Finance expert Herring analyzes BrightView’s financial statements

August 15, 2018 -  By
Greg Herring

Greg Herring

BrightView released its financial statements and related disclosures for the quarter ended June 30. This information has great value for owners of landscape companies. I have simplified the company’s income statement and provided some observations below.

As a CFO, I assemble and review rolling 12-month income statements in seasonal industries like the landscape industry.

The table below contains the trailing 12-month income statements for the last six quarters. In other words, each column represents 12 months or four quarters.

Year Ended
Mar-17
Year Ended
Jun-17
Year Ended
Sep-17
Year Ended
Dec-17
Year Ended
Mar-18
Year Ended
Jun-18
Net service revenues $2,160 $2,204 $2,226 $2,265 $2,336 $2,339
     Year over year growth rate 8.1% 6.1%
Cost of services 1,569.9 1,610.8 1,629.8 1,668.4 1,716.5 1,720.1
Gross profit 590.3 593.0 596.1 596.3 619.5 618.7
      Gross profit margin 27.3% 26.9% 26.8% 26.3% 26.5% 26.5%
Selling, general and administrative expenses 455.2 447.3 435.5 431.6 446.2 461.3
Adjustments (29.0) (28.4) (26.5) (38.8) (45.6) (63.2)
Ongoing selling, general and administrative expenses 426.2 418.9 409.0 392.8 400.6 398.1
Adjusted operating income $164.1 $174.1 $187.1 $203.5 $218.9 $220.6
      Operating profit margin 7.6% 7.9% 8.4% 9.0% 9.4% 9.4%

Revenue and adjusted operating income for the year ended June 30 was essentially the same as in the year ended March 31. That analysis means that revenue and adjusted operating income in the quarter ended June 30, 2018, was about the same as in the quarter ended June 30, 2017. For the most recent quarter, BrightView explained that revenue growth from new acquisitions of $26 million was offset by less construction revenue and lost maintenance customers.

The remarkable thing about BrightView’s results in the table above is the consistent growth in the adjusted operating profit margin from 7.6 percent to 9.4 percent in the years ended March 31, 2017, and June 30, 2018, respectively. That growth came despite a slight decrease in the gross profit margin from 27.3 percent to 26.5 percent for the same periods. In summary, the consistency of both the gross profit margin and the operating profit margin is a sign of great management.

BrightView incurred expenses associated with acquiring and integrating businesses, becoming a public company and paying some employees partially through equity-based compensation. Because most landscape businesses do not incur these expenses, I have reduced selling, general and administrative expenses by these amounts in the table above.

Additional intel

Here are some additional observations for landscape business owners based on BrightView’s earnings release and associated conference call.

BrightView has a strategic initiative to increase the pricing on its maintenance contracts to offset wage increases of 5-6 percent. BrightView CEO Andrew Masterman said the company is realizing average price increases of 1.75-2 percent on its portfolio of customers. BrightView will continue to raise prices as contracts expire over the next 12 months.

BrightView, which intends to keep acquiring landscape businesses, continues to invest in training its 750 Account Managers who are responsible for customer service and retention. The company also is investing in electronic time capture of field employees to improve efficiency.

BrightView works diligently to increase cash flow so that it can pay down debt. In fact, the BrightView CFO said he approves every significant capital expenditure, which indicates how important cash flow is to the success of the company.

Two situations create tremendous pressure on corporate and branch management: 1). the high level of BrightView’s debt ($1.1 billion) in relation to its operating income ($220.6 million), and 2). the large ownership positions of private equity firms. To succeed, management will either need to grow the company’s revenue or increase its profitability—something that did not happen in the quarter ended June 30.

Herring has served as a CFO of both public and private companies. He 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.

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