Driven Brands Holdings Inc. — Q3 2022 Form 10-Q
Reporting period: Fiscal quarter and first nine months ended September 24, 2022; comparisons are to the periods ended September 25, 2021. The company operates automotive service businesses through franchised, independently operated and company-operated locations. It reported 4,707 locations across 49 U.S. states and 14 other countries.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $516.6 million | $371.1 million | $1,493.5 million | $1,075.4 million |
| Operating income | $95.8 million | $63.7 million | $133.8 million | $177.1 million |
| Net income | $38.4 million | $33.1 million | $15.8 million | $48.3 million |
| Diluted EPS | $0.23 | $0.19 | $0.09 | $0.29 |
| Adjusted EBITDA (non-GAAP) | $129.4 million | $98.0 million | $383.3 million | $276.7 million |
| Operating margin | 18.5% | 17.2% | 9.0% | 16.5% |
Revenue increased 39% in both the quarter and nine-month period, reflecting acquisitions, same-store growth and store expansion. Q3 system-wide sales rose 22% to $1.46 billion; nine-month sales rose 23% to $4.14 billion. Nine-month reported earnings were weighed down by a $125.5 million non-cash trade-name impairment. Adjusted EBITDA is a company-defined non-GAAP measure and should be considered alongside GAAP results.
Q3 same-store sales were 11.9% overall, including 15.7% in Paint, Collision & Glass and 14.4% in Maintenance, but negative 9.0% in Car Wash. For the nine months, overall same-store sales increased 14.7%; Car Wash decreased 1.8%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $167.7 million, down from $198.2 million. Investing cash outflow was $771.8 million, including $652.1 million for acquisitions and $276.2 million of capital expenditures; sale-leaseback proceeds were $150.1 million.
- Cash and cash equivalents were $190.4 million at September 24, 2022, versus $523.4 million at year-end 2021. Management reported approximately $288 million of total liquidity, including $97 million of availability under securitization financing; the $300 million revolving credit facility was fully drawn.
- Gross debt was $2.72 billion, compared with $2.43 billion at December 25, 2021. Nine-month net interest expense increased 51% to $78.9 million. The company stated it was in compliance with debt covenants.
- Operating lease liabilities were approximately $1.10 billion. The company completed sale-leasebacks of 37 properties for $156 million, recognizing an $18 million net gain and recording $121 million of related right-of-use assets and lease liabilities.
Material changes, outlook and risks
- Q3 net income and diluted EPS increased year over year. For the nine months, net income and EPS declined, primarily because of the trade-name impairment and higher foreign-currency losses; the prior-year period also included a $45.6 million debt-extinguishment loss.
- The company recorded a $125.5 million impairment after deciding to rebrand most U.S. car washes as Take 5 Car Wash. The transition is expected to take about two and a half years.
- Foreign-currency transaction losses were $15.6 million in Q3 and $30.5 million for the nine months, primarily from remeasurement of non-U.S.-dollar entities, debt and intercompany balances.
- Management said available liquidity should be adequate for operations, acquisitions, store development and other needs for at least the next 12 months, while noting that capital-market access could be affected by credit-rating or financial-ratio deterioration. The filing provides no specific numerical earnings or revenue guidance.
- Risks highlighted include inflation affecting labor and input costs, pricing and customer demand; foreign-exchange volatility; Car Wash traffic, weather and same-store sales weakness; acquisition and integration execution; and litigation. Management said current legal proceedings were not expected to have a material adverse impact, but could not assure that outcome.
- Subsequent to quarter-end, subsidiaries issued $365 million of securitization notes at a fixed 7.393% rate, with proceeds intended for general corporate purposes, including repayment of revolving facilities. The company also acquired four car-wash sites for approximately $38 million through November 4, 2022.
Important facts for investors to verify
- How much future growth and profitability depends on acquisitions versus organic same-store performance, especially in Car Wash.
- Cash conversion and capital demands: operating cash flow fell while acquisition spending and capital expenditures rose substantially.
- Debt, interest expense, revolver availability and the impact of the post-quarter securitization refinancing.
- The assumptions underlying the $125.5 million impairment, the pace and cost of the Take 5 Car Wash rebrand, and subsequent amortization.
- Exposure to foreign-currency movements, inflation, and the company’s ability to pass higher costs through to customers.
- Potential cash obligations under the income tax receivable agreement, which entitles pre-IPO shareholders to 85% of qualifying realized tax savings.