Driven Brands Holdings Inc
For the period ended Sep 28, 2024. Filed Nov 7, 2024.
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Sep 28, 2024 · Filed Nov 7, 2024
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Notes to the Consolidated Financial Statements
DRIVEN BRANDS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1—Description of Business
Description of Business
Driven Brands Holdings Inc. together with its subsidiaries (collectively, the “Company”) is a Delaware corporation and is the parent holding company of Driven Brands, Inc. and Shine Holdco (UK) Limited (collectively, “Driven Brands”). Driven Brands is the largest automotive services company in North America with a growing and highly-franchised base of more than 5,100 franchised, independently-operated, and company-operated locations across 49 U.S. states and 13 other countries. The Company has a portfolio of highly recognized brands, including Take 5 Oil Change®, Take 5 Car Wash®, Meineke Car Care Centers®, MAACO®, CARSTAR®, Auto Glass Now®, and 1-800-Radiator & A/C® that compete in the automotive services industry.
Tax Receivable Agreement
The Company expects to be able to utilize certain tax benefits which are related to periods prior to the effective date of the Company’s IPO and are attributed to our pre-IPO shareholders. The Company previously entered into a Tax Receivable Agreement which provides our pre-IPO shareholders with the right to receive payment of 85% of the amount of cash savings, if any, in U.S. and Canadian federal, state, local, and provincial income tax that the Company will actually realize or divests. The Tax Receivable Agreement was effective as of the date of the Company’s IPO. The Company recorded a current tax receivable liability of $56 million as of December 30, 2023 and a non-current tax receivable liability of $134 million and $118 million as of September 28, 2024 and December 30, 2023, respectively, on the consolidated balance sheets. We made payments of approximately $38 million under the Tax Receivable Agreement in 2024.
Note 2—Summary of Significant Accounting Policies
Fiscal Year
The Company operates and reports financial information on a 52- or 53-week year with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The three and nine months ended September 28, 2024 and September 30, 2023 each consisted of 13 weeks and 39 weeks, respectively. The Car Wash segment is consolidated based on a calendar month end.
Basis of Presentation
The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). In the opinion of management, the unaudited interim financial data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of operations, balance sheet, cash flows, and shareholders’/members’ equity for the interim periods presented. The adjustments include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 30, 2023. Certain information and note disclosures normally included in the unaudited financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and nine months ended September 28, 2024 may not be indicative of the results to be expected for any other interim period or the year ending December 28, 2024.
The nine months ended September 28, 2024 include an adjustment to the unaudited consolidated balance sheet and consolidated statement of operations that originated in the prior year. The adjustment decreased current assets and increased selling, general, and administrative expenses by $3.7 million. The Company evaluated the materiality of the adjustment on prior period financial statements, recorded the adjustment in the current period, and concluded the effect of the adjustment was immaterial to both the current and prior financial statements.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and the related notes to the consolidated financial statements. Significant items that are subject to estimates and assumptions include, but are not limited to, valuation of intangible assets and goodwill; income taxes; allowances for credit losses; valuation of derivatives; self-insurance claims; and share-based compensation. Management evaluates its estimates on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on historical experience, current conditions, and various other additional information, may affect amounts reported in future periods. Actual results could differ due to uncertainty inherent in the nature of these estimates.
Shares Repurchased
We record shares repurchased on their trade date and reduce shareholders’ equity and increase accounts payable. Shares repurchased are retired, and the excess of repurchase price over the par value of the shares is charged to retained earnings.
In August 2023, the Board of Directors authorized a program to repurchase up to $50 million of the Company’s common stock (the “Share Repurchase Program”). During the three and nine months ended September 30, 2023, the Company repurchased 3,601,694 shares of its common stock for approximately $50 million, at an average price per share of $13.87. All repurchases were made in open market transactions. As of September 30, 2023, the Company completed the purchase of all shares under the Share Repurchase Program.
Fair Value of Financial Instruments
Financial assets and liabilities are categorized, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. Observable market data, when available, is required to be used in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:
Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; or
Level 3: Unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
Financial assets and liabilities measured at fair value on a recurring basis as of September 28, 2024 and December 30, 2023 are summarized as follows:
| Items Measured at Fair Value at September 28, 2024 | |||
|---|---|---|---|
| (in thousands) | Level 1 | Level 2 | Total |
| Derivative assets, recorded in other assets | $— | $1,464 | $1,464 |
| Derivative liabilities, recorded in accrued expenses and other liabilities | — | 247 | 247 |
| Items Measured at Fair Value at December 30, 2023 | |||
|---|---|---|---|
| (in thousands) | Level 1 | Level 2 | Total |
| Derivative assets, recorded in other assets | — | 285 | 285 |
| Derivative liabilities, recorded in accrued expenses and other liabilities | — | 493 | 493 |
The carrying value and estimated fair value of total long-term debt were as follows:
| September 28, 2024 | December 30, 2023 | |||
|---|---|---|---|---|
| (in thousands) | Carrying value | Estimated fair value | Carrying value | Estimated fair value |
| Long-term debt | $2,802,419 | $2,673,945 | $2,977,996 | $2,800,011 |
Recently Issued Accounting Standards
In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures. The standard enhances segment disclosure requirements of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) to assist in understanding how segment expenses and operating results are evaluated. The new standard does not change the definition or aggregation of operating segments. The standard also expands the interim disclosure requirements on a retrospective basis. This ASU is effective for annual periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The Company is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures. This ASU improves the transparency of income tax disclosures, including consistent categories and greater disaggregation of information in the tax rate reconciliation as well as disaggregation of income taxes paid by jurisdiction. This ASU is effective for annual periods beginning after December 15, 2024, with early adoption permitted for annual financial statements that have not yet been issued or made available for issuance. The Company is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
Note 3—Acquisitions and Divestitures
The Company strategically acquires companies and assets to increase its footprint and offer products and services that diversify its existing offerings, primarily through asset purchase agreements. These acquisitions are accounted for as business combinations using the acquisition method, whereby the purchase price is allocated to the assets acquired and liabilities assumed, based on their fair values as of the date of the acquisition with the remaining amount recorded in goodwill.
2024 Acquisitions
The Company completedone acquisition within the Maintenance segment andone acquisition in the international car wash business within the Car Wash segment during the nine months ended September 28, 2024, representingtwo sites andone site, respectively, for an aggregate cash consideration, net of cash acquired and liabilities assumed, of less than $2 million.
2023 Acquisitions
The Company completed five acquisitions within the Maintenance segment during the nine months ended September 30, 2023, representing five sites. The aggregate cash consideration for these acquisitions, net of cash acquired and liabilities assumed, was approximately $8 million.
The Company completed three acquisitions within the Car Wash segment during the nine months ended September 30, 2023, representing four sites. The aggregate cash consideration for these acquisitions, net of cash acquired and liabilities assumed, was approximately $15 million.
The Company completedtwo acquisitions in the Paint, Collision & Glass segment during the nine months ended September 30, 2023, representingtwo sites. The aggregate cash consideration for these acquisitions, net of cash acquired and liabilities assumed, was approximately $6 million.
The Company estimated the fair value of acquired assets and liabilities as of the date of acquisition based on information currently available. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The provisional amounts for assets acquired and liabilities assumed for the 2023 acquisitions are as follows:
2023 Maintenance Segment
| (in thousands) | Maintenance |
|---|---|
| Assets: | |
| Operating lease right-of-use assets | $2,678 |
| Property and equipment, net | 3,805 |
| Deferred tax asset | 10 |
| Assets acquired | 6,493 |
| Liabilities: | |
| Accrued expenses and other liabilities | 179 |
| Operating lease liabilities | 2,476 |
| Total liabilities assumed | 2,655 |
| Cash consideration, net of cash acquired | 7,206 |
| Deferred consideration | 390 |
| Total consideration, net of cash acquired | $7,596 |
| Goodwill | $3,759 |
2023 Car Wash Segment
| (in thousands) | Car Wash |
|---|---|
| Assets: | |
| Operating lease right-of-use assets | $1,249 |
| Property and equipment, net | 11,181 |
| Assets acquired | 12,430 |
| Liabilities: | |
| Accrued expenses and other liabilities | 11 |
| Deferred tax liability | 6 |
| Operating lease liabilities | 1,220 |
| Total liabilities assumed | 1,237 |
| Cash consideration, net of cash acquired | 15,293 |
| Deferred consideration | 25 |
| Total consideration, net of cash acquired | $15,318 |
| Goodwill | $4,125 |
2023 Paint, Collision & Glass Segment
| (in thousands) | Paint, Collision & Glass |
|---|---|
| Assets: | |
| Inventory | $35 |
| Property and equipment, net | 667 |
| Deferred tax asset | 51 |
| Assets acquired | 753 |
| Cash consideration, net of cash acquired | 4,947 |
| Deferred consideration | 695 |
| Total Consideration, net of cash acquired | $5,642 |
| Goodwill | $4,889 |
Goodwill represents the excess of the consideration paid over the fair value of net assets acquired and includes the expected benefit of synergies within the existing segments and intangible assets that do not qualify for separate recognition. Goodwill, which was allocated to the Maintenance, Car Wash, and Paint, Collision & Glass segments, is substantially all deductible for income tax purposes.
Deferred Consideration and Transaction Costs
Deferred consideration is typically paid six months toone-year after the acquisition closing date once all conditions under the purchase agreement have been satisfied. The Company had $2 million and $9 million of deferred consideration related to acquisitions as of September 28, 2024 and September 30, 2023, respectively. The Company paid approximately $1 million and $27 million of deferred consideration related to prior acquisitions during the nine months ended September 28, 2024 and September 30, 2023, respectively. Deferred consideration is recorded within investing activities at the time of payment.
The Company incurred less than $1 million of transaction costs during each of the three and nine months ended September 28, 2024 and September 30, 2023.
Divestitures
During the three months ended September 28, 2024, the Company completed the sale of its Canadian distribution business, primarily operated under the PH Vitres D’Auto brand, within the Platform Services segment at a purchase price of approximately $78 million. The sale included essentially all assets and liabilities associated with the business as well as allocated goodwill of $13 million resulting in a gain of $3 million on the sale of business within selling, general and administrative expenses on the unaudited consolidated statement of operations during the three and nine months ended September 28, 2024. Approximately $47 million of the sale proceeds were utilized to repay a portion of outstanding secured senior notes with the remainder primarily utilized to repay a portion of the outstanding Term Loan.
During the nine months ended September 28, 2024, the Company sold nine company-operated stores within the Paint, Collision, & Glass segment to a franchisee at a purchase price of $18 million. The Company sold certain store assets as well as allocated $9 million of Paint, Collision & Glass goodwill based on the fair value of the segment at the time of sale, resulting in a gain of $6 million on the sale of businesses within selling, general, and administrative expenses on the unaudited consolidated statement of operations during the nine months ended September 28, 2024.
Note 4—Revenue from Contracts with Customers
The Company records contract assets for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year and if such costs are material. Commission expenses, a primary cost associated with the sale of franchise licenses, are amortized to selling, general, and administrative expenses in the unaudited consolidated statements of operations ratably over the life of the associated franchise agreement.
Capitalized costs to obtain a contract as of September 28, 2024 and December 30, 2023 were $7 million and $6 million, respectively, and are presented within deferred commissions on the consolidated balance sheets. The Company recognized less than $1 million of costs during the three and nine months ended months ended September 28, 2024, respectively, and the Company recognized less than $1 million and $1 million during the three and nine months ended September 30, 2023, respectively, that were recorded as a contract asset at the beginning of the periods.
Contract liabilities consist primarily of deferred franchise fees and deferred development fees. The Company had contract liabilities of $32 million and $31 million as of September 28, 2024 and December 30, 2023, respectively, which are presented within deferred revenue on the consolidated balance sheets. The Company recognized less than $1 million and $1 million of revenue relating to contract liabilities during the three months ended September 28, 2024 and September 30, 2023, respectively. The Company recognized $2 million and $4 million of revenue relating to contract liabilities during the nine months ended September 28, 2024 and September 30, 2023, respectively.
Note 5—Segment Information
The Company’s worldwide operations are comprised of the following reportable segments: Maintenance, Car Wash, Paint, Collision & Glass, and Platform Services.
In addition to the reportable segments, the Company’s consolidated financial results include “Corporate and Other” activity. Corporate and Other incurs costs related to the advertising revenues and expenses and shared service costs, which are related to finance, IT, human resources, legal, supply chain, and other support services. Corporate and Other activity includes the adjustments necessary to eliminate certain intercompany transactions, namely sales by the Platform Services segment to the Paint, Collision & Glass and Maintenance segments.
Segment results for the three and nine months ended September 28, 2024 and September 30, 2023 are as follows:
| Three Months Ended September 28, 2024 | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | Maintenance | Car Wash | Paint, Collision & Glass | Platform Services | Corporate and Other | Total |
| Franchise royalties and fees | $14,699 | $— | $25,095 | $9,681 | $— | $49,475 |
| Company-operated store sales | 231,050 | 90,451 | 65,380 | 1,251 | — | 388,132 |
| Independently-operated store sales | — | 49,959 | — | — | — | 49,959 |
| Advertising fund contributions | — | — | — | — | 26,823 | 26,823 |
| Supply and other revenue | 32,438 | 1,765 | 18,477 | 41,286 | (16,676) | 77,290 |
| Total revenue | $278,187 | $142,175 | $108,952 | $52,218 | $10,147 | $591,679 |
| Segment Adjusted EBITDA | $96,666 | $25,563 | $34,703 | $22,467 | $(39,144) | $140,255 |
| Three Months Ended September 30, 2023 | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | Maintenance | Car Wash | Paint, Collision & Glass | Platform Services | Corporate and Other | Total |
| Franchise royalties and fees | $14,566 | $— | $23,799 | $8,997 | $— | $47,362 |
| Company-operated store sales | 204,460 | 98,132 | 85,207 | 1,242 | — | 389,041 |
| Independently-operated store sales | — | 43,582 | — | — | — | 43,582 |
| Advertising fund contributions | — | — | — | — | 27,121 | 27,121 |
| Supply and other revenue | 25,333 | 1,099 | 20,408 | 45,695 | (18,607) | 73,928 |
| Total revenue | $244,359 | $142,813 | $129,414 | $55,934 | $8,514 | $581,034 |
| Segment Adjusted EBITDA | $85,483 | $20,494 | $32,545 | $22,396 | $(37,496) | $123,422 |
| Nine Months Ended September 28, 2024 | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | Maintenance | Car Wash | Paint, Collision & Glass | Platform Services | Corporate and Other | Total |
| Franchise royalties and fees | $45,917 | $— | $74,202 | $24,430 | $— | $144,549 |
| Company-operated store sales | 682,730 | 275,889 | 195,412 | 3,238 | — | 1,157,269 |
| Independently-operated store sales | — | 163,286 | — | — | — | 163,286 |
| Advertising fund contributions | — | — | — | — | 75,804 | 75,804 |
| Supply and other revenue | 89,176 | 4,625 | 57,751 | 139,617 | (56,606) | 234,563 |
| Total net revenue | $817,823 | $443,800 | $327,365 | $167,285 | $19,198 | $1,775,471 |
| Segment Adjusted EBITDA | $291,037 | $88,469 | $100,695 | $67,649 | $(122,156) | $425,694 |
| Nine Months Ended September 30, 2023 | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | Maintenance | Car Wash | Paint, Collision & Glass | Platform Services | Corporate and Other | Total |
| Franchise royalties and fees | $41,224 | $— | $74,627 | $24,831 | $— | $140,682 |
| Company-operated store sales | 605,393 | 302,193 | 248,796 | 3,303 | — | 1,159,685 |
| Independently-operated store sales | — | 157,647 | — | — | — | 157,647 |
| Advertising fund contributions | — | — | — | — | 73,547 | 73,547 |
| Supply and other revenue | 67,737 | 4,708 | 59,952 | 137,171 | (50,777) | 218,791 |
| Total net revenue | $714,354 | $464,548 | $383,375 | $165,305 | $22,770 | $1,750,352 |
| Segment Adjusted EBITDA | $242,528 | $101,303 | $109,052 | $61,923 | $(119,149) | $395,657 |
The reconciliations of (Loss) income before taxes to Segment Adjusted EBITDA for the three and nine months ended September 28, 2024 and September 30, 2023 are as follows:
| Three Months Ended | Nine Months Ended | |||
|---|---|---|---|---|
| (in thousands) | September 28, 2024 | September 30, 2023 | September 28, 2024 | September 30, 2023 |
| (Loss) income before taxes | $(5,140) | $(951,129) | $53,315 | $(852,385) |
| Depreciation and amortization | 43,357 | 45,639 | 131,219 | 129,256 |
| Interest expense, net | 43,677 | 41,292 | 119,245 | 120,304 |
| Acquisition related costs(a) | (606) | 1,667 | 1,459 | 7,264 |
| Non-core items and project costs, net(b) | 6,426 | 1,486 | 16,263 | 6,113 |
| Store opening costs | 1,476 | 1,372 | 3,679 | 3,774 |
| Cloud computing amortization(c) | 1,022 | 991 | 3,436 | 991 |
| Share-based compensation expense(d) | 12,798 | 2,681 | 35,641 | 9,730 |
| Foreign currency transaction loss, net(e) | 765 | 2,980 | 5,767 | 3 |
| Goodwill impairment(f) | — | 850,970 | — | 850,970 |
| Asset sale leaseback (gain) loss,net, impairment and closed store expenses(g) | 36,275 | 125,473 | 55,465 | 119,637 |
| Loss on debt extinguishment(h) | 205 | — | 205 | — |
| Segment Adjusted EBITDA | $140,255 | $123,422 | $425,694 | $395,657 |
(a)Consists of acquisition costs as reflected within the unaudited consolidated statements of operations, including legal, consulting and other fees, and expenses incurred in connection with acquisitions completed during the applicable period, as well as inventory rationalization expenses incurred in connection with acquisitions. We expect to incur similar costs in connection with other acquisitions in the future and, under GAAP, such costs relating to acquisitions are expensed as incurred.
(b) Consists of discrete items and project costs, including third party consulting, professional, and legal fees associated with strategic transformation initiatives as well as non-recurring payroll-related costs.
(c)Includes non-cash amortization expenses relating cloud computing arrangements.
(d) Represents non-cash share-based compensation expense.
(e)Represents foreign currency transaction (gains) losses, net that primarily related to the remeasurement of our intercompany loans as well as gains and losses on cross currency swaps and forward contracts.
(f) Relates to a goodwill impairment within the Car Wash segment. Refer to Note 6 for additional information.
(g) Relates to (gains) losses, net on sale leasebacks, impairment of certain fixed assets and operating lease right-of-use assets related to closed and underperforming locations, assets held for sale, and lease exit costs and other costs associated with stores that were closed prior to the respective lease termination dates. Refer to Note 6 for additional information.
(h) Represents charges incurred related to the Company’s partial repayment of Senior Secured Notes in conjunction with the sale of its Canadian distribution business.
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