BRIGHTVIEW HOLDINGS, INC.

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BRIGHTVIEW HOLDINGS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

08/04/2022 | 06:22am EDT

The following discussion and analysis supplements our management's discussion and analysis for the year ended September 30, 2021 as contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 17, 2021, and presumes that readers have read or have access to such discussion and analysis. The following discussion and analysis should also be read together with the unaudited consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that reflect our plans and strategy for our business, and involve risks and uncertainties. You should review the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, as updated by subsequent filings with the Securities and Exchange Commission, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read "Special Note Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q.

Overview

Our Company

We are the largest provider of commercial landscaping services in the United States, with revenues approximately 7 times those of our next largest commercial landscaping competitor. We provide commercial landscaping services ranging from landscape maintenance and enhancements to tree care and landscape development. We operate through a differentiated and integrated national service model which systematically delivers services at the local level by combining our network of over 290 branches with a qualified service partner network. Our branch delivery model underpins our position as a single-source end-to-end landscaping solution provider to our diverse customer base at the national, regional and local levels, which we believe represents a significant competitive advantage. We believe our commercial customer base understands the financial and reputational risk associated with inadequate landscape maintenance and considers our services to be essential and non-discretionary.

Our Segments

We report our results of operations through two reportable segments: Maintenance Services and Development Services. We serve a geographically diverse set of customers through our strategically located network of branches in 34 U.S. states, and, through our qualified service partner network, we are able to efficiently provide nationwide coverage in all 50 U.S. states.

Maintenance Services

Our Maintenance Services segment delivers a full suite of recurring commercial landscaping services in both evergreen and seasonal markets, ranging from mowing, gardening, mulching and snow removal, to more horticulturally advanced services, such as water management, irrigation maintenance, tree care, golf course maintenance and specialty turf maintenance. In addition to contracted maintenance services, we also have a strong track record of providing value-added landscape enhancements. We primarily self-perform our maintenance services through our national branch network, which are route-based in nature. Our maintenance services customers include Fortune 500 corporate campuses and commercial properties, HOAs, public parks, leading international hotels and resorts, airport authorities, municipalities, hospitals and other healthcare facilities, educational institutions, restaurants and retail, and golf courses, among others.

Development Services

Through our Development Services segment, we provide landscape architecture and development services for new facilities and significant redesign projects. Specific services include project design and management services, landscape architecture, landscape installation, irrigation installation, tree moving and installation, pool and water features and sports field services, among others. Our development services are comprised of sophisticated design, coordination and installation of landscapes at some of the most recognizable corporate, athletic and university complexes and showcase highly visible work that is paramount to our customers' perception of our brand as a market leader.

In our Development Services business, we are typically hired by general contractors, with whom we maintain strong relationships as a result of our superior technical and project management capabilities. We believe the quality of our work is also well-regarded by our end-customers, some of whom directly request that their general contractors utilize our services when outsourcing their landscape development projects.


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Components of Our Revenues and Expenses

Net Service Revenues

Maintenance Services

Our Maintenance Services revenues are generated primarily through landscape maintenance services and snow removal services. Landscape maintenance services that are primarily viewed as non-discretionary, such as lawn care, mowing, gardening, mulching, leaf removal, irrigation and tree care, are provided under recurring annual contracts, which typically range from one to three years in duration and are generally cancellable by the customer with 30-90 days' notice. Snow removal services are provided on either fixed fee based contracts or per occurrence contracts. Both landscape maintenance services and snow removal services can also include enhancement services that represent supplemental maintenance or improvement services generally provided under contracts of short duration related to specific services. Revenue for landscape maintenance and snow removal services under fixed fee models is recognized over time using an output based method. Additionally, a portion of our recurring fixed fee landscape maintenance and snow removal services are recorded under the series guidance. The right to invoice practical expedient, defined within Note 3 "Revenue" to our unaudited consolidated financial statements, is generally applied to revenue related to landscape maintenance and snow removal services performed in relation to per occurrence contracts as well as enhancement services. When use of the practical expedient is not appropriate for these contracts, revenue is recognized using a cost-to-cost input method. Fees for contracted landscape maintenance services are typically billed on an equal monthly basis. Fees for fixed fee snow removal services are typically billed on an equal monthly basis during snow season, while fees for time and material or other activity-based snow removal services are typically billed as the services are performed. Fees for enhancement services are typically billed as the services are performed.

Development Services

For Development Services, revenue is primarily recognized over time using the cost-to-cost input method, measured by the percentage of cost incurred to date to the estimated total cost for each contract, which we believe to be the best measure of progress. The full amount of anticipated losses on contracts is recorded as soon as such losses can be estimated. These losses have been immaterial in prior periods. Changes in job performance, job conditions and estimated profitability, including final contract settlements, may result in revisions to costs and revenue and are recognized in the period in which the revisions are determined.


Expenses

Cost of Services Provided

Cost of services provided is comprised of direct costs we incur associated with our operations during a period and includes employee costs, subcontractor costs, purchased materials, and operating equipment and vehicle costs. Employee costs consist of wages and other labor-related expenses, including benefits, workers compensation and healthcare costs, for those employees involved in delivering our services. Subcontractor costs consist of costs relating to our qualified service partner network in our Maintenance Services segment and subcontractors we engage from time to time in our Development Services segment. When our use of subcontractors increases, we may experience incrementally higher costs of services provided. Operating equipment and vehicle costs primarily consist of depreciation related to branch operating equipment and vehicles and related fuel expenses. A large component of our costs are variable, such as labor, subcontractor expense and materials.

Selling, General and Administrative Expense

Selling, general and administrative expense consists of costs incurred related to compensation and benefits for management, sales and administrative personnel, equity-based compensation, branch and office rent and facility operating costs, depreciation expense related to branch and office locations, as well as professional fees, software costs and other miscellaneous expenses. Corporate expenses, including corporate executive compensation, finance, legal and information technology, are included in consolidated selling, general and administrative expense and not allocated to the business segments.

Amortization Expense

Amortization expense consists of the periodic amortization of intangible assets, including customer relationships, non-compete agreements and trademarks, recognized when KKR acquired the Company on December 18, 2013 and in connection with businesses we have acquired since December 18, 2013.

Interest Expense

Interest expense relates primarily to our long-term debt. See Note 7 "Long-term Debt" in the unaudited consolidated financial statements included under Part I, Item 1, "Financial Statements".


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Income Tax Expense (Benefit)

Income tax expense (benefit) includes U.S. federal, state and local income taxes. Our effective tax rate differs from the statutory U.S. income tax rate due to the effect of state and local income taxes, tax credits and certain nondeductible expenses. Our effective tax rate may vary from quarter to quarter based on recurring and nonrecurring factors including, but not limited to the geographical distribution of our pre-tax earnings, changes in the tax rates of different jurisdictions, the availability of tax credits and nondeductible items. Changes in judgment due to the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the period of the change.

Other (Expense) Income

Other (expense) income consists primarily of losses on debt extinguishment as well as investment losses and gains related to investments held in Rabbi Trust.

Trends and Other Factors Affecting Our Business

Various trends and other factors affect or have affected our operating results, including:

Seasonality

Our services, particularly in our Maintenance Services segment, have seasonal variability such as increased mulching, flower planting and intensive mowing in the spring, leaf removal and cleanup work in the fall, snow removal services in the winter and potentially minimal mowing during drier summer months. This can drive fluctuations in revenue, costs and cash flows for interim periods.

We have a significant presence in geographies that have a year-round growing season, which we refer to as our evergreen markets. Such markets require landscape maintenance services twelve months per year. In markets that do not have a year-round growing season, which we refer to as our seasonal markets, the demand for our landscape maintenance services decreases during the winter months. Typically, our revenues and net income have been higher in the spring and summer seasons, which correspond with our third and fourth fiscal quarters of our fiscal year ending September 30. The lower level of activity in seasonal markets during our first and second fiscal quarters is partially offset by revenue from our snow removal services. Such seasonality causes our results of operations to vary from quarter to quarter.

Weather Conditions

Weather may impact the timing of performance of landscape maintenance and enhancement services and progress on development projects from quarter to quarter. For example, snow events in the winter, hurricane-related cleanup in the summer and fall, and the effects of abnormally high rainfall or drought in a given market may impact our services. These less predictable weather patterns can impact both our revenues and our costs, especially from quarter to quarter, but also from year to year in some cases. Extreme weather events such as hurricanes and tropical storms can result in a positive impact to our business in the form of increased enhancement services revenues related to cleanup and other services. However, such weather events may also negatively impact our ability to deliver our contracted services or impact the timing of performance.

In our seasonal markets, the performance of our snow removal services is correlated with the amount of snowfall and number of snowfall events in a given season. We benchmark our performance against ten- and thirty-year cumulative annual snowfall averages.

Acquisitions

In addition to our organic growth, we have grown, and expect to continue to grow, our business through acquisitions in an effort to better service our existing customers and to attract new customers. These acquisitions have allowed us to execute our "strong-on-strong" acquisition strategy in which we focus on increasing our density and leadership positions in existing local markets, entering into attractive new geographic markets and expanding our portfolio of landscape enhancement services and improving technical capabilities in specialized services. As we continue to selectively pursue acquisitions that complement our "strong-on-strong" acquisition strategy, we believe we are the acquirer of choice in the highly fragmented commercial landscaping industry because we offer the ability to leverage our significant size and scale, as well as provide stable and potentially expanding career opportunities for employees of acquired businesses. In accordance with GAAP, the results of the acquisitions we have completed are reflected in our consolidated financial statements from the date of acquisition. We incur transaction costs in connection with identifying and completing acquisitions and ongoing integration costs as we integrate acquired companies and seek to achieve synergies. During the nine months ended June 30, 2022, the Company acquired seven businesses and paid approximately $89.4 million in aggregate consideration, net of cash acquired. We incurred $4.8 million of integration costs during the first nine months of fiscal 2022, of which $3.2 million related to acquisitions completed prior to fiscal 2022 and $1.6 million related to acquisitions completed during fiscal 2022. Integration costs vary in amount due to the number of acquisitions and size of acquired companies as well as factors specific to each acquisition, and as a result lack


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predictability as to occurrence and/or timing, and create a lack of comparability between periods. Costs are primarily comprised of one-time employee retention costs, employee onboarding and training costs, and fleet and uniform rebranding costs. We typically anticipate integration costs to represent approximately 7%-9% of the acquisition price, and to be incurred within 12 months of acquisition completion.

Industry and Economic Conditions

We believe the non-discretionary nature of our landscape maintenance services provides us with a fairly predictable recurring revenue model. The perennial nature of the landscape maintenance service sector, as well as its wide range of end users, minimizes the impact of a broad or sector-specific downturn. However, in connection with our enhancement services and development services, when demand for commercial construction declines, demand for landscape enhancement services and development projects may decline. When commercial construction activity rises, demand for landscape enhancement services to maintain green space may also increase. This is especially true for new developments in which green space tends to play an increasingly important role. Economic conditions, including rising inflation and fuel prices, as well as rising interest rates, have impacted and may further impact our costs and expenses, and fluctuations in labor markets, may impact our ability to identify, hire and retain employees. Increased costs, including recruiting, retention, and overtime expenditures, could adversely affect our profitability.

COVID-19 Update

The impact of the COVID-19 pandemic and related economic conditions on the Company's results continue to be highly uncertain and outside the Company's control. Although our Maintenance and Development operations are considered essential services, future governmental orders or other restrictions may limit, restrict or prohibit operations in the future. Further limitations could have a material adverse impact on our business, financial condition and results of operations.

The scope, duration and magnitude of the direct and indirect effects of the COVID-19 pandemic are difficult or impossible to anticipate. Due to the uncertainty related to the extent of the ongoing impact of the pandemic, the Company's results in the third quarter of 2021 and 2022 may not be indicative of the Company's future results. We have experienced and may experience a loss in revenue as a result of restrictions on our ability to operate our business. In addition, any further economic deterioration resulting from the impacts of the COVID-19 pandemic would negatively impact our results of operations and financial condition. Further, the degree of the impact on our business continues to be unpredictable as it will depend on factors such as the duration and spread of COVID-19, including new variants; the extent of vaccinations, vaccine mandates, the cost of complying with such mandates, and the extent to which a mandate impacts our workforce, including employee recruiting and attrition; inflationary pressures and increased costs for materials; and the timing and success of the reopening of the economy. For additional information on the risks posed by COVID-19, see "Item 1A - Risk Factors" in our Annual Report on Form 10-K for the year ended September 30, 2021.

Results of Operations


The following tables summarize key components of our results of operations for
the periods indicated.

                                       Three Months Ended                Nine Months Ended
                                            June 30,                         June 30,
(in millions)                         2022             2021            2022            2021
Net service revenues              $      747.4      $     673.6     $   2,051.2     $   1,879.9
Cost of services provided                558.2            494.6         1,565.0         1,409.2
Gross profit                             189.2            179.0           486.2           470.7
Selling, general and
administrative expense                   131.3            123.1           399.5           374.4
Amortization expense                      13.2             12.6            38.7            39.0
Income from operations                    44.7             43.3            48.0            57.3
Other (expense) income                   (14.6 )            0.8           (15.1 )           2.8
Interest expense                          14.8              9.4            34.5            32.5
Income (loss) before income
taxes                                     15.3             34.7            (1.6 )          27.6
Income tax expense (benefit)               4.5              9.5            (0.3 )           8.1
Net income (loss)                 $       10.8      $      25.2     $      (1.3 )   $      19.5
Adjusted EBITDA(1)                $       94.3      $      93.6     $     196.6     $     212.8
Adjusted Net Income(1)            $       39.8      $      46.6     $      66.4     $      86.7
Earnings (loss) per Share         $       0.12      $      0.24     $     (0.01 )   $      0.19
Adjusted Earnings per Share(1)    $       0.43      $      0.44     $      0.65     $      0.82
Cash flows from operating
activities                        $       23.4      $      50.0     $      65.7     $     133.4
Free Cash Flow(1)                 $        2.3      $      37.3     $     (17.0 )   $      96.2




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(1) See the "Non-GAAP Financial Measures" section included below for a reconciliation to the most directly comparable GAAP measure.

Three Months Ended June 30, 2022 compared to Three Months Ended June 30, 2021

Net Service Revenues

Net service revenues for the three months ended June 30, 2022 increased $73.8 million, or 11.0%, to $747.4 million, from $673.6 million in the 2021 period. The increase was driven by increases in Maintenance Services revenues of $37.2 million and Development Services revenues of $36.1 million as discussed further below in Segment Results.

Gross Profit

Gross profit for the three months ended June 30, 2022 increased $10.2 million, or 5.7%, to $189.2 million, from $179.0 million in the 2021 period. Gross margin decreased 130 basis points, to 25.3%, in the three months ended June 30, 2022, from 26.6% in the 2021 period. The increase in gross profit was driven by the increases in Maintenance Services and Development Services revenues. The decrease in gross margin was principally driven by an increase in fuel costs.

Selling, General and Administrative Expense

Selling, general and administrative expense for the three months ended June 30, 2022 increased $8.2 million, or 6.7%, to $131.3 million, from $123.1 million in the 2021 period. The increase was driven principally by the impact of acquisitions and the reinstatement of the employer match for the employee savings plan. As a percentage of revenue, Selling, general and administrative expense decreased 70 basis points for the three months ended June 30, 2022 to 17.6%, from 18.3% in the 2021 period.

Amortization Expense

Amortization expense for the three months ended June 30, 2022 increased $0.6 million, or 4.8%, to $13.2 million, from $12.6 million in the 2021 period. The increase was principally due to a $1.6 million increase in amortization expense for intangible assets recognized in connection with our acquired businesses subsequent to the ValleyCrest Acquisition offset by a $1.0 million decrease in the amortization of historical intangible assets recognized in connection with the KKR Acquisition and the ValleyCrest Acquisition, based on the pattern consistent with expected future cash flows calculated at that time.

Other (Expense) Income

Other expense was $14.6 million for the three months ended June 30, 2022 compared to income of $0.8 million in the 2021 period. The change of $15.4 million was driven principally by the losses on the extinguishment of debt in connection with Amendment No. 6 to the Credit Agreement and the change in value of investments held in the Rabbi Trust.

Interest Expense

Interest expense for the three months ended June 30, 2022 increased $5.4 million, or 57.4%, to $14.8 million, from $9.4 million in the 2021 period. The increase was driven principally by increased interest rates coupled with the increase in the borrowings under the Series B Term Loan associated with Amendment No. 6 to the Credit Agreement.

Income Tax Expense

For the three months ended June 30, 2022, Income tax expense was $4.5 million, compared to an Income tax expense of $9.5 million in the 2021 period. The decrease was primarily attributable to the decrease in the Company's pretax income of $15.3 million in the current period compared to pretax income of $34.7 million in the prior period, as well as the state tax expense related to the geographical distribution of the pre-tax income.

Net Income

For the three months ended June 30, 2022, Net income was $10.8 million, compared to $25.2 million in the 2021 period due to the changes noted above.


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Adjusted EBITDA

Adjusted EBITDA increased $0.7 million for the three months ended June 30, 2022, to $94.3 million, from $93.6 million in the 2021 period. Adjusted EBITDA as a percentage of revenue was 12.6% and 13.9% for the three months ended June 30, 2022 and 2021, respectively. The increase in Adjusted EBITDA was primarily driven by an increase of $2.2 million, or 11.8% in Development Services Segment Adjusted EBITDA, partially offset by a decrease of $1.4 million, or 1.5% in Maintenance Services Segment Adjusted EBITDA, as discussed further below in Segment Results.

Adjusted Net Income

Adjusted Net Income for the three months ended June 30, 2022 decreased $6.8 million to $39.8 million, from $46.6 million in the 2021 period due to the changes noted above.

Nine Months Ended June 30, 2022 compared to Nine Months Ended June 30, 2021

Net Service Revenues

Net service revenues for the nine months ended June 30, 2022 increased $171.3 million, or 9.1%, to $2,051.2 million, from $1,879.9 million in the 2021 period. The increase was driven by increases in Maintenance Services revenues of $75.0 million and Development Services revenues of $96.1 million as discussed further below in Segment Results.

Gross Profit

Gross profit for the nine months ended June 30, 2022 increased $15.5 million, or 3.3%, to $486.2 million, from $470.7 million in the 2021 period. Gross margin decreased 130 basis points, to 23.7%, in the nine months ended June 30, 2022, from 25.0% in the 2021 period. The increase in gross profit was principally driven by the increases in Maintenance Services and Development Services revenues. The decrease in gross margin was driven by increases in materials and fuel costs.

Selling, General and Administrative Expense

Selling, general and administrative expense for the nine months ended June 30, 2022 increased $25.1 million, or 6.7%, to $399.5 million, from $374.4 million in the 2021 period. The increase was primarily due to the impact of acquisitions as well as the reinstatement of the employer match for the employee savings plan coupled with a slight increase in travel costs. As a percentage of revenue, Selling, general and administrative expense decreased 40 basis points for the nine months ended June 30, 2022 to 19.5%, from 19.9% in the 2021 period.

Amortization Expense

Amortization expense for the nine months ended June 30, 2022 decreased $0.3 million, or 0.8%, to $38.7 million, from $39.0 million in the 2021 period. The decrease was principally due to a $3.2 million decrease in the amortization of historical intangible assets recognized in connection with the KKR Acquisition and the ValleyCrest Acquisition, based on the pattern consistent with expected future cash flows calculated at that time, offset by a $2.9 million increase in amortization expense for intangible assets recognized in connection with our acquired businesses subsequent to the ValleyCrest Acquisition.

Other (Expense) Income

Other expense was $15.1 million for the nine months ended June 30, 2022 compared to income of $2.8 million in the 2021 period. The change of $17.9 million was driven principally by the losses on the extinguishment of debt in connection with Amendment No. 6 to the Credit Agreement and the change in value of investments held in the Rabbi Trust.

Interest Expense

Interest expense for the nine months ended June 30, 2022 increased $2.0 million, or 6.2%, to $34.5 million, from $32.5 million in the 2021 period. The increase was driven primarily by increased interest rates coupled with the increase in borrowings, including the Series B Term Loan, partially offset by the impact of our interest rate hedges.


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Income Tax Expense (Benefit)

For the nine months ended June 30, 2022, Income tax benefit was $0.3 million, compared to an Income tax expense of $8.1 million in the 2021 period. The change was primarily attributable to the change in the Company's pretax loss of $1.6 million in the current period compared to pretax income of $27.6 million in the prior period as well as the state tax expense related to state tax law changes that were recorded discretely in each of the periods.

Net Income (Loss)

For the nine months ended June 30, 2022, Net loss was $1.3 million, compared to a Net loss of $19.5 million in the 2021 period due to the changes noted above.

Adjusted EBITDA

Adjusted EBITDA decreased $16.2 million for the nine months ended June 30, 2022, to $196.6 million, from $212.8 million in the 2021 period. Adjusted EBITDA as a percentage of revenue was 9.6% and 11.3% for the nine months ended June 30, 2022 and 2021, respectively. The decrease in Adjusted EBITDA was primarily driven by a decrease of $15.1 million, or 7.1% in Maintenance Services Segment Adjusted EBITDA, partially offset by an increase of $1.6 million, or 3.4% in Development Services Segment Adjusted EBITDA, as discussed further below in Segment Results.

Adjusted Net Income

Adjusted Net Income for the nine months ended June 30, 2022 decreased $20.3 million to $66.4 million, from $86.7 million in the 2021 period due to the changes noted above.

Non-GAAP Financial Measures

In addition to our GAAP financial measures, we review various non-GAAP financial measures including Adjusted EBITDA, Adjusted Net Income, Adjusted Earnings per Share ("Adjusted EPS") and Free Cash Flow.

We believe that Adjusted EBITDA, Adjusted Net Income and Adjusted EPS are helpful supplemental measures to assist us and investors in evaluating our operating results as they exclude certain items whose fluctuations from period to period do not necessarily correspond to changes in the operations of our business. Adjusted EBITDA represents net income (loss) before interest, taxes, depreciation, amortization and certain non-cash, non-recurring and other adjustment items. Adjusted Net Income is defined as net income (loss) including interest and depreciation and excluding other items used to calculate Adjusted EBITDA and further adjusted for the tax effect of these exclusions and the removal of the discrete tax items. Adjusted EPS is defined as Adjusted Net Income divided by the weighted average number of common shares outstanding for the period used in the calculation of basic EPS. We believe that the adjustments applied in presenting Adjusted EBITDA, Adjusted Net Income and Adjusted EPS are appropriate to provide additional information to investors about certain material non-cash items and about non-recurring items that we do not expect to continue at the same level in the future.

We believe Free Cash Flow is a helpful supplemental measure to assist us and investors in evaluating our liquidity. Free Cash Flow represents cash flows from operating activities less capital expenditures, net of proceeds from the sale of property and equipment. We believe Free Cash Flow is useful to provide additional information to assess our ability to pursue business opportunities and investments and to service our debt. Free Cash Flow has limitations as an analytical tool, including that it does not account for our future contractual commitments and excludes investments made to acquire assets under finance leases and required debt service payments.


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Set forth below are the reconciliations of net income (loss) to Adjusted EBITDA
and Adjusted Net Income, and cash flows from operating activities to Free Cash
Flow. Adjusted EPS is defined as Adjusted Net Income (shown below) divided by
the weighted average number of common shares outstanding for the period used in
the calculation of basic EPS and presented in Note 13 "Earnings (Loss) Per Share
of Common Stock" in the Notes to our unaudited consolidated financial
statements.

                                              Three Months Ended             Nine Months Ended
                                                   June 30,                       June 30,
(in millions)                                2022             2021           2022          2021
Adjusted EBITDA
Net income (loss)                         $     10.8       $     25.2     $     (1.3 )   $    19.5
Plus:
Interest expense, net                           14.8              9.4           34.5          32.5
Income tax expense (benefit)                     4.5              9.5           (0.3 )         8.1
Depreciation expense                            25.7             21.3           71.5          63.6
Amortization expense                            13.2             12.6           38.7          39.0
Business transformation and integration
costs (a)                                        4.3              7.2           12.7          20.0
Offering-related expenses (b)                    0.1              0.3            0.1           0.5
Equity-based compensation (c)                    4.8              5.3           14.2          15.5
COVID-19 related expenses (d)                    3.5              2.8           13.9          14.1
Debt extinguishment (e)                         12.6                -           12.6             -
Adjusted EBITDA                           $     94.3       $     93.6     $    196.6     $   212.8
Adjusted Net Income
Net income (loss)                         $     10.8       $     25.2     $     (1.3 )   $    19.5
Plus:
Amortization expense                            13.2             12.6           38.7          39.0
Business transformation and integration
costs (a)                                        4.3              7.2           12.7          20.0
Offering-related expenses (b)                    0.1              0.3            0.1           0.5
Equity-based compensation (c)                    4.8              5.3           14.2          15.5
COVID-19 related expenses (d)                    3.5              2.8           13.9          14.1
Debt extinguishment (e)                         12.6                -           12.6             -
Income tax adjustment (f)                       (9.5 )           (6.8 )        (24.5 )       (21.9 )
Adjusted Net Income                       $     39.8       $     46.6     $     66.4     $    86.7
Free Cash Flow
Cash flows from operating activities      $     23.4       $     50.0     $     65.7     $   133.4
Minus:
Capital expenditures                            23.9             16.8           88.1          44.7

Plus:

Proceeds from sale of property and
equipment                                        2.8              4.1            5.4           7.5
Free Cash Flow                            $      2.3       $     37.3     $    (17.0 )   $    96.2



(a)

Business transformation and integration costs consist of (i) severance and related costs; (ii) business integration costs and (iii) information technology infrastructure, transformation costs, and other.

                                              Three Months Ended              Nine Months Ended
                                                   June 30,                        June 30,
(in millions)                                2022             2021           2022            2021
Severance and related costs               $      0.6       $      0.1     $      0.9       $     0.3
Business integration (g)                         0.3              3.4            4.8             9.2
IT infrastructure, transformation, and
other (h)                                        3.4              3.7            7.0            10.5
Business transformation and integration
costs                                     $      4.3       $      7.2     $     12.7       $    20.0



(b)

Represents transaction related expenses incurred for IPO related litigation and completed or contemplated subsequent registration statements.

(c)

Represents equity-based compensation expense and related taxes recognized for equity incentive plans outstanding.

(d)

Represents expenses related to the Company's response to the COVID-19 pandemic, principally temporary and incremental salary and related expenses, personal protective equipment, cleaning and supply purchases, and other.

(e)

Represents losses on the extinguishment of debt related to Amendment No. 6 to the Credit Agreement and includes the write-off of deferred finance fees and original issue discount.


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(f)

Represents the tax effect of pre-tax items excluded from Adjusted Net Income and the removal of the applicable discrete tax items, which collectively result in a reduction of income tax. The tax effect of pre-tax items excluded from Adjusted Net Income is computed using the statutory rate related to the jurisdiction that was impacted by the adjustment after taking into account the impact of permanent differences and valuation allowances. Discrete tax items include changes in laws or rates, changes in uncertain tax positions relating to prior years and changes in valuation allowances.


                                             Three Months Ended          Nine Months Ended
                                                  June 30,                    June 30,
(in millions)                                2022           2021         2022           2021
Tax impact of pre-tax income adjustments   $     9.7       $   6.9     $    24.7       $ 21.6
Discrete tax items                              (0.2 )        (0.1 )        (0.2 )        0.3
Income tax adjustment                      $     9.5       $   6.8     $    24.5       $ 21.9



(g)

Represents isolated expenses specifically related to the integration of acquired companies such as one-time employee retention costs, employee onboarding and training costs, and fleet and uniform rebranding costs. The Company excludes Business integration costs from the measures disclosed above since such expenses vary in amount due to the number of acquisitions and size of acquired companies as well as factors specific to each acquisition, and as a result lack predictability as to occurrence and/or timing, and create a lack of comparability between periods.

(h)

Represents expenses related to distinct initiatives, typically significant enterprise-wide changes. Such expenses are excluded from the measures disclosed above since such expenses vary in amount based on occurrence as well as factors specific to each of the activities, are outside of the normal operations of the business, and create a lack of comparability between periods.

Segment Results

We classify our business into two segments: Maintenance Services and Development Services. Our corporate operations are not allocated to the segments and are not discussed separately as any results that had a significant impact on operating results are included in the consolidated results discussion above.

We evaluate the performance of our segments on Net service revenues, Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin (Segment Adjusted EBITDA as a percentage of Net service revenues). Segment Adjusted EBITDA is indicative of operational performance and ongoing profitability. Our management closely monitors Segment Adjusted EBITDA to evaluate past performance and identify actions required to improve profitability.

Segment Results for the Three Months Ended June 30, 2022 and 2021

The following tables present Net service revenues, Segment Adjusted EBITDA, and Segment Adjusted EBITDA Margin for each of our segments. Changes in Segment Adjusted EBITDA Margin are shown in basis points, or bps.

Maintenance Services Segment Results

                                   Three Months Ended
                                        June 30,              Percent Change
(in millions)                       2022          2021        2022 vs. 2021
Net Service Revenues             $    561.8      $ 524.6                  7.1 %
Segment Adjusted EBITDA          $     89.2      $  90.6                 (1.5 )%

Segment Adjusted EBITDA Margin 15.9 % 17.3 % (140) bps

Maintenance Services Net Service Revenues

Maintenance Services net service revenues for the three months ended June 30, 2022 increased by $37.2 million, or 7.1%, from the 2021 period. The increase was primarily driven by a $15.7 million revenue contribution from acquired businesses combined with an increase of $12.0 million, or 2.3%, in underlying commercial landscape services underpinned by a combination of contract services growth and to a greater extent ancillary services growth. Snow removal services increased $9.5 million principally driven by higher snowfall during the three months ended June 30, 2022 as compared to the 2021 period.

Maintenance Services Segment Adjusted EBITDA

Segment Adjusted EBITDA for the three months ended June 30, 2022 decreased by $1.4 million to $89.2 million from $90.6 million in the 2021 period. Segment Adjusted EBITDA Margin decreased 140 basis points, to 15.9%, in the three months ended June 30, 2022, from 17.3% in the 2021 period. The decreases in Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin were principally driven by higher fuel costs and increased selling, general & administrative costs, including the reinstatement of the employer


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match for the employee savings plan and the investment to grow our business development team, which were partially offset by increases in revenues from underlying commercial landscape services and acquisitions discussed above.

Development Services Segment Results

                                   Three Months Ended
                                        June 30,              Percent Change
(in millions)                       2022          2021        2022 vs. 2021
Net Service Revenues             $    186.4      $ 150.3                 24.0 %
Segment Adjusted EBITDA          $     20.9      $  18.7                 11.8 %

Segment Adjusted EBITDA Margin 11.2 % 12.4 % (120) bps

Development Services Net Service Revenues

Development Services net service revenues for the three months ended June 30, 2022 increased $36.1 million, or 24.0%, compared to the 2021 period. The increase was principally driven by an increase in Development Services project volumes of $21.1 million coupled with $15.0 million of revenue contributions from acquired businesses.

Development Services Segment Adjusted EBITDA

Segment Adjusted EBITDA for the three months ended June 30, 2022 increased $2.2 million, to $20.9 million, compared to the 2021 period, primarily driven by the increased revenues discussed above. Segment Adjusted EBITDA Margin decreased 120 basis points, to 11.2% for the quarter from 12.4% in the 2021 period primarily as a result of increased use of subcontractors due to the mix of projects performed during the period, reinstatement of the employer match for the employee savings plan and higher fuel costs, partially offset by lower material costs as a percentage of revenue.

Segment Results for the Nine Months Ended June 30, 2022 and 2021

The following tables present Net service revenues, Segment Adjusted EBITDA, and Segment Adjusted EBITDA Margin for each of our segments. Changes in Segment Adjusted EBITDA Margin are shown in basis points, or bps.

Maintenance Services Segment Results

                                    Nine Months Ended
                                        June 30,              Percent Change
(in millions)                      2022          2021         2022 vs. 2021
Net Service Revenues             $ 1,553.4     $ 1,478.4                  5.1 %
Segment Adjusted EBITDA          $   197.4     $   212.5                 (7.1 )%

Segment Adjusted EBITDA Margin 12.7 % 14.4 % (170) bps

Maintenance Services Net Service Revenues

Maintenance Services net service revenues for the nine months ended June 30, 2022 increased by $75.0 million, or 5.1%, from the 2021 period. The increase was primarily driven by a $63.5 million, or 5.3%, increase in underlying commercial landscape services underpinned by a combination of contract services growth and to a greater extent ancillary services growth, as well as a $60.7 million revenue contribution from acquired businesses. Offsetting this was a decrease of $28.1 million in snow removal services, net of $21.1 million from acquired businesses, due to overall less snowfall during the nine months ended June 30, 2022 as compared to the 2021 period.

Maintenance Services Segment Adjusted EBITDA

Segment Adjusted EBITDA for the nine months ended June 30, 2022 decreased by $15.1 million to $197.4 million from $212.5 million in the 2021 period. Segment Adjusted EBITDA Margin decreased 170 basis points, to 12.7%, in the nine months ended June 30, 2021, from 14.4% in the 2021 period. The decreases in Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin were principally driven by the decrease in snow removal revenues and higher fuel costs which were partially offset by increases in revenues from underlying commercial landscape services and acquisitions discussed above.


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Development Services Segment Results

                                   Nine Months Ended
                                        June 30,             Percent Change
(in millions)                       2022         2021        2022 vs. 2021
Net Service Revenues             $    500.8     $ 404.7                 23.7 %
Segment Adjusted EBITDA          $     48.2     $  46.6                  3.4 %

Segment Adjusted EBITDA Margin 9.6 % 11.5 % (190) bps

Development Services Net Service Revenues

Development Services net service revenues for the nine months ended June 30, 2022 increased $96.1 million, or 23.7%, compared to the 2021 period. The increase was principally driven by a $51.8 million revenue contribution from acquired businesses combined with an increase of $44.3 million due to additional project volumes.

Development Services Segment Adjusted EBITDA

Segment Adjusted EBITDA for the nine months ended June 30, 2022 increased $1.6 million, to $48.2 million, compared to the 2021 period, principally as a result of the increases in revenues described above, partially offset by higher materials costs. Segment Adjusted EBITDA Margin decreased 190 basis points, to 9.6% for the period from 11.5% in the 2021 period, primarily as a result of higher materials and fuel costs as a percentage of revenue, partially offset by lower labor and subcontractor costs as a percentage of revenue.

Liquidity and Capital Resources

Liquidity

Our principal sources of liquidity are existing cash and cash equivalents, cash generated from operations and borrowings under the Credit Agreement and the Receivables Financing Agreement. Our principal uses of cash are to provide working capital, meet debt service requirements, fund capital expenditures and finance strategic plans, including acquisitions and share repurchases under the share repurchase program announced in December 2021. We may also seek to finance capital expenditures under finance leases or other debt arrangements that provide liquidity or favorable borrowing terms. We continue to consider acquisition opportunities, but the size and timing of any future acquisitions and the related potential capital requirements cannot be predicted. While we have in the past financed certain acquisitions with internally generated cash, in the event that suitable businesses are available for acquisition upon acceptable terms, we may obtain all or a portion of the necessary financing through the incurrence of additional long-term borrowings.

Based on our current level of operations and available cash, we believe our cash flow from operations, together with availability under the Revolving Credit Facility under the Credit Agreement and the Receivables Financing Agreement, will provide sufficient liquidity to fund our current obligations, projected working capital requirements, debt service requirements, capital spending requirements and share repurchases for the next twelve months.


A substantial portion of our liquidity needs arise from debt service
requirements, and from the ongoing cost of operations, working capital and
capital expenditures.

                                                       June 30,         September 30,
(in millions)                                            2022               2021
Cash and cash equivalents                           $         26.3     $         123.7

Short-term borrowings and current maturities of
long-term debt                                      $         12.0     $          10.4
Long-term debt                                             1,336.4             1,130.6
Total debt, net                                     $      1,348.4     $       1,141.0


The Company is party to a credit agreement dated December 18, 2013 (the "Credit Agreement"), a five-year revolving credit facility that, pursuant to the Amendment Agreement, currently matures on April 22, 2027 (the "Revolving Credit Facility") and, through a wholly-owned subsidiary, a receivables financing agreement dated April 28, 2017 (as amended, the "Receivables Financing Agreement"). Each of the Company's credit facilities bear interest based in-part on a secured overnight funding rate.

We can increase the borrowing availability under the Credit Agreement or increase the term loans outstanding under the Credit Agreement by up to $303.0 million, in the aggregate, in the form of additional commitments under the Revolving Credit Facility and/or incremental term loans under the Credit Agreement, or in the form of other indebtedness in lieu thereof, plus an additional amount so


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long as we do not exceed a specified senior secured leverage ratio and, in the case of second lien indebtedness, a specified senior secured leverage ratio. We can incur such additional secured or other unsecured indebtedness under the Credit Agreement if certain specified conditions are met. Our liquidity requirements are significant primarily due to debt service requirements. See Note 7 "Long-term Debt" to our unaudited consolidated financial statements included under Part I, Item 1, "Financial Statements".

Our business may not generate sufficient cash flows from operations or future borrowings may not be available to us under our Revolving Credit Facility or the Receivables Financing Agreement in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. Our ability to do so depends on, among other factors, prevailing economic conditions, many of which are beyond our control. In addition, upon the occurrence of certain events, such as a change in control, we could be required to repay or refinance our indebtedness. We may not be able to refinance any of our indebtedness, including the Series B Term Loan under the Credit Agreement, on commercially reasonable terms or at all. Any future acquisitions, joint ventures, or other similar transactions may require additional capital and there can be no assurance that any such capital will be available to us on acceptable terms or at all.

Cash Flows

Information about our cash flows, by category, is presented in our statements of cash flows and is summarized below:


                         Nine Months Ended
                              June 30,
(in millions)            2022          2021
Operating activities   $    65.7     $  133.4
Investing activities   $  (172.1 )   $ (143.0 )
Financing activities   $     9.0     $  (22.5 )
Free Cash Flow (1)     $   (17.0 )   $   96.2


(1)

See the "Non-GAAP Financial Measures" above for a reconciliation to the most directly comparable GAAP measure.

Cash Flows provided by Operating Activities

Net cash provided by operating activities for the nine months ended June 30, 2022 decreased $67.7, to $65.7 million, from $133.4 million in the 2021 period. This decrease was due to a decrease in the cash provided by accounts payable and other operating liabilities principally due to the repayment of the payroll tax deferral under the CARES Act coupled with a reduction in cash provided by other operating assets. This was partially offset by an increase in cash provided by unbilled and deferred revenue and accounts receivable.

Cash Flows provided (used) in Investing Activities

Net cash used in investing activities increased $29.1 to $172.1 million for the nine months ended June 30, 2022 from $143.0 in the 2021 period. The increase was driven by an increase of $43.4 million in cash used for capital expenditures driven principally by receipted orders previously impacted by pandemic-related supply chain challenges, partially offset by a decrease of $16.8 million in cash used for acquisitions in comparison to the prior period.

Cash Flows provided (used) in Financing Activities

Net cash flows provided by financing activities of $9.0 million for the nine months ended June 30, 2022 included proceeds from the April 22, 2022 refinancing of our Term Loan, net of issuance costs of 1,180.1 million, partially offset by repayments of our Term Loan of $1,003.3 million and repayments of the previous draw on our Revolving Credit Facility of $165.0 million. Proceeds from our Receivables Financing Agreement, net of issuance costs of $223.7 million were partially offset by repayments of our Receivables Financing Agreement of $203.0 million. Additionally, repurchases of common stock and distributions of totaled $163.7 million and repayments of finance lease obligations totaled $18.1 million in the period.

Free Cash Flow

Free Cash Flow decreased $113.2 million to an outflow of $17.0 million for the nine months ended June 30, 2022 from an inflow of $96.2 million in the 2021 period. The decrease in Free Cash Flow was due to a decrease in net cash provided by operating activities and an increase in cash used for capital expenditures, as described above.


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Working Capital

                             June 30,       September 30,
(in millions)                  2022             2021
Net Working Capital:
Current assets              $    683.8     $         710.8
Less: Current liabilities        529.7               496.1
Net working capital         $    154.1     $         214.7


Net working capital is defined as current assets less current liabilities. Net working capital decreased $60.6 million to $154.1 million at June 30, 2022, from $214.7 million at September 30, 2021, primarily driven by a decrease in cash and cash equivalents of $97.4 million as described above, as well as an increase in deferred revenue of $24.8 million, and an increase in accounts payable of $14.6 million. This was partially offset by an increase in accounts receivable, net of $43.5 million, an increase in other current assets of $17.0 million, a decrease in accrued expenses and other liabilities of $10.4 million and an increase in unbilled revenue of $9.9 million.

Description of Indebtedness

As of June 30, 2022, we were in compliance with all of our debt covenants and no event of default has occurred or was ongoing. See Note 7 "Long-term Debt" to our unaudited consolidated financial statements included under Part I, Item 1, "Financial Statements".

Contractual Obligations and Commercial Commitments

As of June 30, 2022, there were no material changes outside the ordinary course of business in our contractual obligations and commercial commitments from those reported as of September 30, 2021 in our Annual Report on Form 10-K.

Critical Accounting Policies and Estimates

Management has evaluated the accounting policies used in the preparation of the Company's consolidated financial statements and related notes and believe those policies to be reasonable and appropriate. Certain of these accounting policies require the application of significant judgment by management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The most significant areas involving management judgments and estimates may be found in the Annual Report on Form 10-K, in the "Critical Accounting Policies and Estimates" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations." There have been no material changes to our critical accounting policies as compared to the critical accounting policies described in the Annual Report on Form 10-K for the year ended September 30, 2021.

Recently Issued Accounting Policies

The information set forth in Note 2 "Recent Accounting Pronouncements" to our unaudited consolidated financial statements under Part I, Item 1, "Financial Statements" is incorporated herein by reference.


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