BrightView Holdings, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended June 30, 2019 (fiscal 2019 third quarter). Filed August 7, 2019. BrightView provides commercial landscaping, maintenance, snow removal and development services through Maintenance Services and Development Services. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Three months 2019 | Three months 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $657.2 | $630.3 | $1,779.9 | $1,771.8 |
| Gross profit / margin | $188.6 / 28.7% | $175.6 / 27.9% | $466.6 / 26.2% | $460.4 / 26.0% |
| Operating income | $60.7 | $27.1 | $80.2 | $13.9 |
| Net income (loss) | $31.7 | $(1.4) | $19.3 | $(4.1) |
| Adjusted EBITDA (non-GAAP) | $101.9 / 15.5% of revenue | $97.8 / 15.5% | $213.1 / 12.0% | $215.9 / 12.2% |
| Operating cash flow | $44.5 | $44.5 | $109.2 | $123.7 |
| Free cash flow (non-GAAP) | $13.7 | $19.3 | $38.8 | $55.9 |
Quarterly revenue grew 4.3%; nine-month revenue increased 0.5%. Third-quarter revenue rose in both segments: Maintenance Services revenue was $492.1 million, up 3.7%, and Development Services revenue was $166.3 million, up 5.7%. For the nine months, Maintenance Services revenue increased 1.2% to $1,358.0 million, while Development Services declined 2.1% to $424.7 million.
Changes and drivers
- Third-quarter gross margin expanded 80 basis points, attributed to revenue growth and lower material costs as a share of revenue. Operating income benefited from lower SG&A and substantially lower amortization, as amortization of older acquisition-related trademarks was largely complete.
- Quarterly net income improved from a loss to $31.7 million, supported by higher operating income and $9.1 million lower interest expense. Nine-month net income also improved, but the prior-year comparison included a $41.4 million one-time tax benefit from the 2017 Tax Act.
- Nine-month Adjusted EBITDA fell 1.3%; Maintenance Services segment Adjusted EBITDA declined 2.6% and its margin fell 60 basis points to 15.1%. Management cited the absence of prior-year hurricane cleanup, unfavorable weather, reduced operating efficiencies and costs of absorbing acquired businesses. Development Services nine-month revenue declined, but its segment margin increased 20 basis points to 13.0%.
- Acquisitions contributed $69.9 million to nine-month landscape-services revenue. This was partly offset by $29.0 million of revenue reduction from the managed exit of underperforming contracts and the absence of $17.5 million in prior-year hurricane cleanup revenue. Snow-removal revenue was lower year over year.
Cash, debt and liquidity
At June 30, 2019, cash was $10.9 million, total current assets were $523.5 million, and current liabilities were $344.9 million; working capital was $178.6 million, down from $199.7 million at September 30, 2018. Net debt reported on the balance sheet was $1,156.2 million, compared with $1,154.2 million at September 30, 2018. Long-term debt, net, was $1,145.8 million. The company reported no outstanding balance on its $260 million revolving credit facility; $150 million was outstanding under its receivables financing agreement, which has a $200 million capacity.
Nine-month operating cash flow declined $14.5 million, primarily due to higher accounts receivable from collection timing and lower deferred revenue. Capital expenditures were $77.2 million; cash used for acquisitions was $59.5 million. Free cash flow was $38.8 million, versus $55.9 million a year earlier. Management stated that operating cash flow and available borrowing capacity should be sufficient for obligations, working capital, debt service and capital spending over the next 12 months. The company said it was in compliance with debt covenants and had no event of default.
Outlook, risks and notable matters
- The filing provides no quantified earnings or revenue guidance. Management’s liquidity assessment covers the next 12 months; results are subject to seasonal and weather-related variability.
- Principal disclosed risks include customer retention and contract profitability, labor availability (including H-2B visa-related workforce constraints), weather, acquisitions and integration, competition, input costs, and the ability to generate cash to service substantial debt. Variable-rate debt also exposes the company to interest-rate changes; swaps hedge part of that exposure.
- Two purported securities class actions concerning the July 2018 IPO were consolidated in Pennsylvania state court. Allegations include failure to disclose underperforming contracts and labor shortages. BrightView intends to defend the actions and said it cannot estimate any possible loss or range of loss.
- Self-insurance reserves totaled $126.2 million. Management considers recorded reserves adequate, while noting that ultimate claims depend on future developments.
- Adoption of the new revenue-recognition standard had an immaterial impact. The company expected the lease standard, effective for it October 1, 2019, to increase recognized lease assets and liabilities.
Important facts for investors to verify
- Whether revenue growth and margins persist after considering acquisitions, managed contract exits, weather and the prior-year hurricane comparison.
- Cash conversion, receivable collections and deferred-revenue trends, given lower year-to-date operating and free cash flow.
- Debt-service capacity, available receivables-facility borrowing, interest-rate exposure and covenant headroom.
- Developments and potential financial exposure in the consolidated IPO-related securities litigation.
- The sustainability of reported results alongside non-GAAP adjustments, including integration costs and equity-based compensation.