DRIVEN BRANDS HOLDINGS INC. The following discussion and analysis forDriven 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 52/53-week fiscal year, which ends on the last Saturday in December. The three months endedSeptember 24, 2022 andSeptember 25, 2021 were both 13 week periods. The nine months endedSeptember 24, 2022 andSeptember 25, 2021 were both 39 week periods..
Overview of Operations
Driven Brands is the largest automotive services company inNorth America with a growing and highly-franchised base of more than 4,700 locations across 49 U.S. states and 14 other countries. Our scaled, diversified platform fulfills an extensive range of core consumer and commercial automotive needs, including paint, collision, glass, repair, car wash, oil change and maintenance.Driven Brands provides a breadth of high quality and high-frequency services to a wide range of customers, who rely on their cars in all economic environments to get to work and in many other aspects of their daily lives. Our asset-light business model has generated consistent recurring revenue and strong operating margins with limited maintenance capital expenditures, which has resulted in significant cash flow generation and capital-efficient growth. We have a diversified 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 large, growing, needs-based and highly-fragmented automotive care industry. OurU.S. industry is underpinned by a large, growing population of more than 284 million vehicles in operation, and is expected to continue its long-term growth trajectory given (i) long-term increases in annual miles traveled; (ii) consumers more frequently outsourcing automotive services due to vehicle complexity; (iii) increases in average repair costs and (iv) average age of the car on the road getting older. We serve a diverse mix of customers, with sales coming from retail customers and commercial customers such as fleet operators and insurance carriers. Our success is driven in large part by our mutually beneficial relationships with more than 2,800 individual franchisees and independent operators. We have driven sustained predictable growth and share gain through our robust pipeline of organic growth complemented by consistent and repeatable M&A, including more than 100 acquisitions since 2015. Notably, inAugust 2020 we acquired ICWG, the world's largest conveyor car wash company by location count with more than 900 locations across 14 countries, demonstrating our continued ability to pursue and execute upon scalable and highly strategic acquisitions. We leveraged our significant M&A capabilities to drive growth of 112 acquired locations in 2021 while we built our greenfield pipeline. In 2022, we continued to leverage M&A as a strategic complement to growing greenfield openings in car wash to drive density in key target locations, including 26 locations in the first nine months of 2022. We entered theU.S. glass market in the first quarter of 2022 through the acquisition of Auto Glass Now and have quickly become the second largest player in the auto glass servicing category. We grew our service offerings through seven glass business acquisitions in the first nine months of 2022 (156 sites in aggregate).
Significant Factors Impacting Financial Results
Our acquisitions in both our Car Wash and Paint, Collision & Glass segments were a core driver of growth in our key performance indicators and our financial results for the three and nine months endedSeptember 24, 2022 , as compared to the three and nine months endedSeptember 25, 2021 . For additional information on our acquisitions, see Note 3 to the consolidated financial statements. We recognized net income of$38 million , or$0.23 per diluted share for the three months endedSeptember 24, 2022 , compared to net income of$33 million , or$0.19 per diluted share, for the three months endedSeptember 25, 2021 . This increase was primarily due to an increase in revenue related to same store sales growth and significant unit growth from theU.S. glass business acquisitions (156 sites), a number of car wash acquisitions in the trailing twelve month period, and organic store count growth, partially offset by a$15 million increase in net loss on foreign currency transactions and higher operating, interest and income tax expenses associated with growth. 29 -------------------------------------------------------------------------------- Adjusted Net Income was$55 million for the three months endedSeptember 24, 2022 , an increase of$11 million , compared to$43 million for the three months endedSeptember 25, 2021 . The increase in Adjusted Net Income was primarily due to an increase in revenue related to same store sales growth and significant unit growth from theU.S. glass business acquisitions (156 sites), a number of car wash acquisitions in the trailing twelve month period, and organic store count growth, partially offset by higher operating, interest and income tax expenses associated with growth. See Note 3 to our consolidated financial statements for additional information regarding acquisitions. Adjusted EBITDA was$129 million for the three months endedSeptember 24, 2022 , an increase of$31 million , compared to$98 million for the three months endedSeptember 25, 2021 . The increase in Adjusted EBITDA was primarily due to an increase in revenue related to same store sales growth and significant unit growth from theU.S. glass business acquisitions (156 sites), a number of car wash acquisitions in the trailing twelve month period, and organic store count growth, partially offset by higher operating, interest and income tax expenses associated with growth. We recognized net income of$16 million , or$0.09 per diluted share for the nine months endedSeptember 24, 2022 , compared to net income of$48 million , or$0.29 per diluted share, for the nine months endedSeptember 25, 2021 . This decrease was primarily due to a$125 million non-cash impairment charge related to the change in intended use of certain existing Car Wash trade names migrating them to the Take 5 brand and a$24 million increase in net loss on foreign currency transactions. Also, for the nine months endedSeptember 25, 2021 there was$45 million in debt extinguishment costs related to the repayment of the ICWG debt. This was partially offset by an an increase in revenue related to same store sales growth and significant unit growth from theU.S. glass business acquisitions (156 sites), a number of car wash acquisitions in the trailing twelve month period, and organic store count growth, partially offset by higher operating, interest and income tax expenses associated with growth. Adjusted Net Income was$162 million for the nine months endedSeptember 24, 2022 , an increase of$47 million , compared to$116 million for the nine months endedSeptember 25, 2021 . The increase in Adjusted Net Income was primarily due to an increase in revenue related to same store sales growth and significant unit growth from theU.S. glass business acquisitions (156 sites), a number of car wash acquisitions in the trailing twelve month period, and organic store count growth, partially offset by higher operating, interest and income tax expenses associated with growth. See Note 3 to our consolidated financial statements for additional information regarding acquisitions. Adjusted EBITDA was$383 million for the nine months endedSeptember 24, 2022 , an increase of$107 million , compared to$277 million for the nine months endedSeptember 25, 2021 . The increase in Adjusted EBITDA was primarily due to an an increase in revenue related to same store sales growth and significant unit growth from theU.S. glass business acquisitions (156 sites), a number of car wash acquisitions in the trailing twelve month period, and organic store count growth, partially offset by higher operating, interest and income tax expenses associated with growth.
Adjusted Net Income and Adjusted EBITDA are non-GAAP financial measures of performance. For a discussion of our use of these non-GAAP measures and a reconciliation from net income (loss) to Adjusted Net Income and Adjusted EBITDA, see "Reconciliation of Non-GAAP Financial Information".
Strong operational execution, improving consumer and driving trends and acquisitions led to total system-wide sales of$1.5 billion and$4.1 billion during the three and nine months endedSeptember 24, 2022 , an increase of 22% and 23% from the three and nine months endedSeptember 25, 2021 .
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. Franchise royalties and fees revenue represented 9% and 10% of our total revenue for the three months endedSeptember 24, 2022 andSeptember 25, 2021 , respectively and 9% and 10% for the nine months endedSeptember 24, 2022 andSeptember 25, 2021 , respectively. For the three months endedSeptember 24, 2022 andSeptember 25, 2021 , approximately 95% and 98% respectively, of franchise royalties and fees revenue is attributable to royalties, with the remaining balance attributable to license and development fees. For the nine months endedSeptember 24, 2022 andSeptember 25, 2021 , approximately 94% and 98%, respectively, of franchise royalties and fees revenue is attributable to royalties, with the remaining balance attributable to license and development fees. Revenue from company-operated stores represented 66% and 58% of total revenue for the three months endedSeptember 24, 2022 andSeptember 25, 2021 , respectively, and 64% and 56% 30 -------------------------------------------------------------------------------- for the nine months endedSeptember 24, 2022 andSeptember 25, 2021 , respectively. Revenue from independently-operated stores represented 8% and 13% of our total revenue for the three months endedSeptember 24, 2022 andSeptember 25, 2021 , respectively. Revenue from independently-operated stores represented 11% and 15% of our total revenue for the nine months endedSeptember 24, 2022 andSeptember 25, 2021 , respectively. 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, straight-line rent, equity compensation, loss on debt extinguishment, foreign currency transaction related gains or losses, store opening costs, 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 endedSeptember 24, 2022 andSeptember 25, 2021 . 31 --------------------------------------------------------------------------------
The following table sets forth our key performance indicators for the three and
nine months ended
Three months ended Nine months ended
(in thousands, except store count or as
otherwise noted) September 24, 2022 September 25, 2021 September 24, 2022 September 25, 2021
System-Wide Sales
System-Wide Sales by Segment:
Maintenance $ 411,452 $ 333,779 $ 1,167,717 $ 932,890
Car Wash 138,704 122,046 453,026 357,341
Paint, Collision & Glass 781,229 620,302 2,164,932 1,760,313
Platform Services 130,751 120,290 352,865 307,120
Total $ 1,462,136 $ 1,196,417 $ 4,138,540 $ 3,357,664
System-Wide Sales by Business Model:
Franchised Stores $ 1,080,426 $ 934,721 $ 3,022,370 $ 2,593,373
Company-Operated Stores 341,241 213,755 957,670 603,808
Independently-Operated Stores 40,469 47,941 158,500 160,483
Total $ 1,462,136 $ 1,196,417 $ 4,138,540 $ 3,357,664
Store Count
Store Count by Segment:
Maintenance 1,597 1,506 1,597 1,506
Car Wash 1,086 1,018 1,086 1,018
Paint, Collision & Glass 1,822 1,647 1,822 1,647
Platform Services 202 201 202 201
Total 4,707 4,372 4,707 4,372
Store Count by Business Model:
Franchised Stores 2,849 2,809 2,849 2,809
Company-Operated Stores 1,141 831 1,141 831
Independently-Operated Stores 717 732 717 732
Total 4,707 4,372 4,707 4,372
Same Store Sales %
Maintenance 14.4 % 17.0 % 16.0 % 24.4 %
Car Wash (9.0 %) 6.2% (1.8 %) 6.2 %
Paint, Collision & Glass 15.7 % 10.8 % 17.5 % 12.2 %
Platform Services 8.7 % 15.8 % 14.9 % 24.7 %
Total 11.9 % 12.8 % 14.7 % 16.9 %
Segment Adjusted EBITDA
Maintenance $ 68,763 $ 47,894 $ 185,324 $ 132,895
Car Wash 39,098 37,999 148,495 115,223
Paint, Collision & Glass 38,919 22,039 100,847 61,534
Platform Services 19,765 16,254 54,471 44,864
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.
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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, straight-line rent, equity compensation, loss on debt
extinguishment 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.
The following table provides a reconciliation of Net Income (Loss) to Adjusted Net Income and Adjusted Earnings per Share:
Adjusted Net Income/Adjusted Earnings per Share
Three months ended Nine months ended
September 24 ,
2022 2021 2022 2021
Net income (loss) $ 38,391 $ 33,086 $ 15,775 $ 48,321
Acquisition related costs(a) 2,325 636 9,981 2,674
Non-core items and project costs,
net(b) 851 1,357 3,436 3,910
Straight-line rent adjustment(c) 3,220 2,548 11,530 8,391
Equity-based compensation expense(d) 5,308 933 12,159 2,944
Foreign currency transaction loss,
net(e) 15,582 1,074 30,490 6,356
Bad debt recovery(f) (449) - (449) -
Trade name impairment(g) - - 125,450 -
Asset sale leaseback (gain) loss,
impairment and closed store expenses(h) (14,186) 313 (20,248) 3,005
Loss on debt extinguishment(i) - - - 45,576
Amortization related to acquired
intangible assets(j) 7,212 4,665 18,284 13,875
Provision for uncertain tax
positions(k) - (251) 76 (251)
Adjusted net income before tax impact
of adjustments 58,254 44,361 206,484 134,801
Tax impact of adjustments(l) (3,290) (886) (44,086) (18,968)
Adjusted net income 54,964 43,475 162,398 115,833
Net income (loss) attributable to
non-controlling interest - (38) (15) (68)
Adjusted net income attributable to
Driven Brands Holdings Inc. $ 54,964 $ 43,513 $ 162,413 $ 115,901
Adjusted earnings per share
Basic $ 0.33 $ 0.26 $ 0.98 $ 0.71
Diluted $ 0.32 $ 0.26 $ 0.96 $ 0.69
Weighted average shares outstanding
Basic 162,760 162,635 162,768 160,030
Diluted 166,831 166,630 166,663 163,968
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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, straight-line rent, equity
compensation, loss on debt extinguishment 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.
The following table provides a reconciliation of Net income to Adjusted EBITDA:
Adjusted EBITDA
Three months ended Nine months ended
September 24, September 25, September 24, September 25,
2022 2021 2022 2021
Net income (loss) $ 38,391 $ 33,086 $ 15,775 $ 48,321
Income tax expense 14,472 11,880 8,592 24,445
Interest expense, net 27,323 17,688 78,946 52,390
Depreciation and amortization 36,518 28,447 107,628 78,722
EBITDA 116,704 91,101 210,941 203,878
Acquisition related costs(a) 2,325 636 9,981 2,674
Non-core items and project costs, net(b) 851 1,357 3,436 3,910
Straight-line rent adjustment(c) 3,220 2,548 11,530 8,391
Equity-based compensation expense(d) 5,308 933 12,159 2,944
Foreign currency transaction (gain)
loss, net(e) 15,582 1,074 30,490 6,356
Bad debt recovery(f) (449) - (449) -
Trade name impairment(g) - - 125,450 -
Asset impairment and closed store
expenses(h) (14,186) 313 (20,248) 3,005
Loss on debt extinguishment(i) - - - 45,576
Adjusted EBITDA $ 129,355 $ 97,962 $ 383,290 $ 276,734
a.Consists of acquisition costs as reflected within the 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 (i) third-party
consulting and professional fees associated with strategic transformation
initiatives and (ii) other miscellaneous expenses, including non-capitalizable
expenses relating to the Company's initial public offering and other strategic
transactions.
c.Consists of the non-cash portion of rent expense, which reflects the extent to
which our straight-line rent expense recognized under GAAP exceeds or is less
than our cash rent payments.
d.Represents non-cash equity-based compensation expense.
e.Represents foreign currency transaction gains/losses, net that primarily related to the remeasurement of our intercompany loans. These losses are offset by unrealized gains/losses on remeasurement of cross currency swaps and forward contracts.
f.Represents the recovery of previously uncollectible receivables outside of normal operations.
g.Relates to an impairment of certain Car Wash trade names for the Company elected to discontinue their use.
h.Relates to (gain) loss on sale leasebacks, impairment of certain fixed assets and operating lease right-of-use assets related to closed locations. Also, represents lease exit costs and other costs associated with stores that were closed prior to the respective lease termination dates.
i.Represents the write-off of unamortized discount associated with early termination of debt.
j.Consists of amortization related to acquired intangible assets as reflected within depreciation and amortization in the consolidated statements of operations.
k.Represents uncertain tax positions recorded for tax positions inclusive of interest and penalties.
l.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 taxes. To
determine the tax impact of the deductible
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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.
Results of Operations for the three months ended
To facilitate 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.
Revenue
Three months ended
September 24, September 25,
(in thousands) 2022 2021 Change
Franchise royalties and fees $ 45,562 $ 38,953 $ 6,609 17 %
Company-operated store sales 341,211 213,755 127,456 60 %
Independently-operated store sales 40,469 47,941 (7,472) (16) %
Advertising fund contributions 22,018 19,762 2,256 11 %
Supply and other revenue 67,334 50,737 16,597 33 %
Total revenue $ 516,594 $ 371,148 $ 145,446 39 %
Franchise Royalties and Fees
Franchise royalties and fees increased$7 million primarily due to same store sales growth and benefited from a net increase of 40 franchise stores. Franchise system-wide sales increased by$146 million or 16%.
Company-operated Store Sales
Company-operated store sales increased$127 million of which$47 million ,$24 million , and$57 million related to the Maintenance, Car Wash and Paint, Collision and Glass segments, respectively. The sales increase in Maintenance segment was primarily due to same store sales growth and 60 net new stores. The sales increase in Paint, Collision and Glass segment was primarily due to same store sales growth as well as net store growth from acquisitions. The acquisition of seven glass businesses, (which had 156 stores in aggregate) in the first nine months of 2022 and the acquisition of 10CARSTAR franchise sites in the fourth quarter of 2021 generated$48 million and$7 million of sales for three months endedSeptember 24, 2022 , respectively. The sales increase in Car Wash segment was primarily due to the addition of 83 net new company-operated stores primarily from a number of acquisitions in the fourth quarter of 2021 and first nine months of 2022 and new greenfield store openings, which was partially offset by a decrease in same store sales. In aggregate, the Company added 310 company-operated stores year-over-year.
Independently-operated Store Sales
Independently-operated store sales (comprised entirely of sales from the
international car wash locations) decreased by
Advertising Fund Contributions
Advertising fund contributions increased by
Supply and Other Revenue
Supply and other revenue increased$17 million primarily from growth in product and service revenue within the Platform Services, Paint, Collision and Glass and Maintenance segments due to an increase in system wide sales. 35 --------------------------------------------------------------------------------
Operating Expenses
Three months ended
September 24, September 25,
(in thousands) 2022 2021 Change
Company-operated store expenses $ 209,562 $ 130,520 $ 79,042 61 %
Independently-operated store expenses 23,254 27,764 (4,510) (16) %
Advertising fund expenses 22,018 19,762 2,256 11 %
Supply and other expenses 41,042 28,330 12,712 45 %
Selling, general, and administrative expenses 82,460 71,565 10,895 15 %
Acquisition costs 2,325 636 1,689 266 %
Store opening costs 753 666 87 13 %
Depreciation and amortization 36,518 28,447 8,071 28 %
Asset impairment charges and lease
terminations 2,894 (270) 3,164 (1172) %
Total operating expenses $ 420,826 $ 307,420 $ 113,406 37 %
Company-operated Store Expenses
Company-operated store expenses increased
Independently-operated Store Expenses
Independently-operated store expenses, which are entirely related to the Car Wash segment, decreased$5 million due primarily to unfavorable foreign currency translation decreasing independently-operated store sales.
Advertising Fund Expenses
The$2 million increase in advertising fund expenses represents a commensurate 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 increased$13 million due to an increase in Supply and other revenue as well as higher oil and freight costs incurred in the Platform Services segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased
Acquisition Costs
Acquisition costs increased by$2 million . The three months endedSeptember 24, 2022 included costs associated with three glass acquisitions as well as several tuck-in car wash acquisitions while the three months endedSeptember 25, 2021 included costs associated with several car wash tuck-in acquisitions.
Store Opening Costs
Store opening costs increased slightly due to an increase in company-operated new store openings and conversions of acquired stores to the Take 5 Quick Lube brand. There were eleven new company-operated store openings and four Take 5 store conversion in the three months endedSeptember 24, 2022 , compared to eight company-operated store openings and three Take 5 store conversion during the three months endedSeptember 25, 2021 . 36 --------------------------------------------------------------------------------
Depreciation and Amortization
Depreciation and amortization expense increased$8 million due to additional fixed assets and finite-lived intangible assets recognized in conjunction with recent acquisitions and higher current period capital expenditures, primarily related to car wash new site development. Asset Impairment Charges and Lease Terminations Asset impairment charges (benefits) were approximately$3 million for the three months endedSeptember 24, 2022 compared to$(0.3) million for three months endedSeptember 25, 2021 , which consisted of impairment related to certain property and equipment and operating lease right-of-use assets at closed locations in the current period compared to favorable lease settlement in the prior year period. Interest Expense, Net Three months ended (in thousands) September 24, 2022 September 25, 2021 Change Interest expense, net $ 27,323 $ 17,688$ 9,635 54 % Interest expense, net increased$10 million as a result of higher average debt outstanding which was partially offset by a lower average interest rate in the current period. Higher average debt outstanding was primarily due to the issuance of debt in the fourth quarter of 2021 to fund the AGN and other acquisitions and for general corporate purposes.
Loss (Gain) on Foreign Currency Transactions, Net
Three months ended
September 24, September 25,
2022 2021 Change
Loss (gain) on foreign currency $ 15,582 $ 1,074 $ 14,508 1351 %
transactions, net
The loss on foreign currency transactions for the three months endedSeptember 24, 2022 was comprised of a$18 million net remeasurement loss on our nonU.S. dollar entities including third party long-term debt and intercompany notes as well as a$3 million unrealized gain on foreign currency hedges that are not designated as hedging instruments. The loss on foreign currency transactions for the three months endedSeptember 25, 2021 was comprised of a$3 million net remeasurement losses on our foreign third party long-term debt and foreign intercompany notes partially offset by$2 million of unrealized translation gains on other foreign currency hedges. Income Tax Expense Three months ended September 24, September 25, (in thousands) 2022 2021 Change Income tax expense (benefit)$ 14,472 $ 11,880 $ 2,592 22 % Income tax expense increased by$3 million . The effective income tax rate for the three months endedSeptember 24, 2022 was 27.4% compared to 26.4% for the three months endedSeptember 25, 2021 . The increase in income tax expense and tax rate was primarily driven by foreign exchange rate adjustments for the three months endedSeptember 24, 2022 . 37 --------------------------------------------------------------------------------
Results of Operations for the nine months ended
To facilitate 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.
Revenue
Nine months ended
September 24, September 25,
(in thousands) 2022 2021 Change
Franchise royalties and fees $ 128,300 $ 107,240 $ 21,060 20 %
Company-operated store sales 957,487 603,808 353,679 59 %
Independently-operated store sales 158,500 160,483 (1,983) (1) %
Advertising fund contributions 63,807 56,665 7,142 13 %
Supply and other revenue 185,447 147,199 38,248 26 %
Total revenue $ 1,493,541 $ 1,075,395 $ 418,146 39 %
Franchise Royalties and Fees
Franchise royalties and fees increased$21 million primarily due to same store sales growth as well as additional 40 franchised stores. Franchised system-wide sales increased$429 million or 17%.
Company-operated Store Sales
Company-operated store sales increased$354 million of which$132 million ,$98 million and$124 million related to the Maintenance, Car Wash and Paint, Collision and Glass segments, respectively. Company-operated store sales increased primarily due to the addition of 310 company-operated stores year-over-year primarily from the acquisitions of seven glass businesses (which had 156 stores in aggregate), a number of car wash tuck in acquisitions and 10CARSTAR franchise sites. The acquisition of the glass businesses in the first nine months of 2022 and the acquisition of 10CARSTAR franchise sites in the fourth quarter of 2021 generated$98 million and$21 million of sales, respectively, for the nine months endedSeptember 24, 2022 . Company-operated store sales also increased due to same store sales growth.
Independently-Operated Store Sales
Independently-operated store sales (comprised entirely of sales from the
international car wash locations) decreased
Advertising Fund Contributions
Advertising fund contributions increased by$7 million primarily due to a$429 million , or 17%, increase in franchised system-wide sales from same store sales growth and additional net new franchise stores. Our franchise agreements typically require the franchisee to pay continuing advertising fund fees based on a percentage of franchisee gross sales.
Supply and Other Revenue
Supply and other revenue increased
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Operating Expenses
Nine months ended
September 24, September 25,
(in thousands) 2022 2021 Change
Company-operated store expenses $ 580,368 $ 367,095 $ 213,273 58 %
Independently-operated store expenses 85,396 89,664 (4,268) (5) %
Advertising fund expenses 63,807 56,665 7,142 13 %
Supply and other expenses 109,616 80,417 29,199 36 %
Selling, general, and administrative
expenses 272,657 218,549 54,108 25 %
Acquisition costs 9,981 2,674 7,307 273 %
Store opening costs 1,925 1,360 565 42 %
Depreciation and amortization 107,628 78,722 28,906 37 %
Trade name impairment charges 125,450 - 125,450 NM
Asset impairment charges 2,910 3,161 (251) (8) %
Total operating expenses $ 1,359,738 $ 898,307 $ 461,431 51 %
Company-Operated Store Expenses
Company-operated store expenses increased$213 million which is commensurate with the increase in Company-operated store sales from the addition of new stores, acquisitions and same store sales growth. Company-operated store expenses continue to increase at a slower rate than company-operated store sales due to effective operational leverage and cost management.
Independently-Operated Store Expenses
Independently-operated store expenses, which are entirely related to the Car Wash segment, decreased$4 million , due to a decrease in Independently-operated store sales which were negatively impacted by unfavorable foreign currency translation.
Advertising Fund Expenses
The$7 million increase in advertising fund expenses represents a commensurate 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 increased$29 million due to an increase in Supply and other revenue as well as higher oil and freight costs incurred in the Platform Services segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$54 million due to an increase in employee compensation and other employee-related expense from increased headcount and acquisitions, infrastructure costs, travel costs, legal and professional fees, and marketing expenses.
Acquisition Costs
Acquisition costs increased$7 million . The nine months endedSeptember 24, 2022 included costs associated with the glass business acquisitions and a number of car wash tuck-in acquisitions while the nine months endedSeptember 25, 2021 included costs associated with car wash tuck-in acquisitions.
Store Opening Costs
Store opening costs increased slightly due to an increase in company-operated new store openings and conversions of acquired stores to the Take 5 Quick Lube brand. There were seventeen new company-operated store openings and five Take 5 Quick Lube store conversions in the nine months endedSeptember 24, 2022 , compared to eighteen company-operated store openings and four Take 5 Quick Lube store conversions during the nine months endedSeptember 25, 2021 . 39 --------------------------------------------------------------------------------
Depreciation and Amortization
Depreciation and amortization expense increased$29 million due to additional property and equipment and definite-lived intangible assets recognized in conjunction with recent acquisitions and higher current period capital expenditures largely driven by capital expenditures related to growth such as new store openings..
Trade Name Impairment Charges
The Company acquired a number of car wash businesses over the past two years and determined a fair value of each of the associated intangibles including trademarks and customer relationships. During the nine months endedSeptember 24, 2022 , the Company made the strategic decision to rebrand the majority of itsU.S. car wash locations to operate under the name "Take 5 Car Wash", and therefore are discontinuing the use of certain Car Wash trade names that had indefinite lives. As a result, the Company recognized a$125 million non-cash impairment charge. Asset Impairment Charges Asset impairment charges decreased slightly for the nine months endedSeptember 24, 2022 compared to the nine months endedSeptember 25, 2021 , due to fewer impairments related to property and equipment and operating lease right-of-use assets at closed locations. Interest Expense, Net Nine months ended (in thousands) September 24, 2022 September 25, 2021 Change Interest expense, net $ 78,946 $ 52,390$ 26,556 51 % Interest expense, net increased$27 million as a result of a higher average debt outstanding partially offset by lower average interest rates for the nine months endedSeptember 24, 2022 . Higher average debt outstanding was primarily due to the issuance of debt in the fourth quarter of 2021 to fund the AGN and other acquisitions and for general corporate purposes.
Loss on Foreign Currency Transactions, Net
Nine months ended
September 24, September 25,
(in thousands) 2022 2021 Change
Loss on foreign currency transactions,
380 %
net
The loss on foreign currency transactions for the nine months endedSeptember 24, 2022 is comprised of a$33 million remeasurement loss on our nonU.S. dollar entities including foreign third party long-term debt and intercompany notes and$3 million of unrealized gains on foreign currency hedges that are not designated as hedging instruments. The loss on foreign currency transactions for the nine months endedSeptember 25, 2021 is comprised of a remeasurement loss on our foreign third party long-term debt and intercompany notes of$9 million , partially offset by unrealized gains incurred on foreign currency hedges that are not designated as hedging instruments of$3 million . Loss on Debt Extinguishment Nine months ended September 24, September 25, (in thousands) 2022 2021 Change Loss on debt extinguishment $ -$ 45,576 $ (45,576) (100) %
The loss on debt extinguishment for the nine months ended
40
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Income Tax Expense
Nine months ended
(in thousands) September 24, 2022 September 25, 2021 Change
Income tax expense $ 8,592 $ 24,445 $ (15,853) (65) %
Income tax expense decreased by $16 million . The effective income tax rate for
the nine months ended September 24, 2022 was 35.3% compared to 33.6% for the
nine months ended September 25, 2021 . The net decrease in income tax expense was
primarily driven by a favorable discrete tax adjustment related to the trade
name impairment charge for the nine months ended September 24, 2022 , and
favorable discrete tax adjustments related to non-deductible loss on debt
extinguishment as well as tax deductible costs incurred related to the initial
public offering for the nine months ended September 25, 2021 . The net increase
in tax rate was primarily driven by foreign exchange rate adjustments.
Segment Results of Operations for the three months ended
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 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 may not be comparable to similarly titled metrics of other companies due to differences in methods of calculation.
Maintenance
Three months ended
September 24, September 25,
(in thousands, unless otherwise noted) 2022 2021 Change
Franchise royalties and fees $ 11,625 $ 9,635 $ 1,990 21 %
Company-operated store sales 172,162 125,561 46,601 37 %
Supply and other revenue 17,035 9,261 7,774 84 %
Total revenue $ 200,822 $ 144,457 $ 56,365 39 %
Segment Adjusted EBITDA $ 68,763 $ 47,894 $ 20,869 44 %
System-Wide Sales
Franchised stores $ 239,290 $ 208,218 $ 31,072 15 %
Company-operated stores 172,162 125,561 46,601 37 %
Total System-Wide Sales $ 411,452 $ 333,779 $ 77,673 23 %
Store Count (in whole numbers)
Franchised stores 1,023 992 31 3 %
Company-operated stores 574 514 60 12 %
Total Store Count 1,597 1,506 91 6 %
Same Store Sales % 14.4 % 17.0 % N/A N/A
Maintenance revenue increased $56 million for the three months ended September
24, 2022 , as compared to the three months ended September 25, 2021 . Franchise
royalties and fees increased by $2 million primarily due a $31 million or 15%
increase in franchised system-wide sales from same store sales growth and 31 net
new franchise stores. Company-operated store sales increased by $47 million
primarily due to same store sales growth and 60 net new company-operated stores.
Supply and other revenue increased by $8 million primarily due to higher
system-wide sales from franchised stores.
Maintenance Segment Adjusted EBITDA increased
41
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Car Wash
Three months ended
September 24, September 25,
(in thousands, unless otherwise noted) 2022 2021 Change
Company-operated store sales $ 98,235 $ 74,105 $ 24,130 33 %
Independently-operated store sales 40,469 47,941 (7,472) (16) %
Supply and other revenue 1,599 1,516 83 5 %
Total revenue $ 140,303 $ 123,562 16,741 14 %
Segment Adjusted EBITDA $ 39,098 $ 37,999 1,099 3 %
System-Wide Sales
Company-operated stores 98,235 74,105 24,130 33 %
Independently-operated stores 40,469 47,941 (7,472) (16) %
Total System-Wide Sales $ 138,704 $ 122,046 16,658 14 %
Store Count (in whole numbers) -
Company-operated stores 369 286 83 29 %
Independently-operated stores 717 732 (15) (2) %
Total Store Count 1,086 1,018 68 7 %
Same Store Sales % (9.0) % 6.2 % N/A N/A
The Car Wash segment is comprised of our car wash sites throughout
Car Wash Segment revenue increased by$17 million driven by the addition of 68 net new stores primarily from a number of acquisitions in the fourth quarter of 2021 and first nine months of 2022, which was partially offset by a 560 basis point unfavorable change in foreign currency rates, unfavorable weather dynamics in the quarter and macro pressure on retail traffic.
Car Wash Segment Adjusted EBITDA increased by
Paint, Collision & Glass
Three months ended
September 24, September 25,
(in thousands, unless otherwise noted) 2022 2021 Change
Franchise royalties and fees $ 24,055 $ 20,280 $ 3,775 19 %
Company-operated store sales 69,413 12,723 56,690 446 %
Supply and other revenue 19,782 17,572 2,210 13 %
Total revenue $ 113,250 $ 50,575 $ 62,675 124 %
Segment Adjusted EBITDA $ 38,919 $ 22,039 $ 16,880 77 %
System-Wide Sales
Franchised stores $ 711,816 $ 607,579 $ 104,237 17 %
Company-operated stores 69,413 12,723 56,690 446 %
Total System-Wide Sales $ 781,229 $ 620,302 $ 160,927 26 %
Store Count (in whole numbers)
Franchised stores 1,625 1,617 8 - %
Company-operated stores 197 30 167 557 %
Total Store Count 1,822 1,647 175 11 %
Same Store Sales % 15.7 % 10.8 % N/A N/A
42-------------------------------------------------------------------------------- Paint, Collision & Glass revenue increased$63 million for the three months endedSeptember 24, 2022 , as compared to the three months endedSeptember 25, 2021 . The Company-operated store sales increased$57 million , of which$48 million was related to the glass business acquisitions (156 sites) in the first nine months of 2022,$7 million from the acquisition of 10CARSTAR franchise sites in the fourth quarter of 2021 and same store sales growth. Franchise royalties and fees, which were impacted by differences in the revenue mix by brand, increased by$4 million primarily due to a$104 million or 17% increase in franchise system-wide sales primarily generated by same store sales growth. Supply and other revenue increased by$2 million primarily due to higher vendor rebates resulting from an increase in system wide sales. Paint, Collision & Glass Segment Adjusted EBITDA increased$17 million primarily due to higher revenue from acquisitions and same store sales growth as well as cost management and operational leverage. . Platform Services Three months ended September 24, September 25, (in thousands, unless otherwise noted) 2022 2021 Change Franchise royalties and fees$ 9,882 $ 9,038 $ 844 9 % Company-operated store sales 1,431 1,465 (34) (2) % Supply and other revenue 40,686 31,558 9,128 29 % Total revenue$ 51,999 $ 42,061 $ 9,938 24 % Segment Adjusted EBITDA$ 19,765 $ 16,254 $ 3,511 22 % System-Wide Sales Franchised stores$ 129,320 $ 118,825 $ 10,495 9 % Company-operated stores 1,431 1,465 (34) (2) % Total System-Wide Sales$ 130,751 $ 120,290 $ 10,461 9 % Store Count (in whole numbers) Franchised stores 201 200 1 1 % Company-operated stores 1 1 - - % Total Store Count 202 201 1 - % Same Store Sales % 8.7 % 15.8 % N/A N/A
Platform Services revenue increased
Platform Services Segment Adjusted EBITDA increased
Segment Results of Operations for the nine months ended
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 and certain non-recurring,
non-core, infrequent or unusual charges. Additionally, 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.
43
--------------------------------------------------------------------------------
Maintenance
Nine months ended
September 24, 2022 September 25,
(in thousands, unless otherwise noted) 2021 Change
Franchise royalties and fees $ 32,586 $ 26,651 $ 5,935 22 %
Company-operated store sales 497,638 365,735 131,903 36 %
Supply and other revenue 43,645 25,231 18,414 73 %
Total revenue $ 573,869 $ 417,617 $ 156,252 37 %
Segment Adjusted EBITDA $ 185,324 $ 132,895 $ 52,429 39 %
System-Wide Sales
Franchised stores $ 670,079 $ 567,155 $ 102,924 18 %
Company-operated stores 497,638 365,735 131,903 36 %
Total System-Wide Sales $ 1,167,717 $ 932,890 $ 234,827 25 %
Store Count (in whole numbers)
Franchised stores 1,023 992 31 3 %
Company-operated stores 574 514 60 12 %
Total Store Count 1,597 1,506 91 6 %
Same Store Sales % 16.0 % 24.4 % N/A N/A
Maintenance revenue increased $156 million driven primarily by a $132 million
increase in company-operated store sales from same store sales growth and 60 net
new Company-operated stores. Franchise royalties and fees increased by $6
million primarily due to the $103 million or 18% increase in franchised
system-wide sales from same store sales growth and 31 net new franchise stores.
Supply and other revenue increased by $18 million primarily due to higher
system-wide sales from franchised stores.
Maintenance Segment Adjusted EBITDA increased
Car Wash
Nine months ended
September 24, September 25,
(in thousands, unless otherwise noted) 2022 2021 Change
Company-operated store sales 294,526 196,858 $ 97,668 50 %
Independently-operated store sales 158,500 160,483 (1,983) (1) %
Supply and other revenue 5,131 4,800 331 7 %
Total revenue $ 458,157 $ 362,141 $ 96,016 27 %
Segment Adjusted EBITDA $ 148,495 $ 115,223 $ 33,272 29 %
System-Wide Sales
Company-operated stores $ 294,526 196,858 $ 97,668 50 %
Independently-operated stores 158,500 160,483 (1,983) (1) %
Total System-Wide Sales $ 453,026 $ 357,341 $ 95,685 27 %
Store Count (in whole numbers)
Company-operated stores 369 286 83 29 %
Independently-operated stores 717 732 (15) (2) %
Total Store Count 1,086 1,018 $ 68 7 %
Same Store Sales % (1.8) % 6.2 % N/A N/A
Car Wash segment is comprised of our car wash sites throughout
44
--------------------------------------------------------------------------------
Car Wash segment revenue increased $96 million driven by the addition of 68 net
new stores primarily due to a number of acquisitions which was partially offset
by a (1.8)% decrease in same store sales. Same store sales were negatively
impacted by an unfavorable change in foreign currency rates.
Car Wash Segment Adjusted EBITDA increased by
Paint, Collision & Glass
Nine months ended
(in thousands, unless otherwise noted) September 24, 2022 September 25, 2021 Change
Franchise royalties and fees $ 69,025 $ 57,578 $ 11,447 20 %
Company-operated store sales 161,531 37,672 123,859 329 %
Supply and other revenue 57,577 49,791 7,786 16 %
Total revenue $ 288,133 $ 145,041 $ 143,092 99 %
Segment Adjusted EBITDA $ 100,847 $ 61,534 $ 39,313 64 %
System-Wide Sales
Franchised stores $ 2,003,401 $ 1,722,641 $ 280,760 16 %
Company-operated stores 161,531 37,672 $ 123,859 329 %
Total System-Wide Sales $ 2,164,932 $ 1,760,313 $ 404,619 23 %
Store Count (in whole numbers)
Franchised stores 1,625 1,617 8 - %
Company-operated stores 197 30 167 557 %
Total Store Count 1,822 1,647 175 11 %
Same Store Sales % 17.5 % 12.2 % N/A N/A
Paint, Collision & Glass revenue increased $143 million for the nine months
ended September 24, 2022 , as compared to the nine months ended September 25,
2021 . Company-owned store revenue increased $124 million , of which $98 million
was due to the glass acquisitions (156 sites) in the first nine months of 2022,
and $21 million from the acquisition of 10 CARSTAR franchise sites in the fourth
quarter of 2021 and same store sales growth. Franchise royalties and fees
revenue increased $11 million due to a $281 million or 16% increase in
franchised system-wide sales from same store sales growth. Supply and other
revenue increased $8 million due to same store sales growth and higher franchise
income resulting from an increase in system wide sales.
Paint, Collision & Glass Segment Adjusted EBITDA increased $39 million primarily
due to revenue growth from acquisitions and same store sales growth as well as
cost management and operational leverage.
45
--------------------------------------------------------------------------------Platform Services
Nine months ended
September 24, September 25,
(in thousands, unless otherwise noted) 2022 2021 Change
Franchise royalties and fees $ 26,689 $ 23,011 $ 3,678 16 %
Company-operated store sales 3,975 3,911 64 2 %
Supply and other revenue 117,704 94,576 23,128 24 %
Total revenue $ 148,368 $ 121,498 $ 26,870 22 %
Segment Adjusted EBITDA $ 54,471 $ 44,864 $ 9,607 21 %
System-Wide Sales
Franchised stores $ 348,890 $ 303,209 $ 45,681 15 %
Company-operated stores 3,975 3,911 $ 64 2 %
Total System-Wide Sales $ 352,865 $ 307,120 $ 45,745 15 %
Store Count (in whole numbers)
Franchised stores 201 200 1 1 %
Company-operated stores 1 1 - - %
Total Store Count 202 201 1 - %
Same Store Sales % 14.9 % 24.7 % N/A N/A
Platform Services revenue increased $27 million primarily due to higher ASP
largely driven by inflationary pressure and an increase in platform services
customers. Also, Franchise royalties and fees increased due to higher Franchised
stores system-wide sales primarily from same store sales growth.
Platform Services Segment Adjusted EBITDA increased
Financial Condition, Liquidity and Capital Resources
Sources of Liquidity and Capital Resources
Cash flow from operations, supplemented with 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 a downgrade of our credit rating or a deterioration of certain financial ratios.Driven Brands Funding, LLC (the "Master Issuer"), a wholly owned subsidiary of the Company, andDriven Brands Canada Funding Corporation (along with the Master Issuer, the "Co-Issuers") are subject to certain quantitative covenants related to debt service coverage and leverage ratios in connection with the Securitization Senior Notes. Driven Holdings Revolving Credit Facility also has certain qualitative covenants. As ofSeptember 24, 2022 , theCo-Issuers and Driven Holdings were in compliance with all covenants under their respective credit agreements. AtSeptember 24, 2022 , the Company had total liquidity of$288 million , which included$190 million in cash, and cash equivalents, and$97 million and$0 of undrawn capacity on its 2019 variable funding securitization senior notes and Driven Holdings Revolving Credit Facility, respectively. As ofSeptember 24, 2022 , the Company also had$2 million of outstanding letters of credit. 46 --------------------------------------------------------------------------------
The following table illustrates the main components of our cash flows for the
nine months ended
Nine months ended
(in thousands) September 24, 2022 September 25, 2021
Net cash provided by operating activities $ 167,652 $ 198,195
Net cash used in investing activities (771,768) (462,721)
Net cash provided by financing activities 282,580 204,845
Effect of exchange rate changes on cash (7,705) (2,285)
Net change in cash, cash equivalents, restricted cash, and restricted cash included in advertising fund assets $ (329,241) $ (61,966)
Operating Activities Net cash provided by operating activities was$168 million for the nine months endedSeptember 24, 2022 compared to$198 million for the nine months endedSeptember 25, 2021 . The decrease was due to$56 million payment of transaction costs associated with the AGN acquisition during the nine months endedSeptember 24, 2022 and a$25 million increase in net working capital from timing and an increase in inventory, which were partially offset by$51 million increase in operating results. Investing Activities Net cash used in investing activities was$772 million for the nine months endedSeptember 24, 2022 compared to$463 million for the nine months endedSeptember 25, 2021 . During the nine months endedSeptember 24, 2022 , there was a$210 million increase in net cash paid for acquisitions and$183 million increase in capital expenditures, offset by a$83 million increase in proceeds from sale-leaseback transactions. For the nine months endedSeptember 24, 2022 , we invested$276 million in capital expenditures, compared to$94 million for the nine months endedSeptember 25, 2021 . This increase is primarily due to new company-operated store openings within our Car Wash and Maintenance segments, as well as expenditures related to the maintenance of our existing store base and technology initiatives.
Financing Activities
Net cash provided by financing activities was$283 million for the nine months endedSeptember 24, 2022 primarily related to borrowings on the revolving credit facility, which was partially offset by the repayment of senior securitization notes. Net cash provided by financing activities was$205 million for the nine months endedSeptember 25, 2021 primarily resulting from our$722 million repayment of the Car Wash Senior Credit Facilities,$43 million in repurchases of our common stock, and$22 million payment related to the termination of our interest rate swaps. These were offset by the$761 million in proceeds from our IPO and the underwriters' exercise of their over-allotment option, net of underwriting discounts and$247 million net proceeds from borrowings under the Driven Holdings Revolving Credit Facility. See Note 7 to our consolidated financial statements for additional information regarding the Company's debt.
Income 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 an income 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, inU.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. For purposes of the income 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 income 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. 47 -------------------------------------------------------------------------------- Because we are a holding company with no operations of our own, our ability to make payments under the income 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 income tax receivable agreement. To the extent that we are unable to make payments under the income tax receivable agreement because of restrictions under our outstanding indebtedness, such payments will be deferred and will generally accrue interest at a rate of LIBOR plus 1.00% per annum until paid. To the extent that we are unable to make payments under the income tax receivable agreement for any other reason, such payments will generally accrue interest at a rate of LIBOR plus 5.00% 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. Refer to our annual report for the year endedDecember 25, 2021 for a full discussion of our critical accounting policies. There have been no material changes to our critical accounting policies from those disclosed in our Form 10-K for the year endedDecember 25, 2021 .
Application of New Accounting Standards
See Note 2 of the consolidated financial statements for a discussion of recently issued accounting standards.
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