Driven Brands Holdings Inc. — Q2 2021 Form 10-Q
Reporting period: 13 and 26 weeks ended June 26, 2021; comparative periods ended June 27, 2020. Financial statements are unaudited. Comparisons are affected by acquisitions and the unusually weak 2020 pandemic period; ICWG, acquired in August 2020, is not included in the prior-year comparison.
Business context and results
Driven Brands operates automotive service businesses across maintenance, car wash, paint/collision/glass and platform services. It reported 4,319 locations across 49 U.S. states and 14 other countries; approximately 82% were franchised or independently operated.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $374.8m | $167.8m | $704.2m | $347.9m |
| Operating income | $63.6m | $21.3m | $113.4m | $37.0m |
| Operating margin | 17.0% | 12.7% | 16.1% | 10.6% |
| Net income (loss) | $35.2m | $3.1m | $15.2m | $(0.9)m |
| Diluted EPS | $0.21 | $0.03 | $0.09 | $(0.01) |
| Adjusted EBITDA (non-GAAP) | $100.8m | $40.0m | $178.8m | $70.6m |
Q2 system-wide sales were $1.16bn, up 65%; first-half sales were $2.16bn, up 46%. Same-store sales improved across comparable segments: total was 38.7% for Q2 and 19.2% for the half, versus declines of 19.0% and 8.7%, respectively, in 2020. Acquisition-driven scale, including ICWG and car-wash tuck-ins, was a major contributor to reported growth. Management also cited organic store growth, same-store sales recovery and efficient labor practices.
Cash flow, debt and liquidity
- First-half operating cash flow was $124.7m, versus $13.6m a year earlier. Investing used $196.8m, including $205.6m for acquisitions and $46.2m in capital expenditures; financing provided $40.8m.
- Cash and cash equivalents were $147.3m at June 26, 2021, down from $172.6m at year-end. Current assets were $366.4m and current liabilities $331.7m.
- Gross debt was $1.56bn, down from $2.21bn at December 26, 2020; reported long-term debt, net of issuance costs and current maturities, was $1.50bn. The company had $79m drawn on a new $300m revolving facility. It reported compliance with debt covenants.
- The January IPO and over-allotment raised approximately $761m net. Proceeds and cash on hand repaid approximately $725m of ICWG-related senior facilities, and $43m was used to repurchase shares. The repayment generated a $45.6m first-half debt-extinguishment loss.
Material changes, outlook and risks
- The acquisition of ICWG added the Car Wash segment, including 979 company-operated and independently operated sites in the reported store count. First-half 2021 acquisitions also included 30 car-wash sites and three maintenance sites, for approximately $206m of aggregate net cash consideration.
- Q2 net income rose to $35.2m. First-half GAAP net income was $15.2m despite higher operating income, in part because of the debt-extinguishment loss and foreign-currency losses. First-half effective tax rate was 45.2%; the filing attributes it to profitable pretax operations and tax adjustments, among other factors.
- Management said liquidity and capital resources should be adequate for operations, acquisitions, store development and general needs for at least the next 12 months, while noting access to capital markets could be affected by credit-rating or financial-ratio deterioration. No quantitative earnings or revenue guidance is provided.
- COVID-19 had not materially adversely affected the reported 2021 periods, but management said volatility and uncertainty remained. Risks include acquisition execution, litigation and potential franchisor joint-employer liability as labor rules change. The company said it did not currently expect pending legal matters to have a material adverse impact, but could not assure that outcome.
- The company recorded a $156m income tax receivable agreement liability; pre-IPO shareholders are entitled to 85% of qualifying realized tax savings. Subsequent to quarter-end, it acquired 18 Frank’s Car Wash Express sites for $106m and reported a net $123m July draw on the revolving facility. A proposed secondary offering of approximately 12m shares by existing holders would provide no proceeds to the company.
Important facts for investors to verify
- How much revenue and EBITDA growth is attributable to acquisitions versus same-store, organic growth; the 2020 comparison excludes ICWG and reflects pandemic disruption.
- The definition and reconciliation of non-GAAP Adjusted EBITDA, which excludes specified costs and differs from GAAP operating income and cash generation.
- Post-quarter acquisition spending, revolver borrowings and remaining availability, alongside cash needs for further acquisitions and capital expenditures.
- Debt maturities, interest-rate exposure, lease obligations and potential future payments under the $156m tax receivable agreement.
- The timing and financial impact of performance-based equity awards, contingent on performance criteria, and evolving joint-employer rules.