Other than the matter described above, as of September 28, 2024, there are no current proceedings or litigation matters involving the Company or its property that we believe would have a material adverse effect on our consolidated financial position or cash flows, although they could have a material adverse effect on our operating results for a particular reporting period.
22
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis for Driven Brands Holdings Inc. and Subsidiaries (“Driven Brands,” “the Company,” “we,” “us,” or “our”) should be read in conjunction with our consolidated financial statements and the related notes to our consolidated financial statements included elsewhere in this quarterly report. We operate on a 52 or 53-week fiscal year, which ends on the last Saturday in December. The three months ended September 28, 2024 and September 30, 2023 were both 13 weeks periods. The nine months ended September 28, 2024 and September 30, 2023 were both 39 week periods.
Overview
Driven Brands is the largest automotive services company in North America with a growing and highly-franchised base of more than 5,100 locations across 49 U.S. states and 13 other countries. Our scaled, diversified platform fulfills an extensive range of core retail and commercial automotive needs, including paint, collision, glass, and repair services, as well as a variety of high-frequency services, such as oil changes and car washes.
We have continued to grow our base of consistent recurring revenue by adding new franchised and company-operated stores and same store sales growth. Driven Brands generated net revenue of approximately $592 million and $1.8 billion during the three and nine months ended September 28, 2024, respectively, an increase of 2% and 1%, respectively, compared to the prior year comparative periods, and system-wide sales of approximately $1.6 billion and $4.9 billion during the three and nine months ended September 28, 2024, respectively, an increase of 2% and 3% from the prior year comparative periods.
Although we have continued to experience total Company same store sales growth for 15 consecutive quarters through our diversified customer base and service offerings, we have experienced and expect to continue experiencing softening demand across several of our segments, primarily as a result of inflationary pressures, increased competition, industry dynamics, and negative weather patterns, including hurricanes.
Q3 2024 Three Months Ended Highlights and Key Performance Indicators
(as compared to same period in the prior year, unless otherwise noted)
•Net revenue increased 2% to $592 million, driven by higher product and service revenue due to an increase in system-wide sales, net new store growth, and a positive impact from foreign exchange.
•Consolidated same store sales increased 1%.
•The Company added 56 net new stores during the quarter.
•Net loss decreased $784 million to $15 million or $0.09 loss per diluted share, primarily relating to decreased impairment charges, net new store growth, and improved margins across the Paint, Collision & Glass, Car Wash, and Platform Services segments, partially offset by increased employee related benefit costs, including share-based compensation expense, reduced margins within the Maintenance segment, and increased income tax expense.
•Adjusted Net Income (non-GAAP) increased 40% to $42 million or $0.26 per diluted share. The increase was primarily due to net new store growth, and margin improvements across the Paint, Collision & Glass, Car Wash, and Platform Services segments, partially offset by increased employee related benefit costs and reduced margins within the Maintenance segment.
•Adjusted EBITDA (non-GAAP) increased 14% to $139 million. The increase was primarily due to net new store growth and margin improvements across the Paint, Collision & Glass, Car Wash, and Platform Services segments, partially offset by increased employee related benefit costs and reduced margins within the Maintenance segment.
Q3 2024 Nine Months Ended Highlights and Key Performance Indicators
(as compared to same period in the prior year, unless otherwise noted)
•Net revenue increased 1% to $1,775 million, driven by higher product and service revenue due to an increase in system-wide sales, net new store growth, and a positive impact from foreign exchange.
•Consolidated same store sales increased less than 1%.
•The Company added 121 net new stores during the first nine months of 2024.
•Net Income increased $751 million to $19 million or $0.12 per diluted share, primarily relating to decreased impairment charges in the current period, net new store growth, improved operating margins within the Maintenance, Platform Services, and Paint, Collision & Glass segments, and increased gains relating to the sale of assets and businesses, partially
23
offset by increased employee related benefit costs, including share-based compensation expense, increased income tax expense, and reduced margins within the Car Wash segment.
•Adjusted Net Income (non-GAAP) increased 20% to $138 million or $0.84 per diluted share. The increase was primarily due to net new store growth and margin improvements within our Maintenance, Platform Services, and Paint, Collision & Glass segments as well as decreased interest expense, partially offset by increased employee related benefit costs and reduced margins within the Car Wash segment.
•Adjusted EBITDA (non-GAAP) increased 8% to $422 million. The increase was primarily due to net new store growth and improved margins within our Maintenance, Platform Services, and Paint, Collision & Glass segments, partially offset by increased employee related benefit costs and reduced margins within the Car Wash segment.
Key Performance Indicators
Key measures that we use in assessing our business and evaluating our segments include the following:
System-wide sales. System-wide sales represent the total of net sales for our franchised, independently-operated, and company-operated stores. This measure allows management to better assess the total size and health of each segment, our overall store performance, and the strength of our market position relative to competitors. Sales at franchised stores are not included as revenue in our results from operations, but rather, we include franchise royalties and fees that are derived from sales at franchised stores.
Store count. Store count reflects the number of franchised, independently-operated, and company-operated stores open at the end of the reporting period. Management reviews the number of new, closed, acquired, and divested stores to assess net unit growth and drivers of trends in system-wide sales, franchise royalties and fees revenue, company-operated store sales, and independently-operated store sales.
Same store sales. Same store sales reflect the change in sales year-over-year for the same store base. We define the same store base to include all franchised, independently-operated, and company-operated stores open for comparable weeks during the given fiscal period in both the current and prior year, which may be different from how others define similar terms. This measure highlights the performance of existing stores, while excluding the impact of new store openings and closures and acquisitions and divestitures.
Segment Adjusted EBITDA. We define Segment Adjusted EBITDA as earnings before interest expense, net, income tax expense, and depreciation and amortization, with further adjustments for acquisition related costs, equity compensation, loss on debt extinguishment, foreign currency transaction related gains or losses, store opening costs, cloud computing amortization, and certain non-recurring and non-core, infrequent or unusual charges. Segment Adjusted EBITDA is a supplemental measure of operating performance of our segments and may not be comparable to similar measures reported by other companies. Segment Adjusted EBITDA is a performance metric utilized by our Chief Operating Decision Maker to allocate resources to and assess performance of our segments. Refer to Note 5 in our consolidated financial statements for a reconciliation of income before taxes to Segment Adjusted EBITDA for the three and nine months ended September 28, 2024 and September 30, 2023.
24
The following table sets forth our key performance indicators for the three and nine months ended September 28, 2024 and September 30, 2023:
Three Months Ended
Nine Months Ended
(in thousands, except store count or as otherwise noted)
September 28, 2024
September 30, 2023
September 28, 2024
September 30, 2023
System-Wide Sales
System-Wide Sales by Segment:
Maintenance
$
535,942
$
502,482
$
1,571,046
$
1,429,049
Car Wash
140,410
141,714
439,175
459,840
Paint, Collision & Glass
857,210
845,644
2,601,490
2,554,216
Platform Services
108,194
119,199
301,982
327,911
Total
$
1,641,756
$
1,609,039
$
4,913,693
$
4,771,016
System-Wide Sales by Business Model:
Franchised Stores
$
1,203,665
$
1,176,416
$
3,593,138
$
3,453,684
Company-Operated Stores
388,132
389,041
1,157,269
1,159,685
Independently-Operated Stores
49,959
43,582
163,286
157,647
Total
$
1,641,756
$
1,609,039
$
4,913,693
$
4,771,016
Store Count
Store Count by Segment:
Maintenance
1,899
1,732
1,899
1,732
Car Wash
1,107
1,133
1,107
1,133
Paint, Collision & Glass
1,897
1,920
1,897
1,920
Platform Services
206
208
206
208
Total
5,109
4,993
5,109
4,993
Store Count by Business Model:
Franchised Stores
3,078
2,977
3,078
2,977
Company-Operated Stores
1,312
1,301
1,312
1,301
Independently-Operated Stores
719
715
719
715
Total
5,109
4,993
5,109
4,993
Same Store Sales %
Maintenance
3.0
%
9.1
%
4.0
%
10.8
%
Car Wash
1.8
%
(4.0%)
(3.4
%)
(6.7
%)
Paint, Collision & Glass
1.3
%
8.6
%
0.7
%
13.3
%
Total consolidated
1.1
%
6.4
%
0.8
%
8.6
%
Segment Adjusted EBITDA
Maintenance
$
96,666
$
85,483
$
291,037
$
242,528
Car Wash
25,563
20,494
88,469
101,303
Paint, Collision & Glass
34,703
32,545
100,695
109,052
Platform Services
22,467
22,396
67,649
61,923
Adjusted EBITDA as a percentage of net revenue by segment
Maintenance
34.7
%
35.0
%
35.6
%
34.0
%
Car Wash
18.0
%
14.4
%
19.9
%
21.8
%
Paint, Collision & Glass
31.9
%
25.1
%
30.8
%
28.4
%
Platform Services
43.0
%
40.0
%
40.4
%
37.5
%
Total consolidated
23.5
%
21.0
%
23.8
%
22.4
%
25
Reconciliation of Non-GAAP Financial Information
To supplement our consolidated financial statements prepared and presented in accordance with GAAP, we use certain non-GAAP financial measures throughout this quarterly report, as described further below, to provide investors with additional useful information about our financial performance, to enhance the overall understanding of our past performance and future prospects and to allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making.
Non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. In addition, non-GAAP financial measures may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. As a result, non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, our consolidated financial statements prepared and presented in accordance with GAAP.
Adjusted Net Income/Adjusted Earnings per Share.We define Adjusted Net Income as net income calculated in accordance with GAAP, adjusted for acquisition related costs, equity compensation, loss on debt extinguishment, cloud computing amortization, and certain non-recurring, non-core, infrequent or unusual charges, amortization related to acquired intangible assets, and the tax effect of the adjustments. Adjusted Earnings Per Share is calculated by dividing Adjusted Net Income by the weighted average shares outstanding. Management believes this non-GAAP financial measure is useful because it is a key measure used by our management team to evaluate our operating performance, generate future operating plans, and make strategic decisions.
26
The following table provides a reconciliation of Net (Loss) Income to Adjusted Net Income and Adjusted Earnings per Share:
Adjusted Net Income /Adjusted Earnings per Share
Three Months Ended
Nine Months Ended
(in thousands, except per share data)
September 28, 2024
September 30, 2023
September 28, 2024
September 30, 2023
Net (loss) income
$
(14,947)
$
(799,311)
$
19,473
$
(731,813)
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
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
—
Amortization related to acquired intangible assets(i)
5,980
9,252
19,528
23,564
Valuation allowance for deferred tax asset(j)
7,941
—
9,196
—
Adjusted net income before tax impact of adjustments
55,859
196,189
166,433
286,459
Tax impact of adjustments(k)
(14,100)
(166,320)
(28,543)
(171,783)
Adjusted net income
$
41,759
$
29,869
$
137,890
$
114,676
(Loss) earnings per share
Basic
$
(0.09)
$
(4.82)
$
0.12
$
(4.40)
Diluted
$
(0.09)
$
(4.83)
$
0.12
$
(4.41)
Adjusted earnings per share
Basic
$
0.27
$
0.18
$
0.84
$
0.69
Diluted
$
0.26
$
0.18
$
0.84
$
0.68
Weighted average shares outstanding
Basic
159,804
162,398
159,743
162,698
Diluted
159,804
162,398
160,713
162,698
Weighted average shares outstanding for Adjusted Net Income
Basic
159,804
162,398
159,743
162,698
Diluted
161,113
165,850
160,713
166,557
Adjusted EBITDA. We define Adjusted EBITDA as earnings before interest expense, net, income tax expense, and depreciation and amortization, with further adjustments for acquisition related costs, equity compensation, loss on debt extinguishment, cloud computing amortization, and certain non-recurring, non-core, infrequent or unusual charges. Adjusted EBITDA may not be comparable to similarly titled metrics of other companies due to differences in methods of calculation. Management believes this non-GAAP financial measure is useful because it is a key measure used by our management team to evaluate our operating performance, generate future operating plans, and make strategic decisions.
27
The following table provides a reconciliation of Net (Loss) Income to Adjusted EBITDA:
Adjusted EBITDA
Three Months Ended
Nine Months Ended
September 28, 2024
September 30, 2023
September 28, 2024
September 30, 2023
Net (loss) income
$
(14,947)
$
(799,311)
$
19,473
$
(731,813)
Income tax expense
9,807
(151,818)
33,842
(120,572)
Interest expense, net
43,677
41,292
119,245
120,304
Depreciation and amortization
43,357
45,639
131,219
129,256
EBITDA
81,894
(864,198)
303,779
(602,825)
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
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
—
Adjusted EBITDA
$
138,779
$
122,050
$
422,015
$
391,883
(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 and not capitalized.
(b) Consists of discrete items and project costs, including third party consulting and professional fees associated with strategic transformation initiatives as well as non-recurring payroll-related costs.
(c) Includes non-cash amortization expenses relating to cloud computing arrangements.
(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.
(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.
(i) Consists of amortization related to acquired intangible assets as reflected within depreciation and amortization in the unaudited consolidated statement of operations.
(j) Represents valuation allowances on income tax carryforwards in certain domestic jurisdictions that are not more likely than not to be realized.
(k) Represents the tax impact of adjustments associated with the reconciling items between net income and Adjusted Net Income, excluding the provision for uncertain tax positions and valuation allowance for certain deferred tax assets. To determine the tax impact of the deductible reconciling items, we utilized statutory income tax rates ranging from 9% to 36% depending upon the tax attributes of each adjustment and the applicable jurisdiction.
28
Results of Operations for the Three Months Ended September 28, 2024 Compared to the Three Months Ended September 30, 2023
Net Loss
We recognized a net loss of $15 million, or $0.09 loss per diluted share, for the three months ended September 28, 2024 compared to a net loss of $799 million, or $4.83 loss per diluted share, for the three months ended September 30, 2023. The improvement of approximately $784 million was primarily due to the following:
•a non-cash goodwill impairment charge in the prior year period of $851 million;
•non-cash asset impairment charges of $24 million in the current period relating to assets held for sale as well as property and equipment and right-of-use assets at closed stores compared to $111 million in the prior year period, which primarily related to Car Wash assets including approved store closures, underperforming stores, and assets held for sale;
•positive same store sales across all segments, net new store openings, primarily within the Maintenance segment, and operating margin improvements within the Paint, Collision & Glass, Car Wash, and Platform Services segments; and
•a positive impact from foreign exchange.
These increases were partially offset by:
•an increase in tax expense of $162 million, primarily relating to impairment charges in the prior year;
•increased payroll and employee benefit costs, including $10 million of additional share-based compensation expense primarily relating to the modification of pre-IPO awards in the fourth quarter of 2023; and
•decreased operating margins within the Maintenance segment.
Adjusted Net Income
Adjusted net income was $42 million, or $0.26 per diluted share, for the three months ended September 28, 2024 compared to $30 million, or $0.18 per diluted share, for the three months ended September 30, 2023. This increase of $12 million was primarily due to the following:
•positive same store sales across all segments, net new store openings, primarily within the Maintenance segment, and operating margin improvements within the Paint, Collision & Glass, Car Wash, and Platform Services segments; and
•a positive impact from foreign exchange.
The increases were partially offset by:
•increased payroll and employee benefit costs; and
•decreased operating margins within the Maintenance segment.
Adjusted EBITDA
Adjusted EBITDA was $139 million for the three months ended September 28, 2024 compared to $122 million for the three months ended September 30, 2023. The increase of $17 million in Adjusted EBITDA was primarily due to:
•positive same store sales across all segments, net new store openings, primarily within the Maintenance segment, and operating margin improvements within the Paint, Collision & Glass, Car Wash, and Platform Services segments.
The increase was partially offset by:
•increased payroll and employee benefit costs; and
•decreased operating margins within the Maintenance segment.
29
To facilitate the review of our results of operations, the following tables set forth our financial results for the periods indicated. All information is derived from the unaudited Consolidated Statements of Operations. Certain percentages presented in this section have been rounded, therefore, totals may not equal the sum of the line items in the tables below.
Net Revenue
Three Months Ended
(in thousands)
September 28, 2024
% of Net Revenues
September 30, 2023
% of Net Revenues
Franchise royalties and fees
$
49,475
8.3
%
$
47,362
8.1
%
Company-operated store sales
388,132
65.7
%
389,041
67.0
%
Independently-operated store sales
49,959
8.4
%
43,582
7.5
%
Advertising fund contributions
26,823
4.5
%
27,121
4.7
%
Supply and other revenue
77,290
13.1
%
73,928
12.7
%
Total net revenue
$
591,679
100.0
%
$
581,034
100.0
%
Franchise Royalties and Fees
Franchise royalties and fees increased $2 million, or 4%, primarily due to the addition of 101 net new franchised stores and increased franchise system-wide sales of $27 million, or 2%, driven by franchise same store sales growth within the Paint, Collision & Glass and Maintenance segments, partially offset by decreased franchise system-wide sales within the Platform Services Segment.
Company-operated Store Sales
Company-operated store sales decreased less than $1 million of which$20 million and $8 million related to a decrease in the Paint, Collision & Glass and Car Wash segments, respectively, partially offset by an increase of $27 million within the Maintenance segment. The sales decrease in the Paint, Collision & Glass segment was primarily associated with the sale of nine company-operated stores to a franchisee in the current year, as well as decreased company-operated same store sales due to reduced volume. The decrease in Car Wash sales is primarily due to a decrease in company-operated same store sales primarily relating to lower volume from our retail customers as a result of unfavorable weather conditions, partially offset by an increase in membership revenue. The sales increase in the Maintenance segment was primarily due to same store sales growth and71 net new company-operated stores. In total, the Company added 11 net new company-operated stores year-over-year.
Independently-operated Store Sales
Independently-operated store sales (comprised entirely of sales from the international car wash locations) increased by $6 million, or 15%, primarily due to same store sales growth as a result of improved price realization, new product offerings, and favorable impacts from foreign exchange.
Advertising Fund Contributions
Advertising fund contributions remained flat primarily due to franchise system-wide sales mix. Our franchise agreements typically require the franchisee to pay continuing advertising fund fees based on a percentage of franchisee gross sales or a stated fee.
Supply and Other Revenue
Supply and other revenue increased$3 million, or 5%, primarily from growth in product and service revenue within the Maintenance segment as a result of an increase in system-wide sales and net store growth, partially offset by decreased volume within the Paint, Collision & Glass segment and the sale of our Canadian distribution business in the current period.
30
Operating Expenses
Three Months Ended
(in thousands)
September 28, 2024
% of Net Revenues
September 30, 2023
% of Net Revenues
Company-operated store expenses
$
242,073
40.9
%
$
262,282
45.1
%
Independently-operated store expenses
29,382
5.0
%
25,773
4.4
%
Advertising fund expenses
26,823
4.5
%
27,121
4.7
%
Supply and other expenses
35,790
6.0
%
38,816
6.7
%
Selling, general, and administrative expenses
149,766
25.3
%
123,012
21.2
%
Acquisition related costs
(606)
(0.1
%)
1,667
0.3
%
Store opening costs
1,476
0.2
%
1,372
0.2
%
Depreciation and amortization
43,357
7.3
%
45,639
7.9
%
Goodwill impairment
—
—
%
850,970
146.5
%
Asset impairment charges and lease terminations
24,111
4.1
%
111,239
19.1
%
Total operating expenses
$
552,172
93.3
%
$
1,487,891
256.1
%
Company-operated Store Expenses
Company-operated store expenses decreased $20 million, or 8%, primarily due to improved labor efficiency, reduced property related expenses, and lower inventory costs in the current period.
Independently-operated Store Expenses
Independently-operated store expenses (comprised entirely of expenses from the international car wash locations) increased $4 million, or 14%, primarily related to variable costs associated with the increase in sales and increased rent charges.
Advertising Fund Expenses
Advertising fund expenses remained flat which is commensurate to advertising fund contributions during the period. Advertising fund expenses generally trend consistent with advertising fund contributions.
Supply and Other Expenses
Supply and other expenses decreased $3 million, or 8%, due to lower inventory and payroll costs, primarily relating to the sale of our Canadian distribution business in the current period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$27 million, or 22%, primarily due to increased payroll and employee benefit costs, including $10 million of additional share-based compensation expense primarily relating to the modification of pre-IPO awards in the fourth quarter of 2023, marketing expenses, closed store expenses, and third-party legal and professional fees. This increase was partially offset by decrease in the loss on sale or disposal of assets of $8 million in the current period compared to a $14 million loss in the prior year period.
Acquisition Related Costs
Acquisition related costs decreased $2 million, or 136%, primarily due to decreased acquisition activity in the current period and changes in estimates.
Store Opening Costs
Store opening costs increased by less than $1 million, primarily associated with Take 5 Oil Change (“Take 5 Oil”) new store openings in the current period compared with store opening costs associated with our Take 5 Oil and U.S. glass business in the prior period.
31
Depreciation and Amortization
Depreciation and amortization expense decreased$2 million, or 5%, primarily relating to a one-time adjustment of $4 million for property and equipment placed in service in the prior year quarter.
Goodwill Impairment
Goodwill impairment charge of $851 million in the three months ended September 30, 2023 is directly attributable to our Car Wash segment. For more information, refer to Note 6 in our consolidated financial statements included in this 10-Q.
Asset Impairment Charges and Lease Terminations
Asset impairment charges and lease terminations decreased $87 million for the three months ended September 28, 2024 compared to the three months ended September 30, 2023. During the three months ended September 28, 2024, impairment charges were primarily related to assets held for sale as well as assets associated with closed stores within the Car Wash segment. During the three months ended September 30, 2023, asset impairment charges were primarily related to property and equipment and right-of-use assets relating to 29 stores management approved for closure, underperforming stores, and assets held for sale or abandoned within the Car Wash segment. For more information, refer to Note 6 in our consolidated financial statements included within this Form 10-Q.
Interest Expense, Net
Three Months Ended
(in thousands)
September 28, 2024
% of Net Revenues
September 30, 2023
% of Net Revenues
Interest expense, net
$
43,677
7.4
%
$
41,292
7.1
%
Interest expense, net increased $2 million, or 6%, primarily due to costs associated with the issuance of the 2024-1 Senior Notes of $2 million as well as the increased fixed rate of 6.372% associated with the 2024-1 Senior Notes issued in July 2024 compared to the fixed rate of 4.739% associated with Series 2018-1 Senior Notes, which was repaid concurrently with the issuance of the 2024-1 Senior Notes, partially offset by reduced Term Loan interest as a result of principal payments of $101 million in the current year.
Foreign Currency Transaction Loss, Net
Three Months Ended
September 28, 2024
% of Net Revenues
September 30, 2023
% of Net Revenues
Foreign currency transaction loss, net
$
765
0.1
%
$
2,980
0.5
%
The foreign currency transaction loss for the three months ended September 28, 2024 was primarily comprised of a loss on foreign currency hedges of $2 million, partially offset by a gain of $1 million on transaction gains in our foreign operations. The foreign currency transaction gain for the three months ended September 30, 2023 was primarily comprised of transaction losses in our foreign operations of $5 million, partially offset by a gain of $2 million on foreign currency hedges.
Loss on Debt Extinguishment
Three Months Ended
(in thousands)
September 28, 2024
% of Net Revenues
September 30, 2023
% of Net Revenues
Loss on debt extinguishment
$
205
—
%
$
—
—
%
Represents charges incurred related to the Company’s partial repayment of Senior Secured Notes in conjunction with the sale of its Canadian distribution business.
32
Income Tax Expense (Benefit)
Three Months Ended
(in thousands)
September 28, 2024
% of Net Revenues
September 30, 2023
% of Net Revenues
Income tax expense (benefit)
$
9,807
1.7
%
$
(151,818)
(26.1
%)
Income tax expense was $10 million for the three months ended September 28, 2024 compared to an income tax benefit of $152 million for the three months ended September 30, 2023. The effective income tax rate for the three months ended September 28, 2024 was (190.8%) primarily driven by the recognition of valuation allowances on income tax carryforwards in certain domestic jurisdictions that are not more likely than not to be realized, non-deductible share-based compensation, and state taxes related to pre-tax income compared to 16.0% for the three months ended September 30, 2023.
Results of Operations for the Nine Months Ended September 28, 2024 Compared to the Nine Months Ended September 30, 2023
Net Income (Loss)
We recognized net income of $19 million, or $0.12 per diluted share, for the nine months ended September 28, 2024, compared to a net loss of $732 million, or $4.41 loss per diluted share, for the nine months ended September 30, 2023. The improvement of approximately $751 million was primarily due to the following:
•a non-cash goodwill impairment charge in the prior year period of $851 million;
•non-cash asset impairment charges of $56 million in the current period, which primarily related to assets held for sale as well as property and equipment and right-of-use assets at closed stores in the current period compared to $117 million in the prior year period, which primarily related to Car Wash assets including store closures, underperforming stores, and assets held for sale;
•a net gain of $8 million primarily comprised of the sale of assets held for sale, a gain on the sale of of our Canadian distribution business, and sale leaseback transactions, partially offset primarily by the disposals of property and equipment in our Car Wash business during the nine months ended September 28, 2024 compared to a loss of $2 million during the nine months ended September 30, 2023; and
•positive same store sales within the Maintenance and Paint, Collision & Glass segments, net new store openings, primarily within the Maintenance segment, and operating margin improvements within the Maintenance, Paint, Collision & Glass, and Platform Services segments.
These increases were partially offset by:
•increased tax expense of $154 million, primarily relating to impairment charges in the prior year;
•increased payroll and employee benefit costs, including $26 million of additional share-based compensation expense primarily relating to the modification of pre-IPO awards in the fourth quarter of 2023;
•an unfavorable impact from foreign exchange of $6 million;
•increased marketing expenditures; and
•decreased operating margins within the Car Wash segment.
Adjusted Net Income
Adjusted net income was $138 million for the nine months ended September 28, 2024 compared to $115 million for the nine months ended September 30, 2023. This increase of $23 million was primarily due to the following:
•positive same store sales within the Maintenance and Paint, Collision & Glass segments, net new store openings, primarily within the Maintenance segment, and operating margin improvements within the Maintenance, Paint, Collision & Glass, and Platform Services segments.
The increases were partially offset by:
•increased payroll and employee benefit costs and marketing expenditures; and
•decreased operating margins within the Car Wash segment.
Adjusted EBITDA
Adjusted EBITDA was $422 million for the nine months ended September 28, 2024 compared to $392 million for the nine months ended September 30, 2023. The increase of $30 million was primarily due to:
33
•positive same store sales within the Maintenance and Paint, Collision & Glass segments, net new store openings, primarily within the Maintenance segment, and operating margin improvements within the Maintenance, Paint, Collision & Glass, and Platform Services segments.
The increase was partially offset by:
•increased payroll and employee benefit costs and marketing expenditures; and
•decreased operating margins within the Car Wash segment.
To facilitate the review of our results of operations, the following tables set forth our financial results for the periods indicated. All information is derived from the consolidated statements of operations. Certain percentages presented have been rounded to the nearest number, therefore, totals may not equal the sum of the line items in the tables below.
Net Revenue
Nine Months Ended
(in thousands)
September 28, 2024
% of Net Revenues
September 30, 2023
% of Net Revenues
Franchise royalties and fees
$
144,549
8.1
%
$
140,682
8.0
%
Company-operated store sales
1,157,269
65.2
%
1,159,685
66.3
%
Independently-operated store sales
163,286
9.2
%
157,647
9.0
%
Advertising fund contributions
75,804
4.3
%
73,547
4.2
%
Supply and other revenue
234,563
13.2
%
218,791
12.5
%
Total net revenue
$
1,775,471
100.0
%
$
1,750,352
100.0
%
Franchise Royalties and Fees
Franchise royalties and fees increased $4 million, or 3%, primarily due to the addition of 101 net new franchised stores and an increase in franchise system-wide sales of $139 million, or4%, driven by franchise same store sales growth within the Paint, Collision & Glass and Maintenance segments, partially offset by decreased franchise system-wide sales within the Platform Services Segment.
Company-Operated Store Sales
Company-operated store sales decreased$2 million, or less than 1%, of which approximately $53 million and $26 million related to a decrease in the Paint, Collision & Glass and Car Wash segments, respectively, partially offset by an increase of $77 million in the Maintenance segment. The sales decrease in the Paint, Collision & Glass segment was primarily driven by revenue associated with the sale of nine company-operated stores to a franchisee in the current period as well as decreased volume. The decrease in Car Wash sales is primarily due to the net reduction of 30 company-operated stores and a decrease in same store sales primarily relating to lower volume. The sales increase in the Maintenance segment was primarily due to same store sales growth and71 net new company-operated stores. In aggregate, the Company added a net 11 company-operated stores year-over-year.
Independently-Operated Store Sales
Independently-operated store sales (comprised entirely of sales from the international car wash locations) increased$6 million, or4%, due to same store sales growth as a result of improved price realization, new product offerings, and favorable impacts from foreign exchange.
Advertising Fund Contributions
Advertising fund contributions increased by $2 million, or 3%, primarily due to an increase in franchise system-wide sales of approximately $139 million, or 4%, from same store sales growth and an additional 101 net new franchise stores. Our franchise agreements typically require the franchisee to pay continuing advertising fund fees based on a percentage of the franchisee’s gross sales or a stated fee.
Supply and Other Revenue
Supply and other revenue increased$16 million, or 7%, primarily due to growth in product and service revenue within the Maintenance and Platform Services segments as a result of an increase in system-wide sales and net store growth, partially offset by decreased volume within the Paint, Collision & Glass segment and the sale of our Canadian distribution business in the current period.
34
Operating Expenses
Nine Months Ended
(in thousands)
September 28, 2024
% of Net Revenues
September 30, 2023
% of Net Revenues
Company-operated store expenses
$
738,300
41.6
%
$
762,731
43.6
%
Independently-operated store expenses
90,693
5.1
%
87,095
5.0
%
Advertising fund expenses
75,804
4.3
%
73,547
4.2
%
Supply and other expenses
112,560
6.3
%
118,188
6.8
%
Selling, general, and administrative expenses
387,291
21.8
%
332,155
19.0
%
Acquisition related costs
1,459
0.1
%
7,264
0.4
%
Store opening costs
3,679
0.2
%
3,774
0.2
%
Depreciation and amortization
131,219
7.4
%
129,256
7.4
%
Goodwill impairment
—
—
%
—
850,970
48.6
%
Asset impairment charges and lease terminations
55,934
3.2
%
117,450
6.7
%
Total operating expenses
$
1,596,939
89.9
%
$
2,482,430
141.8
%
Company-Operated Store Expenses
Company-operated store expenses decreased $24 million, or 3%, primarily due to lower inventory costs and labor efficiency, partially offset by increased rent and property related expenses.
Independently-Operated Store Expenses
Independently-operated store expenses (comprised entirely of expenses from the international car wash locations) increased $4 million, or 4%, due to variable costs associated with the increase in sales.
Advertising Fund Expenses
Advertising fund expenses increased $2 million, or 3%, which is commensurate with the increase to advertising fund contributions during the period. Advertising fund expenses generally trend consistent with advertising fund contributions.
Supply and Other Expenses
Supply and other expenses decreased $6 million, or 5%, due to decreased payroll costs, primarily relating to the sale of our Canadian distribution business in the current period.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased $55 million, or 17%, primarily due to increased payroll and employee benefit costs, including $26 million of additional share-based compensation expense primarily relating to the modification of pre-IPO awards in the fourth quarter of 2023, marketing expenses, closed store expenses, and third-party legal and professional fees. This increase was partially offset by a gain on the sale or disposal of assets and businesses of $8 million in the current period compared to a $2 million loss in the prior year period.
Acquisition Related Costs
Acquisition related costs decreased $6 million, or 80%, due to decreased acquisition activity in the current year compared to the prior year.
Store Opening Costs
Store opening costs remained flat primarily as the Company continues to open Take 5 Oil company-operated stores as well as undergo brand conversions of previously acquired locations.
Depreciation and Amortization
Depreciation and amortization expense increased $2 million, or 2%, due to additional fixed assets, primarily related to Take 5 Oil site development.
35
Goodwill Impairment
Goodwill impairment charge of $851 million in the nine months ended September 30, 2023 is directly attributable to our Car Wash segment. For more information, refer to Note 6 in our consolidated financial statements included in this 10-Q.
Asset Impairment Charges and Lease Terminations
Asset impairment charges and lease terminations decreased by $62 million for the nine months ended September 28, 2024 compared to the nine months ended September 30, 2023. During the nine months ended September 28, 2024, impairment charges were primarily related to assets held for sale as well as assets associated with closed stores within the Car Wash segment. During the nine months ended September 30, 2023, impairment charges were primarily related to property and equipment and right-of-use assets relating to 29 stores management approved for closure, underperforming stores, and assets held for sale or abandoned within the Car Wash segment. For more information, refer to Note 6 in our consolidated financial statements included within this Form 10-Q.
Interest Expense, Net
Nine Months Ended
(in thousands)
September 28, 2024
% of Net Revenues
September 30, 2023
% of Net Revenues
Interest expense, net
$
119,245
6.7
%
$
120,304
6.9
%
Interest expense, net decreased $1 million, or 1%, primarily due to reduced Term Loan interest as a result of principal payments of $101 million in the current year, partially offset by increased interest and costs associated with the 2024-1 Senior Notes.
Foreign Currency Transaction Loss, Net
Nine Months Ended
(in thousands)
September 28, 2024
% of Net Revenues
September 30, 2023
% of Net Revenues
Foreign currency transaction loss, net
$
5,767
0.3
%
$
3
—
%
The foreign currency transaction loss for the nine months ended September 28, 2024 was primarily comprised of transaction losses in our foreign operations of $9 million, partially offset by a gain on foreign currency hedges of $3 million. The foreign currency transaction gain for the nine months ended September 30, 2023 was primarily comprised of transaction losses in our foreign operations of $4 million, partially offset by a gain of $4 million on foreign currency hedges.
Loss on Debt Extinguishment
Nine Months Ended
(in thousands)
September 28, 2024
% of Net Revenues
September 30, 2023
% of Net Revenues
Loss on Debt Extinguishment
$
205
—
%
$
—
—
%
Represents charges incurred related to the Company’s partial repayment of Senior Secured Notes in conjunction with the sale of its Canadian distribution business.
36
Income Tax Expense (Benefit)
Nine Months Ended
(in thousands)
September 28, 2024
% of Net Revenues
September 30, 2023
% of Net Revenues
Income tax expense (benefit)
$
33,842
1.9
%
$
(120,572)
(6.9
%)
Income tax expense was $34 million for the nine months ended September 28, 2024 compared to an income tax benefit of $121 million for the nine months ended September 30, 2023. The effective tax rate for the nine months ended September 28, 2024 was 63.5% primarily driven by the recognition of valuation allowances on income tax carryforwards in certain domestic jurisdictions that are not more likely than not to be realized, non-deductible share-based compensation and state taxes related to pre-tax income compared to 14.1% for the nine months ended September 30, 2023.
37
Segment Results of Operations for the Three Months Ended September 28, 2024 Compared to the Three Months Ended September 30, 2023
We assess the performance of our segments based on Segment Adjusted EBITDA, which is defined as earnings before interest expense, net, income tax expense, and depreciation and amortization, with further adjustments for acquisition related costs, store opening and closure costs, straight-line rent, equity compensation, loss on debt extinguishment, cloud computing amortization, and certain non-recurring, non-core, infrequent or unusual charges. In addition, shared services costs are not allocated to these segments and are included in Corporate and Other. Segment Adjusted EBITDA is a supplemental measure of the operating performance of our segments and may not be comparable to similar measures reported by other companies.
Maintenance
Three Months Ended
2024
2023
(in thousands, unless otherwise noted)
September 28, 2024
September 30, 2023
% Net Revenue For Segment
% Net Revenue For Segment
Franchise royalties and fees
$
14,699
$
14,566
5.3
%
6.0
%
Company-operated store sales
231,050
204,460
83.0
%
83.6
%
Supply and other revenue
32,438
25,333
11.7
%
10.4
%
Total revenue
$
278,187
$
244,359
100.0
%
100.0
%
Segment Adjusted EBITDA
$
96,666
$
85,483
34.7
%
35.0
%
System-Wide Sales
Change
Franchised stores
$
304,892
$
298,022
$
6,870
2.3
%
Company-operated stores
231,050
204,460
26,590
13.0
%
Total System-Wide Sales
$
535,942
$
502,482
$
33,460
6.7
%
Store Count (in whole numbers)
Change
Franchised stores
1,204
1,108
96
8.7
%
Company-operated stores
695
624
71
11.4
%
Total Store Count
1,899
1,732
167
9.6
%
Same Store Sales %
3.0
%
9.1
%
Maintenance revenue increased $34 million, or 14%, for the three months ended September 28, 2024, as compared to the three months ended September 30, 2023. Company-operated store sales increased by $27 million, or 13%, primarily due to same store sales growth and 71 net new company-operated stores. Supply and other revenue increased by $7 million, or 28%, primarily due to higher system-wide sales from franchised stores and product mix. Franchise royalties and fees increased less than $1 million, or 1%, primarily due to a $7 million, or 2%, increase in franchise system-wide sales from same store sales growth and 96 net new franchised stores.
Maintenance Segment Adjusted EBITDA increased $11 million, or 13%, primarily due to new store growth and same store sales growth.
38
Car Wash
Three Months Ended
2024
2023
(in thousands, unless otherwise noted)
September 28, 2024
September 30, 2023
% Net Revenue For Segment
% Net Revenue For Segment
Company-operated store sales
$
90,451
$
98,132
63.7
%
68.7
%
Independently-operated store sales
49,959
43,582
35.1
%
30.5
%
Supply and other revenue
1,765
1,099
1.2
%
0.8
%
Total revenue
$
142,175
$
142,813
100.0
%
100.0
%
Segment Adjusted EBITDA
$
25,563
$
20,494
18.0
%
14.4
%
System-Wide Sales
Change
Company-operated stores
$
90,451
$
98,132
$
(7,681)
(7.8
%)
Independently-operated stores
49,959
43,582
6,377
14.6
%
Total System-Wide Sales
$
140,410
$
141,714
$
(1,304)
(0.9
%)
Store Count (in whole numbers)
Change
Company-operated stores
388
418
(30)
(7.2
%)
Independently-operated stores
719
715
4
0.6
%
Total Store Count
1,107
1,133
(26)
(2.3
%)
Same Store Sales %
1.8
%
(4.0
%)
Car Wash Segment revenue decreased by less than $1 million, driven by an $8 million decrease in company-operated store sales primarily due to a decrease in company-operated same store sales primarily relating to lower volume from our retail customers as a result of unfavorable weather conditions, partially offset by an increase in membership revenue. Independently-operated store sales increased $6 million due to same store sales growth as a result of improved price realization, new product offerings, and favorable impacts from foreign exchange.
Car Wash is comprised of car wash sites throughout the U.S., Europe, and Australia with varying geographical, economical, and political factors, which could impact the results of the business. Our U.S. Car Wash locations have experienced softening demand, increased competitive pressures, and negative weather patterns, which have contributed to negative company-operated same store sales and could result in future asset impairment charges.
Car Wash Segment Adjusted EBITDA increased by $5 million, or 25%, primarily driven by positive same store sales within our independently-operated stores and improved inventory cost management, partially offset by decreased same store sales within company-operated stores and increased rent and marketing expenses.
39
Paint, Collision & Glass
Three Months Ended
2024
2023
(in thousands, unless otherwise noted)
September 28, 2024
September 30, 2023
% Net Revenue For Segment
% Net Revenue For Segment
Franchise royalties and fees
$
25,095
$
23,799
23.0
%
18.4
%
Company-operated store sales
65,380
85,207
60.0
%
65.8
%
Supply and other revenue
18,477
20,408
17.0
%
15.8
%
Total revenue
$
108,952
$
129,414
100.0
%
100.0
%
Segment Adjusted EBITDA
$
34,703
$
32,545
31.9
%
25.1
%
System-Wide Sales
Change
Franchised stores
$
791,830
$
760,437
$
31,393
4.1
%
Company-operated stores
65,380
85,207
(19,827)
(23.3
%)
Total System-Wide Sales
$
857,210
$
845,644
$
11,566
1.4
%
Store Count (in whole numbers)
Change
Franchised stores
1,669
1,662
7
0.4
%
Company-operated stores
228
258
(30)
(11.6
%)
Total Store Count
1,897
1,920
(23)
(1.2
%)
Same Store Sales %
1.3
%
8.6
%
Paint, Collision & Glass revenue decreased $20 million, or 16%, for the three months ended September 28, 2024, as compared to the three months ended September 30, 2023. Company-operated store sales decreased $20 million, or 23%, driven by revenue associated with the sale of nine company-operated stores to a franchisee in the current year, as well as decreased same store sales due to reduced volume. Supply and other revenue decreased $2 million, or 9%, primarily due to decreased volume. Franchise royalties and fees increased $1 million, or 5%, primarily due to a $31 million, or 4%, increase in franchise system-wide sales, a net increase of 7 franchise stores, and positive franchise same store sales.
Paint, Collision & Glass Segment Adjusted EBITDA increased $2 million, or 7%, primarily due to growth in franchise revenue and improved labor efficiency.
40
Platform Services
Three Months Ended
2024
2023
(in thousands, unless otherwise noted)
September 28, 2024
September 30, 2023
% Net Revenue For Segment
% Net Revenue For Segment
Franchise royalties and fees
$
9,681
$
8,997
18.5
%
16.1
%
Company-operated store sales
1,251
1,242
2.4
%
2.2
%
Supply and other revenue
41,286
45,695
79.1
%
81.7
%
Total revenue
$
52,218
$
55,934
100.0
%
100.0
%
Segment Adjusted EBITDA
$
22,467
$
22,396
43.0
%
40.0
%
System-Wide Sales
Change
Franchised stores
$
106,943
$
117,957
$
(11,014)
(9.3
%)
Company-operated stores
1,251
1,242
9
0.7
%
Total System-Wide Sales
$
108,194
$
119,199
$
(11,005)
(9.2
%)
Store Count (in whole numbers)
Change
Franchised stores
205
207
(2)
(1.0
%)
Company-operated stores
1
1
—
—
%
Total Store Count
206
208
(2)
(1.0
%)
Platform Services revenue decreased $4 million, or 7%, primarily due to the sale of our Canadian distribution business during the quarter, partially offset by an increase in total Company system-wide sales of $33 million, or 2%, which resulted in increased product purchases by franchisees and company-operated stores, primarily within the Maintenance segment.
Platform Services Segment Adjusted EBITDA remained flat primarily due to increased supply revenue related to the Maintenance segment offset by the EBITDA relating to the sale of our Canadian distribution business during the quarter.
41
Segment Results of Operations for the Nine Months Ended September 28, 2024 Compared to the Nine Months EndedSeptember 30, 2023
We assess the performance of our segments based on Segment Adjusted EBITDA, which is defined as earnings before interest expense, net, income tax expense, and depreciation and amortization, with further adjustments for acquisition related costs, store opening and closure costs, equity compensation, loss on debt extinguishment, cloud computing amortization, and certain non-recurring, non-core, infrequent or unusual charges. Shared services costs are not allocated to these segments and are included in Corporate and Other. Segment Adjusted EBITDA may not be comparable to similarly titled metrics of other companies due to differences in methods of calculation.
Maintenance
Nine Months Ended
2024
2023
(in thousands, unless otherwise noted)
September 28, 2024
September 30, 2023
% Net Revenue For Segment
% Net Revenue For Segment
Franchise royalties and fees
$
45,917
$
41,224
5.6
%
5.8
%
Company-operated store sales
682,730
605,393
83.5
%
84.7
%
Supply and other revenue
89,176
67,737
10.9
%
9.5
%
Total net revenue
$
817,823
$
714,354
100.0
%
100.0
%
Segment Adjusted EBITDA
$
291,037
$
242,528
35.6
%
34.0
%
System-Wide Sales
Change
Franchised stores
$
888,316
$
823,656
$
64,660
7.9
%
Company-operated stores
682,730
605,393
77,337
12.8
%
Total System-Wide Sales
$
1,571,046
$
1,429,049
$
141,997
9.9
%
Store Count (in whole numbers)
Change
Franchised stores
1,204
1,108
96
8.7
%
Company-operated stores
695
624
71
11.4
%
Total Store Count
1,899
1,732
167
9.6
%
Same Store Sales %
4.0
%
10.8
%
Maintenance net revenue increased $103 million, or 14%, driven primarily by a $77 million increase in company-operated store sales from same store sales growth and 71 net new company-operated stores. Supply and other revenue increased by $21 million, or 32%, primarily due to higher system-wide sales. Franchise royalties and fees increased by $5 million, or 11%, primarily due to a $65 million, or 8%, increase in franchise system-wide sales from same store sales growth and 96 net new franchise stores.
Maintenance Segment Adjusted EBITDA increased $49 million, or 20%, primarily due to net new store growth, same store sales growth, cost management, and operational leverage.
42
Car Wash
Nine Months Ended
2024
2023
(in thousands, unless otherwise noted)
September 28, 2024
September 30, 2023
% Net Revenue For Segment
% Net Revenue For Segment
Company-operated store sales
$
275,889
$
302,193
62.2
%
65.1
%
Independently-operated store sales
163,286
157,647
36.8
%
33.9
%
Supply and other revenue
4,625
4,708
1.0
%
1.0
%
Total net revenue
$
443,800
$
464,548
100.0
%
100.0
%
Segment Adjusted EBITDA
$
88,469
$
101,303
19.9
%
21.8
%
System-Wide Sales
Change
Company-operated stores
$
275,889
$
302,193
$
(26,304)
(8.7
%)
Independently-operated stores
163,286
157,647
5,639
3.6
%
Total System-Wide Sales
$
439,175
$
459,840
$
(20,665)
(4.5
%)
Store Count (in whole numbers)
Change
Company-operated stores
388
418
(30)
(7.2
%)
Independently-operated stores
719
715
4
0.6
%
Total Store Count
1,107
1,133
(26)
(2.3
%)
Same Store Sales %
(3.4
%)
(6.7
%)
Car Wash segment net revenue decreased $21 million, or 4%, driven primarily by a $26 million, or 9%, decrease in company-operated store sales from the net reduction of 30 company-operated stores during the prior 12 months and a decrease in same store sales primarily relating to lower volume. Independently-operated store sales increased $6 million due to same store sales growth as a result of improved price realization, new product offerings, and favorable impacts from foreign exchange.
Car Wash is comprised of car wash sites throughout the U.S., Europe, and Australia with varying geographical, economical, and political factors, which could impact the results of the business. Our U.S. Car Wash locations have experienced softening demand, increased competitive pressures, and negative weather patterns, which have contributed to negative company-operated same store sales and could result in future asset impairment charges.
Car Wash Segment Adjusted EBITDA decreased by $13 million, or 13%, primarily driven by decreased same store sales within company-operated stores, partially offset by positive same store sales within the independently operated stores and improved inventory cost management.
43
Paint, Collision & Glass
Nine Months Ended
2024
2023
(in thousands, unless otherwise noted)
September 28, 2024
September 30, 2023
% Net Revenue For Segment
% Net Revenue For Segment
Franchise royalties and fees
$
74,202
$
74,627
22.7
%
19.5
%
Company-operated store sales
195,412
248,796
59.7
%
64.9
%
Supply and other revenue
57,751
59,952
17.6
%
15.6
%
Total net revenue
$
327,365
$
383,375
100.0
%
100.0
%
Segment Adjusted EBITDA
$
100,695
$
109,052
30.8
%
28.4
%
System-Wide Sales
Change
Franchised stores
$
2,406,078
$
2,305,420
$
100,658
4.4
%
Company-operated stores
195,412
248,796
(53,384)
(21.5
%)
Total System-Wide Sales
$
2,601,490
$
2,554,216
$
47,274
1.9
%
Store Count (in whole numbers)
Change
Franchised stores
1,669
1,662
7
0.4
%
Company-operated stores
228
258
(30)
(11.6
%)
Total Store Count
1,897
1,920
(23)
(1.2
%)
Same Store Sales %
0.7
%
13.3
%
Paint, Collision & Glass net revenue decreased $56 million, or 15%, for the nine months ended September 28, 2024, as compared to the nine months ended September 30, 2023. Company-operated store sales decreased $53 million, or 21%, primarily driven by revenue associated with the sale of nine company-operated stores to a franchisee in the current period as well as decreased same store sales due to reduced volume. Franchise royalties and fees remained flat primarily due to a decrease in average royalty rates, partially offset by a $101 million, or 4%, increase in franchise system-wide sales generated by same store sales growth.
Paint, Collision & Glass Segment Adjusted EBITDA decreased $8 million, or 8%, primarily due to decreased volume associated with company-operated stores as well as the Adjusted EBITDA associated with the nine company-operated stores sold to a franchisee in the current year, partially offset by an improvement in operating margin.
44
Platform Services
Nine Months Ended
2024
2023
(in thousands, unless otherwise noted)
September 28, 2024
September 30, 2023
% Net Revenue For Segment
% Net Revenue For Segment
Franchise royalties and fees
$
24,430
$
24,831
14.6
%
15.0
%
Company-operated store sales
3,238
3,303
1.9
%
2.0
%
Supply and other revenue
139,617
137,171
83.5
%
83.0
%
Total net revenue
$
167,285
$
165,305
100.0
%
100.0
%
Segment Adjusted EBITDA
$
67,649
$
61,923
40.4
%
37.5
%
System-Wide Sales
Change
Franchised stores
$
298,744
$
324,608
$
(25,864)
(8.0
%)
Company-operated stores
3,238
3,303
(65)
(2.0
%)
Total System-Wide Sales
$
301,982
$
327,911
$
(25,929)
(7.9
%)
Store Count (in whole numbers)
Change
Franchised stores
205
207
(2)
(1.0
%)
Company-operated stores
1
1
—
—
%
Total Store Count
206
208
(2)
(1.0
%)
Platform Services net revenue increased $2 million, or 1%, driven primarily by an increase in total Company system-wide sales of $4.9 billion in the current year compared to $4.8 billion in the prior year, which resulted in increased product purchases by franchisees and company-operated stores.
Platform Services Segment Adjusted EBITDA increased $6 million, or 9%, primarily driven by a combination of revenue growth and cost management.
45
Financial Condition, Liquidity and Capital Resources
Sources of Liquidity and Capital Resources
Cash flow from operations, supplemented with our long-term borrowings and revolving credit facilities, have been sufficient to fund our operations while allowing us to make strategic investments to grow our business. We believe that our sources of liquidity and capital resources will be adequate to fund our operations, acquisitions, company-operated store development, other general corporate needs, and the additional expenses we expect to incur for at least the next twelve months. We expect to continue to have access to the capital markets at acceptable terms. However, this could be adversely affected by many factors including macroeconomic factors, a downgrade of our credit rating, or a deterioration of certain financial ratios.
Driven Brands Funding, LLC (the “Issuer”), a wholly-owned subsidiary of the Company, and Driven Brands Canada Funding Corporation (along with the Issuer, the “Co-Issuers”) are subject to certain quantitative covenants related to debt service coverage and leverage ratios in connection with our securitization senior notes. Our Term Loan Facility and Revolving Credit Facility also have certain qualitative covenants. As of September 28, 2024, the Co-Issuers and Driven Holdings were in material compliance with all such covenants under their respective credit agreements.
On July 29, 2024, the Company issued $275 million of 2024-1 Senior Notes as well as replaced the 2019 VFN with a $400 million 2024 VFN. Proceeds from the 2024-1 Senior Notes were primarily used to repay the Company’s 2018-1 Senior Notes. See Note 7 to our consolidated financial statements for additional information regarding the Company’s debt.
At September 28, 2024, the Company had total liquidity of $655 million, which included$204 million in cash and cash equivalents and$374 million and $77 million of undrawn capacity on its 2024 VFN and Revolving Credit Facility, respectively. This does not include the additional $135 million Series 2022-1 Class A-1 Notes that expand our variable funding note borrowing capacity when the company elects to exercise it, assuming certain conditions continue to be met.
The following table illustrates the main components of our cash flows for the nine months ended September 28, 2024 and September 30, 2023:
Nine Months Ended
(in thousands)
September 28, 2024
September 30, 2023
Net cash provided by operating activities
$
208,508
$
212,033
Net cash provided by (used in) investing activities
51,426
(361,207)
Net cash (used in) provided by financing activities
(226,661)
147,850
Effect of exchange rate changes on cash
71
365
Net change in cash, cash equivalents, restricted cash, and restricted cash included in advertising fund assets
$
33,344
$
(959)
In the third quarter 2024 earnings release on October 31, 2024, we reported net cash provided by operating activities of $175 million, and net cash provided by investing activities of $85 million, for the nine months ended September 28, 2024. Both amounts have been revised to reflect the actual cash movement during the nine months ended September 28, 2024.
Operating Activities
Net cash provided by operating activities was $209 million for the nine months ended September 28, 2024 compared to$212 million for the nine months ended September 30, 2023. The decrease was primarily due to costs associated with improvements to our IT infrastructure, including the ERP implementation, offset by net working capital improvements during the nine months ended September 28, 2024.
Investing Activities
Net cash provided by investing activities was $51 million for the nine months ended September 28, 2024 compared to $361 million used in investing activities for the nine months ended September 30, 2023. The increase was due primarily due to a $263 million decrease in capital expenditures, $256 million proceeds from the sale or disposal of businesses and fixed assets, primarily consisting of $161 million from the sale of assets held for sale, $78 million from the sale of our Canadian distribution business, and $18 million from the sale of nine company-operated collision stores to a franchisee, as well as a $51 million decrease in net cash paid for acquisitions, partially offset by a $154 million decrease in proceeds from sale leaseback transactions.
Financing Activities
Net cash used in financing activities was $227 million for the nine months ended September 28, 2024 primarily related to repayments of long-term debt, including finance leases, of $427 million, Tax Receivable Agreement payments of $38 million,
46
net repayments on the Revolving Credit facility of $25 million and debt issuance costs of $10 million, partially offset by the 2024-1 Senior Notes issuance of $275 million. Net cash provided by financing activities was $148 million for the nine months ended September 30, 2023 primarily related to net debt borrowings on the Revolving Credit Facility of $215 million, partially offset by share repurchases of $50 million, and repayments of long-term debt, including finance leases of $23 million. See Note 7 to our consolidated financial statements for additional information regarding the Company’s debt.
Tax Receivable Agreement
We expect to be able to utilize certain tax benefits which are related to periods prior to the effective date of the Company’s initial public offering, which we therefore attribute to our existing shareholders. We expect that these tax benefits (i.e., the Pre-IPO and IPO-Related Tax Benefits) will reduce the amount of tax that we and our subsidiaries would otherwise be required to pay in the future. We have entered into a Tax Receivable Agreement which provides our Pre-IPO shareholders with the right to receive payment by us of 85% of the amount of cash savings, if any, in U.S. and Canadian federal, state, local, and provincial income tax that we and our subsidiaries actually realize as a result of the utilization of the Pre-IPO and IPO-Related Tax Benefits or divests. 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.
For purposes of the Tax Receivable Agreement, cash savings in income tax will be computed by reference to the reduction in the liability for income taxes resulting from the utilization of the Pre-IPO and IPO-Related Tax Benefits. The term of the Tax Receivable Agreement commenced upon the effective date of the Company’s initial public offering and will continue until the Pre-IPO and IPO-Related Tax Benefits have been utilized, accelerated, or expired.
Because we are a holding company with no operations of our own, our ability to make payments under the Tax Receivable Agreement is dependent on the ability of our subsidiaries to make distributions to us. The securitized debt facility may restrict the ability of our subsidiaries to make distributions to us, which could affect our ability to make payments under the Tax Receivable Agreement. To the extent that we are unable to make payments under the Tax Receivable Agreement because of restrictions under our outstanding indebtedness, such payments will be deferred and will generally accrue interest. As of July 1, 2023, interest accrues at the Base Rate plus an applicable margin or SOFR plus an applicable term adjustment plus 1.0%. To the extent that we are unable to make payments under the Tax Receivable Agreement for any other reason, such payments will generally accrue interest at a rate of SOFR plus an applicable term adjustment plus 5.0% per annum until paid.
Critical Accounting Policies and Estimates
Our significant accounting policies are more fully described in Note 2 of the consolidated financial statements presented in our Form 10-K for the year ended December 30, 2023. There have been no material changes to our critical accounting policies from those disclosed in our Form 10-K for the year ended December 30, 2023.
Application of New Accounting Standards
See Note 2 of the consolidated unaudited financial statements for a discussion of recently issued accounting standards applicable to the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Refer to the Company’s annual report for the year ended December 30, 2023 for a complete discussion of the Company’s market risk. There have been no material changes in the Company’s market risk from those disclosed in the Company’s Form 10-K for the year ended December 30, 2023.
47
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our CEO and CFO, has evaluated the design effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act), as of September 28, 2024. The term “disclosure controls and procedures,” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on evaluation of the design of our disclosure controls and procedures as of September 28, 2024, our CEO and CFO have concluded that as of such date, our disclosure controls and procedures were designed effectively and will provide a reasonable level of assurance.
Changes in Internal Control over Financial Reporting
During the three months ended September 28, 2024, the Company implemented a new cloud-based enterprise resource planning (“ERP”) system including modules for general ledger, accounts receivable, accounts payable, fixed assets, cash management, indirect procurement, supply chain and inventory management, and consolidations for the majority of our business operations. We will continue to evaluate business units and processes utilizing systems other than the new ERP system for transition in future periods. As a result of the ERP implementation, certain internal controls over financial reporting have been automated, modified, or implemented to address the new control environment and processes associated with the ERP system.
With the exception of the implementation of the ERP modules outlined above, there were no changes in our internal control over financial reporting that occurred during the most recently completed quarter ended September 28, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
48
Part II. Other Information
Item 1. Legal Proceedings
Information relating to this item is included within Note 12 of our financial statements included elsewhere within this Form 10-Q.
Item 1A. Risk Factors
For a discussion of risk factors that could adversely affect our results of operations, financial condition, business reputation or business prospects, we refer you to Part I, Item 1A "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 5. Other Information
(c) Trading Plans
During the three months ended September 28, 2024, no director or Section 16 officer adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements (in each case, as defined in Item 408(a) of Regulation S-K).
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
*
Filed herewith.
†
Indicates management contract or compensatory plan.
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 7, 2024
DRIVEN BRANDS HOLDINGS INC.
By:
/s/ Jonathan Fitzpatrick
Name:
Jonathan Fitzpatrick
Title:
President and Chief Executive Officer
By:
/s/ Michael Beland
Name:
Michael Beland
Title:
Senior Vice President and Chief Accounting Officer