Driven Brands Holdings Inc. — Q3 2021 Form 10-Q
Reporting period: 13 weeks ended September 25, 2021; year-to-date period was 39 weeks. Comparisons are with the periods ended September 26, 2020. Financial amounts below are in U.S. dollars.
Business context
Driven Brands operates automotive service businesses across Maintenance, Car Wash, Paint, Collision & Glass, and Platform Services. At quarter-end it reported 4,372 locations across 49 U.S. states and 14 other countries; approximately 81% of locations were franchised or independently operated. Results reflect the August 2020 ICWG acquisition and substantial 2021 car-wash acquisitions, so year-over-year growth is not solely organic.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | First 9 months 2021 | First 9 months 2020 |
|---|---|---|---|---|
| Revenue | $371.1 million | $267.8 million | $1,075.4 million | $615.7 million |
| Operating income | $63.7 million | $38.0 million | $177.1 million | $75.1 million |
| Net income | $33.1 million | $4.1 million | $48.3 million | $3.3 million |
| Diluted EPS | $0.19 | $0.04 | $0.29 | $0.03 |
| Adjusted EBITDA (non-GAAP) | $98.0 million | $69.0 million | $276.7 million | $139.5 million |
Q3 operating margin was approximately 17.2%, compared with 14.2% a year earlier; net margin was approximately 8.9%, compared with 1.5%. These are calculated from reported revenue and income. Q3 system-wide sales rose 28% to $1.20 billion; same-store sales increased 12.8% overall.
- Cash flow: Nine-month operating cash flow was $198.2 million, versus $66.5 million. Investing cash use was $462.7 million, including $442.5 million of net cash used for acquisitions and $93.6 million of capital expenditures. Financing provided $204.8 million.
- Debt and cash: At September 25, total debt was $1.728 billion before unamortized issuance costs; cash and cash equivalents were $115.4 million. The balance sheet also included $843.9 million of long-term operating lease liabilities.
- Liquidity: Management reported $268 million of liquidity at quarter-end, including cash, $100 million of undrawn securitization capacity and $53 million available on the revolving facility. Covenants were reported in compliance.
Material changes and unusual items
- Revenue rose 39% in Q3 and 75% year to date, driven by acquisitions, additional locations and same-store sales. The Car Wash segment benefited from a full quarter of ICWG results, compared with only two post-acquisition months in the prior-year quarter.
- Q3 Adjusted EBITDA increased to $98.0 million from $69.0 million. For the first nine months it increased to $276.7 million from $139.5 million. These are non-GAAP measures and include management-defined adjustments.
- The IPO and over-allotment generated approximately $761 million of net proceeds. The company used proceeds and cash on hand to repay the ICWG-related senior credit facilities, recording a $45.6 million debt-extinguishment loss in the first nine months. It also repurchased about $43 million of shares.
- On September 29, 2021, subsidiaries issued $450 million of securitization notes at a fixed 2.791% rate, using proceeds to repay the $247 million revolver balance, with the remainder intended for general corporate purposes, including acquisitions. The company subsequently drew $10 million on the revolver on November 9.
- Nine-month foreign-currency transaction losses were $6.4 million. Q3 comprehensive income attributable to Driven Brands was only $2.3 million, principally reflecting a $30.8 million foreign-currency translation loss.
Outlook, risks and contingencies
No specific numerical earnings or revenue guidance is provided in the supplied filing text. Management stated that available liquidity was expected to support 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 ratings and financial ratios. Management said COVID-19 had not materially adversely affected the reported periods but that uncertainty remained.
Risks include acquisition execution and integration, continued access to capital, foreign-exchange exposure, and the ability to meet debt covenants. The filing also highlights potential workforce, supplier and cost effects of OSHA’s COVID-19 vaccination/testing requirements. The company disclosed ordinary-course lawsuits and claims; management did not expect current proceedings to have a material adverse impact, but provided no assurance. A $156 million income tax receivable agreement liability was recorded; eligible pre-IPO shareholders may receive 85% of realized tax savings.
Important facts for investors to verify
- How much reported growth and earnings improvement is attributable to acquisitions, versus same-store sales, unit growth and sustainable operating leverage.
- The cash returns and financing implications of the post-quarter $450 million note issuance, revolver repayment and subsequent $10 million draw.
- Acquisition spending, integration performance and returns on the car-wash locations acquired during and after the quarter.
- The treatment and comparability of non-GAAP Adjusted EBITDA and Adjusted Net Income, including the adjustments excluded from those measures.
- Potential cash payments under the $156 million tax receivable agreement, lease obligations, litigation exposure and effects of workforce or supplier requirements.