Driven Brands Holdings Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 30, 2023 (52 weeks), compared with the year ended December 31, 2022 (53 weeks). The filing is an annual report, not a standalone fourth-quarter report.
Business context
Driven Brands operates a diversified automotive-services network spanning maintenance, car wash, paint, collision and glass, and platform services. At year-end it reported 4,988 locations across 49 U.S. states and 13 other countries. The company reported approximately $6.3 billion in system-wide sales; sales at franchised locations are not recognized as company revenue.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net revenue | $2.304 billion | $2.033 billion |
| GAAP operating income (loss) | $(686.5) million | $199.6 million |
| GAAP net income (loss) | $(745.0) million | $43.2 million |
| Diluted earnings (loss) per share | $(4.53) | $0.25 |
| Adjusted EBITDA (non-GAAP) | $516.9 million | $498.8 million |
| Adjusted net income (non-GAAP) | $142.5 million | $196.8 million |
| Operating cash flow | $235.2 million | $197.2 million |
| Capital expenditures | $596.5 million | $436.2 million |
Revenue increased 13%; consolidated same-store sales rose 7.4%, while system-wide sales increased 12%. Adjusted EBITDA increased about 4%, but adjusted net income fell 28%. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
The GAAP loss chiefly reflects an $851.0 million non-cash goodwill impairment in U.S. Car Wash and $132.9 million of asset impairment and lease-termination charges. Interest expense rose 44% to $164.2 million. The effective tax rate was 12.1%, compared with 36.8% in FY2022; the filing attributes the change primarily to impairments.
Adjusted EBITDA as a percentage of segment revenue was 34.3% for Maintenance (32.3% in FY2022), 21.6% for Car Wash (29.6%), 28.1% for Paint, Collision & Glass (32.8%), and 37.3% for Platform Services (36.9%). Consolidated adjusted EBITDA margin was 22.4%, versus 24.5%.
Cash and cash equivalents were $176.5 million at year-end. Reported total liquidity was $319 million, including cash and undrawn capacity on the variable funding notes and revolving credit facility. Total debt was approximately $3.0 billion, including $248 million drawn on the $300 million revolver; net long-term debt on the balance sheet was $2.911 billion. Operating cash flow was below capital expenditures by approximately $361 million. The company also reported $2.2 billion of remaining operating lease commitments.
Material changes and unusual items
- Following a strategic review of U.S. Car Wash, management approved 29 store closures, halted new company-operated store openings, and began marketing assets for sale. The company classified $301 million of assets as held for sale and recorded $122 million of related property, equipment, and right-of-use asset impairment charges.
- U.S. Car Wash same-store sales declined 5.6%; segment adjusted EBITDA fell 26% to $129.0 million. Management cited softer demand, competition, weather, higher rent following sale-leasebacks, and higher operating costs. The segment’s system-wide sales increased about 1%.
- In Paint, Collision & Glass, the company closed 22 U.S. glass locations and reduced headcount as it continued integrating Auto Glass Now and related acquisitions. Management said integration took longer than planned and produced lower revenue and fewer cost efficiencies than expected.
- Maintenance segment adjusted EBITDA increased 27% to $329.5 million, supported by sales growth, cost management, and operating leverage. Paint, Collision & Glass adjusted EBITDA increased 4% to $140.6 million; Platform Services adjusted EBITDA increased 11% to $80.5 million.
- Capital expenditures rose to $596.5 million, including $438.4 million in Car Wash. Investing cash outflow declined year over year to $451.4 million, principally because acquisition spending was lower.
- The company repurchased approximately $50 million of common stock during 2023, completing its authorized program. It does not currently intend to pay cash dividends in the foreseeable future.
Outlook, risks and contingencies
Management said liquidity and capital resources are expected to be adequate for operations, acquisitions, store development, and general corporate needs for at least the next 12 months, while noting that capital-market access and liquidity could be affected by economic conditions and financial metrics. The filing provides no specific FY2024 revenue or earnings guidance.
Key risks include substantial indebtedness and variable-rate borrowing costs, debt covenants and restrictions on subsidiary distributions, execution and integration of acquisitions, franchisee financial health and unit development, labor and supply costs, competitive and demand pressures, and cybersecurity and technology risks. A 1% change in rates on variable-rate debt outstanding at year-end would change annual interest expense by approximately $7 million.
The Tax Receivable Agreement requires payment to certain holders of 85% of realized tax savings. A payment of approximately $25 million was made in January 2024; the company estimated future payments could total $160 million to $180 million if the relevant tax benefits are fully realized. A putative securities class action was filed in December 2023; the company disputes the allegations, and the filing states that no assessment of the likelihood or range of a potential adverse outcome had been made. Management and the external auditor reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether the U.S. Car Wash asset-sale plan, store closures, and operating changes improve performance and generate the expected proceeds; monitor for further impairments.
- Whether Car Wash and U.S. glass integration, margins, and same-store sales improve, and how results compare with management’s stated operational actions.
- Debt maturities, covenant headroom, refinancing needs, revolver usage, interest-rate exposure, and cash available after capital spending and lease obligations.
- The assumptions underlying the $851 million goodwill impairment and valuation sensitivity disclosed for the remaining goodwill reporting units and indefinite-lived trade names.
- Cash-tax realization and the timing and amount of Tax Receivable Agreement payments, along with developments in the securities lawsuit.
- The reconciliation and definitions of non-GAAP measures, particularly adjusted EBITDA and adjusted net income, and their comparability with GAAP performance.