BrightView Holdings, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. BrightView provides commercial landscaping, maintenance, snow removal and development services through Maintenance Services and Development Services. The quarter ended June 30, 2018; comparisons are with the quarter and nine months ended June 30, 2017. Amounts below are in millions unless noted. The filing covers the period before BrightView’s July 2, 2018 IPO.
Financial performance
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Nine months ended June 30, 2018 | Nine months ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $630.3 | $627.5 | $1,771.8 | $1,658.9 |
| Gross profit / margin | $175.6 / 27.9% | $176.4 / 28.1% | $460.4 / 26.0% | $437.9 / 26.4% |
| Operating income | $27.1 | $41.1 | $13.9 | $12.1 |
| Net income (loss) | $(1.4) | $15.4 | $(4.1) | $(37.9) |
| Adjusted EBITDA / margin | $97.8 / 15.5% | $98.5 / 15.7% | $215.9 / 12.2% | $186.8 / 11.3% |
| Operating cash flow | $44.5 | $0.2 | $123.7 | $69.0 |
| Free cash flow | $19.3 | $(15.5) | $55.9 | $23.3 |
Quarterly interest expense was $27.5, up from $24.9; the company attributed the increase to higher rates and borrowings. For the nine-month period, the $58.2 income tax benefit included a $41.4 benefit from remeasuring deferred taxes after the Tax Act rate reduction. Nine-month adjusted free cash flow was $77.5, including a $21.6 adjustment for acquired ValleyCrest land and buildings.
Liquidity and debt
At June 30, cash and cash equivalents were $16.4; working capital was $171.5, up from $160.4 at September 30, 2017. Reported total debt was $1,657.7, including $14.6 current debt. The company reported $127.1 of revolver availability and $25.0 under its receivables financing agreement, and said it was covenant-compliant. Operating cash flow funded only part of investing outflows: nine-month investing cash use was $172.6, including $104.4 for acquisitions and $71.7 in capital expenditures.
After quarter-end, the IPO generated approximately $501.2 net proceeds. BrightView used them to repay $110.0 of second-lien debt, $55.0 drawn on its revolver and approximately $336.1 of first-lien debt. The resulting approximately $501.1 debt-extinguishment charge was to be recognized in Q4 2018. Accordingly, June 30 debt balances do not reflect this repayment.
Changes versus prior comparable periods
- Q3 revenue rose just 0.4%; acquired businesses and higher snow-removal revenue were partly offset by lower landscape and development revenue. Gross margin slipped 20 basis points, while operating income fell to $27.1 from $41.1 and results shifted from net income to a net loss.
- Q3 SG&A rose 14.5%, principally reflecting IPO-related equity compensation and costs. Adjusted EBITDA was slightly lower year over year.
- Nine-month revenue grew 6.8%, driven by acquisitions and snow removal. Adjusted EBITDA increased 15.6%, led by Maintenance Services; Development Services adjusted EBITDA declined 6.9% and its margin fell 110 basis points.
- Nine-month operating cash flow increased $54.7, while investing cash outflow rose substantially with acquisitions. Cash at period-end was $16.4 versus $12.8 at September 30, 2017.
Outlook, commentary and risks
- Management said cash flow, cash on hand and available borrowing capacity should cover current obligations, working capital, debt service and capital spending for the next 12 months. The filing provides no specific earnings or revenue guidance.
- Management described recurring maintenance services as a source of predictability and reported an approximately 85% contract renewal rate in each of calendar 2016 and 2017. It also emphasized seasonality and sensitivity to weather, including snowfall, rainfall and drought.
- Key risks include customer retention and contract renewals, labor availability and costs, acquisition integration, competition, fuel and material costs, real estate and construction conditions, and the ability to generate cash and refinance or service substantial debt. Debt agreements restrict certain actions; rising interest rates could increase borrowing costs.
- Self-insurance reserves totaled $118.8 at June 30. BrightView said it was not aware of any legal proceeding or claim expected to have a material effect; ordinary-course employee, injury, commercial and regulatory matters remain possible.
- Unusual items include IPO costs and elevated equity-based compensation. The company also terminated its sponsor monitoring agreement upon the IPO, paying termination fees of approximately $11.0 in total. Management said it expected the new revenue recognition standard to increase disclosures but not materially affect results, financial position or cash flows.
Important facts for investors to verify
- Confirm the post-IPO debt balances, interest expense and the Q4 accounting for the approximately $501.1 debt extinguishment.
- Track whether revenue growth continues without relying primarily on acquisitions or unusually favorable snowfall, and whether Maintenance Services contract retention remains strong.
- Assess margin pressure, particularly labor costs and Development Services project-material costs, against management’s efficiency initiatives.
- Compare reported cash generation with capital spending, acquisition costs, debt service and the company’s non-GAAP free cash flow adjustments.
- Review the ongoing effects of IPO-related compensation, sponsor ownership and the company’s debt covenants and borrowing availability.