due to an increase in company-operated new store openings and conversions of acquired stores to the Take 5 Quick Lube brand. There were eleven new company-operated store openings and four Take 5 store conversion in the three months ended September 24, 2022, compared to eight company-operated store openings and three Take 5 store conversion during the three months ended September 25, 2021.
36
Depreciation and Amortization
Depreciation and amortization expense increased $8 million due to additional fixed assets and finite-lived intangible assets recognized in conjunction with recent acquisitions and higher current period capital expenditures, primarily related to car wash new site development.
Asset Impairment Charges and Lease Terminations
Asset impairment charges (benefits) were approximately $3 million for the three months ended September 24, 2022 compared to $(0.3) million for three months ended September 25, 2021, which consisted of impairment related to certain property and equipment and operating lease right-of-use assets at closed locations in the current period compared to favorable lease settlement in the prior year period.
Interest Expense, Net
Three months ended | ||||||||||||||||||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Interest expense, net | $ | 27,323 | $ | 17,688 | $ | 9,635 | 54 | % |
Interest expense, net increased $10 million as a result of higher average debt outstanding which was partially offset by a lower average interest rate in the current period. Higher average debt outstanding was primarily due to the issuance of debt in the fourth quarter of 2021 to fund the AGN and other acquisitions and for general corporate purposes.
Loss (Gain) on Foreign Currency Transactions, Net
Three months ended | ||||||||||||||||||||||||||
September 24, 2022 | September 25, 2021 | Change | ||||||||||||||||||||||||
Loss (gain) on foreign currency transactions, net | $ | 15,582 | $ | 1,074 | $ | 14,508 | 1351 | % |
The loss on foreign currency transactions for the three months ended September 24, 2022 was comprised of a $18 million net remeasurement loss on our non U.S. dollar entities including third party long-term debt and intercompany notes as well as a $3 million unrealized gain on foreign currency hedges that are not designated as hedging instruments. The loss on foreign currency transactions for the three months ended September 25, 2021 was comprised of a $3 million net remeasurement losses on our foreign third party long-term debt and foreign intercompany notes partially offset by $2 million of unrealized translation gains on other foreign currency hedges.
Income Tax Expense
Three months ended | ||||||||||||||||||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Income tax expense (benefit) | $ | 14,472 | $ | 11,880 | $ | 2,592 | 22 | % |
Income tax expense increased by $3 million. The effective income tax rate for the three months ended September 24, 2022 was 27.4% compared to 26.4% for the three months ended September 25, 2021. The increase in income tax expense and tax rate was primarily driven by foreign exchange rate adjustments for the three months ended September 24, 2022.
37
Results of Operations for the nine months ended September 24, 2022 compared to the nine months ended September 25, 2021
To facilitate review of our results of operations, the following tables set forth our financial results for the periods indicated. All information is derived from the consolidated statements of operations.
Revenue
Nine months ended | ||||||||||||||||||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Franchise royalties and fees | $ | 128,300 | $ | 107,240 | $ | 21,060 | 20 | % | ||||||||||||||||||
Company-operated store sales | 957,487 | 603,808 | 353,679 | 59 | % | |||||||||||||||||||||
Independently-operated store sales | 158,500 | 160,483 | (1,983) | (1) | % | |||||||||||||||||||||
Advertising fund contributions | 63,807 | 56,665 | 7,142 | 13 | % | |||||||||||||||||||||
Supply and other revenue | 185,447 | 147,199 | 38,248 | 26 | % | |||||||||||||||||||||
Total revenue | $ | 1,493,541 | $ | 1,075,395 | $ | 418,146 | 39 | % |
Franchise Royalties and Fees
Franchise royalties and fees increased $21 million primarily due to same store sales growth as well as additional 40 franchised stores. Franchised system-wide sales increased $429 million or 17%.
Company-operated Store Sales
Company-operated store sales increased $354 million of which $132 million, $98 million and $124 million related to the Maintenance, Car Wash and Paint, Collision and Glass segments, respectively. Company-operated store sales increased primarily due to the addition of 310 company-operated stores year-over-year primarily from the acquisitions of seven glass businesses (which had 156 stores in aggregate), a number of car wash tuck in acquisitions and 10 CARSTAR franchise sites. The acquisition of the glass businesses in the first nine months of 2022 and the acquisition of 10 CARSTAR franchise sites in the fourth quarter of 2021 generated $98 million and $21 million of sales, respectively, for the nine months ended September 24, 2022. Company-operated store sales also increased due to same store sales growth.
Independently-Operated Store Sales
Independently-operated store sales (comprised entirely of sales from the international car wash locations) decreased $2 million as the benefit of higher volume (same store sales growth) was offset by unfavorable currency translation.
Advertising Fund Contributions
Advertising fund contributions increased by $7 million primarily due to a $429 million, or 17%, increase in franchised system-wide sales from same store sales growth and additional net new franchise stores. Our franchise agreements typically require the franchisee to pay continuing advertising fund fees based on a percentage of franchisee gross sales.
Supply and Other Revenue
Supply and other revenue increased $38 million primarily due to growth in product and service revenue within the Platform Services, Paint, Collision and Glass and Maintenance segments due to an increase in system wide sales.
38
Operating Expenses
Nine months ended | ||||||||||||||||||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Company-operated store expenses | $ | 580,368 | $ | 367,095 | $ | 213,273 | 58 | % | ||||||||||||||||||
Independently-operated store expenses | 85,396 | 89,664 | (4,268) | (5) | % | |||||||||||||||||||||
Advertising fund expenses | 63,807 | 56,665 | 7,142 | 13 | % | |||||||||||||||||||||
Supply and other expenses | 109,616 | 80,417 | 29,199 | 36 | % | |||||||||||||||||||||
Selling, general, and administrative expenses | 272,657 | 218,549 | 54,108 | 25 | % | |||||||||||||||||||||
Acquisition costs | 9,981 | 2,674 | 7,307 | 273 | % | |||||||||||||||||||||
Store opening costs | 1,925 | 1,360 | 565 | 42 | % | |||||||||||||||||||||
Depreciation and amortization | 107,628 | 78,722 | 28,906 | 37 | % | |||||||||||||||||||||
Trade name impairment charges | 125,450 | — | 125,450 | NM | ||||||||||||||||||||||
Asset impairment charges | 2,910 | 3,161 | (251) | (8) | % | |||||||||||||||||||||
Total operating expenses | $ | 1,359,738 | $ | 898,307 | $ | 461,431 | 51 | % |
Company-Operated Store Expenses
Company-operated store expenses increased $213 million which is commensurate with the increase in Company-operated store sales from the addition of new stores, acquisitions and same store sales growth. Company-operated store expenses continue to increase at a slower rate than company-operated store sales due to effective operational leverage and cost management.
Independently-Operated Store Expenses
Independently-operated store expenses, which are entirely related to the Car Wash segment, decreased $4 million, due to a decrease in Independently-operated store sales which were negatively impacted by unfavorable foreign currency translation.
Advertising Fund Expenses
The $7 million increase in advertising fund expenses represents a commensurate increase to advertising fund contributions during the period. Advertising fund expenses generally trend consistent with advertising fund contributions.
Supply and Other Expenses
Supply and other expenses increased $29 million due to an increase in Supply and other revenue as well as higher oil and freight costs incurred in the Platform Services segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $54 million due to an increase in employee compensation and other employee-related expense from increased headcount and acquisitions, infrastructure costs, travel costs, legal and professional fees, and marketing expenses.
Acquisition Costs
Acquisition costs increased $7 million. The nine months ended September 24, 2022 included costs associated with the glass business acquisitions and a number of car wash tuck-in acquisitions while the nine months ended September 25, 2021 included costs associated with car wash tuck-in acquisitions.
Store Opening Costs
Store opening costs increased slightly due to an increase in company-operated new store openings and conversions of acquired stores to the Take 5 Quick Lube brand. There were seventeen new company-operated store openings and five Take 5 Quick Lube store conversions in the nine months ended September 24, 2022, compared to eighteen company-operated store openings and four Take 5 Quick Lube store conversions during the nine months ended September 25, 2021.
39
Depreciation and Amortization
Depreciation and amortization expense increased $29 million due to additional property and equipment and definite-lived intangible assets recognized in conjunction with recent acquisitions and higher current period capital expenditures largely driven by capital expenditures related to growth such as new store openings..
Trade Name Impairment Charges
The Company acquired a number of car wash businesses over the past two years and determined a fair value of each of the associated intangibles including trademarks and customer relationships. During the nine months ended September 24, 2022, the Company made the strategic decision to rebrand the majority of its U.S. car wash locations to operate under the name “Take 5 Car Wash”, and therefore are discontinuing the use of certain Car Wash trade names that had indefinite lives. As a result, the Company recognized a $125 million non-cash impairment charge.
Asset Impairment Charges
Asset impairment charges decreased slightly for the nine months ended September 24, 2022 compared to the nine months ended September 25, 2021, due to fewer impairments related to property and equipment and operating lease right-of-use assets at closed locations.
Interest Expense, Net
Nine months ended | ||||||||||||||||||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Interest expense, net | $ | 78,946 | $ | 52,390 | $ | 26,556 | 51 | % |
Interest expense, net increased $27 million as a result of a higher average debt outstanding partially offset by lower average interest rates for the nine months ended September 24, 2022. Higher average debt outstanding was primarily due to the issuance of debt in the fourth quarter of 2021 to fund the AGN and other acquisitions and for general corporate purposes.
Loss on Foreign Currency Transactions, Net
Nine months ended | ||||||||||||||||||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Loss on foreign currency transactions, net | $ | 30,490 | $ | 6,356 | $ | 24,134 | 380 | % |
The loss on foreign currency transactions for the nine months ended September 24, 2022 is comprised of a $33 million remeasurement loss on our non U.S. dollar entities including foreign third party long-term debt and intercompany notes and $3 million of unrealized gains on foreign currency hedges that are not designated as hedging instruments. The loss on foreign currency transactions for the nine months ended September 25, 2021 is comprised of a remeasurement loss on our foreign third party long-term debt and intercompany notes of $9 million, partially offset by unrealized gains incurred on foreign currency hedges that are not designated as hedging instruments of $3 million.
Loss on Debt Extinguishment
Nine months ended | ||||||||||||||||||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Loss on debt extinguishment | $ | — | $ | 45,576 | $ | (45,576) | (100) | % |
The loss on debt extinguishment for the nine months ended September 25, 2021 was due to the write-off of remaining unamortized discount associated with the settlement of the Car Wash Senior Credit Facilities.
40
Income Tax Expense
Nine months ended | ||||||||||||||||||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Income tax expense | $ | 8,592 | $ | 24,445 | $ | (15,853) | (65) | % |
Income tax expense decreased by $16 million. The effective income tax rate for the nine months ended September 24, 2022 was 35.3% compared to 33.6% for the nine months ended September 25, 2021. The net decrease in income tax expense was primarily driven by a favorable discrete tax adjustment related to the trade name impairment charge for the nine months ended September 24, 2022, and favorable discrete tax adjustments related to non-deductible loss on debt extinguishment as well as tax deductible costs incurred related to the initial public offering for the nine months ended September 25, 2021. The net increase in tax rate was primarily driven by foreign exchange rate adjustments.
Segment Results of Operations for the three months ended September 24, 2022 compared to the three months ended September 25, 2021
We assess the performance of our segments based on Segment Adjusted EBITDA, which is defined as earnings before interest expense, net, income tax expense, and depreciation and amortization, with further adjustments for acquisition-related costs, store opening and closure costs, straight-line rent, equity compensation, loss on debt extinguishment and certain non-recurring, non-core, infrequent or unusual charges. In addition, shared services costs are not allocated to these segments and are included in Corporate and Other. Segment Adjusted EBITDA may not be comparable to similarly titled metrics of other companies due to differences in methods of calculation.
Maintenance
Three months ended | ||||||||||||||||||||||||||
(in thousands, unless otherwise noted) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Franchise royalties and fees | $ | 11,625 | $ | 9,635 | $ | 1,990 | 21 | % | ||||||||||||||||||
Company-operated store sales | 172,162 | 125,561 | 46,601 | 37 | % | |||||||||||||||||||||
Supply and other revenue | 17,035 | 9,261 | 7,774 | 84 | % | |||||||||||||||||||||
Total revenue | $ | 200,822 | $ | 144,457 | $ | 56,365 | 39 | % | ||||||||||||||||||
Segment Adjusted EBITDA | $ | 68,763 | $ | 47,894 | $ | 20,869 | 44 | % | ||||||||||||||||||
System-Wide Sales | ||||||||||||||||||||||||||
Franchised stores | $ | 239,290 | $ | 208,218 | $ | 31,072 | 15 | % | ||||||||||||||||||
Company-operated stores | 172,162 | 125,561 | 46,601 | 37 | % | |||||||||||||||||||||
Total System-Wide Sales | $ | 411,452 | $ | 333,779 | $ | 77,673 | 23 | % | ||||||||||||||||||
Store Count (in whole numbers) | ||||||||||||||||||||||||||
Franchised stores | 1,023 | 992 | 31 | 3 | % | |||||||||||||||||||||
Company-operated stores | 574 | 514 | 60 | 12 | % | |||||||||||||||||||||
Total Store Count | 1,597 | 1,506 | 91 | 6 | % | |||||||||||||||||||||
Same Store Sales % | 14.4 | % | 17.0 | % | N/A | N/A |
Maintenance revenue increased $56 million for the three months ended September 24, 2022, as compared to the three months ended September 25, 2021. Franchise royalties and fees increased by $2 million primarily due a $31 million or 15% increase in franchised system-wide sales from same store sales growth and 31 net new franchise stores. Company-operated store sales increased by $47 million primarily due to same store sales growth and 60 net new company-operated stores. Supply and other revenue increased by $8 million primarily due to higher system-wide sales from franchised stores.
Maintenance Segment Adjusted EBITDA increased $21 million primarily due to revenue growth, cost management and operational leverage. We continue to utilize an efficient labor model at company-operated locations.
41
Car Wash
Three months ended | ||||||||||||||||||||||||||
(in thousands, unless otherwise noted) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Company-operated store sales | $ | 98,235 | $ | 74,105 | $ | 24,130 | 33 | % | ||||||||||||||||||
Independently-operated store sales | 40,469 | 47,941 | (7,472) | (16) | % | |||||||||||||||||||||
Supply and other revenue | 1,599 | 1,516 | 83 | 5 | % | |||||||||||||||||||||
Total revenue | $ | 140,303 | $ | 123,562 | 16,741 | 14 | % | |||||||||||||||||||
Segment Adjusted EBITDA | $ | 39,098 | $ | 37,999 | 1,099 | 3 | % | |||||||||||||||||||
System-Wide Sales | ||||||||||||||||||||||||||
Company-operated stores | 98,235 | 74,105 | 24,130 | 33 | % | |||||||||||||||||||||
Independently-operated stores | 40,469 | 47,941 | (7,472) | (16) | % | |||||||||||||||||||||
Total System-Wide Sales | $ | 138,704 | $ | 122,046 | 16,658 | 14 | % | |||||||||||||||||||
Store Count (in whole numbers) | — | |||||||||||||||||||||||||
Company-operated stores | 369 | 286 | 83 | 29 | % | |||||||||||||||||||||
Independently-operated stores | 717 | 732 | (15) | (2) | % | |||||||||||||||||||||
Total Store Count | 1,086 | 1,018 | 68 | 7 | % | |||||||||||||||||||||
Same Store Sales % | (9.0) | % | 6.2 | % | N/A | N/A |
The Car Wash segment is comprised of our car wash sites throughout the United States, Europe and Australia.
Car Wash Segment revenue increased by $17 million driven by the addition of 68 net new stores primarily from a number of acquisitions in the fourth quarter of 2021 and first nine months of 2022, which was partially offset by a 560 basis point unfavorable change in foreign currency rates, unfavorable weather dynamics in the quarter and macro pressure on retail traffic.
Car Wash Segment Adjusted EBITDA increased by $1 million, primarily driven by higher sales, partially offset by higher operating costs.
Paint, Collision & Glass
Three months ended | ||||||||||||||||||||||||||
(in thousands, unless otherwise noted) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Franchise royalties and fees | $ | 24,055 | $ | 20,280 | $ | 3,775 | 19 | % | ||||||||||||||||||
Company-operated store sales | 69,413 | 12,723 | 56,690 | 446 | % | |||||||||||||||||||||
Supply and other revenue | 19,782 | 17,572 | 2,210 | 13 | % | |||||||||||||||||||||
Total revenue | $ | 113,250 | $ | 50,575 | $ | 62,675 | 124 | % | ||||||||||||||||||
Segment Adjusted EBITDA | $ | 38,919 | $ | 22,039 | $ | 16,880 | 77 | % | ||||||||||||||||||
System-Wide Sales | ||||||||||||||||||||||||||
Franchised stores | $ | 711,816 | $ | 607,579 | $ | 104,237 | 17 | % | ||||||||||||||||||
Company-operated stores | 69,413 | 12,723 | 56,690 | 446 | % | |||||||||||||||||||||
Total System-Wide Sales | $ | 781,229 | $ | 620,302 | $ | 160,927 | 26 | % | ||||||||||||||||||
Store Count (in whole numbers) | ||||||||||||||||||||||||||
Franchised stores | 1,625 | 1,617 | 8 | — | % | |||||||||||||||||||||
Company-operated stores | 197 | 30 | 167 | 557 | % | |||||||||||||||||||||
Total Store Count | 1,822 | 1,647 | 175 | 11 | % | |||||||||||||||||||||
Same Store Sales % | 15.7 | % | 10.8 | % | N/A | N/A | ||||||||||||||||||||
42
Paint, Collision & Glass revenue increased $63 million for the three months ended September 24, 2022, as compared to the three months ended September 25, 2021. The Company-operated store sales increased $57 million, of which $48 million was related to the glass business acquisitions (156 sites) in the first nine months of 2022, $7 million from the acquisition of 10 CARSTAR franchise sites in the fourth quarter of 2021 and same store sales growth. Franchise royalties and fees, which were impacted by differences in the revenue mix by brand, increased by $4 million primarily due to a $104 million or 17% increase in franchise system-wide sales primarily generated by same store sales growth. Supply and other revenue increased by $2 million primarily due to higher vendor rebates resulting from an increase in system wide sales.
Paint, Collision & Glass Segment Adjusted EBITDA increased $17 million primarily due to higher revenue from acquisitions and same store sales growth as well as cost management and operational leverage.
.
Platform Services
Three months ended | ||||||||||||||||||||||||||
(in thousands, unless otherwise noted) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Franchise royalties and fees | $ | 9,882 | $ | 9,038 | $ | 844 | 9 | % | ||||||||||||||||||
Company-operated store sales | 1,431 | 1,465 | (34) | (2) | % | |||||||||||||||||||||
Supply and other revenue | 40,686 | 31,558 | 9,128 | 29 | % | |||||||||||||||||||||
Total revenue | $ | 51,999 | $ | 42,061 | $ | 9,938 | 24 | % | ||||||||||||||||||
Segment Adjusted EBITDA | $ | 19,765 | $ | 16,254 | $ | 3,511 | 22 | % | ||||||||||||||||||
System-Wide Sales | ||||||||||||||||||||||||||
Franchised stores | $ | 129,320 | $ | 118,825 | $ | 10,495 | 9 | % | ||||||||||||||||||
Company-operated stores | 1,431 | 1,465 | (34) | (2) | % | |||||||||||||||||||||
Total System-Wide Sales | $ | 130,751 | $ | 120,290 | $ | 10,461 | 9 | % | ||||||||||||||||||
Store Count (in whole numbers) | ||||||||||||||||||||||||||
Franchised stores | 201 | 200 | 1 | 1 | % | |||||||||||||||||||||
Company-operated stores | 1 | 1 | — | — | % | |||||||||||||||||||||
Total Store Count | 202 | 201 | 1 | — | % | |||||||||||||||||||||
Same Store Sales % | 8.7 | % | 15.8 | % | N/A | N/A |
Platform Services revenue increased $10 million primarily due to higher ASP largely driven by inflationary pressure and an increase in platform services customers.
Platform Services Segment Adjusted EBITDA increased $4 million primarily driven by revenue growth, cost management and operational leverage.
Segment Results of Operations for the nine months ended September 24, 2022 compared to the nine months ended September 25, 2021
We assess the performance of our segments based on Segment Adjusted EBITDA, which is defined as earnings before interest expense, net, income tax expense, and depreciation and amortization, with further adjustments for acquisition-related costs, store opening and closure costs, straight-line rent, equity compensation, loss on debt extinguishment and certain non-recurring, non-core, infrequent or unusual charges. Additionally, shared services costs are not allocated to these segments and are included in Corporate and Other. Segment Adjusted EBITDA may not be comparable to similarly titled metrics of other companies due to differences in methods of calculation.
43
Maintenance
Nine months ended | ||||||||||||||||||||||||||
(in thousands, unless otherwise noted) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Franchise royalties and fees | $ | 32,586 | $ | 26,651 | $ | 5,935 | 22 | % | ||||||||||||||||||
Company-operated store sales | 497,638 | 365,735 | 131,903 | 36 | % | |||||||||||||||||||||
Supply and other revenue | 43,645 | 25,231 | 18,414 | 73 | % | |||||||||||||||||||||
Total revenue | $ | 573,869 | $ | 417,617 | $ | 156,252 | 37 | % | ||||||||||||||||||
Segment Adjusted EBITDA | $ | 185,324 | $ | 132,895 | $ | 52,429 | 39 | % | ||||||||||||||||||
System-Wide Sales | ||||||||||||||||||||||||||
Franchised stores | $ | 670,079 | $ | 567,155 | $ | 102,924 | 18 | % | ||||||||||||||||||
Company-operated stores | 497,638 | 365,735 | 131,903 | 36 | % | |||||||||||||||||||||
Total System-Wide Sales | $ | 1,167,717 | $ | 932,890 | $ | 234,827 | 25 | % | ||||||||||||||||||
Store Count (in whole numbers) | ||||||||||||||||||||||||||
Franchised stores | 1,023 | 992 | 31 | 3 | % | |||||||||||||||||||||
Company-operated stores | 574 | 514 | 60 | 12 | % | |||||||||||||||||||||
Total Store Count | 1,597 | 1,506 | 91 | 6 | % | |||||||||||||||||||||
Same Store Sales % | 16.0 | % | 24.4 | % | N/A | N/A |
Maintenance revenue increased $156 million driven primarily by a $132 million increase in company-operated store sales from same store sales growth and 60 net new Company-operated stores. Franchise royalties and fees increased by $6 million primarily due to the $103 million or 18% increase in franchised system-wide sales from same store sales growth and 31 net new franchise stores. Supply and other revenue increased by $18 million primarily due to higher system-wide sales from franchised stores.
Maintenance Segment Adjusted EBITDA increased $52 million primarily due to revenue growth, cost management and operational leverage.
Car Wash
Nine months ended | ||||||||||||||||||||||||||
(in thousands, unless otherwise noted) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Company-operated store sales | 294,526 | 196,858 | $ | 97,668 | 50 | % | ||||||||||||||||||||
Independently-operated store sales | 158,500 | 160,483 | (1,983) | (1) | % | |||||||||||||||||||||
Supply and other revenue | 5,131 | 4,800 | 331 | 7 | % | |||||||||||||||||||||
Total revenue | $ | 458,157 | $ | 362,141 | $ | 96,016 | 27 | % | ||||||||||||||||||
Segment Adjusted EBITDA | $ | 148,495 | $ | 115,223 | $ | 33,272 | 29 | % | ||||||||||||||||||
System-Wide Sales | ||||||||||||||||||||||||||
Company-operated stores | $ | 294,526 | 196,858 | $ | 97,668 | 50 | % | |||||||||||||||||||
Independently-operated stores | 158,500 | 160,483 | (1,983) | (1) | % | |||||||||||||||||||||
Total System-Wide Sales | $ | 453,026 | $ | 357,341 | $ | 95,685 | 27 | % | ||||||||||||||||||
Store Count (in whole numbers) | ||||||||||||||||||||||||||
Company-operated stores | 369 | 286 | 83 | 29 | % | |||||||||||||||||||||
Independently-operated stores | 717 | 732 | (15) | (2) | % | |||||||||||||||||||||
Total Store Count | 1,086 | 1,018 | $ | 68 | 7 | % | ||||||||||||||||||||
Same Store Sales % | (1.8) | % | 6.2 | % | N/A | N/A |
Car Wash segment is comprised of our car wash sites throughout the United States, Europe and Australia.
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Car Wash segment revenue increased $96 million driven by the addition of 68 net new stores primarily due to a number of acquisitions which was partially offset by a (1.8)% decrease in same store sales. Same store sales were negatively impacted by an unfavorable change in foreign currency rates.
Car Wash Segment Adjusted EBITDA increased by $33 million primarily driven by revenue growth as well as cost management and operational leverage.
Paint, Collision & Glass
Nine months ended | ||||||||||||||||||||||||||
(in thousands, unless otherwise noted) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Franchise royalties and fees | $ | 69,025 | $ | 57,578 | $ | 11,447 | 20 | % | ||||||||||||||||||
Company-operated store sales | 161,531 | 37,672 | 123,859 | 329 | % | |||||||||||||||||||||
Supply and other revenue | 57,577 | 49,791 | 7,786 | 16 | % | |||||||||||||||||||||
Total revenue | $ | 288,133 | $ | 145,041 | $ | 143,092 | 99 | % | ||||||||||||||||||
Segment Adjusted EBITDA | $ | 100,847 | $ | 61,534 | $ | 39,313 | 64 | % | ||||||||||||||||||
System-Wide Sales | ||||||||||||||||||||||||||
Franchised stores | $ | 2,003,401 | $ | 1,722,641 | $ | 280,760 | 16 | % | ||||||||||||||||||
Company-operated stores | 161,531 | 37,672 | $ | 123,859 | 329 | % | ||||||||||||||||||||
Total System-Wide Sales | $ | 2,164,932 | $ | 1,760,313 | $ | 404,619 | 23 | % | ||||||||||||||||||
Store Count (in whole numbers) | ||||||||||||||||||||||||||
Franchised stores | 1,625 | 1,617 | 8 | — | % | |||||||||||||||||||||
Company-operated stores | 197 | 30 | 167 | 557 | % | |||||||||||||||||||||
Total Store Count | 1,822 | 1,647 | 175 | 11 | % | |||||||||||||||||||||
Same Store Sales % | 17.5 | % | 12.2 | % | N/A | N/A | ||||||||||||||||||||
Paint, Collision & Glass revenue increased $143 million for the nine months ended September 24, 2022, as compared to the nine months ended September 25, 2021. Company-owned store revenue increased $124 million, of which $98 million was due to the glass acquisitions (156 sites) in the first nine months of 2022, and $21 million from the acquisition of 10 CARSTAR franchise sites in the fourth quarter of 2021 and same store sales growth. Franchise royalties and fees revenue increased $11 million due to a $281 million or 16% increase in franchised system-wide sales from same store sales growth. Supply and other revenue increased $8 million due to same store sales growth and higher franchise income resulting from an increase in system wide sales.
Paint, Collision & Glass Segment Adjusted EBITDA increased $39 million primarily due to revenue growth from acquisitions and same store sales growth as well as cost management and operational leverage.
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Platform Services
Nine months ended | ||||||||||||||||||||||||||
(in thousands, unless otherwise noted) | September 24, 2022 | September 25, 2021 | Change | |||||||||||||||||||||||
Franchise royalties and fees | $ | 26,689 | $ | 23,011 | $ | 3,678 | 16 | % | ||||||||||||||||||
Company-operated store sales | 3,975 | 3,911 | 64 | 2 | % | |||||||||||||||||||||
Supply and other revenue | 117,704 | 94,576 | 23,128 | 24 | % | |||||||||||||||||||||
Total revenue | $ | 148,368 | $ | 121,498 | $ | 26,870 | 22 | % | ||||||||||||||||||
Segment Adjusted EBITDA | $ | 54,471 | $ | 44,864 | $ | 9,607 | 21 | % | ||||||||||||||||||
System-Wide Sales | ||||||||||||||||||||||||||
Franchised stores | $ | 348,890 | $ | 303,209 | $ | 45,681 | 15 | % | ||||||||||||||||||
Company-operated stores | 3,975 | 3,911 | $ | 64 | 2 | % | ||||||||||||||||||||
Total System-Wide Sales | $ | 352,865 | $ | 307,120 | $ | 45,745 | 15 | % | ||||||||||||||||||
Store Count (in whole numbers) | ||||||||||||||||||||||||||
Franchised stores | 201 | 200 | 1 | 1 | % | |||||||||||||||||||||
Company-operated stores | 1 | 1 | — | — | % | |||||||||||||||||||||
Total Store Count | 202 | 201 | 1 | — | % | |||||||||||||||||||||
Same Store Sales % | 14.9 | % | 24.7 | % | N/A | N/A |
Platform Services revenue increased $27 million primarily due to higher ASP largely driven by inflationary pressure and an increase in platform services customers. Also, Franchise royalties and fees increased due to higher Franchised stores system-wide sales primarily from same store sales growth.
Platform Services Segment Adjusted EBITDA increased $10 million primarily driven by a combination of revenue growth, cost management and operational leverage.
Financial Condition, Liquidity and Capital Resources
Sources of Liquidity and Capital Resources
Cash flow from operations, supplemented with long-term borrowings and revolving credit facilities, have been sufficient to fund our operations while allowing us to make strategic investments to grow our business. We believe that our sources of liquidity and capital resources will be adequate to fund our operations, acquisitions, company-operated store development, other general corporate needs and the additional expenses we expect to incur for at least the next twelve months. We expect to continue to have access to the capital markets at acceptable terms. However, this could be adversely affected by many factors including a downgrade of our credit rating or a deterioration of certain financial ratios.
Driven Brands Funding, LLC (the “Master Issuer”), a wholly owned subsidiary of the Company, and Driven Brands Canada Funding Corporation (along with the Master Issuer, the “Co-Issuers”) are subject to certain quantitative covenants related to debt service coverage and leverage ratios in connection with the Securitization Senior Notes. Driven Holdings Revolving Credit Facility also has certain qualitative covenants. As of September 24, 2022, the Co-Issuers and Driven Holdings were in compliance with all covenants under their respective credit agreements.
At September 24, 2022, the Company had total liquidity of $288 million, which included $190 million in cash, and cash equivalents, and $97 million and $0 of undrawn capacity on its 2019 variable funding securitization senior notes and Driven Holdings Revolving Credit Facility, respectively. As of September 24, 2022, the Company also had $2 million of outstanding letters of credit.
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The following table illustrates the main components of our cash flows for the nine months ended September 24, 2022 and September 25, 2021:
Nine months ended | ||||||||||||||
(in thousands) | September 24, 2022 | September 25, 2021 | ||||||||||||
Net cash provided by operating activities | $ | 167,652 | $ | 198,195 | ||||||||||
Net cash used in investing activities | (771,768) | (462,721) | ||||||||||||
Net cash provided by financing activities | 282,580 | 204,845 | ||||||||||||
Effect of exchange rate changes on cash | (7,705) | (2,285) | ||||||||||||
Net change in cash, cash equivalents, restricted cash, and restricted cash included in advertising fund assets | $ | (329,241) | $ | (61,966) |
Operating Activities
Net cash provided by operating activities was $168 million for the nine months ended September 24, 2022 compared to $198 million for the nine months ended September 25, 2021. The decrease was due to $56 million payment of transaction costs associated with the AGN acquisition during the nine months ended September 24, 2022 and a $25 million increase in net working capital from timing and an increase in inventory, which were partially offset by $51 million increase in operating results.
Investing Activities
Net cash used in investing activities was $772 million for the nine months ended September 24, 2022 compared to $463 million for the nine months ended September 25, 2021. During the nine months ended September 24, 2022, there was a $210 million increase in net cash paid for acquisitions and $183 million increase in capital expenditures, offset by a $83 million increase in proceeds from sale-leaseback transactions.
For the nine months ended September 24, 2022, we invested $276 million in capital expenditures, compared to $94 million for the nine months ended September 25, 2021. This increase is primarily due to new company-operated store openings within our Car Wash and Maintenance segments, as well as expenditures related to the maintenance of our existing store base and technology initiatives.
Financing Activities
Net cash provided by financing activities was $283 million for the nine months ended September 24, 2022 primarily related to borrowings on the revolving credit facility, which was partially offset by the repayment of senior securitization notes. Net cash provided by financing activities was $205 million for the nine months ended September 25, 2021 primarily resulting from our $722 million repayment of the Car Wash Senior Credit Facilities, $43 million in repurchases of our common stock, and $22 million payment related to the termination of our interest rate swaps. These were offset by the $761 million in proceeds from our IPO and the underwriters’ exercise of their over-allotment option, net of underwriting discounts and $247 million net proceeds from borrowings under the Driven Holdings Revolving Credit Facility. See Note 7 to our consolidated financial statements for additional information regarding the Company’s debt.
Income Tax Receivable Agreement
We expect to be able to utilize certain tax benefits which are related to periods prior to the effective date of the Company’s initial public offering, which we therefore attribute to our existing shareholders. We expect that these tax benefits (i.e., the Pre-IPO and IPO-Related Tax Benefits) will reduce the amount of tax that we and our subsidiaries would otherwise be required to pay in the future. We have entered into an income tax receivable agreement which provides our Pre-IPO shareholders with the right to receive payment by us of 85% of the amount of cash savings, if any, in U.S. and Canadian federal, state, local and provincial income tax that we and our subsidiaries actually realize as a result of the utilization of the Pre-IPO and IPO-Related Tax Benefits.
For purposes of the income tax receivable agreement, cash savings in income tax will be computed by reference to the reduction in the liability for income taxes resulting from the utilization of the Pre-IPO and IPO-Related Tax Benefits. The term of the income tax receivable agreement commenced upon the effective date of the Company’s initial public offering and will continue until the Pre-IPO and IPO-Related Tax Benefits have been utilized, accelerated or expired.
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Because we are a holding company with no operations of our own, our ability to make payments under the income tax receivable agreement is dependent on the ability of our subsidiaries to make distributions to us. The securitized debt facility may restrict the ability of our subsidiaries to make distributions to us, which could affect our ability to make payments under the income tax receivable agreement. To the extent that we are unable to make payments under the income tax receivable agreement because of restrictions under our outstanding indebtedness, such payments will be deferred and will generally accrue interest at a rate of LIBOR plus 1.00% per annum until paid. To the extent that we are unable to make payments under the income tax receivable agreement for any other reason, such payments will generally accrue interest at a rate of LIBOR plus 5.00% per annum until paid.
Critical Accounting Policies and Estimates
Our significant accounting policies are more fully described in Note 2 of the consolidated financial statements. Refer to our annual report for the year ended December 25, 2021 for a full discussion of our critical accounting policies. There have been no material changes to our critical accounting policies from those disclosed in our Form 10-K for the year ended December 25, 2021.
Application of New Accounting Standards
See Note 2 of the consolidated financial statements for a discussion of recently issued accounting standards.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Refer to the Company’s annual report for the year ended December 25, 2021 for a complete discussion of the Company’s market risk. There have been no material changes in the Company’s market risk from those disclosed in the Company’s Form 10-K for the year ended December 25, 2021.
Item 4. Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our CEO and CFO, has evaluated the design effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of September 24, 2022. The term “disclosure controls and procedures,” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on evaluation of the design of our disclosure controls and procedures as of September 24, 2022, our CEO and CFO have concluded that as of such date, our disclosure controls and procedures were designed effectively and will provide a reasonable level of assurance.
b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended September 24, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II. Other Information
Item 1. Legal Proceedings.
We are subject to various lawsuits, administrative proceedings, audits, and claims arising in the ordinary course of business. Some of these lawsuits purport to be class actions and/or seek substantial damages. We are required to record an accrual for litigation loss contingencies that are both probable and reasonably estimable. Legal fees and expenses associated with the defense of all of our litigation are expensed as such fees and expenses are incurred. Management regularly assesses our insurance deductibles, analyzes litigation information with our attorneys and evaluates our loss experience in connection with pending legal proceedings. While we do not presently believe that any of the legal proceedings to which we are currently a party will ultimately have a material adverse impact on us, there can be no assurance that we will prevail in all the proceedings we are party to, or that we will not incur material losses from them.
Item 1A. Risk Factors
For a discussion of risk factors that could adversely affect our results of operations, financial condition, business reputation or business prospects, we refer you to Part I, Item 1A "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 25, 2021, as supplemented by the following risk factor.
High levels of economic inflation may affect our ability to pay interest on and principal of our long-term debt obligations
The United States is experiencing historically high levels of price inflation across a wide variety of economic sectors. There can be no assurances as to how high such inflation will go and/or how long such elevated levels of inflation may persist. High levels of inflation may influence employee and staffing costs and costs of goods and services required to be purchased by the Company and its Franchisees. Driven and its Franchisees may not be able to offset the negative impact of inflation with increased prices. In addition, high levels of inflation may influence demand for products purchased by Driven Brands’ customers. Any of the above could have a material adverse effect on our results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 5. Other Information.
On November 3, 2022, the Company entered into an amendment to the employment agreement (the “Amendment”) with Tiffany Mason, the Company’s Chief Financial Officer. The Amendment extends the term of her employment agreement to March 2, 2026, and provides that (1) upon her termination for any reason, Ms. Mason would be entitled to any cash bonus for a completed fiscal year prior to her termination, if such bonus has not been paid prior to her termination and (2) she would be entitled to severance payments in the event she resigns for Good Reason (as such term is defined in the Amendment).
The Amendment does not change Ms. Mason’s salary or incentive compensation as set forth in the 2022 Company’s Proxy Statement.
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Item 6. Exhibits.
Exhibit Number | Exhibit Description | |||||||
3.1 | ||||||||
3.2 | ||||||||
31.1 | ||||||||
31.2 | ||||||||
32.1 | ||||||||
32.2 | ||||||||
101.INS | XBRL Instance Document | |||||||
101.SCH | XBRL Schema Document | |||||||
101.CAL | XBRL Calculation Linkbase Document | |||||||
101.DEF | XBRL Definition Linkbase Document | |||||||
101.LAB | XBRL Label Linkbase Document | |||||||
101.PRE | XBRL Presentation Linkbase Document | |||||||
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 4, 2022
DRIVEN BRANDS HOLDINGS INC. | ||||||||||||||
By: | /s/ Jonathan Fitzpatrick | |||||||||||||
Name: | Jonathan Fitzpatrick | |||||||||||||
Title: | President and Chief Executive Officer |
By: | /s/ Michael Beland | |||||||||||||
Name: | Michael Beland | |||||||||||||
Title: | Senior Vice President and Chief Accounting Officer |
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