Finance expert Herring on BrightView’s first stumble

February 11, 2019 -  By
Greg Herring headshot

Greg Herring

In previous articles, I have expressed admiration for BrightView’s ability to grow its operating profit margin quarter after quarter, on a trailing 12-month basis.

In the 12 months ended Dec. 31, 2018, BrightView had its first stumble. Two events outside its control contributed to the decline in its operating profit margin. First, hurricane cleanup services provided $17.5 million less revenue in the quarter ended Dec. 31, 2018, as compared with the quarter ended Dec. 31, 2017. Second, snow revenue decreased from $53.6 million to $48.0 million in the quarters ended Dec. 31, 2017 and 2018, respectively. According to BrightView, hurricane cleanup services and snow services typically produce higher than average profit margins.

Despite acquisitions of other companies, BrightView’s landscape maintenance revenue also decreased from $353.1 million to $344.6 million due to its program to eliminate low-margin contracts. This reduction likely caused an increase in the profit margin, which was more than offset by the reduction in the margin from the two weather-related situations discussed above.

As a CFO, I assemble and review rolling 12-month income statements in highly seasonal industries like the landscape industry. I have simplified BrightView’s income statement in the table below, which shows the trailing 12-month income statements for the last eight quarters. In other words, each column represents 12 months or four quarters.

Note that 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.

Year Ended
Mar-17
Year Ended
Jun-17
Year Ended
Sep-17
Year Ended
Dec-17
Year Ended
Mar-18
Year Ended
Jun-18
Year Ended
Sep-18
Year Ended
Dec-18
Net service revenues $2,160.2 $2,203.8 $2,225.9 $2,264.7 $2,336.0 $2,338.8 $2,353.6 $2,328.5
     Year over year growth rate 8.1% 6.1% 5.7% 2.8%
Cost of services 1,569.9 1,610.8 1,629.8 1,668.4 1,716.5 1,720.1 1,727.4 1,713.0
Gross profit 590.3 593.0 596.1 596.3 619.5 618.7 626.2 615.5
      Gross profit margin 27.33% 26.91% 26.78% 26.33% 26.52% 26.45% 26.61% 26.43%
Selling, general and administrative expenses 455.2 447.3 435.5 431.6 446.2 461.3 481.1 471.4
Adjustments (29.0) (28.4) (26.5) (38.8) (45.6) (63.2) (78.2) (67.3)
Ongoing selling, general and administrative expenses 426.2 418.9 409.0 392.8 400.6 398.1 402.9 404.1
Adjusted operating income $164.1 $174.1 $187.1 $203.5 $218.9 $220.6 $223.3 $211.4
      Operating profit margin 7.60% 7.90% 8.41% 8.99% 9.37% 9.43% 9.49% 9.08%

To view this chart as an image, click here.

What does this stumble mean?

In the short run, it meant a lower stock price. The stock fell from $14.74 to $12.75 in the two days after it released its earnings – a much greater decline than the rest of the stock market.

Longer term, BrightView must display an ability to grow its revenue and operating profit. Why?

Growing revenue and operating profit generally cause the demand for a stock to grow. BrightView needs greater demand for its stock so it can sell more shares to the public and repay some of its $1.2 billion in bank debt or provide an exit for some of its private equity investors (who own 69 percent of the stock) or both.

Why should an owner of a landscape business care about this information?

That’s a great question.

As you compete with BrightView, you might want to ask your prospective customers if they would rather deal with people that must answer to big banks and private equity investors or deal with people that must answer to you. From a customer’s perspective, bigger is not always better.

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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1 Comment on "Finance expert Herring on BrightView’s first stumble"

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  1. John Grasso says:

    Greg,

    I think Brightview is learning that being a public company allows all to see the “belly of the beast.” So far it hasn’t looked that great. I took a short position and got out about $17. That debt is going to be a big ball & chain. Thanks for unbiased reporting!