This article originally appeared on LandscapeManagement.net on May 11, 2023. Greg Herring regularly writes for Landscape Management, providing financial analysis and insights tailored to landscape business owners.
Pretend that you are on the board of a company. One of your duties is to represent the financial interests of shareholders.
Here’s some of the data you would review:
- Real revenue (adjusted for inflation – see last quarter’s article for a more complete explanation) in the company’s core landscape maintenance business is declining.
- In the 12 months ending March 31, 2023, the shareholders lost 59 percent of their investment, which is like putting $100 in the bank and only getting $41 out of the bank.
- The company has $1.4 billion in debt while the value of its equity is only $453 million.
- The management team has significant equity-based incentive compensation – meaning they have a significant incentive to increase the value of the equity which has not happened.
- Management reduces its capital expenditures to increase cash flow and reduce debt. (This reduction is occurring in an industry where a well-run company has virtually no discretionary capital expenditures. Certainly, one can drive a truck for another year, but what happens to repairs and maintenance expenses?)
- Management promotes an initiative to reduce costs to become more efficient and increase profitability.
As a board member, what would you do? You would probably want to find new management.
The data above is from BrightView.
Did the BrightView board replace management? We do not know, but here are the facts.
The CFO left in October 2022, giving at least five months’ notice; in other words, it was an orderly transition. Now, the CEO is leaving at the end of May and BrightView does not have a permanent replacement – not exactly an orderly transition.
Simply put, BrightView is in a difficult situation – negative real growth in its core business, significant losses for shareholders and a heavy debt burden. That situation is always difficult, but the difficulty is even greater when the Federal Reserve is increasing interest rates and many economists are predicting a recession. Said differently, BrightView has an operating problem (negative real growth and declining profitability), a cash flow problem due to the amount of its debt and an investor problem (due to the decline in the stock price).
All of us in the industry owe BrightView’s management team a debt of gratitude for what they accomplished. They took a landscape company public, raising the profile of the industry and attracting a tremendous amount of investment. Many, if not all, of the people in the industry benefited from their accomplishments.
Before presenting the financial results for the last quarter, I want to comment further on Project Accelerate, BrightView’s cost-saving initiative. Across all divisions, including corporate, the company eliminated 200-plus positions and implemented a hiring freeze. The intention of this project is to reduce expenses and increase efficiency. The company expects $20 million in annual cost savings.
On the one hand, big companies always have the opportunity to reduce costs and increase efficiencies. However, BrightView has been under pressure for quite some time to increase its operating profit margin. Furthermore, a low snow year has intensified the need to find other sources for cash to pay interest and reduce debt. (Snow revenue for the quarter ended March 31, 2023, declined by $69.4 million from the same quarter in the prior year.) That situation makes me wonder whether these cuts will have a more significant impact on BrightView’s service quality and its ability to retain customers and employees. Time will tell.
Income statement summary
In its public reports, BrightView “adjusts” its earnings before interest taxes depreciation and amortization and net income for certain expenses. I have used some of these adjustments for operating income in the tables below. The idea is that these expenses are not part of ordinary operations. Historically, the adjustments included expenses associated with business transformation and integration, becoming a public company and defending shareholder lawsuits, paying some employees partially through equity-based compensation, and some other unusual expenses. The company also made an adjustment for COVID-19-related expenses. In the table below, I did not adjust the results for COVID-19 expenses because they are a normal part of operations for landscape companies.
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 Mar- 22||Qtr Ended Jun- 22||Qtr Ended Sep- 22||Qtr Ended Dec-22||Qtr Ended Mar- 23|
|Snow removal services||208.2||12.9||(0.8)||61.8||138.8|
|Net service revenues||711.9||747.4||723.5||655.9||650.4|
|Year-over-year growth rate||-8.6%|
|Cost of services||554.8||558.2||534.9||508.3||503.3|
|Gross profit margin||22.1%||25.3%||26.1%||22.5%||22.6%|
|Selling, general and admin (SG&A) expenses||133.4||131.3||135.3||137.6||138.7|
|Ongoing SGA&A expenses||126.4||122.2||121.5||127.2||128.3|
|SG&A as a percent of revenue||17.8%||16.4%||16.8%||19.4%||19.4%|
|Adjusted operating income||$30.7||$67.0||$67.1||$20.4||$18.8|
|Operating profit margin||4.3%||9.0%||9.3%||3.1%||2.9%|
To see long-term trends, the following table shows operating results for each of the past four years:
|Year Ended Mar-20||Year Ended Mar-21||Year Ended Mar-22||Year Ended Mar-23|
|Snow removal services||163.5||286.8||247.3||212.7|
|Net services revenues||2,411.8||2,422.5||2,651.0||2,777.2|
|Year-over-year growth rate||0.4%||9.4%||4.8%|
|Cost of services||1,776.2||1,810.8||1,994.9||2,104.7|
|Gross profit margin||26.4%||25.3%||24.7%||24.2%|
|Selling, general and admin (SG&A) expenses||480.0||521.4||525.1||542.9|
|Ongoing SG&A expenses||430.2||423.3||481.4||499.2|
|SG&A as a percent of revenue||17.8%||17.5%||18.2%||18.0%|
|Adjusted operating income||$205.4||$188.4||$174.7||$173.3|
|Operating profit margin||8.5%||7.8%||6.6%||6.2%|
Read previous BrightView articles for additional insights on how the company has gotten to this point. As we often tell our clients, BrightView is too big to ignore in many markets.