Driven Brands Holdings Inc. quarterly report, Q2 FY2022

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Driven Brands Holdings Inc. — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 25, 2022; comparative periods ended June 26, 2021. Driven Brands operates more than 4,600 automotive-service locations across 49 U.S. states and 14 other countries, with Maintenance, Car Wash, Paint, Collision & Glass, and Platform Services segments. Approximately 77% of locations are franchised or independently operated.

Financial performance

  • Revenue: Q2 revenue was $508.6 million, up 36% from $374.8 million. First-half revenue was $976.9 million, up 39% from $704.2 million. Growth reflected acquisitions, store count increases, and same-store sales growth.
  • Profit and margins: Q2 net loss was $57.0 million, or $0.34 per diluted share, versus net income of $35.2 million, or $0.21 per share, a year earlier. First-half net loss was $22.6 million, or $0.14 per share, versus net income of $15.2 million, or $0.09 per share. GAAP operating margin was approximately -7.0% in Q2 and 3.9% for the first half, compared with 17.0% and 16.1%, respectively, in 2021; the decline principally reflects a $125.5 million non-cash trade-name impairment. Adjusted EBITDA, a non-GAAP measure, was $135.4 million in Q2 versus $100.8 million, and $253.9 million for the first half versus $178.8 million.
  • Cash flow: First-half operating cash flow was $75.4 million, down from $124.7 million. Investing used $484.9 million, including $394.4 million for acquisitions and $148.8 million of capital expenditures. Financing provided $94.3 million. Cash and cash equivalents were $197.9 million at June 25, down from $523.4 million at year-end.
  • Debt and liquidity: Total debt before unamortized issuance costs was $2.532 billion; the balance sheet reports $2.465 billion of long-term debt, net, plus $23.6 million current. Total liquidity was $488 million: $198 million cash and $290 million undrawn capacity under two facilities. The company reported covenant compliance. Operating lease liabilities totaled approximately $1.035 billion.
  • Segment trends: First-half Segment Adjusted EBITDA rose across all segments: Maintenance $116.6 million, Car Wash $109.4 million, Paint, Collision & Glass $61.9 million, and Platform Services $34.7 million. Q2 Car Wash same-store sales declined 2.7%; other segments reported positive same-store sales growth.

Material changes and unusual items

  • The company decided to rebrand most U.S. car washes as Take 5 Car Wash and recorded a $125.5 million impairment on trade names. The transition is expected to take about two and a half years; the remaining carrying value will be amortized over 30 months.
  • First-half acquisitions included 17 car-wash sites and 115 Paint, Collision & Glass sites, including glass businesses. Acquisitions contributed materially to revenue and store growth. The company completed sale-leaseback transactions on 16 properties for $55 million, recognizing a $7 million net gain.
  • Higher average debt outstanding increased net interest expense 58% in Q2 and 49% for the first half. Foreign-currency transaction losses were $13.9 million in Q2 and $14.9 million for the first half. The prior-year first half included a $45.6 million debt-extinguishment loss, which did not recur.
  • After June 25, through August 4, the company acquired additional glass and car-wash sites and drew $149 million on its revolving credit facility, primarily to fund acquisitions.

Outlook, risks, and contingencies

  • Management said available liquidity and capital resources should be adequate for operations, acquisitions, store development, and general needs for at least the next 12 months. The filing provides no specific earnings or revenue guidance.
  • The company identified elevated inflation as a risk to labor and input costs, customer demand, franchisee economics, retained collections, and ultimately its ability to service debt. It cautioned that actual results may differ materially from forward-looking statements.
  • Ordinary-course lawsuits, audits, and claims include some purported class actions. Management did not expect current proceedings to have a material adverse impact, while noting outcomes are uncertain. A $156 million income tax receivable agreement liability remained recorded; pre-IPO shareholders are entitled to 85% of qualifying realized tax savings.
  • On August 3, the board approved a one-time $357,153 cash bonus for an executive to partially offset an unintended Canadian tax liability related to a 2020 profits-interest grant.

Key facts investors should verify

  • Whether acquisition-driven growth and positive same-store sales persist, particularly given Q2’s Car Wash same-store sales decline.
  • The cash-flow and leverage effects of continued acquisitions, capital spending, and the $149 million of post-quarter revolver borrowings.
  • The accounting and operating effects of the Take 5 Car Wash rebrand, including the impairment and subsequent amortization.
  • Exposure to inflation, foreign-currency movements, interest costs, debt covenants, and the substantial operating-lease and tax-receivable-agreement obligations.
  • How management’s non-GAAP Adjusted EBITDA and Adjusted Net Income reconcile to GAAP results; these measures exclude specified costs and are not directly comparable across companies.