S-1 1 d541813ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on May 30, 2018

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

BrightView Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   0782   46-4190788

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

401 Plymouth Road

Suite 500

Plymouth Meeting, Pennsylvania 19462-1646

Telephone: (484) 567-7204

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Jonathan M. Gottsegen, Esq.

Executive Vice President, Chief Legal Officer and Corporate Secretary

401 Plymouth Road

Suite 500

Plymouth Meeting, Pennsylvania 19462-1646

Telephone: (484) 567-7204

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

With copies to:

Joseph H. Kaufman, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017-3954

(212) 455-2000

 

Byron B. Rooney, Esq.

Joseph A. Hall, Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017-3954

(212) 450-4000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Proposed
Maximum
Aggregate
Offering Price(1)(2)
 

Amount of

Registration Fee

Common stock, par value $0.01 per share

  $100,000,000   $12,450

 

 

(1) Includes additional shares that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated May 30, 2018

PRELIMINARY PROSPECTUS

Shares

 

LOGO

BrightView Holdings, Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of BrightView Holdings, Inc. We are offering              shares of our common stock.

Prior to this offering, there has been no public market for our common stock. We currently expect that the initial public offering price of our common stock will be between $          and $         per share. We intend to apply to list our common stock on the New York Stock Exchange, or the NYSE, under the symbol “BV.”

After the completion of this offering, affiliates of Kohlberg Kravis Roberts & Co. L.P., or KKR Sponsor, and affiliates of MSD Partners, L.P., or MSD Partners, will continue to own a majority of the voting power of our common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. See “Principal Stockholders.”

 

 

Investing in our common stock involves risk. See “Risk Factors” beginning on page 17 to read about factors you should consider before buying shares of our common stock.

 

 

Neither the Securities and Exchange Commission, or the SEC, nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per
Share
     Total  

Initial public offering price

   $                       $                   

Underwriting discount

   $      $  

Proceeds, before expenses, to us (1)

   $      $  

 

(1) We have agreed to reimburse the underwriters for certain expenses in connection with the offering. See “Underwriting (Conflicts of Interest).”

To the extent that the underwriters sell more than                  shares of our common stock, the underwriters have the option to purchase up to an additional                  shares from us at the initial public offering price, less the underwriting discount, within 30 days of the date of this prospectus.

The underwriters expect to deliver the shares against payment in New York, New York on or about                 , 2018.

 

 

Joint Book-Running Managers

 

Goldman Sachs & Co. LLC   J.P. Morgan   KKR   UBS Investment Bank
Baird                   Credit Suisse   Macquarie Capital
Jefferies   Mizuho Securities   Morgan Stanley   RBC Capital Markets

Co-Managers

 

Nomura   Stifel   William Blair   Moelis & Company   SMBC Nikko

Prospectus dated                 , 2018.


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LOGO

 

A Brighter Outlook for your Landscape Services


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LOGO

 

Creating a More Beautiful Tomorrow


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We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may provide you. We are offering to sell, and seeking offers to buy, these securities only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the securities. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States: We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.

 

 

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Market, Ranking, and Other Industry Data

     ii  

Trademarks, Service Marks and Tradenames

     ii  

Basis of Presentation

     ii  

Non-GAAP Financial Measures

     iii  

Prospectus Summary

     1  

Risk Factors

     17  

Special Note Regarding Forward-Looking Statements

     40  

Use of Proceeds

     42  

Dividend Policy

     43  

Dilution

     44  

Capitalization

     46  

Selected Historical Consolidated Financial Data

     48  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     52  

Business

     86  

Management

     104  

Principal Stockholders

     135  

Certain Relationships and Related Party Transactions

     138  

Description of Capital Stock

     143  

Shares Eligible for Future Sale

     151  

Material United States Federal Income and Estate Tax Consequences to Non-U.S. Holders

     154  

Underwriting (Conflicts of Interest)

     157  

Legal Matters

     164  

Experts

     164  

Where You Can Find More Information

     164  

Index to Financial Statements

     F-1  

 

 

 

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MARKET, RANKING, AND OTHER INDUSTRY DATA

The data included in this prospectus regarding markets, ranking and other industry information are based on reports of government agencies or published industry sources, and our own internal estimates are based on our management’s knowledge and experience in the markets in which we operate. Data regarding the industry in which we compete and our market position and market share within this industry are inherently imprecise and are subject to significant business, economic and competitive uncertainties beyond our control, but we believe they generally indicate size, position and market share within this industry. Our own estimates are based on information obtained from our customers, suppliers, trade and business organizations and other contacts in the markets we operate. We are responsible for all of the disclosure in this prospectus, and we believe these estimates to be accurate as of the date of this prospectus or such other date stated in this prospectus. However, this information may prove to be inaccurate because of the method by which we obtained some of the data for the estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. While we believe that each of the publications used throughout this prospectus are prepared by reputable sources, neither we nor the underwriters have independently verified market and industry data from third-party sources. While we believe our internal company research and estimates are reliable, such research and estimates have not been verified by any independent source. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates. See “Special Note Regarding Forward-Looking Statements.” As a result, you should be aware that market, ranking, and other similar industry data included in this prospectus, and estimates and beliefs based on that data may not be reliable. Neither we nor the underwriters can guarantee the accuracy or completeness of any such information contained in this prospectus.

TRADEMARKS, SERVICE MARKS AND TRADENAMES

We own a number of registered and common law trademarks and pending applications for trademark registrations in the United States, primarily through our subsidiaries, including: BrightView, Brickman and ValleyCrest. Solely for convenience, the trademarks, service marks and tradenames referred to in this prospectus are presented without the ®, SM and TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and tradenames. All trademarks, service marks and tradenames appearing in this prospectus are the property of their respective owners.

BASIS OF PRESENTATION

Unless otherwise indicated or the context otherwise requires, financial data in this prospectus reflects the business and operations of BrightView Holdings, Inc. and its consolidated subsidiaries. Unless the context otherwise requires, all references herein to “BrightView,” the “Company,” “we,” “our” or “us” refer to BrightView Holdings, Inc. and its consolidated subsidiaries. BrightView Holdings, Inc. conducts substantially all of its activities through its direct, wholly-owned subsidiary, BrightView Landscapes, LLC, or BrightView Landscapes, and its subsidiaries.

On January 31, 2018, our Board of Directors approved the change of our fiscal year end from December 31 to September 30 of each year, beginning with September 30, 2017. References to “fiscal year 2017” relate to the period from January 1, 2017 to September 30, 2017. References to “fiscal year 2014,” “fiscal year 2015” and “fiscal year 2016” relate to our fiscal years ended December 31, 2014, 2015 and 2016, respectively.

On December 18, 2013, an affiliate of KKR Sponsor indirectly acquired a controlling interest in our company, which we refer to as the KKR Acquisition. For the purpose of discussing our financial results, we refer

 

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to ourselves as the “Successor” in the periods following the KKR Acquisition and the “Predecessor” during the periods preceding the KKR Acquisition. References herein to the Predecessor period ended December 17, 2013, or the 2013 Predecessor period, relate to the period from January 1, 2013 to December 17, 2013.

Amounts in this prospectus and the consolidated financial statements included in this prospectus are presented in U.S. dollars rounded to the nearest million, unless otherwise noted. Certain amounts presented in tables are subject to rounding adjustments and, as a result, the totals in such tables may not sum. The accounting policies set out in the audited consolidated financial statements contained elsewhere in this prospectus have been consistently applied to all periods presented.

Landscape maintenance contract renewal rates are calculated as the ratio of the number of landscape maintenance customers at the end of the period to the number of landscape maintenance customers at the beginning of the period, weighted by annual contract dollar value per customer at the beginning of the period.

NON-GAAP FINANCIAL MEASURES

This prospectus contains “non-GAAP financial measures” that are financial measures that either exclude or include amounts that are not excluded or included in the most directly comparable measures calculated and presented in accordance with accounting principles generally accepted in the United States, or GAAP. Specifically, we make use of the following non-GAAP financial measures: “Adjusted EBITDA,” “Adjusted Net Income,” “Free Cash Flow” and “Adjusted Free Cash Flow.”

Adjusted EBITDA, Adjusted Net Income, Free Cash Flow and Adjusted Free Cash Flow have been presented in this prospectus as supplemental financial measures that are not required by, or presented in accordance with GAAP, because we believe they assist investors and analysts in comparing our results across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management regularly uses these measures as tools in evaluating our operating performance, financial performance and liquidity, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure and capital investments. Management uses Adjusted EBITDA, Adjusted Net Income, Free Cash Flow and Adjusted Free Cash Flow to supplement comparable GAAP measures in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. In addition, we believe that Adjusted EBITDA, Adjusted Net Income, Free Cash Flow and Adjusted Free Cash Flow are frequently used by investors and other interested parties in the evaluation of issuers, many of which also present Adjusted EBITDA, Adjusted Net Income, Free Cash Flow and Adjusted Free Cash Flow when reporting their results in an effort to facilitate an understanding of their operating and financial results and liquidity. Management supplements GAAP results with non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone.

Adjusted EBITDA and Adjusted Net Income are provided in addition to, and should not be considered as alternatives to, net income (loss) or any other performance measure derived in accordance with GAAP, and Free Cash Flow and Adjusted Free Cash Flow are provided in addition to, and should not be considered an alternative to, cash flow from operating activities or any other measure derived in accordance with GAAP as a measure of our liquidity. Adjusted EBITDA, Adjusted Net Income, Free Cash Flow and Adjusted Free Cash Flow have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP. In addition, because not all companies use identical calculations, the presentations of these measures may not be comparable to other similarly titled measures of other companies and can differ significantly from company to company. Additionally, these measures are not intended to be a measure of cash available for management’s discretionary use as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements.

For a reconciliation of the most directly comparable GAAP measures, see “Prospectus Summary—Summary Historical Consolidated Financial and Other Data” and “Selected Historical Consolidated Financial Data.”

 

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PROSPECTUS SUMMARY

This summary highlights certain significant aspects of our business and this offering. This is a summary of information contained elsewhere in this prospectus, is not complete and does not contain all of the information that you should consider before making your investment decision. You should carefully read the entire prospectus, including the information presented under the sections entitled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” and the consolidated financial statements and the notes thereto, before making an investment decision. This summary contains forward-looking statements that involve risks and uncertainties.

Our Company

We are the largest provider of commercial landscaping services in the United States, with revenues more than 10 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 200 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. This creates recurring revenue and enhances the predictability of our business model, as demonstrated by our landscape maintenance contract renewal rate of approximately 85% for each of calendar year 2016 and 2017.

We operate through two segments: Maintenance Services and Development Services. Our maintenance services (74% of fiscal year 2017 revenues) are primarily self-performed through our national branch network and are route-based in nature. Our development services (26% of fiscal year 2017 revenues) 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.

As the number one player in the highly attractive and growing $62 billion commercial landscape maintenance and snow removal market, we believe our size and scale present several compelling value propositions for our customers, and allow us to offer a single-source landscaping services solution to a diverse group of commercial customers across all 50 U.S. states and Puerto Rico. We serve a broad range of end market verticals, including corporate and commercial properties, homeowners’ associations, or HOAs, public parks, hotels and resorts, hospitals and other healthcare facilities, educational institutions, restaurants and retail, and golf courses, among others. We believe that due to our unmatched geographic scale and breadth of service offerings, we are the only commercial landscaping services provider able to service clients whose geographically disperse locations require a broad range of landscaping services delivered consistently and with high quality. Our top ten customers accounted for approximately 12% of our fiscal year 2017 revenues, with no single customer accounting for more than 3% of our fiscal year 2017 revenues. The diversity of our client base and end-markets are evidenced by the following:

 

    We serve approximately 13,000 office parks and corporate campuses, 9,000 residential communities and 450 educational institutions.

 

    We serve four of the five largest U.S. banks, 11 of the top 15 U.S. health systems, nine of the top ten third-party hotel management firms and four of the top five largest U.S. companies.

Our business model is characterized by stable, recurring revenues, a scalable operating model, strong and improving operating margins, limited capital expenditures and low working capital requirements, which together, generate significant Free Cash Flow. For the twelve months ended December 31, 2017, we generated net service



 

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revenues of $2,264.7 million, net income of $5.3 million and Adjusted EBITDA of $283.6 million, with a net income margin of 0.2% and an Adjusted EBITDA margin of 12.5%.

Our Operating Segments

We deliver our broad range of services through two operating segments: Maintenance Services and Development Services. We serve a geographically diverse set of customers through our strategically located network of branches in 30 U.S. states and, through our qualified service partner network, we are able to efficiently provide nationwide coverage in all 50 U.S. states and Puerto Rico. Our broad range of services include:

 

LOGO

Maintenance Services Overview

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. 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. Owing to the non-discretionary nature of landscape maintenance services for commercial customers and our long history with many of our customers, we have achieved a landscape maintenance contract renewal rate of approximately 85% for each of calendar year 2016 and 2017.

For the twelve months ended December 31, 2017, in Maintenance Services, we generated net service revenues of $1,685.0 million and Segment Adjusted EBITDA of $270.9 million, with a Segment Adjusted EBITDA Margin of 16.1%.

Development Services Overview

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 nursery and installation, pool and water features and sports field services, among others. These complex and specialized offerings showcase our technical expertise across a broad range of end market verticals.



 

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For the twelve months ended December 31, 2017, in Development Services, we generated net service revenues of $582.9 million and Segment Adjusted EBITDA of $73.4 million, with a Segment Adjusted EBITDA Margin of 12.6%.

Market Opportunity

Commercial Landscaping Services Industry

The landscape services industry consists of landscape maintenance and development services, as well as a number of related ancillary services such as tree care and snow removal, for both commercial and residential customers. BrightView operates only within the commercial segments of each of the landscape maintenance, landscape development and snow removal industries. Commercial landscape maintenance, including snow removal, represents a $62 billion industry that is characterized by a number of attractive market drivers. Due to the essential and non-discretionary need of these recurring services, the commercial landscape maintenance services and snow removal services industries have, and are expected to continue to, exhibit stable and predictable growth. Highlighting the consistency of this growth, from 2012 through 2022 the combined industry is expected to grow at a 3% CAGR.

In addition to its stable characteristics, the industry is also highly fragmented. Despite being the largest provider of commercial landscaping services, we currently hold only a 2.7% market share, representing a significant opportunity for future consolidation. According to the October 2017 IBISWorld – Landscaping Services in the U.S. report, which we refer to as the 2017 IBISWorld Report, there are over 500,000 enterprises providing landscape maintenance services in the United States. Approximately three quarters of the industry participants are classified as sole proprietors, with a limited set of companies having the capabilities to operate on a regional or national scale.

Key Trends and Industry Drivers

We believe we are well-positioned to capitalize on the following key industry trends that are expected to drive stable and growing demand for our landscaping services: (i) outsourcing by customers of non-core processes, such as landscape maintenance; (ii) sole-sourcing by customers to full-service vendors; (iii) customers’ enhanced quality demands; (iv) increased focus on corporate campus environments; and (v) growth of private non-residential construction.

Value Proposition

Our ability to systematically deliver high quality landscaping services is the foundation of our value proposition to our customers. We leverage our national footprint of over 200 branches and the significant breadth of our offerings to service all of our customers’ landscaping needs. We believe our long tenured and experienced employee base has resulted in the development of significant institutional horticultural and technical expertise that we systematically deliver to our customers. In addition, we have dedicated resources to enhance employee training, safety and compliance and through investments in our business systems, we are able to deliver a seamless, professionally managed service experience. Finally, our branch-led business model, supported by a process-driven management approach and strategically centralized corporate functions, supports our focus on quality of service and repeatable execution.

Together, our branch-led business model, national footprint and experienced employee base enable us to deliver high quality services with a scope and on a scale that we believe is not matched by our competitors. We believe our customers value the consistency and professionalism of our execution and, as a result, trust us to maintain facilities that have a meaningful impact on their reputation and brand image.



 

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Our Competitive Strengths

#1 Position in a Large, Highly Fragmented and Growing Industry

We are the largest provider of commercial landscaping services in the United States, with revenues more than 10 times the size of our next largest commercial landscaping competitor. In addition to our #1 position in commercial landscaping services, we are also the #1 provider of snow removal services, as well as a leading tree nursery, water irrigation and golf course maintenance services provider. Our market leadership is anchored across a wide range of services in a large, fragmented and growing industry primarily characterized by smaller local players, with no other industry participant commanding more than 1% market share.

Commercial landscape maintenance is an essential service to our customers, who generally utilize such services throughout the economic cycle. Customers are increasingly raising their expectations regarding the quality of the work performed by their landscape maintenance providers and on the variety of services offered. With our position as the #1 provider of commercial landscaping services and our nationwide branch network, we are well-positioned to take advantage of positive growth trends in the industry.

Single-Source Landscape Solutions Provider with an Unparalleled Suite of Capabilities and Scale

We provide a full spectrum of landscape maintenance and development services on a national scale, positioning our company as a trusted, “one-stop shop” for sophisticated customers that demand high quality execution. We also provide a full suite of offerings that covers every stage of a customer’s landscaping needs, regardless of complexity or scale, from design and development to maintenance and enhancement. Our snow removal business acts as a natural complement to landscape maintenance services provided to customers in regions impacted by seasonal weather and leverages our existing capital equipment already in place. Our reputation for technical excellence and industry know-how also makes us the developer and servicer of choice for high-profile, bespoke assignments, showcasing the breadth and depth of what we are able to deliver. Our ability to deliver consistent local performance across a national footprint is differentiating in a highly fragmented market. We believe no other industry participant is able to deliver the same value proposition across U.S. regional markets.

Our Services are Systematically and Consistently Delivered at the Local Level

One of the fundamental pillars of our differentiated business model is our ability to systematically and comprehensively deliver the full spectrum of capabilities and industry expertise at the local level through our branch network. The route-based nature of our Maintenance Services business and high network density compound incremental revenue opportunities as account managers and crew leaders interact more frequently with a range of customers on a daily basis.

At its core, our success is driven by optimized, branch-level execution and customer management. We conduct branch-by-branch reviews and track key operating statistics at a local level to ensure consistency of customer service and operational performance. In addition, regional leadership, branch managers and account managers are properly incentivized to consider performance targets from both a growth and profitability standpoint.

Maintenance Services branch managers are supported by a best-in-class network of 700+ dedicated branch-level account managers, responsible for the day-to-day support, attention and customized service delivered to customers. The fact that local customers entrust our account managers to interact directly with their businesses each day is a testament to the capabilities of our account managers and the service they provide.



 

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Scalable Business Model Built for Future Growth

We have made significant investments in our operating platform to position us for future growth. We have invested in centralizing core management functions and systems, while also establishing purpose-built processes to enable our branch-level teams to provide consistent, repeatable services for our customers. For example, we have continued to invest in our business model, focusing on route optimization, fleet and asset management programs, our human capital management and our technology capabilities. Our highly standardized operating structure enables our branch managers to focus on efficiently delivering high quality services in a consistent and profitable manner. When a branch reaches a critical size, we are able to efficiently split the branch to support continued growth and high quality of execution. The potential to amplify the already meaningful operating leverage inherent to our business model creates a significant opportunity going forward.

Recurring and Predictable Revenue Base

Our business model is inherently stable, predictable, and insulated from economic volatility due to several factors. The majority of our revenues are generated from maintenance services, which provide a highly predictable, recurring revenue stream with clear visibility into future performance. Many of the commercial landscape maintenance services which we provide are non-discretionary for our customers, who are focused on maintaining a perceived level of quality or desired environment at a given location. In addition, our services often represent a low percentage of the overall expense associated with the upkeep of properties we serve. The predictability of our platform is further enhanced by compelling contract renewal rates. Our focus on systematically delivering our services locally has resulted in a landscape maintenance contract renewal rate of approximately 85% for each of calendar year 2016 and 2017.

Differentiated Quality and Expertise of Employee Base

Our size, scale and organizational structure enable us to attract and retain an employee base that we believe is superior to those of our smaller competitors, which drives substantial competitive advantages in an industry highly focused on reputation, track record of execution and applicable industry expertise. Given our sophisticated customer base, and the complex, holistic solutions our customers often demand, our human capital is critical to our success. We believe our long tenured and experienced employee base has resulted in the development of significant institutional horticultural and technical expertise that we systematically deliver to our customers. Our scale supports meaningful training and development resources, which bolsters our ability to attract, develop and retain the best talent.

We are highly focused on employee engagement, development, wage dynamics, career progression opportunities and personal ownership and accountability across all levels of tenure and seniority. We also maintain a best-in-class safety track record, with OSHA recordable incidents at approximately half of the industry average. Finally, our commitment to federal employment practices is evident in our self-imposed requirement that 100% of new employees be verified through the U.S. Department of Homeland Security’s E-Verify® system.

Our Operational Discipline Provides for Strong Cash Flow Generation

Our scaled operating platform and variable cost structure results in attractive operating margins and significant Free Cash Flow generation. We have successfully reduced our indirect and overhead costs through our focus on driving operational enhancements and efficiencies. For example, we have standardized a substantial amount of our procurement process, leveraged our scale to reduce materials and equipment costs, meaningfully reduced corporate expenses, consolidated our multiple corporate headquarters locations and introduced an electronic time capture and payroll system. Additionally, our business model is characterized by strong Adjusted



 

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EBITDA margins, low and improving working capital and limited capital expenditure requirements, which have allowed us to deliver consistent and strong Free Cash Flow generation. As a result, this has allowed us to retain a significant portion of our operational cash flows, resulting in cash conversion (defined as Adjusted EBITDA less net capital expenditures, adjusted for the acquisition of legacy ValleyCrest land and buildings, as a percentage of Adjusted EBITDA) of over 80% for the twelve months ended December 31, 2017. We intend to use a meaningful portion of our future Free Cash Flow to pursue our acquisition strategy, as well as to reduce our debt, which was $1,603.7 million as of March 31, 2018 and would have been $             million as of March 31, 2018 after giving effect to this offering and the use of proceeds therefrom.

Demonstrated M&A Capabilities

We have developed significant capabilities and have a proven track record of identifying, acquiring and integrating strategic acquisitions. We will selectively continue to pursue 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. 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 providing stable and potentially expanding career opportunities for employees of acquired businesses. Since January 1, 2017, we have acquired eight businesses with more than $188.2 million of aggregate annualized revenue (of which $73.2 million of annualized revenue relates to transactions completed after March 31, 2018 and not yet reflected in our historical financial statements) adding over 4,200 additional customer sites. We anticipate incurring integration related costs in respect of these acquisitions of $3.8 million, of which $1.3 million had been incurred as of March 31, 2018, with the remainder to be incurred by the second quarter of fiscal year 2019.

We maintain a dedicated M&A team that not only targets and executes strategic transactions, but also maintains an on-site presence at newly acquired businesses to ensure efficient integration into the broader BrightView platform. Our stringent and proven target identification framework delivers an actionable pipeline of acquisition opportunities at attractive valuation levels. Our typical target opportunity is an established landscape maintenance business with a strong commercial customer base.

Proven Management Team

Our management team combines extensive business services experience with robust local landscaping leadership. Our management team also draws on significant prior expertise in managing distributed workforces and has a history of success empowering branch managers and fostering leadership teams at the local level. Our senior leadership team consists of a combination of long-term internal leaders and strategic hires from well-respected external platforms with an average of 14 years of executive leadership experience. Our senior leadership team is supported by a deep bench of operating senior vice presidents and vice presidents with an average tenure of 17 years with BrightView or acquired companies.

Our Strategy

Grow Wallet Share with Existing Customers

We have developed and implemented a set of standard operating practices to increase both the existing customer wallet size and share of wallet. Our 700+ branch-level account managers have a mandate to proactively promote additional services that we can provide to our existing customers and to leverage our mobile technology to design and generate enhancement proposals with customers while on site. We have also aligned branch-level compensation to be focused on growing our wallet share with existing customers.



 

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Gain New Customers

We recently created an experienced 125-member business development team that is focused on winning new customers at a local level. Our approach is to leverage our existing branch footprint and qualified service partner network to gain new customers in the attractive markets where we already have a presence. Through detailed assessments of local market conditions and demographics, we expect to focus on selected high-growth geographies which exhibit positive weather and economic characteristics. Our decentralized branch structure allows us to efficiently gain market share while at the same time providing the support of centralized back office operations and a network of experienced operators, ensuring BrightView’s best-in-class standards are met at every site.

Continue Operational Enhancements

Following the ValleyCrest Acquisition, we pursued a number of strategic initiatives to better position our business to profitably grow on an accelerated basis. A key aspect of this strategy was to develop operational best practices, ensure consistent execution and drive increased profitability across our business. We created a Center of Excellence as a mechanism to institutionalize and implement these best practices across our branch network, including the following: (i) leveraging the deployment of technology; (ii) implementing centralized procurement; (iii) standardizing quality by ensuring consistent service across branches and customer sites; (iv) improving safety training, monitoring and performance; and (v) optimizing asset and resource management. We intend to continue to implement these operational enhancements across our branch network.

Execute Accretive Maintenance M&A Opportunities

Following the integration of the ValleyCrest Acquisition, we resumed and accelerated our “strong-on-strong” acquisition strategy, which has resulted in the completion of eight acquisitions since January 1, 2017. Given the highly fragmented nature of our industry, we believe there are numerous attractive acquisition opportunities that would enable us to further expand our business. Our national scale provides us with deep market knowledge and our strong track record of successfully integrating acquisitions further validates us as a leading consolidator in the industry. Our highly selective and disciplined approach to acquisitions is focused on the tenet of enhancing our services with existing customers and expanding our service reach to new customers, including: (i) increasing density in existing regions; (ii) developing a presence in attractive underpenetrated geographic markets; (iii) acquiring new maintenance customers with potential to provide ancillary services; (iv) expanding our portfolio of landscape enhancement business; and (v) improving technical capabilities in specialized services.

Risks Related to Our Business and this Offering

Investing in our common stock involves substantial risk, and our ability to successfully operate our business is subject to numerous risks.

Risk factors related to our business include the following:

 

    Our business is affected by general business, financial market and economic conditions, which could adversely affect our financial position, results of operations and cash flows.

 

    Our industry and the markets in which we operate are highly competitive and increased competitive pressures could reduce our share of the markets we serve and adversely affect our business, financial position, results of operations and cash flows.

 

    Our business success depends on our ability to preserve long-term customer relationships.

 

    We may be adversely affected if customers reduce their outsourcing.


 

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    Because we operate our business through dispersed locations across the United States, our operations may be materially adversely affected by inconsistent practices and the operating results of individual branches may vary.

 

    Seasonality affects the demand for our services and our results of operations and cash flows.

 

    Our operations are impacted by weather conditions.

 

    Our substantial indebtedness could have important adverse consequences and adversely affect our financial condition.

 

    Increases in raw material costs, fuel prices, wages and other operating costs could adversely impact our business, financial position, results of operations and cash flows.

 

    If we are unable to accurately estimate the overall risks, requirements or costs when we bid on or negotiate contracts that are ultimately awarded to us, we may achieve lower than anticipated profits or incur contract losses.

Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute our business strategy. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under “Risk Factors” in deciding whether to invest in our common stock.

Corporate History and Information

Through its predecessors, BrightView commenced operations in 1939 and has grown organically and through acquisitions.

BrightView Holdings, Inc. was incorporated in Delaware on November 7, 2013 as Garden Acquisition Holdings, Inc., an entity owned by KKR Sponsor and certain of its affiliates, in connection with the KKR Acquisition. On December 18, 2013, Garden Acquisition Holdings, Inc. purchased all of the outstanding equity of BG Holdings, LLC, the former parent of Brickman Group Holding, Inc., and BG Holdings, LLC was merged into Garden Acquisition Holdings, Inc., with Garden Acquisition Holdings, Inc. surviving. Following the KKR Acquisition, Garden Acquisition Holdings, Inc. changed its name to Brickman Acquisition Holdings, Inc.

On June 30, 2014, we acquired ValleyCrest Holding Co., or ValleyCrest Holding, a landscape horticultural company that provides landscape maintenance, enhancement, snow removal and development services for commercial customers, primarily in California, Florida and Texas, which we refer to as the ValleyCrest Acquisition. Following the ValleyCrest Acquisition, we changed the name of our business to BrightView and Brickman Acquisition Holdings, Inc. changed its name to BrightView Acquisition Holdings, Inc. On March 15, 2018, we further changed our name to BrightView Holdings, Inc.

Our principal executive offices are located at 401 Plymouth Road, Suite 500, Plymouth Meeting, Pennsylvania 19462-1646. The telephone number of our principal executive offices is (484) 567-7204. We maintain a website at www.brightview.com. The information contained on, or that can be accessed through, our corporate website or other company websites referenced elsewhere in this prospectus neither constitutes part of this prospectus nor is incorporated by reference herein.

About KKR & Co.

KKR & Co. L.P., which, together with its subsidiaries, we refer to as KKR & Co., is a leading global investment firm that manages multiple alternative asset classes including private equity, energy, infrastructure, real estate and credit, with strategic manager partnerships that manage hedge funds. KKR & Co. aims to generate attractive investment returns for its fund investors by following a patient and disciplined investment approach,



 

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employing world-class people, and driving growth and value creation with its portfolio companies. KKR & Co. invests its own capital alongside the capital it manages for fund investors and provides financing solutions and investment opportunities through its capital markets business. KKR & Co. L.P. is listed on The New York Stock Exchange (NYSE: KKR).

About MSD Partners, L.P. and MSD Capital, L.P.

MSD Capital, L.P., or MSD Capital, is the private investment firm that was established in 1998 to exclusively manage the capital of Michael Dell and his family. The firm’s investment strategy is focused on maximizing long-term capital appreciation by making investments across the globe in the equities of public and private companies, credit, real estate and other asset classes and securities. In 2009, the principals of MSD Capital formed MSD Partners, L.P., an SEC-registered investment adviser, to enable a select group of investors to invest in strategies that were developed by MSD Capital. MSD Capital and MSD Partners are headquartered in New York.



 

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The Offering

 

Common stock offered by us

                 shares.

 

Underwriters’ option to purchase additional shares of common stock

We have granted the underwriters a 30-day option to purchase up to an additional                  shares of our common stock at the initial public offering price, less the underwriting discount.

 

Common stock to be outstanding immediately after this offering

                 shares (or                  shares if the underwriters exercise in full their option to purchase additional shares).

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting the underwriting discount and estimated offering expenses payable by us, will be approximately $          million (or approximately $         million, if the underwriters exercise in full their option to purchase additional shares), based on the assumed initial public offering price of $         per share, which is the mid-point of the estimated offering price range set forth on the cover page of this prospectus. For a sensitivity analysis as to the offering price and other information, see “Use of Proceeds.”

 

  We intend to use the net proceeds to us from this offering to repay borrowings outstanding under the Second Lien Credit Agreement and, to the extent there are any remaining proceeds, to repay borrowings outstanding under the First Lien Credit Agreement. See “Use of Proceeds.”

 

Risk factors

See “Risk Factors” beginning on page 17 and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Dividend policy

We do not currently anticipate paying any dividends on our common stock following this offering and currently expect to retain all future earnings for use in the operation and expansion of our business. Following this offering and upon repayment of certain outstanding indebtedness, we may reevaluate our dividend policy. Any decision to declare and pay dividends in the future will be made at the sole discretion of our Board of Directors and will depend on various factors. See “Dividend Policy.”

 

Conflicts of interest

Affiliates of KKR Sponsor beneficially own (through investment in KKR BrightView Aggregator L.P.) in excess of 10% of our issued and outstanding common stock. Because KKR Capital Markets LLC, an affiliate of KKR Sponsor, is an underwriter in this offering and its affiliates own in excess of 10% of our issued and outstanding common stock, KKR Capital Markets LLC is deemed to have a “conflict of interest” under Rule 5121, or Rule 5121, of the Financial Industry



 

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Regulatory Authority, Inc., or FINRA. Accordingly, this offering is being made in compliance with the requirements of Rule 5121. Pursuant to that rule, the appointment of a “qualified independent underwriter” is not required in connection with this offering as the member primarily responsible for managing the public offering does not have a conflict of interest, is not an affiliate of any member that has a conflict of interest and meets the requirements of paragraph (f)(12)(E) of Rule 5121. See “Underwriting (Conflicts of Interest).”

 

Controlled company

After the completion of this offering, the KKR Sponsor and MSD Partners, or our Sponsors, will continue to own a majority of the voting power of our common stock. We currently intend to avail ourselves of the controlled company exemption under the corporate governance standards of the NYSE. As of March 31, 2018, our Sponsors beneficially owned 93.5% of our outstanding common stock and immediately following this offering our Sponsors will beneficially own     % of our common stock, or     % if the underwriters exercise in full their option to purchase additional shares.

 

Proposed trading symbol

“BV.”

Unless we indicate otherwise or the context otherwise requires, all information in this prospectus reflects and assumes the following:

 

    the adoption of our amended and restated certificate of incorporation and our amended and restated by-laws immediately prior to the completion of this offering;

 

    a             -for-one reverse split of our common stock, which will occur prior to the completion of this offering;

 

    the pro rata distribution of shares of common stock to holders of class A limited partnership units, or Class A Units, on a one-to-one basis, of BrightView Parent L.P., or Parent L.P., our direct parent, of                  total shares of our common stock (approximately     % of which will be restricted stock subject to vesting), in connection with this offering, which we refer to as the Class A Equity Conversion;

 

    the issuance of                  shares of common stock (approximately     % of which will be restricted stock subject to vesting) and              stock options (but not the shares of common stock issuable in respect thereof) at a weighted average exercise price of $          per share (approximately     % of which will be subject to vesting), based on the mid-point of the estimated offering price range set forth on the cover page of this prospectus, in respect of class B limited partnership units, or Class B Units, of Parent L.P., held by current and former employees that will be cancelled in connection with this offering, which cancellation of units and issuance of shares of common stock and stock options we collectively refer to as the Class B Equity Conversion, and the issuance of                  shares of common stock (all of which will be restricted stock subject to vesting) and              stock options (but not the shares of common stock issuable in respect thereof) at a weighted average exercise price of $             per share (all of which will be subject to vesting), based on the mid-point of the estimated offering price range set forth on the cover page of this prospectus, that are expected to be granted to certain officers and employees in connection with this offering, which we refer to as the IPO Equity Grant; and

 

    (1) no exercise of the underwriters’ option to purchase up to an additional                  shares of our common stock and (2) an initial public offering price of $         per share, the mid-point of the estimated offering price range set forth on the cover page of this prospectus.


 

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Unless we indicate otherwise or the context otherwise requires, all information in this prospectus does not give effect to or reflect (1)                  shares of common stock, based on the mid-point of the estimated offering price range set forth on the cover page of this prospectus, issuable in respect of the stock options to be issued in connection with the Class B Equity Conversion and the IPO Equity Grant, (2) a total of                  shares of common stock available for further issuance (which gives effect to the Class B Equity Conversion and the IPO Equity Grant, the final sizes of which will depend on the price per share in this offering and the Class A Equity Conversion) under our 2018 Omnibus Incentive Plan and (3)                  shares of common stock available for issuance under our 2018 Employee Stock Purchase Plan, or ESPP, each of which we intend to adopt in connection with this offering. See “Management—Executive Compensation—Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards in Fiscal Year 2017—2018 Omnibus Incentive Plan” and “Management—Executive Compensation—Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards in Fiscal Year 2017—2018 Employee Stock Purchase Plan.”



 

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Summary Historical Consolidated Financial and Other Data

Set forth below is our summary historical consolidated financial and other data as of the dates and for the periods indicated. The summary historical financial data as of September 30, 2017 and December 31, 2016, for the nine months ended September 30, 2017 and for the years ended December 31, 2016 and 2015 has been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary historical financial data as of December 31, 2015 has been derived from our audited financial statements not included in this prospectus. We changed our fiscal year end from December 31 to September 30 of each year, effective September 30, 2017. The summary historical financial data as of March 31, 2018, March 31, 2017 and September 30, 2016, for the six months ended March 31, 2018 and 2017 and for the nine months ended September 30, 2016 has been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements were prepared on a basis consistent with the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the financial information. The results of operations for any period are not necessarily indicative of the results to be expected for any future period. The results for any interim period are not necessarily indicative of the results that may be expected for the full year. Share and per share data in the table below have not been adjusted to give effect to the     -for-one reverse stock split which will occur prior to completion of this offering.

The summary historical consolidated financial and other data should be read in conjunction with, and are qualified by reference to, “Use of Proceeds,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes and our unaudited consolidated financial statements and related notes thereto, each included elsewhere in this prospectus.

 

(In millions, except

per share amounts)

    Six Months  
Ended
March 31,
2018
      Six Months  
Ended
March 31,
2017
    Nine Months
Ended
September 30,
2017
    Nine Months
Ended
September 30,
2016
      Fiscal Year  
2016
      Fiscal Year  
2015
 

Statement of Operations Data:

           

Net service revenues

  $ 1,141.5     $ 1,031.4     $ 1,713.6     $ 1,673.0     $ 2,185.3     $ 2,214.8  

Cost of services provided

       856.7          769.9       1,259.8       1,208.2       1,578.1       1,604.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    284.8       261.5       453.8       464.8       607.2       610.3  

Selling, general and administrative expense

    237.6       226.9       311.8       344.4       468.0       452.8  

Amortization expense

    60.4       63.6       92.9       98.7       131.6       139.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (13.2     (28.9     49.1       21.8       7.6       18.1  

Other income

    1.0       1.0       1.4       1.9       2.2       3.8  

Interest expense

    50.0       48.5       73.7       70.3       94.7       89.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (62.1     (76.4     (23.2     (46.6     (84.9     (67.7

Income tax benefit

    59.4       23.1       9.3       17.8       32.5       27.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (2.7   $ (53.3   $ (14.0   $ (28.9   $ (52.4   $ (40.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share:

           

Basic

  $ (0.02   $ (0.30   $ (0.08   $ (0.16   $ (0.29   $ (0.22

Diluted

  $ (0.02   $ (0.30   $ (0.08   $ (0.16   $ (0.29   $ (0.22

Weighted average shares outstanding (in thousands):

           

Basic

    180,177       180,189       180,221       181,738       181,658       183,359  

Diluted

    180,177       180,189       180,221       181,738       181,658       183,359  


 

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(In millions, except

per share amounts)

    Six Months  
Ended
March 31,
2018
      Six Months  
Ended
March 31,
2017
    Nine Months
Ended
September 30,
2017
    Nine Months
Ended
September 30,
2016
      Fiscal Year  
2016
      Fiscal Year  
2015
 

Statement of Cash Flows Data:

           

Cash flows from operating activities

  $ 79.2     $ 68.8     $ 78.9     $ 66.6     $ 111.9     $ 123.4  

Cash flows used in investing activities

  $ (87.7   $ (50.5   $ (97.5   $ (61.9   $ (69.5   $ (65.4

Cash flows from (used in) financing activities

  $ 5.3     $ (11.3   $ (36.6   $ (41.0   $ (46.4   $ (24.8

Balance Sheet Data (at period end):

           

Cash and cash equivalents

  $ 9.5     $ 42.6     $ 12.8     $ 35.7     $ 68.0     $ 72.0  

Total assets

  $ 2,860.5     $ 2,869.7     $ 2,858.6     $ 2,965.0     $ 2,890.6     $ 2,974.6  

Total liabilities

  $ 2,155.9     $ 2,192.2     $ 2,162.4     $ 2,242.4     $ 2,185.4     $ 2,191.7  

Total stockholders’ equity

  $ 704.6     $ 677.5     $ 696.3     $ 722.6     $ 705.2     $ 782.9  

Other Financial Data:

           

Adjusted EBITDA (1)

  $ 118.0     $ 88.3     $ 217.2     $ 206.2     $ 255.7     $ 271.6  

Adjusted Net Income (Loss) (1)

  $ 21.0     $ (1.1   $ 55.5     $ 45.9     $ 48.6     $ 61.1  

Free Cash Flow (1)

  $ 36.6     $ 38.8     $ 34.6     $ 6.5     $ 42.3     $ 57.7  

Adjusted Free Cash Flow (1)

  $ 58.2     $ 38.8     $ 34.6     $ 6.5     $ 42.3     $ 57.7  

 

(1) We report our financial results in accordance with GAAP. To supplement this information, we also use the following measures in this prospectus: Adjusted EBITDA, Adjusted Net Income, Free Cash Flow and Adjusted Free Cash Flow.

We believe that Adjusted EBITDA and Adjusted Net Income 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 and amortization, as further adjusted to exclude 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. We believe that the adjustments applied in presenting Adjusted EBITDA and Adjusted Net Income are appropriate to provide additional information 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 and Adjusted Free Cash Flow are helpful supplemental measures 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. Adjusted Free Cash Flow represents Free Cash Flow as further adjusted for the acquisition of certain legacy properties associated with our acquired ValleyCrest business. We believe Free Cash Flow and Adjusted Free Cash Flow are useful to provide additional information to assess our ability to pursue business opportunities and investments and to service our debt. Free Cash Flow and Adjusted Free Cash Flow have limitations as analytical tools, including that they do not account for our future contractual commitments and exclude investments made to acquire assets under capital leases and required debt service payments.

For more information concerning these measures, see “Non-GAAP Financial Measures.”



 

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Set forth below are the reconciliations of net loss to Adjusted EBITDA and Adjusted Net Income, and cash flows from operating activities to Free Cash Flow and Adjusted Free Cash Flow.

 

(In millions)

  Six Months
Ended

   March 31,   
2018
    Six Months
Ended

   March 31,   
2017
    Nine Months
Ended
September 30,
2017
    Nine Months
Ended
September 30,
2016
      Fiscal Year  
2016
      Fiscal Year  
2015
 

Adjusted EBITDA

           

Net loss

  $ (2.7   $ (53.3   $ (14.0   $ (28.9   $ (52.4   $ (40.6

Plus:

           

Interest expense, net

    50.0       48.5       73.7       70.3       94.7       89.6  

Income tax benefit

    (59.4     (23.1     (9.3     (17.8     (32.5     (27.1

Depreciation expense

    38.8       40.8       56.5       58.0       79.3       74.2  

Amortization expense

    60.4       63.6       92.9       98.7       131.6       139.3  

Establish public company financial reporting compliance (a)

    2.8       2.0       0.8       4.0       5.5       —    

Business transformation and integration costs (b)

    18.9       8.2       10.8       16.2       24.1       30.2  

Expenses related to initial public offering (c)

    2.1       —         —         —         —         —    

Equity-based compensation (d)

    5.8       0.4       3.8       3.7       2.8       3.9  

Management fees (e)

    1.3       1.3       1.9       2.0       2.7       2.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 118.0     $ 88.3     $ 217.2     $ 206.2     $ 255.7     $ 271.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

           

Net loss

  $ (2.7   $ (53.3   $ (14.0   $ (28.9   $ (52.4   $ (40.6

Plus:

           

Amortization expense

    60.4       63.6       92.9       98.7       131.6       139.3  

Establish public company financial reporting compliance (a)

    2.8       2.0       0.8       4.0       5.5       —    

Business transformation and integration costs (b)

    18.9       8.2       10.8       16.2       24.1       30.2  

Expenses related to initial public offering (c)

    2.1       —         —         —         —         —    

Equity-based compensation (d)

    5.8       0.4       3.8       3.7       2.8       3.9  

Management fees (e)

    1.3       1.3       1.9       2.0       2.7       2.1  

Income tax adjustment (f)

    (67.7     (23.3     (40.8     (49.8     (65.7     (73.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income (Loss)

  $ 21.0     $ (1.1   $ 55.5     $ 45.9     $ 48.6     $ 61.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow and Adjusted Free Cash Flow

           

Cash flows from operating activities

  $ 79.2     $ 68.8     $ 78.9     $ 66.6     $ 111.9     $ 123.4  

Minus:

           

Capital expenditures

    44.1       32.4       50.6       65.4       75.6       71.3  

Plus:

           

Proceeds from sale of property and equipment

    1.5       2.4       6.3       5.3       6.0       5.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

  $ 36.6     $ 38.8     $ 34.6     $ 6.5     $ 42.3     $ 57.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Plus:

           

ValleyCrest land and building acquisition (g)

    21.6       —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Free Cash Flow

  $ 58.2     $ 38.8     $ 34.6     $ 6.5     $ 42.3     $ 57.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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(a)   Represents costs incurred to establish public company financial reporting compliance, including costs to comply with the requirements of Sarbanes-Oxley and the accelerated adoption of the new revenue recognition standard (ASC 606—Revenue from Contracts with Customers), and other miscellaneous costs.

(b)   Business transformation and integration costs consist of (i) severance and related costs; (ii) vehicle fleet rebranding costs; (iii) business integration costs; and (iv) information technology infrastructure transformation costs and other.

    

    

(In millions)

  Six Months
Ended

   March 31,   
2018
    Six Months
Ended

   March 31,   
2017
    Nine Months
Ended
September 30,
2017
    Nine Months
Ended
September 30,
2016
      Fiscal Year  
2016
      Fiscal Year  
2015
 

Severance and related costs

  $ 2.2     $ 5.7     $ 0.8     $ 7.1     $ 13.1     $ 7.0  

Rebranding of vehicle fleet

    12.1       —         6.3       —         —         —    

Business integration

    0.2       0.2       —         3.8       4.0       23.2  

IT infrastructure transformation and other

    4.4       2.2       3.7       5.3       7.0       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Business transformation and integration costs

  $ 18.9     $ 8.2     $ 10.8     $ 16.2     $ 24.1     $ 30.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(c) Represents expenses incurred in connection with this offering.
(d) Represents equity-based compensation expense recognized for stock plans outstanding.
(e) Represents management fees paid to our Sponsors pursuant to a monitoring agreement. See “Certain Relationships and Related Party Transactions—Monitoring Agreement.”
(f) Represents the tax effect of pre-tax items excluded from Adjusted Net Income and the removal of discrete tax items, which collectively result in a reduction of income tax benefit. 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. The six months ended March 31, 2018 amount includes a $41.4 million benefit recognized as a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the 2017 Tax Act.

 

(in millions)

  Six Months
Ended
   March 31,   
2018
    Six Months
Ended
   March 31,   
2017
    Nine Months
Ended
September 30,
2017
    Nine Months
Ended
September 30,
2016
      Fiscal Year  
2016
      Fiscal Year  
2015
 

Tax impact of pre-tax income adjustments

  $ 25.9     $ 23.6     $ 39.0     $ 49.8     $ 66.1     $ 73.7  

Discrete tax items

    41.8       (0.3     1.8       —         (0.4     0.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax adjustment

  $ 67.7     $ 23.3     $ 40.8     $ 49.8     $ 65.7     $ 73.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(g) Represents the acquisition of legacy ValleyCrest land and buildings in October 2017.


 

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RISK FACTORS

An investment in our common stock involves risk. You should carefully consider the following risks as well as the other information included in this prospectus, including “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes, before investing in our common stock. Any of the following risks could materially and adversely affect our business, financial condition, or results of operations. The selected risks described below, however, are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition, or results of operations. In such a case, the trading price of our common stock could decline and you may lose all or part of your investment.

Risks Related to Our Business

Our business is affected by general business, financial market and economic conditions, which could adversely affect our financial position, results of operations and cash flows.

Our business and results of operations are significantly affected by general business, financial market and economic conditions. General business, financial market and economic conditions that could impact the level of activity in the commercial landscape services industry include the level of commercial construction activity, the condition of the real estate markets where we operate, interest rate fluctuations, inflation, unemployment and wage levels, tax rates, capital spending, bankruptcies, volatility in both the debt and equity capital markets, liquidity of the global financial markets, the availability and cost of credit, investor and consumer confidence, global economic growth, local, state and federal government regulation, and the strength of regional and local economies in which we operate. These factors could also negatively impact the timing or the ultimate collection of accounts receivable, which would adversely impact our business, financial position, results of operations and cash flows.

During an economic downturn, our customers may decrease their spending on landscape services by seeking to reduce expenditures for landscape services, in particular enhancement services, engaging a lower cost service provider or performing landscape maintenance themselves rather than outsourcing to third parties like us or generally reducing the size and complexity of their new landscaping development projects.

Our industry and the markets in which we operate are highly competitive and increased competitive pressures could reduce our share of the markets we serve and adversely affect our business, financial position, results of operations and cash flows.

We operate in markets with relatively few large competitors, but barriers to entry in the landscape services industry are generally low, which has led to highly competitive markets consisting of various sized entities, ranging from small or local operators to large regional businesses, as well as potential customers that choose not to outsource their landscape maintenance services. Any of our competitors may foresee the course of market development more accurately than we do, provide superior service, have the ability to deliver similar services at a lower cost, develop stronger relationships with our customers and other consumers in the landscape services industry, adapt more quickly to evolving customer requirements than we do, devote greater resources to the promotion and sale of their services or access financing on more favorable terms than we can obtain. In addition, while regional competitors may be smaller than we are, some of these regional competitors may have a greater presence than we do in a particular market. As a result of any of these factors, we may not be able to compete successfully with our competitors, which could have an adverse effect on our business, financial position, results of operations and cash flows.

Our customers consider the quality and differentiation of the services we provide, our customer service and price when deciding whether to use our services. As we have worked to establish ourselves as leading, high-

 

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quality providers of landscape maintenance and development services, we compete predominantly on the basis of high levels of service and strong relationships. We may not be able to, or may choose not to, compete with certain competitors on the basis of price. If we are unable to differentiate our services on the basis of high levels of service, quality and strong relationships, a greater proportion of our customers may switch to lower cost services providers or perform such services themselves. If we are unable to compete effectively with our existing competitors or new competitors enter the markets in which we operate, or our current customers stop outsourcing their landscape maintenance services, our financial position, results of operations and cash flows may be materially and adversely affected.

In addition, former employees may start landscape services businesses similar to ours and compete directly with us. Our industry faces low barriers to entry, making the possibility of former employees starting similar businesses more likely. While we customarily sign non-competition agreements, which typically continue for one year following the termination of employment, with our account managers, branch managers and certain other officers, such agreements do not fully protect us against competition from former employees. Enforceability of these non-competition agreements varies from state to state, and state courts will generally examine all of the facts and circumstances at the time a party seeks to enforce a non-competition agreement. Consequently, we cannot predict with certainty whether, if challenged, a court will enforce any particular non-competition agreement. Any increased competition from businesses started by former employees may reduce our market share and adversely affect our business, financial position, results of operations and cash flows.

Our business success depends on our ability to preserve long-term customer relationships.

Our success depends on our ability to retain our current customers, renew our existing customer contracts and obtain new business. Our ability to do so generally depends on a variety of factors, including the quality, price and responsiveness of our services, as well as our ability to market these services effectively and differentiate ourselves from our competitors. We largely seek to differentiate ourselves from our competitors on the basis of high levels of service, breadth of service offerings and strong relationships and may not be able to, or may choose not to, compete with certain competitors on the basis of price. There can be no assurance that we will be able to obtain new business, renew existing customer contracts at the same or higher levels of pricing or that our current customers will not cease operations, elect to self-operate or terminate contracts with us.

With respect to our Maintenance Services segment, we primarily provide services pursuant to agreements that are cancelable by either party upon 30-days’ notice. Consequently, our customers can unilaterally terminate all services pursuant to the terms of our service agreements, without penalty.

We may be adversely affected if customers reduce their outsourcing.

Our business and growth strategies benefit from the continuation of a current trend toward outsourcing services. Customers will outsource if they perceive that outsourcing may provide quality services at a lower overall cost and permit them to focus on their core business activities. We cannot be certain that this trend will continue or not be reversed or that customers that have outsourced functions will not decide to perform these functions themselves. If a significant number of our existing customers reduced their outsourcing and elected to perform the services themselves, such loss of customers could have a material adverse impact on our business, financial position, results of operations and cash flows.

Because we operate our business through dispersed locations across the United States, our operations may be materially adversely affected by inconsistent practices and the operating results of individual branches may vary.

We operate our business through a network of dispersed locations throughout the United States, supported by corporate executives and certain centralized services in our headquarters, with local branch management retaining responsibility for day-to-day operations and adherence to applicable local laws. Our operating structure

 

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could make it difficult for us to coordinate procedures across our operations in a timely manner or at all. We may have difficulty attracting and retaining local personnel. In addition, our branches may require significant oversight and coordination from headquarters to support their growth. In addition, the operating results of an individual branch may differ from that of another branch for a variety of reasons, including market size, management practices, competitive landscape, regulatory requirements and local economic conditions. Inconsistent implementation of corporate strategy and policies at the local level could materially and adversely affect our business, financial position, results of operations, and cash flows.

We may not successfully implement our business strategies, including achieving our growth objectives.

We may not be able to fully implement our business strategies or realize, in whole or in part within the expected time frames, the anticipated benefits of our various growth or other initiatives. Our various business strategies and initiatives, including our growth, operational and management initiatives, are subject to business, economic and competitive uncertainties and contingencies, many of which are beyond our control. The execution of our business strategy and our financial performance will continue to depend in significant part on our executive management team and other key management personnel, our ability to identify and complete suitable acquisitions and our executive management team’s ability to execute the new operational initiatives that they are undertaking. In addition, we may incur certain costs as we pursue our growth, operational and management initiatives, and we may not meet anticipated implementation timetables or stay within budgeted costs. As these initiatives are undertaken, we may not fully achieve our expected efficiency improvements or growth rates, or these initiatives may not be successful or could adversely impact our customer retention, supplier relationships or operations. Also, our business strategies may change from time to time in light of our ability to implement our business initiatives, competitive pressures, economic uncertainties or developments, or other factors.

Future acquisitions or other strategic transactions could negatively impact our reputation, business, financial position, results of operations and cash flows.

We have acquired businesses in the past and expect to continue to acquire businesses or assets in the future. However, there can be no assurance that we will be able to identify and complete suitable acquisitions. For example, due to the highly fragmented nature of our industry, it may be difficult for us to identify potential targets with revenues sufficient to justify taking on the risks associated with pursuing their acquisition. The failure to identify suitable acquisitions and successfully integrate these acquired businesses may limit our ability to expand our operations and could have an adverse effect on our business, financial position and results of operations.

In addition, acquired businesses may not perform in accordance with expectations, and our business judgments concerning the value, strengths and weaknesses of acquired businesses may not prove to be correct. We may also be unable to achieve expected improvements or achievements in businesses that we acquire. The process of integrating an acquired business may create unforeseen difficulties and expenses, including:

 

    the diversion of resources needed to integrate new businesses, technologies, services, personnel or systems;

 

    the inability to retain employees, customers and suppliers;

 

    difficulties implementing our strategy at the acquired business;

 

    the assumption of actual or contingent liabilities (including those relating to the environment);

 

    failure to effectively and timely adopt and adhere to our internal control processes, accounting systems and other policies;

 

    write-offs or impairment charges relating to goodwill and other intangible assets;

 

    unanticipated liabilities relating to acquired businesses; and

 

    potential expenses associated with litigation with sellers of such businesses.

 

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If management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, we may not be able to realize anticipated benefits and revenue opportunities resulting from acquisitions and our business could suffer. Although we conduct due diligence investigations prior to each acquisition, there can be no assurance that we will discover or adequately protect against all material liabilities of an acquired business for which we may be responsible as a successor owner or operator.

In connection with our acquisitions, we generally require that key management and former principals of the businesses we acquire enter into non-competition agreements in our favor. Enforceability of these non-competition agreements varies from state to state, and state courts will generally examine all of the facts and circumstances at the time a party seeks to enforce a non-competition agreement. Consequently, we cannot predict with certainty whether, if challenged, a court will enforce any particular non-competition agreement. If one or more former principals or members of key management of the businesses we acquire attempt to compete with us and the courts refuse to enforce the non-competition agreement entered into by such person or persons, we might be subject to increased competition, which could materially and adversely affect our business, financial position, results of operations and cash flows.

Seasonality affects the demand for our services and our results of operations and cash flows.

The demand for our services and our results of operations are affected by the seasonal nature of our landscape maintenance services in certain regions. In geographies that do not have a year-round growing season, 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 following the change of our fiscal year end date to September 30, effective September 30, 2017. 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. In our Development Services segment, we typically experience lower activity levels during the winter months. Such seasonality causes our results of operations to vary from quarter to quarter. Due to the seasonal nature of the services we provide, we also experience seasonality in our employment and working capital needs. Our employment and working capital needs generally correspond with the increased demand for our services in the spring and summer months and employment levels and operating costs are generally at their highest during such months. Consequently, our results of operations and financial position can vary from year-to-year, as well as from quarter-to-quarter. If we are unable to effectively manage the seasonality and year-to-year variability, our results of operations, financial position and cash flow may be adversely affected.

Our operations are impacted by weather conditions.

We perform landscape services, the demand for which is affected by weather conditions, including, without limitation, potential impacts from climate change, droughts, severe storms and significant rain or snowfall, all of which may impact the timing and frequency of the performance of our services, or our ability to perform the services at all. For example, severe weather conditions, such as excessive heat or cold, may result in maintenance services being omitted for part of a season or beginning earlier than anticipated, which could result in lost revenues or require additional services to be performed for which we may not receive corresponding incremental revenues. Variability in the frequency of which we must perform our services can affect the margins we realize on a given contract.

Certain extreme weather events, such as hurricanes and tropical storms, can result in increased enhancement revenues related to cleanup and other services. However, such weather events may also impact our ability to deliver our contracted services or cause damage to our facilities or equipment. These weather events can also result in higher fuel costs, higher labor costs and shortages of raw materials and products. As a result, a perceived earnings benefits related to extreme weather events may be moderated.

 

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Additionally, droughts could cause shortage in the water supply and governments may impose limitations on water usage, which may change customer demand for landscape maintenance and irrigation services. There is a risk that demand for our services will change in ways that we are unable to predict.

Increases in raw material costs, fuel prices, wages and other operating costs could adversely impact our business, financial position, results of operations and cash flows.

Our financial performance may be adversely affected by increases in the level of our operating expenses, such as fuel, fertilizer, chemicals, road salt, mulch, wages and salaries, employee benefits, health care, subcontractor costs, vehicle, facilities and equipment leases, self-insurance costs and other insurance premiums as well as various regulatory compliance costs, all of which may be subject to inflationary pressures. While we seek to manage price and availability risks related to raw materials, such as fuel, fertilizer, chemicals, road salt and mulch, through procurement strategies, these efforts may not be successful and we may experience adverse impacts due to rising prices of such products. In addition, we closely monitor wage, salary and benefit costs in an effort to remain competitive in our markets. Attracting and maintaining a high quality workforce is a priority for our business, and if wage, salary or benefit costs increase, including as a result of minimum wage legislation, our operating costs will increase, and have increased in the past.

We cannot predict the extent to which we may experience future increases in operating expenses as well as various regulatory compliance costs. To the extent such costs increase, we may be prevented, in whole or in part, from passing these cost increases through to our existing and prospective customers, which could have a material adverse impact on our business, financial position, results of operations and cash flows.

Product shortages, loss of key suppliers, failure to develop relationships with qualified suppliers or dependence on third-party suppliers and manufacturers could affect our financial health.

Our ability to offer a wide variety of services to our customers is dependent upon our ability to obtain adequate supplies, materials and products from manufacturers, distributors and other suppliers. Any disruption in our sources of supply, particularly of the most commonly used items, including fertilizer, chemicals, road salt and mulch, could result in a loss of revenues, reduced margins and damage to our relationships with customers. Supply shortages may occur as a result of unanticipated increases in demand or difficulties in production or delivery.

Additionally, as part of our procurement strategy, we source certain materials and products we use in our business from a limited number of suppliers. We have historically purchased more than 10% of our direct material costs from a single supplier. If our suppliers experience difficulties or disruptions in their operations or if we lose any significant supplier, we may experience increased supply costs or may experience delays in establishing replacement supply sources that meet our quality and control standards. The loss of, or a substantial decrease in the availability of, supplies and products from our suppliers or the loss of key supplier arrangements could adversely impact our business, financial position, results of operations and cash flows.

If we are unable to accurately estimate the overall risks, requirements or costs when we bid on or negotiate contracts that are ultimately awarded to us, we may achieve lower than anticipated profits or incur contract losses.

A significant portion of our contracts are subject to competitive bidding and/or are negotiated on a fixed- or capped-fee basis for the services covered. Such contracts generally require that the total amount of work, or a specified portion thereof, be performed for a single price irrespective of our actual costs. If our cost estimates for a contract are inaccurate, or if we do not execute the contract within our cost estimates, then cost overruns may cause the contract not to be as profitable as we expected or could cause us to incur losses.

 

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Our results of operations from our landscape development services are subject to periodic fluctuations. Our landscape development services have been, and in the future may be, adversely impacted by declines in the new commercial construction sector, as well as in spending on repair and upgrade activities. Such variability in this part of our business could result in lower revenues and reduced cash flows and profitability.

With respect to our Development Services segment, a significant portion of our revenues are derived from development activities associated with new commercial real estate development, including hospitality and leisure, which has experienced periodic declines, some of which have been severe. The strength of these markets depends on, among other things, housing starts, local occupancy rates, demand for commercial space, non-residential construction spending activity, business investment and general economic conditions, which are a function of many factors beyond our control, including interest rates, employment levels, availability of credit, consumer spending, consumer confidence and capital spending. During a downturn in the commercial real estate development industry, customers may decrease their spending on landscape development services by generally reducing the size and complexity of their new landscaping development projects. Weakness or downturns in commercial real estate development markets could have an adverse effect on our business, financial position, results of operations or cash flows.

Our results of operations for our snow removal services depend primarily on the level, timing and location of snowfall. As a result, a decline in frequency or total amounts of snowfall in multiple regions for an extended time could cause our results of operations to decline and adversely affect our ability to generate cash flow.

As a provider of snow removal services, our revenues are impacted by the frequency, amount, timing and location of snowfall in the regions in which we offer our services. A high number of snowfalls in a given season generally has a positive effect on the results of our operations. A low level or lack of snowfall in any given year in any of the snow-belt regions in North America (primarily the Midwest, Mid-Atlantic and Northeast regions of the United States) or a sustained period of reduced snowfall events in one or more of the geographic regions in which we operate will likely cause revenues from our snow removal services to decline in such year, which in turn may adversely affect our revenues, results of operations and cash flow.

In the past ten- and thirty-year periods, the regions that we service have averaged 2,765 inches and 2,567 inches of annual snowfall, respectively. However, there can be no assurance that these regions will receive seasonal snowfalls near their historical average in the future. Variability in the frequency and timing of snowfalls creates challenges associated with budgeting and forecasting for the Maintenance Services segment.

Additionally, the potential effects of climate change may impact the frequency and total amounts of future snowfall, which could have a material adverse effect on our revenues, results of operations and cash flow.

Our success depends on our executive management and other key personnel.

Our future success depends to a significant degree on the skills, experience and efforts of our executive management and other key personnel and their ability to provide us with uninterrupted leadership and direction. The failure to retain our executive officers and other key personnel or a failure to provide adequate succession plans could have an adverse impact. The availability of highly qualified talent is limited, and the competition for talent is robust. A failure to efficiently or effectively replace executive management members or other key personnel and to attract, retain and develop new qualified personnel could have an adverse effect on our operations and implementation of our strategic plan.

Our future success depends on our ability to attract, retain and maintain positive relations with trained workers.

Our future success and financial performance depend substantially on our ability to attract, train and retain workers, including account, branch and regional management personnel. The landscape services industry is labor

 

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intensive, and industry participants, including us, experience high turnover rates among hourly workers and competition for qualified supervisory personnel. In addition we, like many landscape service providers who conduct a portion of their operations in seasonal climates, employ a portion of our field personnel for only part of the year.

We have historically relied on the H-2B visa program to bring workers to the United States on a seasonal basis. In 2017, we employed approximately 1,626 seasonal workers through the H-2B visa program. If we are unable to hire sufficient numbers of seasonal workers, through the H-2B program or otherwise, we may experience a labor shortage. In the event of a labor shortage, whether related to seasonal or permanent staff, we could experience difficulty in delivering our services in a high-quality or timely manner and could experience increased recruiting, training and wage costs in order to attract and retain employees, which would result in higher operating costs and reduced profitability.

As of March 31, 2018, we had approximately 19,000 employees, approximately 5% of which are represented by a union pursuant to collective bargaining agreements. If a significant number of our employees were to unionize, including in the wake of any future legislation that makes it easier for employees to unionize, our business could be negatively affected. Any inability by us to negotiate collective bargaining arrangements could result in strikes or other work stoppages disrupting our operations, and new union contracts could increase operating and labor costs. If these labor organizing activities were successful, it could further increase labor costs, decrease operating efficiency and productivity in the future, or otherwise disrupt or negatively impact our operations. Moreover, certain of the collective bargaining agreements we participate in require periodic contributions to multiemployer defined benefit pension plans. Our required contributions to these plans could increase because of a shrinking contribution base as a result of the insolvency or withdrawal of other companies that currently contribute to these plans, the inability or failure of withdrawing companies to pay their withdrawal liability, low interest rates, lower than expected returns on pension fund assets or other funding deficiencies. Additionally, in the event we were to withdraw from some or all of these plans as a result of our exiting certain markets or otherwise, and the relevant plans are underfunded, we may become subject to a withdrawal liability. The amount of these required contributions may be material.

Our business could be adversely affected by a failure to properly verify the employment eligibility of our employees.

We use the “E-Verify” program, an Internet-based program run by the U.S. government, to verify employment eligibility for all new employees throughout our company. However, use of E-Verify does not guarantee that we will successfully identify all applicants who are ineligible for employment. Although we use E-Verify and require all new employees to provide us with government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. The employment of unauthorized workers may subject us to fines or penalties, and adverse publicity that negatively impacts our reputation and may make it more difficult to hire and keep qualified employees. We are subject to regulations of U.S. Immigration and Customs Enforcement, or ICE, and we are audited from time to time by ICE for compliance with work authentication requirements. While we believe we are in compliance with applicable laws and regulations, if we are found not to be in compliance as a result of any audits, we may be subject to fines or other remedial actions. See “Business—Regulatory Overview—Employee and Immigration Matters.”

Termination of a significant number of employees in specific markets or across our company due to work authorization or other regulatory issues would disrupt our operations, and could also cause additional adverse publicity and temporary increases in our labor costs as we train new employees. We could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state immigration compliance laws. Our reputation and financial performance may be materially harmed as a result of any of these factors. Furthermore, immigration laws have been an area of considerable political focus in recent years, and the U.S. Congress and the Executive Branch of the U.S. government from time to time consider or implement changes to federal immigration laws, regulations or enforcement programs.

 

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Further changes in immigration or work authorization laws may increase our obligations for compliance and oversight, which could subject us to additional costs and potential liability and make our hiring process more cumbersome, or reduce the availability of potential employees.

Our use of subcontractors to perform work under certain customer contracts exposes us to liability and financial risk.

In our Development Services segment and through our qualified service partner network in our Maintenance Services segment, we use subcontractors to perform work in situations in which we are not able to self-perform the work involved. If we are unable to hire qualified subcontractors, our ability to successfully complete a project or perform services could be impaired. If we are not able to locate qualified third-party subcontractors or the amount we are required to pay for subcontractors exceeds what we have estimated, especially in a fixed- or capped-fee contract, these contracts may not be as profitable as we expected or we could incur losses. In addition, contracts which require work to be performed by subcontractors may yield a lower margin than contracts where we self-perform the work.

Such arrangements may involve subcontracts where we do not have direct control over the performing party. A failure to perform, for whatever reason, by one or more of our subcontractors, or the alleged negligent performance of, the agreed-upon services may damage our reputation or expose us to liability. Although we have in place controls and programs to monitor the work of our subcontractors, there can be no assurance that these controls or programs will have the desired effect, and we may incur significant damage to our reputation or liability as a result of the actions or inactions of one or more of our subcontractors, any of which could have a material adverse effect on our business, financial position and results of operations.

Furthermore, while we screen subcontractors on a variety of criteria, including insurance, the level of insurance carried by our subcontractors varies. If our subcontractors are unable to cover the cost of damages or physical injuries caused by their actions, whether through insurance or otherwise, we may be held liable, regardless of any indemnification agreements in place.

A significant portion of our assets consists of goodwill and other intangible assets, the value of which may be reduced if we determine that those assets are impaired.

As a result of the KKR Acquisition and the ValleyCrest Acquisition, we applied the acquisition method of accounting. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the tangible and identifiable intangible assets acquired, liabilities assumed and any non-controlling interest. Intangible assets, including goodwill, are assigned to our segments based upon their fair value at the time of acquisition. In accordance with GAAP, goodwill and indefinite lived intangible assets are evaluated for impairment annually, or more frequently if circumstances indicate impairment may have occurred. As of March 31, 2018, the net carrying value of goodwill and other intangible assets, net, represented $2,056.0 million, or 72% of our total assets. A future impairment, if any, could have a material adverse effect to our financial position or results of operations. See Note 7 “Intangible Assets, Goodwill and Acquisitions” to our audited consolidated financial statements and Note 6 “Intangible Assets, Goodwill and Acquisitions” to our unaudited consolidated financial statements included elsewhere in this prospectus for additional information related to impairment testing for goodwill and other intangible assets and the associated charges taken.

If we fail to comply with requirements imposed by applicable law or other governmental regulations, we could become subject to lawsuits, investigations and other liabilities and restrictions on our operations that could significantly and adversely affect our business.

We are subject to governmental regulation at the federal, state, and local levels in many areas of our business, such as employment laws, wage and hour laws, discrimination laws, immigration laws, human health and safety laws, transportation laws, environmental laws, false claims or whistleblower statutes, disadvantaged

 

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business enterprise statutes, tax codes, antitrust and competition laws, intellectual property laws, governmentally funded entitlement programs and cost and accounting principles, the Foreign Corrupt Practices Act, other anti-corruption laws, lobbying laws, motor carrier safety laws and data privacy and security laws. We may be subject to review, audit or inquiry by applicable regulators from time to time.

While we attempt to comply with all applicable laws and regulations, there can be no assurance that we are in full compliance with all applicable laws and regulations or interpretations of these laws and regulations at all times or that we will be able to comply with any future laws, regulations or interpretations of these laws and regulations.

If we fail to comply with applicable laws and regulations, including those referred to above, we may be subject to investigations, criminal sanctions or civil remedies, including fines, penalties, damages, reimbursement, injunctions, seizures or disgorgements or the ability to operate our motor vehicles. The cost of compliance or the consequences of non-compliance, could have a material adverse effect on our business and results of operations. In addition, government agencies may make changes in the regulatory frameworks within which we operate that may require either the corporation as a whole or individual businesses to incur substantial increases in costs in order to comply with such laws and regulations.

Compliance with environmental, health and safety laws and regulations, including laws pertaining to the use of pesticides, herbicides and fertilizers, or liabilities thereunder, could result in significant costs that adversely impact our reputation, business, financial position, results of operations and cash flows.

We are subject to a variety of federal, state and local laws and regulations relating to environmental, health and safety matters. In particular, in the United States, products containing pesticides generally must be registered with the U.S. Environmental Protection Agency, or EPA, and similar state agencies before they can be sold or applied. The pesticides we use are manufactured by independent third parties and are evaluated by the EPA as part of its ongoing exposure risk assessment and may be subject to similar evaluation by similar state agencies. The EPA, or similar state agencies, may decide that a pesticide we use will be limited or will not be re-registered for use in the United States. We cannot predict the outcome or the severity of the effect of the EPA’s, or a similar state agency’s, continuing evaluations. The failure to obtain or the cancellation of any such registration, or the partial or complete ban of such pesticides, could have an adverse effect on our business, the severity of which would depend on the products involved, whether other products could be substituted and whether our competitors were similarly affected.

The use of certain pesticides, herbicides and fertilizer products is also regulated by various federal, state and local environmental and public health and safety agencies. These regulations may require that only certified or professional users apply the product or that certain products only be used on certain types of locations. These laws may also require users to post notices on properties at which products have been or will be applied, notification to individuals in the vicinity that products will be applied in the future, or labeling of certain products or may restrict or ban the use of certain products. We can give no assurance that we can prevent violations of these or other regulations from occurring. Even if we are able to comply with all such regulations and obtain all necessary registrations and licenses, we cannot assure you that the pesticides, herbicides, fertilizers or other products we apply, or the manner in which we apply them, will not be alleged to cause injury to the environment, to people or to animals, or that such products will not be restricted or banned in certain circumstances. The costs of compliance, consequences of non-compliance, remediation costs and liabilities, unfavorable public perceptions of such products or products liability lawsuits could have a material adverse effect on our reputation, business, financial position, results of operations and cash flows.

In addition, federal, state and local agencies regulate the use, storage, treatment, disposal, handling and management of hazardous substances and wastes, emissions or discharges from our facilities or vehicles and the investigation and clean-up of contaminated sites, including our sites, customer sites and third-party sites to which we send wastes. We could incur significant costs and liabilities, including investigation and clean-up costs, fines,

 

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penalties and civil or criminal sanctions for non-compliance and claims by third parties for property and natural resource damage and personal injury under these laws and regulations. If there is a significant change in the facts or circumstances surrounding the assumptions upon which we operate, or if we are found to violate, or be liable under, applicable environmental and public health and safety laws and regulations, it could have a material adverse effect on future environmental capital expenditures and other environmental expenses and on our reputation, business, financial position, results of operations and cash flows. In addition, potentially significant expenditures could be required to comply with environmental laws and regulations, including requirements that may be adopted or imposed in the future.

Adverse litigation judgments or settlements resulting from legal proceedings relating to our business operations could materially adversely affect our business, financial position and results of operations.

From time to time, we are subject to allegations, and may be party to legal claims and regulatory proceedings, relating to our business operations. Such allegations, claims or proceedings may, for example, relate to personal injury, property damage, general liability claims relating to properties where we perform services, vehicle accidents involving our vehicles and our employees, regulatory issues, contract disputes or employment matters and may include class actions. See “Business—Legal Proceedings.” Such allegations, claims and proceedings have been and may be brought by third parties, including our customers, employees, governmental or regulatory bodies or competitors. Defending against these and other such claims and proceedings is costly and time consuming and may divert management’s attention and personnel resources from our normal business operations, and the outcome of many of these claims and proceedings cannot be predicted. If any of these claims or proceedings were to be determined adversely to us, a judgment, a fine or a settlement involving a payment of a material sum of money were to occur, or injunctive relief were issued against us, our business, financial position and results of operations could be materially adversely affected.

Currently, we carry a broad range of insurance for the protection of our assets and operations. However, such insurance may not fully cover all material expenses related to potential allegations, claims and proceedings, or any adverse judgments, fines or settlements resulting therefrom, as such insurance programs are often subject to significant deductibles or self-insured retentions or may not cover certain types of claims. In addition, we self-insure with respect to certain types of claims. To the extent we are subject to a higher frequency of claims, are subject to more serious claims or insurance coverage is not available, our liquidity, financial position and results of operations could be materially adversely affected.

We are also responsible for our legal expenses relating to such claims. We reserve currently for anticipated losses and related expenses. We periodically evaluate and adjust our claims reserves to reflect trends in our own experience as well as industry trends. However, ultimate results may differ from our estimates, which could result in losses over our reserved amounts.

Some of the equipment that our employees use is dangerous, and an increase in accidents resulting from the use of such equipment could negatively affect our reputation, results of operations and financial position.

Many of the services that we provide pose the risk of serious personal injury to our employees. Our employees regularly use dangerous equipment, such as lawn mowers, edgers and other power equipment. As a result, there is a significant risk of work-related injury and workers’ compensation claims. To the extent that we experience a material increase in the frequency or severity of accidents or workers’ compensation claims, or unfavorable developments on existing claims or fail to comply with worker health and safety regulations, our operating results and financial position could be materially and adversely affected. In addition, the perception that our workplace is unsafe may damage our reputation among current and potential employees, which may impact our ability to recruit and retain employees, which may adversely affect our business and results of operations.

 

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Any failure, inadequacy, interruption, security failure or breach of our information technology systems, whether owned by us or outsourced or managed by third parties, could harm our ability to effectively operate our business and could have a material adverse effect on our business, financial position and results of operations.

We have centralized certain core functions and are dependent on automated information technology systems and networks to manage and support a variety of business processes and activities. Our ability to effectively manage our business and coordinate the sourcing of supplies, materials and products and our services depend significantly on the reliability and capacity of these systems and networks. Such systems and networks are subject to damage or interruption from power outages or damages, telecommunications problems, data corruption, software errors, network failures, security breaches, acts of war or terrorist attacks, fire, flood and natural disasters. Our servers or cloud-based systems could be affected by physical or electronic break-ins, and computer viruses or similar disruptions may occur. A system outage may also cause the loss of important data or disrupt our operations. Our existing safety systems, data backup, access protection, user management, disaster recovery and information technology emergency planning may not be sufficient to prevent or minimize the effect of data loss or long-term network outages.

In addition, we may have to upgrade our existing information technology systems from time to time in order for such systems to support the needs of our business and growth strategy, and the costs to upgrade such systems may be significant. We rely on certain hardware, telecommunications and software vendors to maintain and periodically upgrade many of these systems so that we can continue to support our business. Costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems could disrupt or reduce the efficiency of our operations. We also depend on our information technology staff. If we cannot meet our staffing needs in this area, we may not be able to fulfill our technology initiatives while continuing to provide maintenance on existing systems.

We could be required to make significant capital expenditures to remediate any such failure, malfunction or breach with our information technology systems or networks. Any material disruption or slowdown of our systems, including those caused by our failure to successfully upgrade our systems, and our inability to convert to alternate systems in an efficient and timely manner could have a material adverse effect on our business, financial position and results of operations.

If we fail to protect the security of personal information about our customers, employees or third parties, we could be subject to interruption of our business operations, private litigation, reputational damage and costly penalties.

We rely on, among other things, commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential information of customers, employees and third parties. Activities by third parties, advances in computer and software capabilities and encryption technology, new tools and discoveries and other events or developments may facilitate or result in a compromise or breach of these systems. Any compromises, breaches or errors in applications related to these systems could cause damage to our reputation and interruptions in our operations and could result in a violation of applicable laws, regulations, orders, industry standards or agreements and subject us to costs, penalties and liabilities. We are subject to risks caused by data breaches and operational disruptions, particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments and cyber terrorists. The frequency of data breaches of companies and governments has increased in recent years as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. The occurrence of any of these events could have a material adverse impact on our reputation, business, financial position, results of operations and cash flow. Although we maintain insurance coverage for various cybersecurity risks, there can be no guarantee that all costs incurred will be fully insured.

 

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We may not be able to adequately protect our intellectual property, which could harm the value of our brand and adversely affect our business.

Our ability to implement our business plan successfully depends in part on our ability to further build brand recognition using our trademarks, service marks and other proprietary intellectual property, including our name and logos. While it is our policy to protect and defend vigorously our rights to our intellectual property, we cannot predict whether steps taken by us to protect our intellectual property rights will be adequate to prevent infringement or misappropriation of these rights. Although we believe that we have sufficient rights to all of our trademarks, service marks and other intellectual property rights, we may face claims of infringement that could interfere with our business or our ability to market and promote our brands. Any such litigation may be costly, divert resources from our business and divert the attention of management. Moreover, if we are unable to successfully defend against such claims, we may be prevented from using our trademarks, service marks or other intellectual property rights in the future and may be liable for damages, which in turn could materially adversely affect our business, financial position or results of operations.

Although we make a significant effort to avoid infringing known proprietary rights of third parties, the steps we take to prevent misappropriation, infringement or other violation of the intellectual property of others may not be successful and from time to time we may receive notice that a third party believes that our use of certain trademarks, service marks and other proprietary intellectual property may be infringing certain trademarks or other proprietary rights of such third party. Responding to and defending such claims, regardless of their merit, can be costly and time-consuming, can divert management’s attention and other resources, and we may not prevail. Depending on the resolution of such claims, we may be barred from using a specific mark or other rights, may be required to enter into licensing arrangements from the third party claiming infringement (which may not be available on commercially reasonable terms, or at all), or may become liable for significant damages.

If any of the foregoing occurs, our ability to compete could be affected or our business, financial position and results of operations may be adversely affected.

Natural disasters, terrorist attacks and other external events could adversely affect our business.

Natural disasters, terrorist attacks and other adverse external events could materially damage our facilities or disrupt our operations, or damage the facilities or disrupt the operations of our customers or suppliers. The occurrence of any such event could prevent us from providing services and adversely affect our business, financial position and results of operations.

Changes in generally accepted accounting principles in the United States could have an adverse effect on our previously reported results of operations.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC, and various bodies formed to promulgate and to interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our previously reported results of operations and could affect the reporting of transactions completed before the announcement of a change.

In May 2014, the FASB issued new revenue recognition guidance under Accounting Standards Update, or ASU, No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which will be effective for our interim and annual periods beginning after September 30, 2018. Under this new guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue that is recognized. In order to be able to comply with the requirements of ASU 2014-09 beginning in the first quarter of fiscal year 2019, we need to update and enhance our internal accounting systems, processes and our internal controls over financial reporting. This has

 

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required, and will continue to require, additional investments by us, and may require incremental resources and system configurations that could increase our operating costs in future periods. While we are continuing to evaluate the impact, we currently do not expect that the impact of adopting ASU 2014-09 will be material to our financial results, however, it is difficult to predict the exact impact of this or future changes to accounting principles or our accounting policies, any of which could negatively affect our results of operations.

Additionally, our assumptions, estimates and judgments related to complex accounting matters could significantly affect our financial results. GAAP and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including, but not limited to, revenue recognition, impairment of long-lived assets, leases and related economic transactions, intangibles, self-insurance, income taxes, property and equipment, litigation and equity-based compensation are highly complex and involve many subjective assumptions, estimates and judgments by us. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by us (i) could require us to make changes to our accounting systems to implement these changes that could increase our operating costs and (ii) could significantly change our reported or expected financial performance.

Risks Related to Our Indebtedness

Our substantial indebtedness could have important adverse consequences and adversely affect our financial condition.

We have a significant amount of indebtedness. As of March 31, 2018, we had total indebtedness of $1,603.7 million, and as adjusted for this offering and the use of net proceeds therefrom, we would have had total indebtedness of $         million, and we had availability under the Revolving Credit Facility and the Receivables Financing Agreement of $128.6 million and $25.0 million, respectively. For a description of our credit facilities and definitions of capitalized terms used in this section, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Indebtedness.”

Our level of debt could have important consequences, including: making it more difficult for us to satisfy our obligations with respect to our debt; limiting our ability to obtain additional financing to fund future working capital, capital expenditures, investments or acquisitions, or other general corporate requirements; requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, investments or acquisitions and other general corporate purposes; increasing our vulnerability to adverse changes in general economic, industry and competitive conditions; exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under the First Lien Credit Agreement and the Second Lien Credit Agreement, are at variable rates of interest; limiting our flexibility in planning for and reacting to changes in the industries in which we compete; placing us at a disadvantage compared to other, less leveraged competitors; increasing our cost of borrowing; and hampering our ability to execute on our growth strategy.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

Our credit agreements impose significant operating and financial restrictions. These covenants may limit our ability and the ability of our subsidiaries, under certain circumstances, to, among other things:

 

    incur additional indebtedness;

 

    create or incur liens;

 

    engage in certain fundamental changes, including mergers or consolidations;

 

    sell or transfer assets;

 

    pay dividends and distributions on our subsidiaries’ capital stock;

 

    make acquisitions, investments, loans or advances;

 

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    prepay or repurchase certain indebtedness;

 

    engage in certain transactions with affiliates; and

 

    enter into negative pledge clauses and clauses restricting subsidiary distributions.

Each of our credit agreements also contain certain customary affirmative covenants and events of default, including a change of control. The First Lien Credit Agreement also contains a financial maintenance requirement with respect to the Revolving Credit Facility, prohibiting us from exceeding a certain first lien secured leverage ratio under certain circumstances. As a result of these covenants and restrictions, we are limited in how we conduct our business, and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot guarantee that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.

Our failure to comply with the restrictive covenants described above as well as others contained in our future debt instruments from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their maturity dates. In addition, any event of default or declaration of acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments. If we are unable to repay, refinance or restructure our indebtedness under our secured debt, the holders of such debt could proceed against the collateral securing that indebtedness. If we are forced to refinance these borrowings on less favorable terms or if we are unable to repay, refinance or restructure such indebtedness, our financial condition and results of operations could be adversely affected.

We may be unable to generate sufficient cash flow to satisfy our significant debt service obligations, which could have a material adverse effect on our business, financial condition and results of operations.

Our ability to make principal and interest payments on and to refinance our indebtedness will depend on our ability to generate cash in the future and is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If our business does not generate sufficient cash flow from operations, in the amounts projected or at all, or if future borrowings are not available to us in amounts sufficient to fund our other liquidity needs, our business, financial condition and results of operations could be materially adversely affected.

If we cannot generate sufficient cash flow from operations to make scheduled principal and interest payments in the future, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures or seek additional equity. The terms of our existing or future debt agreements may also restrict us from affecting any of these alternatives. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. Further, changes in the credit and capital markets, including market disruptions and interest rate fluctuations, may increase the cost of financing, make it more difficult to obtain favorable terms, or restrict our access to these sources of future liquidity. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on commercially reasonable terms or at all. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, could have a material adverse effect on our business, financial condition and results of operations, as well as on our ability to satisfy our obligations in respect of our indebtedness.

 

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Despite our level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt, including off-balance sheet financing, contractual obligations and general and commercial liabilities. This could further exacerbate the risks to our financial condition described above.

We and our subsidiaries may be able to incur significant additional indebtedness in the future, including off-balance sheet financings, contractual obligations and general and commercial liabilities. Although the First Lien Credit Agreement and Second Lien Credit Agreement contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. In addition, we can increase the borrowing availability under the First Lien Credit Agreement by up to $150.0 million in the form of additional commitments under the Revolving Credit Facility and/or incremental term loans plus an additional amount so long as we do not exceed a specified first lien secured leverage ratio. If new debt is added to our current debt levels, the related risks that we now face could intensify.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Borrowings under the First Lien Credit Agreement and Second Lien Credit Agreement and our Receivables Financing Agreement are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed will remain the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease.

If the financial institutions that are part of the syndicate of our Revolving Credit Facility fail to extend credit under our facility or reduce the borrowing base under our Revolving Credit Facility, our liquidity and results of operations may be adversely affected.

We have access to capital through our Revolving Credit Facility, which is governed by the First Lien Credit Agreement. Each financial institution which is part of the syndicate for our Revolving Credit Facility is responsible on a several, but not joint, basis for providing a portion of the loans to be made under our facility. If any participant or group of participants with a significant portion of the commitments in our Revolving Credit Facility fails to satisfy its or their respective obligations to extend credit under the facility and we are unable to find a replacement for such participant or participants on a timely basis (if at all), our liquidity may be adversely affected.

We utilize derivative financial instruments to reduce our exposure to market risks from changes in interest rates on our variable rate indebtedness and we will be exposed to risks related to counterparty credit worthiness or non-performance of these instruments.

We have entered into interest rate swap instruments to limit our exposure to changes in variable interest rates. While our hedging strategy is designed to minimize the impact of increases in interest rates applicable to our variable rate debt, there can be no guarantee that our hedging strategy will be effective, and we may experience credit-related losses in some circumstances. See Note 10 “Financial Instruments Measured at Fair Value” to our audited consolidated financial statements and Note 8 “Fair Value Measurements and Derivatives Instruments” to our unaudited consolidated financial statements included elsewhere in this prospectus.

Risks Related to this Offering and Ownership of Our Common Stock

No market currently exists for our common stock, and an active, liquid trading market for our common stock may not develop, which may cause shares of our common stock to trade at a discount from the initial offering price and make it difficult to sell the shares of common stock you purchase.

Prior to this offering, there has not been a public trading market for shares of our common stock. We cannot predict the extent to which investor interest in us, including coverage by securities analysts, will lead to the

 

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development of a trading market or how active and liquid that market may become. If an active and liquid trading market does not develop or continue, you may have difficulty selling your shares of our common stock at an attractive price or at all. The initial public offering price per share of common stock will be determined by negotiations between us and the underwriters, and may not be indicative of the price at which shares of our common stock will trade in the public market after this offering. The market price of our common stock may decline below the initial offering price and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all.

You will incur immediate and substantial dilution.

Prior stockholders have paid substantially less per share of our common stock than the price in this offering. The initial public offering price per share of our common stock will be substantially higher than the net tangible book deficit per share of outstanding common stock prior to completion of this offering. Based on our net tangible book deficit as of March 31, 2018 and upon the issuance and sale of                  shares of our common stock by us at an assumed initial public offering price of $         per share (the mid-point of the estimated offering price range set forth on the cover page of this prospectus), if you purchase our common stock in this offering, you will pay more for your shares than the amounts paid by our existing stockholders for their shares and you will suffer immediate dilution of approximately $         per share. Dilution is the amount by which the offering price paid by purchasers of our common stock in this offering will exceed the as adjusted net tangible book value (deficit) per share of our common stock upon completion of this offering. If the underwriters exercise their option to purchase additional shares, or if outstanding options to purchase our common stock are exercised, you will experience additional dilution. You may experience additional dilution upon future equity issuances or upon the exercise of options to purchase our common stock or the settlement of restricted stock units granted to our employees, executive officers and directors under our 2018 Omnibus Incentive Plan or our ESPP, each of which we intend to adopt in connection with this offering, or other omnibus incentive plans. See “Dilution.”

Our stock price may change significantly following this offering, and you may not be able to resell shares of our common stock at or above the price you paid or at all, and you could lose all or part of your investment as a result.

We and the underwriters will negotiate to determine the initial public offering price. You may not be able to resell your shares at or above the initial public offering price due to a number of factors such as those listed in “—Risks Related to Our Business” and the following:

 

    results of operations that vary from the expectations of securities analysts and investors;

 

    results of operations that vary from those of our competitors;

 

    changes in expectations as to our future financial performance, including financial estimates and investment recommendations by securities analysts and investors;

 

    changes in economic conditions for companies in our industry;

 

    changes in market valuations of, or earnings and other announcements by, companies in our industry;

 

    declines in the market prices of stocks generally, particularly those of peer companies or other companies in the service sector;

 

    additions or departures of key management personnel;

 

    strategic actions by us or our competitors;

 

    announcements by us, our competitors, and our suppliers related to significant contracts, acquisitions, joint ventures, other strategic relationships or capital commitments;

 

    changes in preferences of our customers;

 

    changes in general economic or market conditions or trends in our industry or the economy as a whole;

 

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    changes in business or regulatory conditions;

 

    future sales of our common stock or other securities;

 

    investor perceptions of or the investment opportunity associated with our common stock relative to other investment alternatives;

 

    the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC;

 

    announcements relating to litigation or governmental investigations;

 

    guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;

 

    the development and sustainability of an active trading market for our stock;

 

    changes in accounting principles; and

 

    other events or factors, including those resulting from informational technology system failures and disruptions, natural disasters, war, acts of terrorism or responses to these events.

Furthermore, the stock market may experience extreme volatility that, in some cases, may be unrelated or disproportionate to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low.

In the past, following periods of market volatility, or following periods or events unrelated to market volatility, stockholders have instituted securities class action litigation. If we were to become involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from our business regardless of the merits or outcome of such litigation.

Because we have no current plans to pay cash dividends on our common stock, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We have no current plans to pay cash dividends on our common stock. The declaration, amount and payment of any future dividends on our common stock will be at the sole discretion of our Board of Directors. Our Board of Directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, including restrictions under our credit agreements and other indebtedness we may incur, and such other factors as our Board of Directors may deem relevant. See “Dividend Policy.”

As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than your purchase price.

We are a holding company with no operations of our own and, as such, we depend on our subsidiaries for cash to fund all of our operations and expenses, including future dividend payments, if any.

Our operations are conducted entirely through our subsidiaries and our ability to generate cash to meet our debt service obligations or to make future dividend payments, if any, is highly dependent on the earnings and the receipt of funds from our subsidiaries via dividends or intercompany loans.

 

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If securities analysts do not publish research or reports about our business or if they downgrade our stock or our sector, our stock price and trading volume could decline.

The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our industry. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrade our stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business, the price of our stock could decline. If one or more of these analysts stop covering us or fail to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.

We will incur significantly increased costs and become subject to additional regulations and requirements as a result of becoming a public company, and our management will be required to devote substantial time to new compliance matters, which could lower our profits or make it more difficult to run our business.

As a public company, we will incur significant legal, regulatory, finance, accounting, investor relations and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. As a result of having publicly traded common stock, we will also be required to comply with, and incur costs associated with such compliance with, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, as well as rules and regulations implemented by the SEC and the NYSE. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. Our management will need to devote a substantial amount of time to ensure that we comply with all of these requirements, diverting the attention of management away from revenue-producing activities. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

Failure to comply with requirements to design, implement and maintain effective internal controls could have a material adverse effect on our business and stock price.

As a privately-held company, we were not required to evaluate our internal control over financial reporting in a manner that meets the standards of publicly traded companies required by Section 404(a) of the Sarbanes-Oxley Act, or Section 404.

As a public company, we will have significant requirements for enhanced financial reporting and internal controls. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. If we are unable to establish or maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our consolidated financial statements and harm our results of operations. In addition, we will be required, pursuant to Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting in the second annual report following the completion of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. Testing and maintaining internal controls may divert our

 

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management’s attention from other matters that are important to our business. Our independent registered public accounting firm will be required to issue an attestation report on effectiveness of our internal controls in the second annual report following the completion of this offering.

In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, we may encounter problems or delays in completing the remediation of any deficiencies identified by our independent registered public accounting firm in connection with the issuance of their attestation report.

Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Any material weaknesses could result in a material misstatement of our annual or quarterly consolidated financial statements or disclosures that may not be prevented or detected.

We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 or our independent registered public accounting firm may not issue an unqualified opinion. If either we are unable to conclude that we have effective internal control over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified report, investors could lose confidence in our reported financial information, which could have a material adverse effect on the trading price of our common stock.

Future sales, or the perception of future sales, by us or our existing stockholders in the public market following this offering could cause the market price for our common stock to decline.

After this offering, the sale of shares of our common stock in the public market, or the perception that such sales could occur, including sales by our existing stockholders, could harm the prevailing market price of shares of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Upon completion of this offering, we will have a total of                  shares of our common stock outstanding (                 shares if the underwriters exercise in full their option to purchase additional shares). Of the outstanding shares, the                  shares sold in this offering (or                  shares if the underwriters exercise in full their option to purchase additional shares) will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, or Rule 144, including our directors, executive officers and other affiliates (including affiliates of KKR Sponsor and affiliates of MSD Partners), may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.”

The              shares of common stock held by affiliates of KKR Sponsor, affiliates of MSD Partners and certain of our directors and executive officers after this offering, representing     % of the total outstanding shares of our common stock following this offering, will be “restricted securities” within the meaning of Rule 144 and subject to certain restrictions on resale. Restricted securities may be sold in the public market only if they are registered under the Securities Act or are sold pursuant to an exemption from registration such as Rule 144, as described in “Shares Eligible for Future Sale.”

In connection with this offering, we, our directors and executive officers and the Sponsors will sign lock-up agreements with the underwriters that will, subject to certain exceptions, restrict the disposition of, or hedging with respect to, the shares of our common stock or securities convertible into or exchangeable for shares of common stock, each held by them for 180 days following the date of this prospectus, except with the prior written consent of the representatives of the underwriters. See “Underwriting (Conflicts of Interest)” for a description of these lock-up agreements. Additionally, the holders of substantially all of our outstanding common

 

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stock prior to this offering (other than affiliates of the KKR Sponsor) will be subject to agreements that will, subject to certain exceptions, restrict the disposition of, or hedging with respect to, the shares of our common stock or securities convertible into or exchangeable for shares of our common stock. See “Certain Relationships and Related Party Transactions—Amended Parent Limited Partnership Agreement.”

We expect that KKR Sponsor and certain of its affiliates will be considered an affiliate upon the expiration of the lock-up period based on their expected share ownership (consisting of                  shares), as well as their board nomination rights. We also expect that MSD Partners and certain of its affiliates will be considered an affiliate upon the expiration of the lock-up period based on their expected share ownership (consisting of                  shares), as well as their board nomination rights. Certain other of our stockholders may also be considered affiliates at that time.

In addition, pursuant to the Amended Parent Limited Partnership Agreement (as defined in “Certain Relationships and Related Party Transactions—Amended Parent Limited Partnership Agreement”), each of the Sponsors has the right, subject to certain conditions, to require us to register the sale of their shares of our common stock under the Securities Act. See “Certain Relationships and Related Party Transactions—Amended Parent Limited Partnership Agreement.” By exercising its registration rights and selling a large number of shares, a Sponsor could cause the prevailing market price of our common stock to decline. Certain of our other stockholders have “piggyback” registration rights with respect to future registered offerings of our common stock. Following completion of this offering, the shares covered by registration rights would represent approximately      % of our total common stock outstanding (or      % if the underwriters exercise in full their option to purchase additional shares). Registration of any of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. See “Shares Eligible for Future Sale.”

As soon as practicable following this offering, we intend to file one or more registration statements on Form S-8 under the Securities Act to register all shares of our common stock subject to outstanding stock options and the shares of our common stock subject to issuance under our 2018 Omnibus Incentive Plan, which will be adopted in connection with this offering. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market, subject to limitations in the Amended Parent Limited Partnership Agreement. See “Certain Relationships and Related Party Transactions—Amended Parent Limited Partnership Agreement.” We expect that the initial registration statement on Form S-8 relating to our 2018 Omnibus Incentive Plan and our ESPP, each of which will be adopted in connection with this offering, will cover                  shares of our common stock.

As restrictions on resale end, or if the existing stockholders exercise their registration rights, the market price of our shares of common stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of common stock or other securities.

In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

We will be a “controlled company” within the meaning of the NYSE rules and the rules of the SEC and, as a result, qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of other companies that are subject to such requirements.

After completion of this offering, the Sponsors will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate

 

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governance standards of the NYSE. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements that:

 

    a majority of our Board of Directors consist of “independent directors” as defined under the rules of the NYSE;

 

    our Board of Directors have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

    our director nominations be made, or recommended to the full Board of Directors, by our independent directors or by a nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

Following this offering, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors, our compensation committee will not consist entirely of independent directors and we will have no nominating/corporate governance committee. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

In addition, on June 20, 2012, the SEC adopted Rule 10C-1, under the Securities Exchange Act of 1934, as amended, or the Exchange Act, to implement provisions of the Dodd-Frank Act, pertaining to compensation committee independence and the role and disclosure of compensation consultants and other advisers to the compensation committee. The national securities exchanges (including the NYSE) have since adopted amendments to their existing listing standards to comply with provisions of Rule 10C-1, and on January 11, 2013, the SEC approved such amendments. The amended listing standards require, among others, that:

 

    compensation committees be composed of fully independent directors, as determined pursuant to new and existing independence requirements;

 

    compensation committees be explicitly charged with hiring and overseeing compensation consultants, legal counsel and other committee advisers; and

 

    compensation committees be required to consider, when engaging compensation consultants, legal counsel or other advisers, certain independence factors, including factors that examine the relationship between the consultant or adviser’s employer and us.

As a “controlled company,” we will not be subject to these compensation committee independence requirements.

Our Sponsors control us and their interests may conflict with ours or yours in the future.

Immediately following this offering, the Sponsors will beneficially own      % of our common stock, or     % if the underwriters exercise in full their option to purchase additional shares. As a result, the Sponsors will be able to control the election and removal of our directors and thereby control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, payment of dividends, if any, on our common stock, the incurrence or modification of indebtedness by us, amendment of our amended and restated certificate of incorporation and amended and restated bylaws and the entering into of extraordinary transactions, and their interests may not in all cases be aligned with your interests. In addition, the Sponsors and their affiliates may have an interest in pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their investment, even though such transactions might involve risks to you. For example, the Sponsors could cause us to make acquisitions that increase our indebtedness or cause us to sell revenue-generating assets.

Our Sponsors and their affiliates are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Our amended and

 

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restated certificate of incorporation will provide that none of the Sponsors, any of their affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his director and officer capacities) or his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. The Sponsors and their affiliates also may pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us.

In addition, the Sponsors and their affiliates will be able to determine the outcome of all matters requiring stockholder approval and will be able to cause or prevent a change of control of our company or a change in the composition of our Board of Directors and could preclude any acquisition of our company. This concentration of voting control could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of our company and ultimately might affect the market price of our common stock.

Anti-takeover provisions in our organizational documents could delay or prevent a change of control.

Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have an anti-takeover effect and may delay, defer or prevent a merger, acquisition, tender offer, takeover attempt, or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders.

These provisions will provide for, among other things:

 

    the ability of our Board of Directors to issue one or more series of preferred stock;

 

    advance notice requirements for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings;

 

    certain limitations on convening special stockholder meetings;

 

    the removal of directors only upon the affirmative vote of the holders of at least 66 23% of the shares of common stock entitled to vote generally in the election of directors if the Sponsors and their affiliates cease to beneficially own at least 40% of shares of common stock entitled to vote generally in the election of directors; and

 

    that certain provisions may be amended only by the affirmative vote of at least 66 23% of shares of common stock entitled to vote generally in the election of directors if the Sponsors and their affiliates cease to beneficially own at least 40% of shares of common stock entitled to vote generally in the election of directors.

These anti-takeover provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares. See “Description of Capital Stock.”

Our Board of Directors will be authorized to issue and designate shares of our preferred stock in additional series without stockholder approval.

Our amended and restated certificate of incorporation will authorize our Board of Directors, without the approval of our stockholders, to issue                  shares of our preferred stock, subject to limitations prescribed by applicable law, rules and regulations and the provisions of our amended and restated certificate of incorporation, as shares of preferred stock in series, to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The powers, preferences and rights of these additional series of preferred stock may be senior to or on parity with our common stock, which may reduce its value.

 

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Our amended and restated certificate of incorporation will provide, subject to limited exceptions, that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the sole and exclusive forums for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

Our amended and restated certificate of incorporation will provide, subject to limited exceptions, that unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (i) derivative action or proceeding brought on behalf of our company, (ii) action asserting a claim of breach of a fiduciary duty owed by any director, officer, or other employee or stockholder of our company to the Company or our stockholders, creditors or other constituents, (iii) action asserting a claim against the Company or any director or officer of the Company arising pursuant to any provision of the Delaware General Corporation Law, or the DGCL, or our amended and restated certificate of incorporation or our amended and restated bylaws or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, or (iv) action asserting a claim against the Company or any director or officer of the Company governed by the internal affairs doctrine. Our amended and restated certificate of incorporation further provides that, to the fullest extent permitted by law, the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the United States federal securities laws.

Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provisions contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain matters we discuss in this prospectus may constitute forward-looking statements. You can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “estimates,” or “anticipates,” or similar expressions which concern our strategy, plans, projections or intentions. These forward-looking statements are included throughout this prospectus, including in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” and relate to matters such as our industry, growth strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. By their nature, forward-looking statements: speak only as of the date they are made; are not statements of historical fact or guarantees of future performance; and are subject to risks, uncertainties, assumptions, or changes in circumstances that are difficult to predict or quantify. Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties, and other important factors that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Such risks, uncertainties, and other important factors include, among others, the risks, uncertainties and factors set forth above under “Risk Factors,” and the following:

 

    general economic and financial conditions;

 

    competitive industry pressures;

 

    the failure to retain certain current customers, renew existing customer contracts and obtain new customer contracts;

 

    a determination by customers to reduce their outsourcing or use of preferred vendors;

 

    our ability to implement our business strategies and achieve our growth objectives;

 

    acquisition and integration risks;

 

    the seasonal nature of our landscape maintenance services;

 

    our dependence on weather conditions;

 

    increases in prices for raw materials and fuel;

 

    product shortages and the loss of key suppliers;

 

    the conditions and periodic fluctuations of real estate markets, including residential and commercial construction;

 

    our ability to retain our executive management and other key personnel;

 

    our ability to attract and retain trained workers and third-party contractors and re-employ seasonal workers;

 

    any failure to properly verify employment eligibility of our employees;

 

    subcontractors taking actions that harm our business;

 

    our recognition of future impairment charges;

 

    laws and governmental regulations, including those relating to employees, wage and hour, immigration, human health and safety and transportation;

 

    environmental, health and safety laws and regulations;

 

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    the impact of any adverse litigation judgments or settlements resulting from legal proceedings relating to our business operations;

 

    increase in on-job accidents involving employees;

 

    any failure, inadequacy, interruption, security failure or breach of our information technology systems;

 

    any failure to protect the security of personal information about our customers, employees and third parties;

 

    our ability to adequately protect our intellectual property;

 

    occurrence of natural disasters, terrorist attacks or other external events;

 

    our ability to generate sufficient cash flow to satisfy our significant debt service obligations;

 

    our ability to obtain additional financing to fund future working capital, capital expenditures, investments or acquisitions, or other general corporate requirements;

 

    restrictions imposed by our debt agreements that limit our flexibility in operating our business; and

 

    increases in interest rates increasing the cost of servicing our substantial indebtedness.

There may be other factors that could cause our actual results to differ materially from the forward-looking statements, including factors disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

We caution you that the risks, uncertainties, and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits, or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. All forward-looking statements in this prospectus apply only as of the date made and are expressly qualified in their entirety by the cautionary statements included in this prospectus. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $         million from the sale of shares of our common stock in this offering, assuming an initial public offering price of $         per share, the mid-point of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us. If the underwriters exercise in full their option to purchase an additional                  shares, the net proceeds to us will be approximately $         million.

We intend to use the net proceeds to us from this offering to repay borrowings outstanding under the Second Lien Credit Agreement and, to the extent there are any remaining proceeds, to repay borrowings outstanding under the First Lien Credit Agreement. Borrowings under the Second Lien Credit Agreement mature on December 18, 2021 and presently bear interest at 8.31%. Borrowings under the First Lien Credit Agreement mature on December 18, 2020 and presently bear interest at 4.88%.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, based on the mid-point of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us. An increase (decrease) of 1,000,000 shares from the expected number of shares to be sold by us in this offering, assuming no change in the assumed initial public offering price per share, the mid-point of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) our net proceeds from this offering by $         million. To the extent we raise more proceeds in this offering than currently estimated, we will repay additional indebtedness. To the extent we raise less proceeds in this offering than currently estimated, we will reduce the amount of our indebtedness that will be repaid.

 

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DIVIDEND POLICY

We do not currently anticipate paying any dividends on our common stock following this offering and currently expect to retain all future earnings for use in the operation and expansion of our business. Following this offering and upon repayment of certain outstanding indebtedness, we may reevaluate our dividend policy. The declaration, amount and payment of any future dividends on our common stock will be at the sole discretion of our Board of Directors, which may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, including restrictions under our credit agreements and other indebtedness we may incur, and such other factors as our Board of Directors may deem relevant. If we elect to pay such dividends in the future, we may reduce or discontinue entirely the payment of such dividends at any time.

Because a significant portion of our operations is through our subsidiaries, our ability to pay dividends depends in part on our receipt of cash dividends from our operating subsidiaries, which may further restrict our ability to pay dividends as a result of the laws of their jurisdiction of organization, agreements of our subsidiaries or covenants under any future outstanding indebtedness we or our subsidiaries incur. In addition, our ability to pay dividends is limited by covenants in our credit agreements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Indebtedness” for a description of the restrictions on our ability to pay dividends.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest in us will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the as adjusted net tangible book value (deficit) per share of our common stock after this offering. Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the book value per share attributable to the shares of common stock held by existing stockholders.

Our net tangible book deficit as of March 31, 2018 was approximately $1,353.0 million, or $             per share of our common stock. We calculate net tangible book value (deficit) per share by taking the amount of our total tangible assets, reduced by the amount of our total liabilities, and then dividing that amount by the total number of shares of common stock outstanding.

After giving effect to (i) the sale of              shares of our common stock in this offering at an assumed initial public offering price of $              per share, the mid-point of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us, and (ii) the application of the net proceeds from this offering as set forth under “Use of Proceeds,” our as adjusted net tangible book value (deficit) as of March 31, 2018 would have been $             million, or $             per share of our common stock. This amount represents an immediate increase in net tangible book value (or a decrease in net tangible book deficit) of $             per share to existing stockholders and an immediate and substantial dilution in net tangible book value (deficit) of $             per share to new investors purchasing shares in this offering at the assumed initial public offering price.

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share of common stock

      $               

Net tangible book deficit per share as of March 31, 2018

   $                  

Increase in tangible book value per share attributable to new investors

   $     
  

 

 

    

As adjusted net tangible book value (deficit) per share after this offering

     
     

 

 

 

Dilution per share to new investors

      $  
     

 

 

 

Dilution is determined by subtracting the as adjusted net tangible book value (deficit) per share of common stock after the offering from the initial public offering price per share of common stock.

If the underwriters exercise in full their option to purchase additional shares, the as adjusted net tangible book value (deficit) per share after giving effect to the offering and the use of proceeds therefrom would be $             per share. This represents an increase in as adjusted net tangible book value (or a decrease in as adjusted net tangible book deficit) of $             per share to the existing stockholders and results in dilution in as adjusted net tangible book value (deficit) of $             per share to new investors.

Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the underwriting discount and estimated offering expenses payable by us, a $1.00 increase or decrease in the assumed initial public offering price of $             per share, the mid-point of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease the as adjusted net tangible book value (deficit) attributable to new investors purchasing shares in this offering by $             per share and the dilution to new investors by $             per share and increase or decrease the as adjusted net tangible book value (deficit) per share after offering by $             per share.

The following table summarizes, as of March 31, 2018, the differences between the number of shares purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and by new investors. As the table shows, new investors purchasing shares in this offering will pay

 

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an average price per share substantially higher than our existing stockholders paid. The table below assumes an initial public offering price of $             per share, the mid-point of the estimated offering price range set forth on the cover page of this prospectus, for shares purchased in this offering and excludes the underwriting discount and estimated offering expenses payable by us:

 

     Shares
Purchased
    Total
Consideration
    Average/
Share
 
     Number      %     Amount      %    

Existing stockholders

               $                            $               

New investors

                          
  

 

 

      

 

 

      

 

 

 

Total

               $               $  

If the underwriters were to fully exercise their option to purchase an additional              shares of our common stock, the percentage of shares of our common stock held by existing stockholders who are directors, officers or affiliated persons as of March 31, 2018 would be     % and the percentage of shares of our common stock held by new investors would be      %.

Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, a $1.00 increase or decrease in the assumed initial public offering price of $             per share, the mid-point of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease total consideration paid by new investors and total consideration paid by all stockholders by approximately $             million.

To the extent that outstanding options are exercised, or we grant options to our employees, executive officers and directors in the future and those options are exercised or other issuances of common stock are made, there will be further dilution to new investors.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2018:

 

    on an actual basis; and

 

    on an as adjusted basis to give effect to (1) the sale of approximately              shares of our common stock in this offering; (2) the application of the estimated proceeds from the offering, at an assumed initial public offering price of $              per share, the mid-point of the estimated offering price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us, as described in “Use of Proceeds”; and (3) the payment of a monitoring agreement termination fee to each of KKR Sponsor and MSD Capital as described in “Certain Relationships and Related Party Transactions—Monitoring Agreement.”

You should read this table in conjunction with the information contained in “Use of Proceeds,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Indebtedness,” as well as the audited consolidated financial statements and the notes thereto and the unaudited consolidated financial statements and notes thereto, each included elsewhere in this prospectus.

 

     As of March 31, 2018  

(In millions, except share amounts)

   Actual      As
Adjusted(1)
 

Cash and cash equivalents

   $ 9.5      $  
  

 

 

    

 

 

 

Debt:

     

First Lien Term Loans (2)

   $ 1,375.1      $  

Second Lien Term Loans (3)

     109.4     

Revolving Credit Facility (4)

     —       

Receivables Financing Agreement (5)

     150.0     

Financing costs, net (6)

     (30.8   
  

 

 

    

 

 

 

Total debt

   $ 1,603.7      $  
  

 

 

    

 

 

 

Stockholders’ equity (7):

     

Common stock, $0.01 par value (185,000,000 shares authorized and 180,022,000 shares issued and outstanding, actual;              shares authorized and              shares issued and outstanding, as adjusted)

   $ 1.8      $  

Additional paid-in capital

     896.2     

Accumulated deficit

     (177.3   

Accumulated other comprehensive loss

     (16.1   
  

 

 

    

 

 

 

Total stockholders’ equity

   $ 704.6      $  
  

 

 

    

 

 

 

Total capitalization

   $ 2,308.3      $               
  

 

 

    

 

 

 

 

(1)

To the extent we change the number of shares of common stock sold by us in this offering from the shares we expect to sell or we change the initial public offering price from the assumed initial public offering price of $         per share, the mid-point of the estimated offering price range set forth on the cover page of this prospectus, or any combination of these events occurs, the net proceeds to us from this offering and each of the total stockholders’ equity and total capitalization may increase or decrease. A $1.00 increase or decrease in the assumed initial public offering price per share of the common stock, assuming no change in the number of shares of common stock to be sold, would increase or decrease the net proceeds that we receive in this offering and each of total stockholders’ equity and total capitalization by approximately $             .

 

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  An increase or decrease of 1,000,000 shares in the expected number of shares to be sold in the offering, assuming no change in the assumed initial public offering price per share, would increase or decrease our net proceeds from this offering and our total stockholders’ equity and total capitalization by approximately $              . To the extent we raise more proceeds in this offering, we will repay additional indebtedness. To the extent we raise less proceeds in this offering, we will reduce the amount of indebtedness that will be repaid.
(2) Represents the aggregate face amount of our First Lien Term Loans. The First Lien Term Loans mature on December 18, 2020. For a further description of our First Lien Credit Agreement, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Indebtedness.”
(3) Represents the aggregate face amount of our Second Lien Term Loans. Our Second Lien Term Loans mature on December 18, 2021. For a further description of our Second Lien Credit Agreement, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Indebtedness.”
(4) As of March 31, 2018 we had no outstanding borrowings and $71.8 million in outstanding letters of credit under our Revolving Credit Facility, which matures on (x) with respect to revolving credit commitments that were extended by Amendment No. 2 to the First Lien Credit Agreement, September 18, 2020 (y) with respect to revolving credit commitments that were not extended by Amendment No. 2 to the First Lien Credit Agreement, December 18, 2018. As of             , 2018, we had $             outstanding borrowings and $             in outstanding letters of credit under our Revolving Credit Facility. For a description of our credit facilities and definitions of capitalized terms used in this section, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Indebtedness.”
(5) The Receivables Financing Agreement provides for aggregate borrowings of up to $175.0 million governed by a borrowing base. As of March 31, 2018 we had $150.0 million in outstanding borrowings and no letters of credit outstanding under the Receivables Financing Agreement and there was $25.0 million of availability under the Receivables Financing Agreement. The Receivables Financing Agreement terminates on April 27, 2020.
(6) Represents the debt issuance costs paid and deferred over the term of the respective loans, net of amortization.
(7) Does not reflect                 shares of common stock (approximately         % of which will be restricted stock subject to vesting) issuable in connection with the Class B Equity Conversion and                 shares of common stock (all of which will be restricted stock subject to vesting) issuable in connection with the IPO Equity Grant, in each case based on the mid-point of the estimated offering price range set forth on the cover page of this prospectus.

 

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Table of Contents

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

Set forth below is our selected historical consolidated financial and other data as of the dates and for the periods indicated. For the purpose of discussing our financial results, we refer to ourselves as the “Successor” in the periods following the KKR Acquisition and the “Predecessor” during the periods preceding the KKR Acquisition.

The selected historical financial data as of September 30, 2017 and December 31, 2016 and for the nine months ended September 30, 2017 and for the years ended December 31, 2016 and 2015 has been derived from our audited historical consolidated financial statements included elsewhere in this prospectus, and the selected historical financial data as of December 31, 2015, 2014 and 2013 and the year ended December 31, 2014 and the periods from January 1, 2013 through December 17, 2013 and December 18, 2013 through December 31, 2013 has been derived from our audited historical consolidated financial statements not included in this prospectus. We changed our fiscal year end from December 31 to September 30 of each year, effective September 30, 2017. The selected historical financial data as of March 31, 2018, March 31, 2017 and September 30, 2016, for the six months ended March 31, 2018 and 2017 and for the nine months ended September 30, 2016 has been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements were prepared on a basis consistent with the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the financial information. The results of operations for any period are not necessarily indicative of the results to be expected for any future period and the results for any interim period are not necessarily indicative of the results that may be expected for the full year. Share and per share data in the table below have not been adjusted to give effect to the         -for-one reverse stock split which will occur prior to completion of this offering.

The selected historical consolidated financial and other data should be read in conjunction with, and are qualified by reference to, “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes and our unaudited consolidated financial statements and related notes thereto, each included elsewhere in this prospectus.

 

    Successor     Predecessor  

(In millions, except
per share amounts)

  Six Months
Ended
March 31,
2018
    Six Months
Ended
March 31,
2017
    Nine Months
Ended
September 30,
2017
    Nine Months
Ended
September 30,
2016
    Fiscal Year
2016
    Fiscal Year
2015
    Fiscal Year
2014(1)
    December 18,
2013 to
December 31,
2013(1)
    January 1,
2013 to
December 17,
2013(1)
 

Statement of Operations Data:

                   

Net service revenues

  $ 1,141.5     $ 1,031.4     $ 1,713.6     $ 1,673.0     $ 2,185.3     $ 2,214.8     $ 1,612.5     $ 19.2     $ 898.0  

Cost of services provided

    856.7       769.9       1,259.8       1,208.2       1,578.1       1,604.6       1,195.7       16.5       610.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    284.8       261.5       453.8       464.8       607.2       610.3       416.8       2.7       287.5  

Selling, general and administrative expense

    237.6       226.9       311.8       344.4       468.0       452.8       297.0       7.6       198.0  

Amortization expense

    60.4       63.6       92.9       98.7       131.6       139.3       96.9       2.6       25.8  

Transaction related expenses

    —         —         —         —         —         —         18.8       18.7       14.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (13.2     (28.9     49.1       21.8       7.6       18.1       4.2       (26.2     49.0  

Loss on debt extinguishment

    —         —         —         —         —         —         —         —         (35.4

Other income

    1.0       1.0       1.4       1.9       2.2       3.8       0.7       0.3       2.0  

Interest expense

    50.0       48.5       73.7       70.3       94.7       89.6       71.9       3.0       50.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (62.1     (76.4     (23.2     (46.6     (84.9     (67.7     (67.0     (28.9     (35.0

Income tax benefit

    59.4       23.1       9.3       17.8       32.5       27.1       16.5       8.3       10.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (2.7   $ (53.3   $ (14.0   $ (28.9   $ (52.4   $ (40.6   $ (50.5   $ (20.6   $ (24.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share(2):

                   

Basic

  $ (0.02   $ (0.30   $ (0.08   $ (0.16   $ (0.29   $ (0.22   $ (0.55     N/M       N/M  

Diluted

  $ (0.02   $ (0.30   $ (0.08   $ (0.16   $ (0.29   $ (0.22   $ (0.55     N/M       N/M  

Weighted average shares outstanding (in thousands)(2):

                   

Basic

    180,177       180,189       180,221       181,738       181,658       183,359       91,798       N/M       N/M  

Diluted

    180,177       180,189       180,221       181,738       181,658       183,359       91,798       N/M       N/M  

 

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Table of Contents
    Successor     Predecessor  

(In millions, except
per share amounts)

  Six Months
Ended
March 31,
2018
    Six Months
Ended
March 31,
2017
    Nine Months
Ended
September 30,
2017
    Nine Months
Ended
September 30,
2016
    Fiscal Year
2016
    Fiscal Year
2015
    Fiscal Year
2014(1)
    December 18,
2013 to
December 31,
2013(1)
    January 1,
2013 to
December 17,
2013(1)
 

Statement of Cash Flows Data:

                   

Cash flows from (used in) operating activities

  $ 79.2     $ 68.8     $ 78.9     $ 66.6     $ 111.9     $ 123.4     $ 50.5     $ (14.9   $ 51.6  

Cash flows used in investing activities

  $ (87.7   $ (50.5   $ (97.5   $ (61.9   $ (69.5   $ (65.4   $ (696.0   $ (1,564.4   $ (9.6

Cash flows from (used in) financing activities

  $ 5.3     $ (11.3   $ (36.6   $ (41.0   $ (46.4   $ (24.8   $ 668.2     $ 1,595.6     $ (58.3

Balance Sheet Data (at period end):

                   

Cash and cash equivalents

  $ 9.5     $ 42.6     $ 12.8     $ 35.7     $ 68.0     $ 72.0     $ 38.9     $ 16.2       N/A  

Total assets

  $ 2,860.5     $ 2,869.7     $ 2,858.6     $ 2,965.0     $ 2,890.6     $ 2,974.6     $ 3,121.7     $ 2,041.6       N/A  

Total liabilities

  $ 2,155.9     $ 2,192.2     $ 2,162.4     $ 2,242.4     $ 2,185.4     $ 2,191.7     $ 2,290.3     $ 1,350.9       N/A  

Total stockholders’ equity

  $ 704.6     $ 677.5     $ 696.3     $ 722.6     $ 705.2     $ 782.9     $ 831.5     $ 690.6       N/A  

Other Financial Data:

                   

Adjusted EBITDA (3)

  $ 118.0     $ 88.3     $ 217.2     $ 206.2     $ 255.7     $ 271.6     $ 212.9     $ (3.4   $ 149.5  

Adjusted Net Income (Loss) (3)

  $ 21.0     $ (1.1   $ 55.5     $ 45.9     $ 48.6     $ 61.1     $ 52.7     $ (4.7   $ 42.6  

Free Cash Flow (3)

  $ 36.6     $ 38.8     $ 34.6     $ 6.5     $ 42.3     $ 57.7     $ (5.6   $ (17.5   $ 26.4  

Adjusted Free Cash Flow (3)

  $ 58.2     $ 38.8     $ 34.6     $ 6.5     $ 42.3     $ 57.7     $ (5.6   $ (17.5   $ 26.4  

 

(1) The results of the business acquired in the ValleyCrest Acquisition are included in our financial results from June 30, 2014, the date of acquisition. Accordingly, our financial results for fiscal year 2014 and periods prior do not reflect the full impact of the ValleyCrest Acquisition. After adjusting for that transaction and related eliminations as if it had occurred at the beginning of the relevant period, management estimates that net service revenues and Adjusted EBITDA would have been $1,917.9 million and $232.3 million in 2013 and $2,155.4 million and $255.2 million in 2014, respectively.
(2) Earnings (loss) per share and weighted average shares outstanding are not meaningful for the 2013 periods shown above due to the small numbers of shares outstanding prior to the ValleyCrest Acquisition.
(3) We report our financial results in accordance with GAAP. To supplement this information, we also use the following measures in this prospectus: “Adjusted EBITDA,” “Adjusted Net Income,” “Free Cash Flow” and “Adjusted Free Cash Flow.” Management believes that Adjusted EBITDA and Adjusted Net Income 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 and amortization, as further adjusted to exclude certain non-cash, non-recurring and other adjustment items. We believe that the adjustments applied in presenting Adjusted EBITDA 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. 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 such exclusions and the removal of the discrete tax items. We believe Free Cash Flow and Adjusted Free Cash Flow are helpful supplemental measures 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. Adjusted Free Cash Flow represents Free Cash Flow as further adjusted for the acquisition of certain legacy properties associated with our acquired ValleyCrest business. We believe Free Cash Flow and Adjusted Free Cash Flow are useful to provide additional information to assess our ability to pursue business opportunities and investments and to service our debt. Free Cash Flow and Adjusted Free Cash Flow have limitations as analytical tools, including that they do not account for our future contractual commitments and exclude investments made to acquire assets under capital leases and required debt service payments.

Set forth below are the reconciliations of net loss to Adjusted EBITDA and Adjusted Net Income, and cash flows from operating activities to Free Cash Flow and Adjusted Free Cash Flow.

 

    Successor     Predecessor  

(In millions)

  Six Months
Ended
March 31,

2018
    Six Months
Ended
March 31,
2017
    Nine Months
Ended
September 30,
2017
    Nine Months
Ended
September 30,
2016
    Fiscal Year
2016
    Fiscal Year
2015
    Fiscal Year
2014
    December 18,
2013 to
December 31,
2013
    January 1,
2013 to
December 17,
2013
 

Adjusted EBITDA

                   

Net loss

  $ (2.7   $ (53.3   $ (14.0   $ (28.9   $ (52.4   $ (40.6   $ (50.5   $ (20.6   $ (24.8

Plus:

                   

Interest expense, net

    50.0       48.5       73.7       70.3       94.7       89.6       71.9       3.0       50.7  

Income tax benefit

    (59.4     (23.1     (9.3     (17.8     (32.5     (27.1     (16.5     (8.3     (10.2

Depreciation expense

    38.8       40.8       56.5       58.0       79.3       74.2       50.4       1.1       31.1  

Amortization expense

    60.4       63.6       92.9       98.7       131.6       139.3       96.9       2.6       25.8  

Establish public company financial reporting compliance (a)

    2.8       2.0       0.8       4.0       5.5       —         —         —         —    

 

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Table of Contents
    Successor     Predecessor  

(In millions)

  Six Months
Ended
March 31,

2018
    Six Months
Ended
March 31,
2017
    Nine Months
Ended
September 30,
2017
    Nine Months
Ended
September 30,
2016
    Fiscal
Year
2016
    Fiscal
Year
2015
    Fiscal
Year
2014
    December 18,
2013 to
December 31,
2013
    January 1,
2013 to
December 17,
2013
 

Business transformation and integration costs (b)

    18.9       8.2       10.8       16.2       24.1       30.2       37.9       —         55.6  

Transaction costs (c)

    —         —         —         —         —         —         18.8       18.7       14.7  

Expenses related to initial public offering (d)

    2.1       —         —         —         —         —         —         —         —    

Equity-based compensation (e)

    5.8       0.4       3.8       3.7       2.8       3.9       2.6       —         6.2  

Management fees (f)

    1.3       1.3       1.9       2.0       2.7       2.1       1.5       —         0.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 118.0     $ 88.3     $ 217.2     $ 206.2     $ 255.7     $ 271.6     $ 212.9     $ (3.4   $ 149.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Adjusted Net Income

                   

Net income (loss)

  $ (2.7   $ (53.3   $ (14.0   $ (28.9   $ (52.4   $ (40.6   $ (50.5   $ (20.6   $ (24.8

Plus:

                   

Amortization expense

    60.4       63.6       92.9       98.7       131.6       139.3       96.9       2.6       25.8  

Establish public company financial reporting compliance (a)

    2.8       2.0       0.8       4.0       5.5       —         —         —         —    

Business transformation and integration costs (b)

    18.9       8.2       10.8       16.2       24.1       30.2       37.9       —         55.6  

Transaction costs (c)

    —         —         —         —         —         —         18.8       18.7       14.7  

Expenses related to initial public offering (d)

    2.1       —         —         —         —         —         —         —         —    

Equity-based compensation (e)

    5.8       0.4       3.8       3.7       2.8       3.9       2.6       —         6.2  

Management fees (f)

    1.3       1.3       1.9       2.0       2.7       2.1       1.5       —         0.5  

Income tax adjustment (g)

    (67.7     (23.3     (40.8     (49.8     (65.7     (73.8     (54.5     (5.4     (35.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income (Loss)

  $ 21.0     $ (1.1   $ 55.5     $ 45.9     $ 48.6     $ 61.1     $ 52.7     $ (4.7   $ 42.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow and Adjusted Free Cash Flow

                   

Cash flows from (used in) operating activities

  $ 79.2     $ 68.8     $ 78.9     $ 66.6     $ 111.9     $ 123.4     $ 50.5     $ (14.9   $ 51.6  

Minus:

                   

Capital expenditures

    44.1       32.4       50.6       65.4       75.6       71.3       60.0       2.6       31.1  

Plus:

                   

Proceeds from sale of property and equipment

    1.5       2.4       6.3       5.3       6.0       5.6       3.8       —         5.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

  $ 36.6     $ 38.8     $ 34.6     $ 6.5     $ 42.3     $ 57.7     $ (5.6   $ (17.5   $ 26.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Plus:

                   

ValleyCrest land and building acquisition (h)

    21.6       —         —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Free Cash Flow

  $ 58.2     $ 38.8     $ 34.6     $ 6.5     $ 42.3     $ 57.7     $ (5.6   $ (17.5   $ 26.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Represents costs incurred to establish public company financial reporting compliance, including costs to comply with the requirements of Sarbanes-Oxley and the accelerated adoption of the new revenue recognition standard (ASC 606 – Revenue from Contracts with Customers) and other miscellaneous costs.
(b) Business transformation and integration costs consist of (i) severance and related costs; (ii) vehicle fleet rebranding costs; (iii) business integration costs and (iv) information technology infrastructure transformation costs and other.

 

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Table of Contents

(In millions)

  Six Months
Ended
March 31,
2018
    Six Months
Ended
March 31,
2017
    Nine Months
Ended
September 30,
2017
    Nine Months
Ended
September 30,
2016
    Fiscal Year
        2016        
    Fiscal Year
        2015        
    Fiscal Year
      2014      
    December 18,
2013 to
December 31,
2013
    January 1,
2013 to
December 17,
2013
 

Severance and related costs

  $ 2.2     $ 5.7     $ 0.8     $ 7.1     $ 13.1     $ 7.0     $ 10.8     $ —       $ 6.5  

Rebranding of vehicle fleet

    12.1       —         6.3       —         —         —         —         —         —    

Business integration

    0.2       0.2       —         3.8       4.0       23.2       27.1       —         49.1  

IT infrastructure transformation and other

    4.4       2.2       3.7       5.3       7.0       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Business transformation and integration costs

  $ 18.9     $ 8.2     $ 10.8     $ 16.2     $ 24.1     $ 30.2     $ 37.9     $ —       $ 55.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(c) Represents transaction costs recognized in connection with the acquisition by our KKR Sponsor and ValleyCrest Acquisition.
(d) Represents expenses incurred in connection with this offering.
(e) Represents equity-based compensation expense recognized for stock plans outstanding.
(f) Represents management fees paid to our Sponsors pursuant to a monitoring agreement. See “Certain Relationships and Related Party Transactions—Monitoring Agreement.”
(g) Represents the tax effect of pre-tax items excluded from Adjusted Net Income and the removal of discrete tax items, which collectively result in a reduction of income tax benefit. 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. The six months ended March 31, 2018 amount includes a $41.4 million benefit recognized as a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the 2017 Tax Act.

 

(In millions)

  Six Months
Ended
March 31,

2018
    Six Months
Ended
March 31,
2017
    Nine Months
Ended
September 30,
2017
    Nine Months
Ended
September 30,
2016
    Fiscal Year
2016
    Fiscal Year
2015
    Fiscal Year
2014
    December 18,
2013 to
December 31,
2013
    January 1,
2013 to
December 17,
2013
 

Tax impact of pre-tax income adjustments

  $ 25.9     $ 23.6     $ 39.0     $ 49.8     $ 66.1     $ 73.7     $ 53.8     $ 5.4     $ 34.0  

Discrete tax items

    41.8       (0.3     1.8       —         (0.4     0.1       0.7       —         1.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax adjustment

  $ 67.7     $ 23.3     $ 40.8     $ 49.8     $ 65.7     $ 73.8     $ 54.5     $ 5.4     $ 35.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(h) Represents the acquisition of legacy ValleyCrest land and buildings in October 2017.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” and “Special Note Regarding Forward-Looking Statements” sections of this prospectus 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.

We changed our fiscal year end from December 31 to September 30, beginning with September 30, 2017. The change aligns the fiscal year end with the seasonal business cycle of our industry. References herein to “fiscal year 2017” relate to the nine month transition period from January 1, 2017 through September 30, 2017. References to the prior year fiscal years relate to twelve month periods ended December 31, 2016 and December 31, 2015.

Overview

Our Company

We are the largest provider of commercial landscaping services in the United States, with revenues more than 10 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 200 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. This creates recurring revenue and enhances the predictability of our business model, as demonstrated by our landscape maintenance contract renewal rate of approximately 85% for each of calendar year 2016 and 2017.

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 30 U.S. states, and, through our qualified service partner network, we are able to efficiently provide nationwide coverage in all 50 U.S. states and Puerto Rico.

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,

 

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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 nursery 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.

Components of Our Revenues and Expenses

Net Service Revenues

Maintenance Services

Our Maintenance Services revenues are generated primarily through landscape maintenance, enhancements 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 days’ notice. Revenues for such services are recognized in proportion to the performance of related services during a given month compared to the estimate of activities to be performed. Landscape enhancement services represent supplemental maintenance or improvement services generally provided under contracts of short duration related to specific services. Revenues for these enhancement services are generally recognized in the period in which the services are provided. Fees for contracted landscape maintenance services are typically billed on an equal monthly basis, while fees for enhancement services are typically billed as the services are performed. Typically, snow removal services are provided on either a fixed fee basis per snow season or on a time and material-basis. Geographies with heavier snowfall are typically associated with fixed fee based contracts. Revenues for snow removal services are recognized in the period in which the services are performed, or expected to be performed. Fees for fixed fee snow removal services are typically billed on an equal monthly basis during a snow season, while fees for time and material or other activity-based snow removal services are typically billed as the services are performed.

Development Services

Revenues from landscape development contracts are recognized using the percentage-of-completion method, measured by the percentage of cost incurred to date of the estimated total cost for each contract. The full amount of anticipated losses on contracts is recorded when such losses can be estimated. Changes in job performance, job conditions and estimated profitability, including final contract settlements, may result in revisions to costs and revenues and are recognized in the period in which such 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, operating equipment and vehicle

 

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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 includes the periodic amortization of intangible assets recognized when the KKR Sponsor acquired us on December 18, 2013 and intangible assets recognized in connection with businesses we acquired since December 18, 2013, including customer relationships and trademarks.

Interest Expense

Interest expense relates primarily to our long term debt. See “—Liquidity and Capital Resources—Description of Indebtedness.”

Income Tax Benefit

The benefit for income taxes 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.

In addition, on December 22, 2017, the U.S. Tax Cuts and Jobs Act, or the 2017 Tax Act, was enacted. The 2017 Tax Act reduced the U.S. corporate income tax rate from 35% to 21%. As a result of the enactment, we expect our effective tax rate to be lower in future periods. Based on the applicable tax rates and number of days in fiscal year 2017 before and after the 2017 Tax Act, we expect to have a 2018 blended corporate tax rate of 24.5%. Although we believe we have accounted for the parts of the 2017 Tax Act that will have the most significant impact on our financials, the ultimate impact of the 2017 Tax Act on our reported results in fiscal year 2018 may differ from the estimates provided herein, due to, among other things, changes in interpretations and assumptions we have made, guidance that may be issued, and other actions we may take as a result of the 2017 Tax Act different from that presently contemplated.

Other Income

Other income consists primarily of investment gains and losses related to deferred compensation.

 

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How We Assess the Performance of our Business

We manage operations through the two operating segments described above. In addition to our GAAP financial measures, we review various non-GAAP financial measures, including Adjusted EBITDA, Adjusted Net Income, Free Cash Flow and Adjusted Free Cash Flow.

We believe Adjusted EBITDA and Adjusted Net Income 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 (loss) income 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. We believe that the adjustments applied in presenting Adjusted EBITDA and Adjusted Net Income 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 and Adjusted Free Cash Flow are helpful supplemental measures 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 sales of property and equipment. Adjusted Free Cash Flow represents Free Cash Flow as further adjusted for the acquisition of certain legacy properties associated with our acquired ValleyCrest business. We believe Free Cash Flow and Adjusted Free Cash Flow are useful to provide additional information to assess our ability to pursue business opportunities and investments and to service our debt. Free Cash Flow and Adjusted Free Cash Flow have limitations as analytical tools, including that they do not account for our future contractual commitments and exclude investments made to acquire assets under capital leases and required debt service payments.

Management regularly uses these measures as tools in evaluating our operating performance, financial performance and liquidity, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure and capital investments. Management uses Adjusted EBITDA, Adjusted Net Income, Free Cash Flow and Adjusted Free Cash Flow to supplement comparable GAAP measures in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. In addition, we believe that Adjusted EBITDA, Adjusted Net Income, Free Cash Flow and Adjusted Free Cash Flow are frequently used by investors and other interested parties in the evaluation of issuers, many of which also present Adjusted EBITDA, Adjusted Net Income, Free Cash Flow and Adjusted Free Cash Flow when reporting their results in an effort to facilitate an understanding of their operating and financial results and liquidity. Management supplements GAAP results with non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone.

Adjusted EBITDA and Adjusted Net Income are provided in addition to, and should not be considered as alternatives to, net income (loss) or any other performance measure derived in accordance with GAAP, and Free Cash Flow and Adjusted Free Cash Flow are provided in addition to, and should not be considered as an alternative to, cash flow from operating activities or any other measure derived in accordance with GAAP as a measure of our liquidity. Adjusted EBITDA, Adjusted Net Income, Free Cash Flow and Adjusted Free Cash Flow have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP. In addition, because not all companies use identical calculations, the presentations of these measures may not be comparable to other similarly titled measures of other companies and can differ significantly from company to company. Additionally, these measures are not intended to be a measure of free cash flow available for management’s discretionary use as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements.

 

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For a reconciliation of the most directly comparable GAAP measures, see “Prospectus Summary—Summary Historical Consolidated Financial and Other Data” and “Selected Historical Consolidated Financial Data.”

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 following the change of our fiscal year end date to September 30, effective September 30, 2017. 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.

Cumulative Annual Snowfall in BrightView Locations Over Time(1)

 

LOGO

 

 

(1) Reflects cumulative annual snowfall at locations where BrightView has a presence.

 

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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 increase our density and leadership positions in existing local markets, enter into attractive new geographic markets and expand our portfolio of landscape enhancement services and improve technical capabilities in specialized services. In accordance with GAAP, the results of the acquisitions we have completed are reflected in our 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. Since January 1, 2017, we have acquired eight businesses with more than $188.2 million of aggregate annualized revenue (of which $73.2 million of annualized revenue relates to transactions completed after March 31, 2018 and not yet reflected in our historical financial statements, including $68.4 million relating to the May 2018 acquisition of The Groundskeeper business), for aggregate consideration of $161.3 million. We anticipate incurring integration related costs in respect of these acquisitions of $3.8 million, of which $1.3 million had been incurred as of March 31, 2018, with the remainder to be incurred by the second quarter of fiscal year 2019. While integration costs vary based on factors specific to each acquisition, such costs are primarily comprised of fleet and uniform rebranding, and to a lesser extent, other administrative costs associated with training employees and transitioning from legacy accounting and IT systems. We typically anticipate integration costs to represent approximately 2%-3% 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.

Equity-based Compensation

The Company has a Management Equity Incentive Plan, or the Plan, under which Parent L.P. may award Class A Units and/or Class B Units to our employees and members of our Board of Directors. Many of our outstanding equity-based compensation awards granted to our employees vest upon a service condition and certain performance criteria of the Company, while some outstanding awards also vest upon a liquidity event, including an initial public offering. In connection with the completion of this offering, we expect to record approximately $             million of equity-based compensation expense in the fiscal quarter in which this offering occurs as a result of such vesting. In addition, in connection with the completion of this offering, we expect to issue stock options (i) in connection with the Class B Equity Conversion, which we expect to result in $             million of equity-based compensation expense, $             million of which we expect to recognize in the quarter in which this offering is completed and the remainder of which we expect to recognize in future periods, and (ii) in connection with the IPO Equity Grant, which we expect to result in $             million of equity based compensation expense, $             million of which we expect to recognize in the quarter in which this offering is completed and the remainder of which we expect to recognize in future periods, in each case based on the mid-point of the estimated offering price range set forth on the cover page of this prospectus. Furthermore, we expect equity-based compensation expense to be higher in the future as our awards will be expensed over the requisite service and performance period. See Note 15 “Equity-Based Compensation Plans” to our audited consolidated financial statements and Note 10 “Equity-Based Compensation Plans” to our unaudited consolidated financial statements included elsewhere in this prospectus for additional information about our equity-based compensation plans.

 

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Results of Operations

We changed our fiscal year end from December 31 to September 30, beginning with September 30, 2017. The change aligns the fiscal year end with the seasonal business cycle of our industry. References herein to “fiscal year 2017” relate to the nine-month transition period from January 1, 2017 through September 30, 2017. References to the prior year fiscal years relate to twelve-month periods ended December 31, 2016 and December 31, 2015. As a result, fiscal year 2017 is a nine-month presentation period, whereas in future periods our fiscal year will be presented as a twelve-month period ending September 30. Comparability of fiscal year 2017 to other fiscal years is therefore limited.

The following tables summarize key components of our results of operations for the periods indicated. These periods, including the nine months ended September 30, 2017 and 2016, were chosen due to the change in fiscal year noted above and because we believe it enhances the understanding of our performance.

 

     Six Months Ended
March 31,
    Nine Months Ended
September 30,
    Year Ended
December 31,
 
($ in millions)    2018     2017     2017     2016     2016     2015  

Net service revenues

   $ 1,141.5     $ 1,031.4     $ 1,713.6     $ 1,673.0     $ 2,185.3     $ 2,214.8  

Cost of services provided

     856.7       769.9       1,259.8       1,208.2       1,578.1       1,604.6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     284.8       261.5       453.8       464.8       607.2       610.3  

Selling, general and administrative expense

     237.6       226.9       311.8       344.4       468.0       452.8  

Amortization expense

     60.4       63.6       92.9       98.7       131.6       139.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (13.2     (28.9     49.1       21.8       7.6       18.1  

Other income

     1.0       1.0       1.4       1.9       2.2       3.8  

Interest expense

     50.0       48.5       73.7       70.3       94.7       89.6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (62.1     (76.4     (23.2     (46.6     (84.9     (67.7

Income tax benefit

     59.4       23.1       9.3       17.8       32.5       27.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (2.7   $ (53.3   $ (14.0   $ (28.9   $ (52.4   $ (40.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (1)

   $ 118.0     $ 88.3     $ 217.2     $ 206.2     $ 255.7     $ 271.6  

Adjusted Net Income (Loss) (1)

   $ 21.0     $ (1.1   $ 55.5     $ 45.9     $ 48.6     $ 61.1  

Free Cash Flow (1)

   $ 36.6     $ 38.8     $ 34.6     $ 6.5     $ 42.3     $ 57.7  

Adjusted Free Cash Flow (1)

   $ 58.2     $ 38.8     $ 34.6     $ 6.5     $ 42.3     $ 57.7  

 

(1) See “Selected Historical Consolidated Financial Data” for a reconciliation to the most directly comparable GAAP measure.

Six Months Ended March 31, 2018 compared to Six Months Ended March 31, 2017

Net Service Revenues

Net service revenues for the six months ended March 31, 2018 increased $110.1 million, or 10.7%, to $1,141.5 million, from $1,031.4 million in the 2017 period. The increase was driven by an increase in Maintenance Services revenues of $94.8 million, or 12.3%, coupled with an increase in Development Services revenues of $15.8 million, or 6.1%. The increase in Maintenance Services revenues was principally driven by increased revenue from snow removal services of $55.2 million due to the relative frequency and volume of snowfall, as well as incremental revenue from our businesses acquired. The increase in Development Services revenues was primarily the result of increased activity on existing contracted development projects.

Gross Profit

Gross profit for the six months ended March 31, 2018 increased $23.3 million, or 8.9%, to $284.8 million, from $261.5 million in the 2017 period. The increase in gross profit resulted from the increase in revenues

 

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described above, offset by a decrease in gross margin (gross profit as a percentage of revenue) to 24.9% for the six months ended March 31, 2018, from 25.4% for 2017. Cost of services provided as a percentage of net service revenues increased 50 basis points to 75.1% in the six months ended March 31, 2018 from 74.6% in the 2017 period principally driven by an increase in the cost of materials of 50 basis points due to certain larger development projects.

Selling, General and Administrative Expense

Selling, general and administrative expense for the six months ended March 31, 2018, increased $10.7 million, or 4.7%, to $237.6 million, from $226.9 million in the 2017 period primarily due to costs for business transformation and integration. As a percentage of revenue, selling, general and administrative expense decreased for the six months ended March 31, 2018 to 20.8%, from 22.0% in the 2017 period.

Amortization Expense

Amortization expense for the six months ended March 31, 2018 decreased $3.2 million, or 5.0%, to $60.4 million, from $63.6 million in the 2017 period. The decrease was principally due to the expected decrease in the amortization of intangible assets recognized in connection with the KKR Acquisition and the ValleyCrest Acquisition, based on the accelerated pattern consistent with expected future cash flows calculated at that time, offset by incremental amortization expense for intangible assets recognized in connection with our acquired businesses.

Other Income

Other income was $1.0 million for each of the six months ended March 31, 2018 and 2017, respectively, and consists primarily of gains and losses on investments.

Interest Expense

Interest expense for the six months ended March 31, 2018 increased $1.5 million, or 3.1%, to $50.0 million, from $48.5 million in the 2017 period. The increase was primarily due to an increase in losses from our hedge contracts of $1.0 million and an increase due to a higher weighted average interest rate in the 2018 period of 4.48%, compared to 4.00% in the 2017 period, which is in direct correlation to rising interest rates in the external LIBOR market. The increases above were offset by lower average outstanding borrowings in the six months ended March 31, 2018.

Income Tax Benefit

Income tax benefit for the six months ended March 31, 2018 increased $36.3 million, or 157.1%, to $59.4 million, from $23.1 million in the 2017 period. The increase in the income tax benefit was primarily attributable to the reduction in the U.S. corporate income tax rate from the enactment of the 2017 Tax Act. As a result of the enactment, we revalued our ending net deferred tax liabilities at December 31, 2017, resulting in a $41.4 million tax benefit in the six months ended March 31, 2018.

Net Income (Loss)

For the six months ended March 31, 2018, net loss decreased $50.6 million, to $2.7 million, from $53.3 million in the 2017 period. The decrease was due to the changes noted above.

Adjusted EBITDA

Adjusted EBITDA increased $29.7 million for the six months ended March 31, 2018, to $118.0 million, from $88.3 million in the 2017 period. Adjusted EBITDA as a percent of revenue was 10.3% and 8.6% in the six

 

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months ended March 31, 2018 and 2017, respectively. The increase in Adjusted EBITDA is principally driven by an increase in Maintenance Services Segment Adjusted EBITDA of $28.1 million, or 30.9%. This increase was offset by a decrease in Development Services Segment Adjusted EBITDA of $2.7 million, or 7.5%, due to the increase of cost of services provided as a percentage of net service revenues, as described above.

Adjusted Net Income

Adjusted Net Income for the six months ended March 31, 2018 increased $22.1 million to $21.0 million, from Adjusted Net Loss of $1.1 million in the 2017 period. The increase was primarily due to the increase in gross profit, as discussed above.

Nine Months Ended September 30, 2017 compared to Nine Months Ended September 30, 2016

Net Service Revenues

Net service revenues for the nine months ended September 30, 2017 increased $40.6 million, or 2.4%, to $1,713.6 million, from $1,673.0 million in the 2016 period. The increase was driven by an increase in Development Services revenues of $78.2 million, or 21.8%, offset by decreases in Maintenance Services revenues of $37.9 million, or 2.9%. The increase in Development Services revenues was primarily the result of increased activity on existing and new larger development projects initiated in fiscal year 2017. The decrease in Maintenance Services revenues was principally driven by lower revenues from snow removal services, due to relative frequency and amount of snowfall, offset by growth in landscape maintenance services revenues, principally derived from businesses acquired during the period, and by growth in our enhancement services revenue.

Gross Profit

Gross profit for the nine months ended September 30, 2017 decreased $11.0 million, or 2.4%, to $453.8 million, from $464.8 million in the 2016 period. The decrease in gross profit was driven by the decline in Maintenance Services revenues described above along with an overall decline in gross margin due to an increase in cost of services provided as a percentage of net service revenues. Cost of services provided as a percentage of net service revenues increased 130 basis points to 73.5% in the nine months ended September 30, 2017 from 72.2% in the 2016 period. The increase in cost of services as a percentage of net service revenues was principally driven by an increase in total labor costs, inclusive of subcontractor expense, of 180 basis points primarily driven by an increase in the percentage of work performed by subcontractors on certain larger development projects, offset by a reduction in the cost of materials of 30 basis points.

Selling, General and Administrative Expense

Selling, general and administrative expense for the nine months ended September 30, 2017 decreased $32.6 million, or 9.5%, to $311.8 million, from $344.4 million in the 2016 period. The decrease was driven by our continued focus on efficiency initiatives to reduce overhead, personnel and related costs across our core functions. As a percentage of revenue, selling, general and administrative expense decreased to 18.2% from 20.6% in the 2016 period.

Amortization Expense

Amortization expense for the nine months ended September 30, 2017 decreased $5.8 million, or 5.9%, to $92.9 million, from $98.7 million in the 2016 period. The decrease was principally due to the expected decrease in the amortization of intangible assets recognized in connection with the KKR Acquisition and the ValleyCrest Acquisition based on the accelerated pattern consistent with expected future cash flows calculated at that time, offset by incremental amortization expense for acquisitions completed during the 2017 period.

 

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Other Income

Other income was $1.4 million and $1.9 million in the nine months ended September 30, 2017 and 2016, respectively, and consists primarily of gains and losses on investments.

Interest Expense

Interest expense for the nine months ended September 30, 2017 increased $3.4 million, or 4.8%, to $73.7 million, from $70.3 million in the 2016 period. The increase primarily resulted from a higher weighted average interest rate in the 2017 period of 4.50%, compared to 4.45% in the 2016 period, which is in direct correlation to rising interest rates in the external LIBOR market. The increases above were offset by lower average outstanding borrowings in the period and the impact of our interest rate swaps for the period.

Income Tax Benefit

Income tax benefit for the nine months ended September 30, 2017 decreased $8.5 million, or 47.8%, to $9.3 million, from $17.8 million in the 2016 period. The decrease in tax benefit was primarily driven by the change in pre-tax loss, which decreased $23.4 million, or 50.2%, to $23.2 million, from $46.6 million in the 2016 period.

Net Income (Loss)

For the nine months ended September 30, 2017, net loss decreased $14.9 million, to $14.0 million, from $28.9 million in the 2016 period. The decrease is primarily due to the changes noted above.

Adjusted EBITDA

Adjusted EBITDA increased $11.0 million for the nine months ended September 30, 2017, to $217.2 million, from $206.2 million in the 2016 period. Adjusted EBITDA as a percent of revenue was 12.7% and 12.3% for the nine months ended September 30, 2017 and 2016, respectively. The increase in Adjusted EBITDA was principally due to the reduction in selling, general and administrative expense, offset by a decline in gross profit.

Adjusted Net Income

Adjusted Net Income for the nine months ended September 30, 2017 increased $9.6 million, to $55.5 million, from $45.9 million in the 2016 period. The increase was primarily due to the reduction in selling, general and administrative expense, including business transformation costs, partially offset by a decline in gross profit and an increase in interest expense, each as discussed above.

Fiscal Year 2016 compared to Fiscal Year 2015

Net Service Revenues

Net service revenues for the year ended December 31, 2016 decreased $29.5 million, or 1.3%, to $2,185.3 million, from $2,214.8 million in 2015. The decrease was driven by a decline in Maintenance Services revenues of $67.2 million, or 3.8%, offset by an increase in Development Services revenues of $37.1 million, or 8.0%. The decrease in Maintenance Services revenues was primarily a result of a reduction in snow removal services revenue. Snow removal services revenue for the year ended December 31, 2016 decreased $58.6 million, or 18.6%, compared with 2015. The remaining $8.6 million decrease in Maintenance Services revenues was driven by disruption in our business caused by undertaking certain initiatives, which have since been discontinued, contemporaneously with the integration efforts following the ValleyCrest Acquisition. In particular, we experienced a reduction in revenues as a result of centralizing certain customer-facing and sales functions, which were previously, and are now currently, provided on a regional and branch level. This initiative,

 

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which was expected to improve revenue and performance, did not yield the anticipated results, and accordingly was discontinued by the end of 2016. The increase in Development Services revenues was primarily the result of increased activity on new and existing contracted development projects.

Gross Profit

Gross profit for the year ended December 31, 2016 decreased $3.1 million, or 0.5%, to $607.2 million, from $610.3 million in 2015. The decrease in gross profit resulted from the decrease in revenues described above, offset by an increase in gross margin to 27.8% for the year ended December 31, 2016, from 27.6% for 2015. Cost of services provided as a percentage of net service revenues decreased 20 basis points for the Company. As a percentage of net services revenues, total labor costs, inclusive of subcontractor expense, improved 50 basis points. The improvement as a percentage of net service revenues was due to a decrease in labor costs from the reduced use of subcontractors for snow removal services of 110 basis points, offset by an increase in total labor costs of 60 basis points from an increase in the percentage of work performed by subcontractors on certain larger development projects.

Selling, General and Administrative Expense

Selling, general and administrative expense for the year ended December 31, 2016 increased $15.2 million, or 3.4%, to $468.0 million, from $452.8 million in 2015. The increase in selling, general and administrative expense was driven by an increase in overhead, personnel costs and professional fees in connection with certain initiatives, which have since been discontinued, undertaken contemporaneously with the integration efforts following the ValleyCrest Acquisition. As a percentage of revenue, selling, general and administrative expense for the year ended December 31, 2016 increased to 21.4%, from 20.4% in 2015.

Amortization Expense

Amortization expense for the year ended December 31, 2016 decreased $7.7 million, or 5.5%, to $131.6 million, from $139.3 million in 2015. The decrease was principally due to the expected decrease in the amortization of intangible assets recognized in connection with the KKR Acquisition and the ValleyCrest Acquisition based on the accelerated pattern consistent with expected future cash flows calculated at that time.

Other Income

Other income was $2.2 million and $3.8 million for the years ended December 31, 2016 and 2015, respectively, and consists primarily of gains and losses on investments.

Interest Expense

Interest expense for the year ended December 31, 2016 increased $5.1 million, or 5.7%, to $94.7 million, from $89.6 million in 2015 due primarily to the impact of our interest rate swaps for the period.

Income Tax Benefit

Income tax benefit for the year ended December 31, 2016 increased $5.4 million, or 19.9%, to $32.5 million, from $27.1 million in 2015. The increase in tax benefit was primarily driven by the change in effective tax rate, which was 38.3% for the year ended December 31, 2016, and 40.1% for the year ended December 31, 2015.

Net Income (Loss)

For the year ended December 31, 2016, net loss increased $11.8 million, to $52.4 million, from $40.6 million in 2015. The increase is primarily due to the changes noted above.

 

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Adjusted EBITDA

Adjusted EBITDA decreased $15.9 million for the year ended December 31, 2016, to $255.7 million, from $271.6 million in 2015. Adjusted EBITDA as a percent of revenue was 11.7% and 12.3% for the years ended December 31, 2016 and 2015, respectively. The decrease in Adjusted EBITDA is principally due to the decrease in snow removal services revenues, as well as the decrease in revenues and increase in selling, general and administrative expense related in each case to the ValleyCrest Acquisition and other prior initiatives, each as described above.

Adjusted Net Income

Adjusted Net Income for the year ended December 31, 2016 decreased $12.5 million, to $48.6 million, from $61.1 million in 2015. The decrease in Adjusted Net Income is principally due to the decrease in snow removal services revenues, as well as the decrease in revenues and increase in selling, general and administrative expense related to the ValleyCrest Acquisition and other prior initiatives, each as described above. Adjusted Net Income was further impacted by a decrease in the income tax provision offset by an increase in interest expense and depreciation expense for the year ended December 31, 2016 compared to the prior year.

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 Six Months Ended March 31, 2018 and 2017

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

 

     Six Months Ended
March 31,
    Percent Change
2018 vs. 2017
 
(In millions)    2018     2017    

Net Service Revenues

   $ 866.8     $ 772.0       12.3

Segment Adjusted EBITDA

   $ 118.9     $ 90.8       30.9

Segment Adjusted EBITDA Margin

     13.7     11.8     190  bps 

Maintenance Services Net Service Revenues

Maintenance Services net service revenues for the six months ended March 31, 2018 increased by $94.8 million, or 12.3%, from the 2017 period. Revenues from landscape services were $623.1 million, an increase of $39.6 million over the 2017 period and revenues from snow removal services were $243.7 million, an increase of $55.2 million over the 2017 period. The increase in snow removal services revenue is correlated with the higher relative snowfall in the six months ended March 31, 2018 (snowfall for the six months ended March 31, 2018 and 2017 was 84% and 63%, respectively, of the historical 10-year average for that six-month period), coupled with an increased frequency of snowfall events and the volume of snowfall per event. The increase in landscape

 

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services revenues was driven by incremental revenue of $37.9 million from businesses acquired, as well as increased demand for our services due to the hurricanes that impacted the southern United States and an overall improvement in enhancement services pricing, reflecting the renewed focus on our branch-centric model.

Maintenance Services Segment Adjusted EBITDA

Segment Adjusted EBITDA for the six months ended March 31, 2018 increased $28.1 million, to $118.9 million, compared to $90.8 million in the 2017 period. The increase in Segment Adjusted EBITDA was primarily due to the increase in revenues described above, offset by a related increase in cost of services provided of $67.6 million. As a result, Segment Adjusted EBITDA Margin increased 190 basis points, to 13.7%, in the six months ended March 31, 2018, from 11.8% in the 2017 period, principally due to a reduction in selling, general and administrative expense of 220 basis points driven by initiatives to increase efficiencies, resulting in reduced personnel costs and other expenses.

Development Services Segment Results

 

     Six Months Ended
March 31,
    Percent Change
2018 vs. 2017
 
(In millions)    2018     2017    

Net Service Revenues

   $ 276.2     $ 260.4       6.1

Segment Adjusted EBITDA

   $ 33.3     $ 36.0       (7.5 )% 

Segment Adjusted EBITDA Margin

     12.1     13.8     (170 ) bps 

Development Services Net Service Revenues

Development Services net service revenues for the six months ended March 31, 2018 increased $15.8 million, or 6.1%, compared to the 2017 period. The increase was primarily due to increased activity on new and existing contracted work. The average contract value related to the work performed in the six months ended March 31, 2018 was larger than the average contract value related to the work performed in the 2017 period.

Development Services Segment Adjusted EBITDA

Segment Adjusted EBITDA for the six months ended March 31, 2018 decreased $2.7 million, to $33.3 million, compared to the 2017 period. The decrease in Segment Adjusted EBITDA was primarily due to an increase in cost of services provided of $22.3 million, with cost of services provided as a percentage of revenue increasing 360 basis points primarily driven by an increase in cost of materials on certain larger development projects. The increase in costs of services performed was offset by the growth in revenue described above, as well as a decrease in selling, general and administrative expense of $3.9 million that was driven by a collection of cash at the completion of a significant project and the release of a prior reserve against a portion of such receivable. As a result, Segment Adjusted EBITDA Margin decreased 170 basis points, to 12.1%, in the six months ended March 31, 2018, from 13.8% in the 2017 period.

Segment Results for the Nine Months Ended September 30, 2017 and 2016

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
September 30,
    Percent Change
2017 vs. 2016
 
(In millions)    2017     2016    

Net Service Revenues

   $ 1,278.3     $ 1,316.2       (2.9 )% 

Segment Adjusted EBITDA

   $ 210.3     $ 215.9       (2.6 )% 

Segment Adjusted EBITDA Margin

     16.5     16.4     10  bps 

 

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Maintenance Services Net Service Revenues

Maintenance Services net service revenues for the nine months ended September 30, 2017 decreased by $37.9 million, or 2.9%, compared to the 2016 period. Revenues from landscape services were $1,132.5 million, an increase of $25.7 million over the 2016 period, and revenues from snow removal services were $145.8 million, a decrease of $63.6 million over the 2016 period. The decline in snow removal services revenue is correlated with the lower relative snowfall in the nine months ended September 30, 2017 (snowfall for the nine months ended September 30, 2017 and 2016 was 58% and 100%, respectively, of the historical 10-year average for that period). This decrease was partially offset by additional revenues from landscape services of $22.6 million from businesses acquired in fiscal year 2017, coupled with an increase in enhancement services due to an increase in demand for our services due to the hurricanes that impacted the southern United States and an overall improvement in enhancement services pricing across our footprint.

Maintenance Services Segment Adjusted EBITDA

Segment Adjusted EBITDA for the nine months ended September 30, 2017 decreased $5.6 million, to $210.3 million, compared to $215.9 million in the 2016 period. The decrease in Segment Adjusted EBITDA was primarily due to the decrease in revenues described above offset by a related decrease in cost of services provided of $15.4 million and a reduction in selling, general and administrative expense of $19.3 million, driven by our continued focus on efficiency initiatives to reduce overhead, personnel and related costs across our core functions. As a result, Segment Adjusted EBITDA Margin increased 10 basis points, to 16.5%, in the nine months ended September 30, 2017, from 16.4% in the 2016 period.

Development Services Segment Results

 

     Nine Months Ended
September 30,
    Percent Change
2017 vs. 2016
 
(In millions)    2017     2016    

Net Service Revenues

   $ 437.7     $ 359.5       21.8

Segment Adjusted EBITDA

   $ 52.9     $ 42.5       24.5

Segment Adjusted EBITDA Margin

     12.1     11.8     30  bps 

Development Services Net Service Revenues

Development Services net service revenues for the nine months ended September 30, 2017 increased $78.2 million, or 21.8%, compared to the 2016 period. The increase was primarily the result of increased activity on new and existing development projects in fiscal year 2017. The average contract value related to the work performed in fiscal year 2017 was larger than the average contract value related to the work performed in the 2016 period.

Development Services Segment Adjusted EBITDA

Segment Adjusted EBITDA for the nine months ended September 30, 2017 increased $10.4 million, to $52.9 million, compared to $42.5 million in the 2016 period. The increase in Segment Adjusted EBITDA was primarily due to the increase in revenue described above, as well as a decrease in selling, general and administrative expense of $2.1 million that was driven by a focus on increasing efficiencies through personnel cost and other expense reductions, offset by increases in cost of services provided of $70.3 million, with cost of services provided as a percentage of revenue increasing 190 basis points driven by an increase in the percentage of work performed by subcontractors on certain larger development projects. As a result, Segment Adjusted EBITDA Margin increased 30 basis points, to 12.1%, in the 2017 period from 11.8% in the 2016 period.

 

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Segment Results for the Years Ended December 31, 2016 and 2015

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

 

     Year Ended
December 31,
    Percent Change
2016 vs. 2015
 
(In millions)    2016     2015    

Net Service Revenues

   $ 1,689.7     $ 1,756.9       (3.8 )% 

Segment Adjusted EBITDA

   $ 263.8     $ 288.4       (8.5 )% 

Segment Adjusted EBITDA Margin

     15.6     16.4     (80 ) bps 

Maintenance Services Net Service Revenues

Maintenance Services net service revenues for the year ended December 31, 2016 decreased by $67.2 million, or 3.8%, compared to the 2015 period. Revenues from landscape services were $1,433.2 million, a decrease of $8.6 million over the 2015 period and revenues from snow removal services were $256.5 million, a decrease of $58.6 million over the 2015 period. The decline in snow removal services revenue is correlated with the lower relative snowfall in the 2016 period (snowfall for 2016 and 2015 was 94% and 112%, respectively, of the historical 10-year average for that period). The remaining $8.6 million decrease in Maintenance Services revenues was driven by disruption in our business caused by undertaking certain initiatives, which have since been discontinued, contemporaneously with the integration efforts following the ValleyCrest Acquisition. In particular, we experienced a reduction in revenues as a result of centralizing certain customer-facing and sales functions, which were previously, and are now currently, provided on a regional and branch level. This initiative, which was expected to improve revenue and performance, did not yield the anticipated results, and accordingly was discontinued by the end of 2016.

Maintenance Services Segment Adjusted EBITDA

Segment Adjusted EBITDA decreased $24.6 million, to $263.8 million, for the year ended December 31, 2016 compared to $288.4 million for the 2015 period. The decrease in Segment Adjusted EBITDA was primarily due to the decline in revenue described above and an increase in selling, general and administrative expense of $45.4 million driven by disruption in our business caused by undertaking certain initiatives, which have since been discontinued, contemporaneously with the integration efforts following the ValleyCrest Acquisition. In particular, we experienced an increase in selling, general and administrative expense as a result of centralizing certain customer-facing and sales functions, which were previously, and are now currently, provided on a regional and branch level. These factors were offset by a decrease in cost of services provided of $81.7 million due to a decrease in labor costs from the reduced use of subcontractors for snow removal services. As a result, Segment Adjusted EBITDA Margin decreased 80 basis points, to 15.6%, in the year ended December 31, 2016, from 16.4% in the 2015 period.

Development Services Segment Results

 

     Year Ended
December 31,
    Percent Change
2016 vs. 2015
 
(In millions)    2016     2015    

Net Service Revenues

   $ 498.9     $ 461.8       8.0

Segment Adjusted EBITDA

   $ 67.1     $ 60.9       10.2

Segment Adjusted EBITDA Margin

     13.4     13.2     20  bps 

 

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Development Services Net Service Revenues

Development Services net service revenues for the year ended December 31, 2016 increased by $37.1 million, or 8.0%, compared to the 2015 period. The increase in revenues was primarily the result of increased activity on new and existing contracted development projects.


Development Services Segment Adjusted EBITDA

Segment Adjusted EBITDA increased $6.2 million, to $67.1 million, for the year ended December 31, 2016 compared to $60.9 million for the 2015 period. The increase in Segment Adjusted EBITDA was primarily due to the increase in revenues described above offset by a related increase in cost of services provided of $33.2 million. As a result, Segment Adjusted EBITDA Margin increased 20 basis points, to 13.4%, in the year ended December 31, 2016, from 13.2% in the 2015 period.

Quarterly Results of Operations

The following table sets forth our historical quarterly results of operations as well as certain operating data for each of our most recent eight fiscal quarters. This unaudited quarterly information (other than Adjusted EBITDA, Adjusted Net Income, Free Cash Flow and Adjusted Free Cash Flow) has been prepared on the same basis as our audited financial statements appearing elsewhere in this prospectus, and includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary to present fairly the financial information for the fiscal quarters presented. This information should be read in conjunction with the audited consolidated financial statements and related notes thereto and unaudited consolidated financial statements and related notes thereto, each included elsewhere in this prospectus.

 

(In millions)

  Three Months Ended  
  March 31,
        2018        
    December 31,
2017
    September 30,
2017
    June 30,
        2017        
    March 31,
        2017        
    December 31,
2016
    September 30,
2016
    June 30,
        2016        
 

Net service revenues

  $ 590.4     $ 551.1     $ 567.0     $ 627.5     $ 519.1     $ 512.3     $ 544.9     $ 583.9  

Cost of services provided

    448.1       408.5       408.8       451.1       400.0       369.9       389.8       410.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    142.2       142.6       158.2       176.4       119.1       142.4       155.1       173.7  

Selling, general and administrative expense

    117.8       119.8       104.5       104.1       103.2       123.7       116.3       112.0  

Amortization expense

    29.3       31.0       31.0       31.3       30.7       32.9       32.9       32.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (4.9     (8.3     22.7       41.1       (14.7     (14.2     5.8       28.8  

Other income

    —         1.0       0.5       0.3       0.6       0.4       1.7       0.2  

Interest expense

    25.1       24.9       24.7       24.9       24.1       24.4       23.2       24.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (29.9     (32.2     (1.6     16.5       (38.2     (38.2     (15.7     4.4  

Income tax benefit (expense)

    7.9       51.5       2.0       (1.1     8.4       14.7       6.5       (1.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (22.1   $ 19.3     $ 0.4     $ 15.4     $ (29.8   $ (23.5   $ (9.2   $ 2.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (1)

  $ 51.6     $ 66.4     $ 79.7     $ 98.5     $ 38.9     $ 49.5     $ 70.8     $ 87.7  

Adjusted Net Income (Loss) (1)

  $ 7.6     $ 13.4     $ 24.2     $ 35.1     $ (3.8   $ 2.6     $ 16.5     $ 25.7  

Free Cash Flow (1)

  $ (16.8   $ 53.4     $ 47.1     $ (15.5   $ 3.0     $ 35.8     $ (9.9   $ 5.9  

Adjusted Free Cash Flow (1)

  $ (16.8   $ 75.0     $ 47.1     $ (15.5   $ 3.0     $ 35.8     $ (9.9   $ 5.9  

 

(1) Set forth below are the reconciliations of net (loss) income to Adjusted EBITDA and Adjusted Net Income, and cash flows from operating activities to Free Cash Flow and Adjusted Free Cash Flow.

 

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(In millions)

  Three Months Ended  
  March 31,
2018
    December 31,
2017
    September 30,
2017
    June 30,
2017
    March 31,
2017
    December 31,
2016
    September 30,
2016
    June 30,
2016
 

Adjusted EBITDA

               

Net (loss) income

  $ (22.1   $ 19.3     $ 0.4     $ 15.4     $ (29.8   $ (23.5   $ (9.2   $ 2.6  

Plus:

               

Amortization expense

    29.3       31.0       31.0       31.3       30.7       32.9       32.9       32.9  

Depreciation expense

    17.7       21.1       17.0       19.9       19.6       21.2       19.8       19.2  

Interest expense, net

    25.1       24.9       24.7       24.9       24.1       24.4       23.2       24.6  

Income tax (benefit) provision

    (7.9     (51.5     (2.0     1.1       (8.4     (14.7     (6.5     1.8  

Establish public company financial reporting compliance (a)

    0.2       2.6       —         0.4       0.4       1.5       1.1       1.1  

Business transformation and integration costs (b)

    2.1       16.8       7.9       2.6       0.2       7.9       7.6       3.3  

Expenses related to initial public offering (c)

    2.1       —         —         —         —         —         —         —    

Equity-based compensation (d)

    4.3       1.5       0.3       2.2       1.4       (0.9     1.3       1.4  

Management fees (e)

    0.7       0.6       0.6       0.7       0.6       0.7       0.7       0.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 51.6     $ 66.4     $ 79.7     $ 98.5     $ 38.9     $ 49.5     $ 70.8     $ 87.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

               

Net (loss) income

  $ (22.1   $ 19.3     $ 0.4     $ 15.4     $ (29.8   $ (23.5   $ (9.2   $ 2.6  

Plus:

               

Amortization expense

    29.3       31.0       31.0       31.3       30.7       32.9       32.9       32.9  

Establish public company financial reporting compliance (a)

    0.2       2.6       —         0.4       0.4       1.5       1.1       1.1  

Business transformation and integration costs (b)

    2.1       16.8       7.9       2.6       0.2       7.9       7.6       3.3  

Expenses related to initial public offering (c)

    2.1       —         —         —         —         —         —         —    

Equity-based compensation (d)

    4.3       1.5       0.3       2.2       1.4       (0.9     1.3       1.4  

Management fees (e)

    0.7       0.6       0.6       0.7       0.6       0.7       0.7       0.7  

Income tax adjustment (f)

    (9.1     (58.6     (16.0     (17.4     (7.4     (15.9     (17.9     (16.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income (Loss)

  $ 7.6     $ 13.4     $ 24.2     $ 35.1     $ (3.8   $ 2.6     $ 16.5     $ 25.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow and Adjusted Free Cash Flow

               

Cash flows (used in) from operating activities

  $ (3.3   $ 82.5     $ 55.3     $ 0.2     $ 23.4     $ 45.3     $ 2.5     $ 33.4  

Minus:

               

Capital expenditures

    14.3       29.8       9.9       18.6       22.1       10.3       13.6       29.1  

Plus:

               

Proceeds from sale of property and equipment

    0.8       0.7       1.7       2.9       1.7       0.7       1.1       1.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

  $ (16.8   $ 53.4     $ 47.1     $ (15.5   $ 3.0     $ 35.8     $ (9.9   $ 5.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Plus:

               

ValleyCrest land and building acquisition (g)

    —         21.6       —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Free Cash Flow

  $ (16.8   $ 75.0     $ 47.1     $ (15.5   $ 3.0     $ 35.8     $ (9.9   $ 5.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(a) Represents costs incurred to establish public company financial reporting compliance, including costs to comply with the requirements of Sarbanes-Oxley and the accelerated adoption of the new revenue recognition standard (ASC 606 – Revenue from Contracts with Customers), and other miscellaneous costs.
(b) Business transformation and integration costs consist of (i) severance and related costs; (ii) vehicle fleet rebranding costs; (iii) business integration costs and (iv) information technology infrastructure transformation costs and other.

 

(In millions)

  Three Months Ended  
  March 31,
2018
    December 31,
2017
    September 30,
2017
    June 30,
2017
    March 31,
2017
    December 31,
2016
    September 30,
2016
    June 30,
2016
 

Severance and related costs

  $ (0.4   $ 2.6     $ 0.8     $ 0.4     $ (0.4   $ 6.1     $ 4.5     $ 0.9  

Rebranding of vehicle fleet

    1.9       10.2       5.6       0.7       —         —         —         —    

Business integration

    0.2       —         —         —         —         0.2       1.4       1.0  

IT infrastructure transformation and other

    0.4       4.0       1.5       1.5       0.6       1.6       1.7       1.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Business transformation and integration costs

  $ 2.1     $ 16.8     $ 7.9     $ 2.6     $ 0.2     $ 7.9     $ 7.6     $ 3.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(c) Represents expenses incurred in connection with this offering.
(d) Represents equity-based compensation expense recognized for stock plans outstanding.
(e) Represents management fees paid to our Sponsors pursuant to a monitoring agreement. See “Certain Relationships and Related Party Transactions—Monitoring Agreement.”
(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. The three months ended December 31, 2017 amount includes a $40.5 million benefit recognized as a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the 2017 Tax Act.

 

    Three Months Ended  

(in millions)

  March 31,
2018
    December 31,
2017
    September 30,
2017
    June 30,
2017
    March 31,
2017
    December 31,
2016
    September 30,
2016
    June 30,
2016
 

Tax impact of pre-tax income adjustments

  $ 7.9     $ 18.1     $ 14.3     $ 17.5     $ 7.2     $ 16.3     $ 17.9     $ 16.3  

Discrete tax items

    1.2       40.5       1.7       (0.1     0.1       (0.4     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax adjustment

  $ 9.1     $ 58.6     $ 16.0     $ 17.4     $ 7.4     $ 15.9     $ 17.9     $ 16.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(g) Represents the acquisition of legacy ValleyCrest land and buildings in October 2017.

Our operations and strategic objectives require continuing investment. Our resources include cash generated from operations and borrowings under long-term debt agreements.

For a description of our material indebtedness, including our First Lien Term Loans, Second Lien Term Loans and Revolving Credit Facility and our outstanding borrowings under the Receivables Financing Agreement, see “—Liquidity and Capital Resources—Description of Indebtedness” and Note 9 “Long-term Debt” of our audited consolidated financial statements included elsewhere in this prospectus.

As of March 31, 2018, September 30, 2017, December 31, 2016 and December 31, 2015, we were in compliance with all of our debt covenants and no event of default had occurred or was ongoing.

Liquidity and Capital Resources

Liquidity

Since the consummation of the KKR Acquisition and related financing transactions, our principal sources of liquidity have been existing cash and cash equivalents, cash generated from operations and borrowings under the

 

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Senior Secured Credit Facilities and the Receivables Financing Agreement. Our principal uses of cash following the consummation of the KKR Acquisition and related financing transactions have been to provide working capital, meet debt service requirements, fund capital expenditures and finance strategic plans, including acquisitions. We may also seek to finance capital expenditures under capital 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 and the Receivables Financing Agreement, will provide sufficient liquidity to fund our current obligations, projected working capital requirements, debt service requirements and capital spending requirements 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.

 

     March 31,
2018
     September 30,
2017
     December 31,  
(In millions)          2016      2015  

Cash and cash equivalents

   $ 9.5      $ 12.8      $ 68.0      $ 72.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Short-term borrowings and current maturities of long-term debt

   $ 14.6      $ 14.6      $ 17.5      $ 15.4  

Long-term debt

   $ 1,589.1      $ 1,574.9      $ 1,595.9      $ 1,600.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt

   $ 1,603.7      $ 1,589.5      $ 1,613.4      $ 1,616.2  
  

 

 

    

 

 

    

 

 

    

 

 

 

We can increase the borrowing availability under the First Lien Credit Agreement or increase the term loans outstanding under the First Lien Credit Agreement or the Second Lien Credit Agreement, or incur other first or second lien indebtedness in lieu thereof, by up to $150.0 million, in the aggregate, in the form of additional commitments under the Revolving Credit Facility and/or incremental term loans under the First Lien Credit Agreement or the Second Lien Credit Agreement, or in the form of other indebtedness in lieu thereof, plus an additional amount so long as we do not exceed, in the case of first lien indebtedness, a specified first lien 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 First Lien Credit Agreement and Second Lien Credit Agreement if certain specified conditions are met. Our liquidity requirements are significant primarily due to debt service requirements. See “—Liquidity and Capital Resources—Description of Indebtedness” and, for a complete description of our credit facilities, refer to Note 9 “Long-term Debt” to our audited consolidated financial statements included elsewhere in this prospectus.

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 Senior Secured Credit Facilities, 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.

 

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Cash Flows

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

 

     Six Months
Ended

March 31,
    Nine Months
Ended

September 30,
    Year Ended
December 31,
 
(In millions)    2018     2017     2017     2016     2016     2015  

Operating activities

   $ 79.2     $ 68.8     $ 78.9     $ 66.6     $ 111.9     $ 123.4  

Investing activities

   $ (87.7   $ (50.5   $ (97.5   $ (61.9   $ (69.5   $ (65.4

Financing activities

   $ 5.3     $ (11.3   $ (36.6   $ (41.0   $ (46.4   $ (24.8

Free Cash Flow (1)

   $ 36.6     $ 38.8     $ 34.6     $ 6.5     $ 42.3     $ 57.7  

Adjusted Free Cash Flow (1)

   $ 58.2     $ 38.8     $ 34.6     $ 6.5     $ 42.3     $ 57.7  

 

(1) See “Prospectus Summary—Summary Historical Consolidated Financial and Other Data” for a reconciliation to the most directly comparable GAAP measure.

Cash Flows provided by Operating Activities

Net cash provided by operating activities for the six months ended March 31, 2018 increased $10.4 million, to $79.2 million, from $68.8 million in the 2017 period. This increase was primarily due to lower net loss, partially offset by changes in operating assets and liabilities of $15.0 million principally driven by increases in accounts receivable and unbilled revenues as a result of revenue growth.

Net cash provided by operating activities for the nine months ended September 30, 2017 increased $12.3 million, to $78.9 million, from $66.6 million in the 2016 period. This increase was primarily due to higher net income, and cash generated from changes in inventories and other operating assets, offset by changes in accounts payable and other operating liabilities.

Net cash provided by operating activities in the twelve months ended December 31, 2016 decreased $11.5 million, to $111.9 million, from $123.4 million in the 2015 period. This decrease was primarily due to an increase in net loss and an increase in the use of cash from increases in unbilled revenue and other operating assets, partially offset by changes in accounts receivable, accounts payable and other liabilities.

Cash Flows used in Investing Activities

Net cash used in investing activities was $87.7 million in the six months ended March 31, 2018, an increase in the use of cash of $37.2 million compared to $50.5 million for the 2017 period. The increase was driven primarily by $44.7 million of cash paid for acquisitions for the six months ended March 31, 2018, compared to $22.7 million in the 2017 period. Capital expenditures increased 36.1%, or $11.7 million, year over year primarily due to the acquisition of legacy ValleyCrest land and buildings for $21.6 million. Excluding such acquisition, cash used for capital expenditures was $22.5 million and $32.4 million for the six months ended March 31, 2018 and 2017, respectively.

Net cash used in investing activities was $97.5 million in the nine months ended September 30, 2017, an increase in the use of cash of $35.6 million compared to $61.9 million for the 2016 period. Cash used in investing activities included capital expenditures of $50.6 million and $65.4 million for the nine months ended September 30, 2017 and 2016, respectively. Capital expenditures decreased 22.5%, or $14.7 million, year over year as a result of our focus on improvement in asset utilization. Cash paid for acquisitions for the nine months ended September 30, 2017 was $53.8 million and we had no acquisitions in the 2016 period.

Net cash used in investing activities was $69.5 million in the twelve months ended December 31, 2016, an increase in the use of cash of $4.1 million compared to $65.4 million for the 2015 period. Cash used in investing

 

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activities included capital expenditures of $75.6 million and $71.3 million in the twelve months ended December 31, 2016 and 2015, respectively, invested primarily to support sales growth initiatives and increased operating efficiency. Net proceeds from business divestitures and disposals of property, plant and equipment were $6.0 million and $5.6 million in the twelve months ended December 31, 2016 and 2015, respectively. There were no business acquisitions in 2016 or 2015.

Cash Flows provided by (used in) Financing Activities

Net cash flows provided by financing activities of $5.3 million for the six months ended March 31, 2018 consisted of proceeds from our Receivables Financing Agreement of $55.0 million, offset by scheduled principal payments on long-term borrowings of $46.2 million, repayments of capital lease obligations of $3.2 million and repurchases of common stock of $0.5 million. Cash used in financing activities was $11.3 million for the six months ended March 31, 2017 and reflects net repayments of long-term borrowings of $7.8 million, repayments of capital lease obligations of $1.7 million and repurchases of common stock of $1.9 million.

Net cash used in financing activities of $36.6 million for the nine months ended September 30, 2017 consisted of proceeds from our Receivables Financing Agreement of $150.0 million, voluntary repayments of long-term borrowings of $166.3 million, scheduled principal payments on long-term borrowings of $11.0 million, other debt-related payments of $4.3 million, repayments of capital lease obligations of $3.9 million and repurchases of common stock of $1.2 million. Cash used in financing activities was $41.0 million for the nine months ended September 30, 2016 and reflects net repayments of long-term borrowings of $11.7 million, repayments of capital lease obligations of $2.8 million and repurchases of common stock of $28.5 million. The decrease in repurchases of common stock was due to higher repurchase activity in the prior year due to the departure of several executives.

Net cash used in financing activities of $46.4 million in the twelve months ended December 31, 2016 reflects scheduled principal payments on long-term borrowings of $14.6 million, repurchases of common stock of $30.2 million and repayments of capital lease obligations of $3.5 million, partially offset by issuances of common stock of $1.9 million. The increase in repurchases of common stock was due to the departure of several executives. Cash used in financing activities of $24.8 million in the twelve months ended December 31, 2015, reflects scheduled principal payments on long-term borrowings of $15.9 million, repurchase of common stock of $3.7 million and repayments of capital lease obligations of $5.3 million.

Free Cash Flow and Adjusted Free Cash Flow

Free Cash Flow decreased $2.2 million to $36.6 million for the six months ended March 31, 2018 from $38.8 million in the 2017 period. The decrease in Free Cash Flow was due to an increase in capital expenditures of $11.7 million, partially offset by an increase in cash flows from operating activities of $10.4 million. Adjusted Free Cash Flow increased $19.4 million to $58.2 million for the six months ended March 31, 2018 from $38.8 million in the 2017 period. The increase in Adjusted Free Cash Flow was due to an increase in cash flows from operating activities of $10.4 million and a decrease in capital expenditures of $9.9 million (net of $21.6 million related to the acquisition of legacy ValleyCrest land and buildings).

Free Cash Flow increased $28.1 million to $34.6 million for the nine months ended September 30, 2017 from $6.5 million in the 2016 period. The increase in Free Cash Flow was due to an increase in cash flows from operating activities of $12.3 million and a decrease in capital expenditures of $14.7 million due to our focus on improvement in asset utilization. Adjusted Free Cash Flow was the same as Free Cash Flow for the nine months ended September 30, 2017 and the same 2016 period.

Free Cash Flow decreased $15.4 million to $42.3 million for the twelve months ended December 31, 2016 from $57.7 million in the 2015 period. The decrease in Free Cash Flow was due to a decrease in cash flows from operating activities of $11.5 million and an increase in capital expenditures of $4.3 million. Adjusted Free Cash Flow was the same as Free Cash Flow for the twelve months ended December 31, 2016 and 2015, respectively.

 

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Working Capital

 

     March 31,
2018
     September 30,
2017
     December 31,  
(In millions)          2016      2015  

Net Working Capital:

           

Current assets

   $ 519.5      $ 502.5      $ 489.3      $ 463.1  

Less: Current liabilities

     390.8        342.1        308.7        289.9  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net working capital

   $ 128.7      $ 160.4      $ 180.6      $ 173.2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net working capital is defined as current assets less current liabilities. Net working capital decreased $31.7 million, to $128.7 million, at March 31, 2018, from $160.4 million at September 30, 2017, primarily driven by an increase in accounts payable, deferred revenue and accrued expenses, offset by increases in accounts receivable and unbilled revenue, related to the timing of work performed.

Net working capital decreased $20.2 million, to $160.4 million, at September 30, 2017, from $180.6 million at December 31, 2016, primarily driven by a decrease in cash and cash equivalents of $55.2 million and an increase in accrued expenses and other current liabilities, offset by higher accounts receivable and unbilled revenue related to the timing of work performed.

Net working capital increased $7.4 million to $180.6 million at December 31, 2016, from $173.2 million at December 31, 2015, driven by increases in accounts receivable and unbilled revenue related to the timing of work performed, partially offset by higher accounts payable.

Description of Indebtedness

First Lien Credit Agreement

On December 18, 2013, in connection with the KKR Acquisition, BrightView Holdings, Inc., as guarantor, and BrightView Landscapes, as borrower, entered into a first lien credit agreement, or the First Lien Credit Agreement, with Morgan Stanley Senior Funding, Inc., as the administrative agent, collateral agent and swingline lender, Morgan Stanley Bank, N.A., as the letter of credit issuer, Morgan Stanley Senior Funding, Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs Bank USA, Royal Bank of Canada, Mizuho Bank, Ltd., KKR Capital Markets LLC, Macquarie Capital (USA) Inc., Sumitomo Mitsui Banking Corporation and UBS Securities LLC, as joint lead arrangers and bookrunners, and the lending institutions from time to time party thereto. The First Lien Credit Agreement was amended on June 30, 2014 pursuant to a joinder agreement and Amendment No. 1 to the First Lien Credit Agreement to, among other things, establish $725.0 million of new incremental term loans and $100.0 million of new incremental revolving commitments. Pursuant to Amendment No. 2 to the First Lien Credit Agreement, dated as of December 18, 2017, which we refer to as Amendment No. 2, the revolving credit maturity date with respect to consenting revolving credit lenders was extended from December 18, 2018, to September 18, 2020 and the revolving credit commitment of consenting lenders was reduced in an aggregate amount of up to $10.0 million. The description of our First Lien Term Loans (as defined below) below gives effect to both the June 2014 incremental term loans and the December 2017 revolving credit commitment maturity extension and reduction. The First Lien Credit Agreement was amended on March 1, 2018 pursuant to Amendment No. 3 to the First Lien Credit Agreement to, among other things, make adjustments to reflect our change in fiscal year.

Our borrowings under the First Lien Credit agreement consist of $735.0 million initial term loans and $725.0 million incremental term loans, or collectively the First Lien Term Loans, each maturing on December 18, 2020. Of these First Lien Term Loans, $1,375.1 million was outstanding as of March 31, 2018. The First Lien Credit Agreement also provides for a $200.4 million revolving credit facility, or the Revolving Credit Facility, which matures on, (x) with respect to the $192.9 million of revolving credit commitments that

 

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were extended by Amendment No. 2 to the First Lien Credit Agreement, September 18, 2020, and (y) with respect to the $7.5 million of revolving credit commitments that were not extended by Amendment No. 2 to the First Lien Credit Agreement, December 18, 2018. Letters of credit and swingline loans were $71.8 million and there were no outstanding borrowings under the Revolving Credit Facility as of March 31, 2018. If we draw more than 30% of the Revolving Credit Facility (including non-cash collateralized letters of credit in excess of $30.0 million), the Revolving Credit Facility is subject to a springing first lien secured leverage covenant pursuant to which the Consolidated First Lien Secured Debt to Consolidated EBITDA Ratio (as defined in the First Lien Credit Agreement) must not exceed 6.50 to 1.

Interest Rate and Fees

Borrowings under the First Lien Credit Agreement bear interest at a rate per annum equal to, at our option, either (a) a LIBOR rate determined by reference to the Reuters LIBOR rate for dollar deposits with a term equivalent to the interest period relevant to such borrowing, plus an applicable margin or (b) an alternative base rate, or ABR, determined by reference to the highest of (i) 0.50% above the federal funds effective rate, (ii) the rate of interest established by the administrative agent as its “prime rate” and (iii) 1.0% above the LIBOR rate for dollar deposits with a one-month term commencing that day, plus an applicable margin. Swingline loans bear interest at a rate per annum equal to the ABR plus an applicable margin. With respect to the First Lien Term Loans that bear interest by reference to a LIBOR rate, the applicable margin is 3.00% and with respect to the First Lien Term Loans that bear interest by reference to an ABR, the applicable margin is 2.00%, subject to a 25 basis point step down depending on a consolidated first lien secured debt to consolidated EBITDA ratio calculated pursuant to the First Lien Credit Agreement, or the first lien secured leverage ratio, being less than or equal to 4.00 to 1.00. The applicable margin for the borrowings under the Revolving Credit Facility (including any swingline loans) varies depending on the first lien secured leverage ratio, and was 3.00% in the case of LIBOR rate loans as of March 31, 2018. There were no ABR loans as of March 31, 2018. With respect to the First Lien Term Loans, the LIBOR rate is subject to a floor of 1.00%, and the ABR is subject to a floor of 2.00%.

In addition, we pay certain recurring fees with respect to the First Lien Credit Agreement, including (i) a fee for the unused commitments of the lenders under the Revolving Credit Facility, accruing at a rate equal to 0.50% per annum, which may be reduced to 0.375% if the first lien secured leverage ratio is less than or equal to 4.25 to 1.00, (ii) letter of credit fees, including a fronting fee and processing fees to each issuing bank, which vary depending on the first lien secured leverage ratio and (iii) administration fees. We paid $1.5 million of such fees for the six months ended March 31, 2018.

Voluntary Prepayments

We may prepay, in full or in part, borrowings under the First Lien Credit Agreement without premium or penalty, subject to notice requirements, minimum prepayment amounts and increment limitations, provided that prepayments on all LIBOR loans will be subject to customary “breakage” costs.

Mandatory Prepayments

The First Lien Credit Agreement requires us to prepay outstanding First Lien Term Loans, subject to certain exceptions, with:

 

    75% (which percentage will be reduced to 50% if the first lien secured leverage ratio is less than or equal to 4.50 to 1.00 but greater than 4.00 to 1.00, 25% if the first lien secured leverage ratio is less than or equal to 4.00 to 1.00 but greater than 3.50 to 1.00 and to 0% if the first lien secured leverage ratio is less than or equal to 3.50 to 1.00) of our annual excess cash flow;

 

    100% of the net cash proceeds of all issuance or incurrence by us or certain of our subsidiaries of any indebtedness (except for permitted debt (other than refinancing debt)); and

 

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    100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property, or any loss, damage, condemnation or government taking of property for which insurance proceeds or a condemnation award is received, if we do not reinvest or commit to reinvest those proceeds in assets to be used in our business or to make certain other permitted investments within 450 days as long as such reinvestment is completed within 180 days from the date of any such commitment to reinvest, with certain exceptions; provided that, solely with respect to any collateral, we may use a portion of such net cash proceeds to prepay or repurchase certain permitted other indebtedness with a lien in accordance with the terms of the First Lien Credit Agreement.

We are also required to prepay the amount of revolving credit exposures by which we exceed the revolving credit commitment.

Amortization

We are required to repay installments on the First Lien Term Loans in quarterly installments equal to 0.25% of (x) the aggregate principal amount of the initial term loan facility outstanding on December 18, 2013, and (y) the aggregate principal amount of the incremental term loan facility outstanding on June 30, 2014, with the remaining amount on all initial term loans and incremental term loans payable on the maturity date with respect to First Lien Term Loans.

Principal amounts outstanding under the Revolving Credit Facility are due and payable in full on the applicable maturity date with respect to the Revolving Credit Facility.

Guarantee and Security

All obligations under the First Lien Credit Agreement are unconditionally guaranteed by BrightView Holdings, Inc. and substantially all existing and future, direct and indirect, wholly-owned material domestic subsidiaries of BrightView Landscapes, subject to certain exceptions.

All obligations under the First Lien Credit Agreement, and the guarantees of such obligations, are secured, subject to permitted liens and other exceptions, by the shares of BrightView Landscapes and substantially all of BrightView Landscapes’ assets and the assets of certain of its subsidiaries, subject to certain exceptions.

Certain Covenants and Events of Default

The First Lien Credit Agreement contains a number of covenants that restrict, subject to certain exceptions, our ability to, among other things:

 

    incur additional indebtedness;

 

    create or incur liens;

 

    engage in certain fundamental changes, including mergers or consolidations;

 

    sell or transfer assets;

 

    pay dividends and distributions on our subsidiaries’ capital stock;

 

    make acquisitions, investments, loans or advances;

 

    prepay or repurchase certain indebtedness;

 

    engage in certain transactions with affiliates; and

 

    enter into negative pledge clauses and clauses restricting subsidiary distributions.

 

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Solely with respect to the Revolving Credit Facility, the revolver is subject to a first lien secured leverage covenant pursuant to which the Consolidated First Lien Secured Debt to Consolidated EBITDA Ratio (as defined in the First Lien Credit Agreement) must not exceed 7.75 to 1, stepping down to 6.50 to 1 for the quarter ending June 30, 2019. The First Lien Credit Agreement also contains certain customary affirmative covenants and events of default, including a change of control. If an event of default occurs, the lenders under the First Lien Credit Agreement will be entitled to take various actions, including the acceleration of amounts due under the First Lien Credit Agreement and all actions permitted to be taken by a secured creditor.

Second Lien Credit Agreement

On December 18, 2013, in connection with the KKR Acquisition, BrightView Holdings, Inc., as guarantor, and BrightView Landscapes, as borrower, also entered into a second lien credit agreement, or the Second Lien Credit Agreement, with Credit Suisse AG, as administrative agent and collateral agent, and Morgan Stanley Senior Funding, Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs Bank USA, Royal Bank of Canada, Mizuho Bank, Ltd., KKR Capital Markets LLC, Macquarie Capital (USA) Inc., Sumitomo Mitsui Banking Corporation and UBS Securities, as joint lead arrangers and bookrunners. The First Lien Credit Agreement was amended on March 1, 2018 pursuant to Amendment No. 1 to the Second Lien Credit Agreement to, among other things, make adjustments to reflect our change in fiscal year.

The Second Lien Credit Agreement provides for a $235.0 million term loan facility, or the Second Lien Term Loans, that matures on December 18, 2021 of which $109.4 million was outstanding as of March 31, 2018. We refer to the First Lien Term Loans and the Second Lien Term Loans together as the “Term Loans.” We refer to the First Lien Term Loans, the Second Lien Term Loans and the Revolving Credit Facility together as the “Senior Secured Credit Facilities.”

Interest Rate and Fees

Borrowings under the Second Lien Credit Agreement bear interest at a rate per annum equal to, at our option, either (a) a LIBOR rate determined by reference to the Reuters LIBOR rate for dollar deposits with a term equivalent to the interest period relevant to such borrowing, plus an applicable margin or (b) an ABR determined by reference to the highest of (i) 0.50% above the federal funds effective rate, (ii) the rate of interest established by the administrative agent as its “prime rate” and (iii) 1.0% above the LIBOR rate for dollar deposits with a one-month term commencing that day, plus an applicable margin. With respect to the Second Lien Term Loans that bear interest by reference to a LIBOR rate, the applicable margin is 6.50% and with respect to the Second Lien Term Loans that bear interest by reference to an ABR, the applicable margin is 5.50%. The LIBOR rate is subject to a floor of 1.00%, and the ABR is subject to a floor of 2.00%.

In addition, we pay certain administration fees with respect to the Second Lien Credit Agreement.

Voluntary Prepayments

We may prepay, in full or in part, borrowings under the Second Lien Credit Agreement without premium or penalty, subject to notice requirements, minimum prepayment amounts and increment limitations, provided that prepayments on all LIBOR loans will be subject to customary “breakage” costs.

Mandatory Prepayments

Subject to the mandatory prepayments under the First Lien Credit Agreement, the Second Lien Credit Agreement requires us to prepay outstanding Second Lien Term Loans, subject to certain exceptions, with:

 

    50% (which percentage will be reduced to 25% if the first lien secured leverage ratio is less than or equal to 4.50 to 1.00 but greater than 4.00 to 1.00 and to 0% if the first lien secured leverage ratio is less than or equal to 4.00 to 1.00) of our annual excess cash flow;

 

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    100% of the net cash proceeds of all issuance or incurrence by us or certain of our subsidiaries of any indebtedness (except for permitted debt (other than refinancing debt)); and

 

    100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property, or any loss, damage, condemnation or government taking of property for which insurance proceeds or a condemnation award is received, if we do not reinvest or commit to reinvest those proceeds in assets to be used in our business or to make certain other permitted investments within 450 days as long as such reinvestment is completed within 180 days from the date of any such commitment to reinvest, with certain exceptions; provided that, solely with respect to any collateral, we may use a portion of such net cash proceeds to prepay or repurchase certain permitted other indebtedness with a lien in accordance with the terms of the First Lien Credit Agreement and the Second Lien Credit Agreement.

Guarantee and Security

All obligations under the Second Lien Credit Agreement are unconditionally guaranteed by BrightView Holdings, Inc. and substantially all existing and future, direct and indirect, wholly-owned material domestic subsidiaries of BrightView Landscapes, subject to certain exceptions.

Subject to an intercreditor agreement which provides that liens under the Second Lien Credit Agreement are junior to the liens under the First Lien Credit Agreement, all obligations under the Second Lien Credit Agreement, and the guarantees of such obligations, are secured, subject to permitted liens and other exceptions, by the shares of BrightView Landscapes and substantially all of BrightView Landscapes’ assets and the assets of certain of its subsidiaries, subject to certain exceptions.

Certain Covenants and Events of Default

The Second Lien Credit Agreement contains a number of covenants that restrict, subject to certain exceptions, our ability to, among other things:

 

    incur additional indebtedness;

 

    create or incur liens;

 

    engage in certain fundamental changes, including mergers or consolidations;

 

    sell or transfer assets;

 

    pay dividends and distributions on our subsidiaries’ capital stock;

 

    make acquisitions, investments, loans or advances;

 

    prepay or repurchase certain indebtedness;

 

    make certain acquisitions;

 

    engage in certain transactions with affiliates; and

 

    enter into negative pledge clauses and clauses restricting subsidiary distributions.

The Second Lien Credit Agreement also contains certain customary affirmative covenants and events of default, including a change of control. If an event of default occurs, the lenders under the Second Lien Credit Agreement will be entitled to take various actions, including the acceleration of amounts due under the Second Lien Credit Agreement and all actions permitted to be taken by a secured creditor.

Receivables Financing Agreement

On April 28, 2017, BrightView Landscapes, as servicer, and BrightView Funding LLC, a wholly-owned “bankruptcy remote” special purpose vehicle, or the SPV, as borrower, entered into a receivables financing

 

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agreement, or the Receivables Financing Agreement, providing for aggregated borrowing of up to $175.0 million governed by a borrowing base. The Receivables Financing Agreement provides for a lower cost alternative in the issuance of letters of credit with the remaining unused capacity providing additional liquidity. As of March 31, 2018, the SPV had $150.0 million in outstanding borrowings under the Receivables Financing Agreement and no letters of credit outstanding.

Borrowings under the Receivables Financing Agreement accrue interest at a reserve-adjusted LIBOR or a base rate, plus either (x) 2.00% or (y) if, among other things, our leverage ratio is less than 2.70 to 1.0 and our fixed charges coverage ratio is greater than 4.00 to 1.0, at 1.6%. Letters of credit accrue interest at the rate from time to time to be agreed to in writing between the applicable issuing bank and the SPV. The SPV may prepay borrowings or letters of credit or draw on the Receivables Financing Agreement with one business day prior written notice and may terminate the Receivables Financing Agreement with 30 days’ prior written notice.

As part of the Receivables Financing Agreement, eligible accounts receivable of certain of our subsidiaries are sold to the SPV. The SPV pledges the receivables as security for loans and letters of credit. The SPV is included in our consolidated financial statements and therefore, the accounts receivable owned by it are included in our consolidated balance sheet. However, the accounts receivable owned by the SPV are separate and distinct from our other assets and are not available to our other creditors should we become insolvent.

The Receivables Financing Agreement contains various customary representations and warranties and covenants, and default provisions which provide for the termination and acceleration of the commitments and loans under the agreement in circumstances including, but not limited to, failure to make payments when due, breach of representations, warranties or covenants, certain insolvency events or failure to maintain the security interest in the eligible accounts receivables, a change in control and defaults under other material indebtedness.

The Receivables Financing Agreement terminates on April 27, 2020, unless terminated earlier pursuant to its terms. At March 31, 2018, there was $25.0 million of capacity available under the Receivables Financing Agreement.

As of March 31, 2018, we were in compliance with all of our debt covenants and no event of default had occurred or was ongoing and we expect to be in compliance with such covenants after giving effect to this offering and the use of proceeds therefrom.

As market conditions warrant, we and our major equity holders, including our KKR Sponsor and their respective affiliates, may from time to time, seek to purchase or repurchase our outstanding debt, including borrowings under the Senior Secured Credit Facilities, in privately negotiated or open market transactions, by tender offer or otherwise. We intend to use the net proceeds to us from this offering for the repayment of certain indebtedness, which will be determined prior to this offering. To the extent we raise more proceeds in this offering than currently estimated, we will repay additional indebtedness. To the extent we raise less proceeds in this offering than currently estimated, we will reduce the amount of our indebtedness that will be repaid. See “Use of Proceeds.”

 

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Contractual Obligations and Commercial Commitments

The following table summarizes our future minimum payments for all contractual obligations and commercial commitments for years subsequent to the period ended September 30, 2017:

 

(In millions)    Total      Less than
1 Year
     1 – 3
Years
     3 – 5
Years
     More than
5 Years
 

Long term debt (1)

   $ 1,627.6      $ 14.6      $ 163.0      $ 1,450.0      $ —    

Expected interest payments (2)

     398.8        92.9        305.9        —          —    

Capital leases (3)

     15.4        5.3        7.8        2.3        —    

O