Driven Brands Holdings Inc. — FY2022 Form 10-K
Business context and period. Driven Brands operates automotive service businesses across maintenance, car wash, paint, collision, glass and platform services. At December 31, 2022, it had 4,805 locations in 49 U.S. states and 13 other countries. Fiscal 2022 ended December 31 and comprised 53 weeks, compared with 52 weeks in fiscal 2021 ended December 25; this affects year-over-year comparability.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $2.033 billion | $1.467 billion |
| Operating income | $199.6 million | $177.1 million |
| Net income | $43.2 million | $9.5 million |
| Diluted EPS | $0.25 | $0.06 |
| Adjusted net income attributable to Driven Brands | $207.9 million; $1.22 diluted per share | $147.1 million; $0.88 diluted per share |
| Adjusted EBITDA | $513.8 million | $361.7 million |
| Net cash from operating activities | $197.2 million | $283.8 million |
| Net cash used in investing activities | $840.3 million | $814.9 million |
Revenue grew 39%, net income rose to $43.2 million, and Adjusted EBITDA increased 42%. Operating income margin was approximately 9.8% of revenue and net income margin approximately 2.1%. Management’s KPI table reports consolidated same-store sales growth of 14.1%, versus 17.1% in 2021. Adjusted EBITDA and adjusted net income are non-GAAP measures; the filing cautions they may not be comparable with similarly titled measures at other companies.
Financial position, liquidity and debt
- Cash and cash equivalents were $227.1 million at year-end, down from $523.4 million. Reported total liquidity was $618 million, including $391 million of undrawn capacity under variable funding notes and the revolving facility; an additional $135 million of potential note capacity was subject to conditions.
- Total debt was $2.784 billion, up from $2.430 billion. Debt included $2.2 billion of securitization notes and a $496 million term loan; the $300 million revolving facility had no balance outstanding. Interest expense rose 50% to $114.1 million, reflecting higher average debt and interest rates.
- Operating cash flow fell by $86.7 million year over year. The company attributed the decline principally to a $56 million payment of AGN transaction costs and $37 million of additional interest paid, partly offset by higher operating income.
- Capital expenditures were $436.2 million; cash paid for acquisitions, net of cash acquired, was $763.1 million. Sale-leaseback proceeds were $333.8 million. Year-end operating lease liabilities were $1.254 billion, and undiscounted operating lease commitments were $1.942 billion.
- The company reported compliance with debt covenants at year-end and said available liquidity should fund operations and planned needs for at least the next 12 months. Substantially all specified revenue-generating assets secure debt, and securitization terms can restrict cash distributions.
Material changes and notable items
- Driven added 393 net locations, ending the year at 4,805, and reported more than 200 locations acquired during 2022. Glass acquisitions added 174 locations; the acquired glass businesses contributed approximately $157 million of 2022 sales.
- Company-operated store sales rose 57%, supported by acquisitions and same-store growth. Paint, Collision & Glass revenue more than doubled, largely due to glass acquisitions. Car Wash same-store sales declined 3.9%, versus 6.0% growth in 2021; international results were affected by closures and unfavorable foreign currency translation.
- A $125.5 million non-cash impairment charge followed the decision to transition most U.S. car washes to the Take 5 Car Wash brand. Management expects the rebranding to take about two and a half years.
- SG&A increased 31% to $383.5 million, including higher employee, professional, infrastructure and operating costs and a $15 million change in estimate related to the Tax Receivable Agreement (TRA). Interest expense also increased substantially.
- The TRA liability was $171 million at year-end. Under the agreement, the company generally pays eligible pre-IPO holders 85% of realized tax savings; management expected the majority of the obligation to be repaid by the end of fiscal 2025, subject to realization of tax benefits and other assumptions.
- Net income included a $25 million gain from sale-leaseback transactions, partly offset in the operating-expense presentation by impairment and closed-store costs. The company sold 89 properties for $334 million and entered into long-term leases for the properties.
Outlook, risks and management commentary
The filing provides no specific numerical revenue, earnings or cash-flow guidance. Management cited continued growth through same-store sales, new locations, acquisitions and franchise development. The company had agreements to open more than 1,200 franchised units and a car-wash development pipeline of more than 250 locations. Management stated that liquidity was expected to cover operations, acquisitions, development and general corporate needs for at least 12 months.
Key risks include the company’s substantial debt and interest-rate exposure; inflation, labor and supply costs; competition and changing consumer demand; dependence on franchisee performance and access to financing; execution and integration of acquisitions and new-store development; and technology changes, including electric vehicles and increasingly complex vehicle systems. Other material exposures include insurance-carrier relationships, foreign exchange, seasonality, environmental and employment regulation, cybersecurity and privacy, litigation, and restrictions on cash movement under debt agreements. The company does not intend to pay cash dividends in the foreseeable future.
The auditors issued an unqualified opinion on the 2022 financial statements and concluded internal control over financial reporting was effective. The audit and management assessment excluded 38 businesses acquired during 2022, representing approximately 5% of consolidated assets and 9% of consolidated revenue for the period, as reported in the filing.
Important facts for investors to verify
- Reconcile acquisition-driven growth and reported same-store sales with the additional fiscal week and assess the sustainability of organic growth.
- Review cash conversion, capital expenditure and acquisition spending, and whether operating cash flow can support the growth plan and debt service.
- Examine debt maturities, variable-rate exposure, covenant headroom, secured assets and restrictions on distributions from securitized entities.
- Assess the assumptions behind the $125.5 million trade-name impairment, the remaining rebranding timeline and the performance of Car Wash same-store sales.
- Track the TRA liability, payment timing and tax-benefit assumptions, along with long-term lease commitments and sale-leaseback obligations.
- Consider the reliance on acquisitions, franchisee funding and insurance relationships, and the integration and control risks associated with recently acquired businesses.