It has been a tough two years for BrightView as a public company with virtually no revenue growth. See the second table below. First, BrightView surprised Wall Street with the loss of maintenance contract revenue due to its managed exit program — eliminating contracts with customers with below satisfactory levels of profit. Then, it was hurricane cleanup revenue that did not recur and a snow season with low snowfall. Now, COVID-19 is reducing ancillary maintenance revenue (e.g., enhancements).
In each of the last two years, BrightView acquired companies, which added approximately $100 million in revenue in the 12 months following acquisition. Revenue from these acquisitions was not enough to overcome the lost revenue mentioned above.
There was one other interesting development in the quarter: The investment funds affiliated with KKR & Co. and MSD Partners that provided capital to build BrightView sold 10 million shares of stock on June 15, 2020 at a price of $13.25 per share, far below the initial public offering price of $22.00 in June 2018. Investment funds affiliated with these companies still own 62 million shares, so I expect to see more stock sales.
Here are some financial highlights from BrightView’s results for the quarter ended June 30, 2020.
- Following a decline of 6.3 percent in the prior quarter, BrightView’s revenue declined $49.1 million or 7.5 percent for the quarter ended June 30, 2020, compared with the quarter that ended June 30, 2019. That decline was primarily a result of $60.1 million in reduced demand for ancillary maintenance services, offset by $28.6 million in revenue from companies acquired in the last 12 months, combined with a reduction in construction revenue of $17.2 million due to project delays. BrightView anticipates fourth quarter revenue to decline at a similar rate.
- Capital expenditures declined $23.8 million or 69 percent for the quarter ended June 30, 2020 as compared to June 30, 2019, as management cut expenditures for new vehicles and equipment as a means of preserving liquidity.
- In its public reports, BrightView “adjusts” its earnings before interest, tax and depreciation and net income for certain expenses. I have used these same adjustments for operating income. The idea is that these expenses are not part of ordinary operations. Historically, the adjustments include expenses associated with business transformation and integration ($8.2 million in the most recent quarter), becoming a public company and defending shareholder lawsuits ($2.6 million in the most recent quarter) and paying some employees partially through equity-based compensation ($4.9 million in the most recent quarter). The most recent quarter also included $4.0 million in COVID-19 related expenses. Additionally, BrightView recorded an expense of $24.1 million to increase reserves related to its self-insurance program. Typically, a reserve is based on estimates from current and prior quarters; however, there is not sufficient information to determine the precise timing of when it should have been expensed. If the additional expenses were spread over the prior two years, the net operating profit margin for those periods would have been reduced by approximately 50 basis points (0.5 percent).
- BrightView’s gross profit margin declined to 25.7 percent in the quarter ended June 30, 2020, as compared to 28.7 percent in the quarter ended June 30, 2019. Despite the adjustments above, its adjusted operating income margin also declined to 11.2 percent from 12.3 percent in the same periods.
For the accounting experts: Note that I have excluded from operating income the expense related to the amortization of intangible assets that were recorded as BrightView acquired other businesses. Since most landscape companies do not have amortization of intangible assets, I have excluded it, so they can compare their numbers to BrightView’s numbers.
To see short-term trends, the following table shows operating results for each of the past five quarters:
| Qtr Ended June-19 | Qtr Ended Sept-19 | Qtr Ended Dec-19 | Qtr Ended Mar-20 | Qtr Ended Jun-20 | |
| Net service revenues | $657.2 | $624.8 | $570.7 | $559.1 | $608.1 |
| Year-over-year growth rate | 4.3% | 7.4% | 8.5% | -6.3% | -7.5% |
| Cost of services | 468.6 | 453.1 | 427.7 | 426.8 | 451.7 |
| Gross profit | 188.6 | 171.7 | 143 | 132.3 | 156.4 |
| Gross profit margin | 28.7% | 27.5% | 25.1% | 23.7% | 25.7% |
| Selling, general and administrative expenses | 114 | 108.8 | 130.3 | 126.9 | 131.8 |
| Adjustments | (6.0) | (10.7) | (18.1) | (16.1) | (43.8) |
| Ongoing selling, general and administrative expenses | 108 | 98.1 | 112.2 | 110.8 | 88.0 |
| Adjusted operating income | $80.6 | $73.6 | $30.8 | $21.5 | $68.4 |
| Operating profit margin | 12.3% | 11.8% | 5.4% | 3.8% | 11.2% |
To see long-term trends, the following table shows operating results for each of the past three years.
| Year Ended Jun-18 | Year Ended Jun-19 | Year Ended Jun-20 | |
| Net service revenues | $2,338.8 | $2,361.6 | $2,362.7 |
| Year-over-year growth rate | 6.1% | 1.0% | 0.0% |
| Cost of services | 1,720.1 | 1,729.4 | 1,759.3 |
| Gross profit | 618.7 | 632.2 | 603.4 |
| Gross profit margin | 26.5% | 26.8% | 25.5% |
| Selling, general and administrative expenses | 431.3 | 467.8 | 497.8 |
| Adjustments | (63.1) | (52.0) | (88.7) |
| Ongoing selling, general and administrative expenses | 398.2 | 415.8 | 409.1 |
| 17.0% | 17.6% | 17.3% | |
| Adjusted operating income | $220.5 | $216.4 | $194.3 |
| Operating profit margin | 9.4% | 9.2% | 8.2% |
Greg Herring has served as a CFO of both public and private companies. Herring is the CEO of The Herring Group, an operational and strategic finance consultancy. He has significant experience in the landscape industry, where he serves business owners challenged by growth by installing financial dashboards and systems that provide more margin for their businesses and their lives. Reach him at greg.herring@herring-group.com.
