Verra Mobility Corporation — Q2 2020 Form 10-Q
Business context and reporting period
Verra Mobility provides toll and violation management, title and registration, and traffic-safety enforcement technology and services in North America and Europe. Its reportable segments are Commercial Services, which serves rental car companies and fleets, and Government Solutions, which serves municipalities and other public agencies. This filing covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $79.8 million | $109.6 million | $196.5 million | $208.0 million |
| Operating income (loss) | $(7.0) million | $17.6 million | $12.5 million | $35.6 million |
| Net income (loss) | $(15.4) million | $3.6 million | $(8.7) million | $6.4 million |
| Operating margin | (8.7)% | 16.1% | 6.3% | 17.1% |
| Net margin | (19.3)% | 3.3% | (4.4)% | 3.1% |
| Diluted earnings (loss) per share | $(0.10) | $0.02 | $(0.05) | $0.04 |
- Q2 service revenue was $62.8 million, down 39.0%; product sales were $17.0 million, up 160.7%. For the first half, service revenue fell 19.3% to $162.3 million, while product sales rose to $34.2 million from $6.9 million.
- Q2 segment profit, the company’s segment measure before specified corporate and noncash items, was $7.2 million for Commercial Services versus $44.1 million a year earlier, and $20.3 million for Government Solutions versus $15.5 million.
- Cash provided by operating activities was $22.5 million in the first half, versus $45.8 million in 2019. Investing activities used $14.3 million and financing activities used $25.5 million. Cash and cash equivalents were $113.2 million at June 30, 2020, down from $131.5 million at December 31, 2019.
- At June 30, total debt carrying value was $843.4 million, including $9.1 million current and $834.3 million long-term; term-loan principal was $870.2 million. The term loan matures in 2025 and bore interest at 3.6%. The company had no revolver borrowings and $68.7 million available, net of letters of credit; it reported compliance with credit covenants.
- Current assets were $270.7 million and current liabilities $65.0 million. Accounts receivable, net, was $125.3 million, including a $12.9 million credit-loss allowance.
Material changes versus the prior comparable period
- Q2 revenue declined 27.2%, principally as Commercial Services service revenue fell 59.9% amid reduced travel, rental cancellations, lower bookings, and rental-fleet reductions associated with COVID-19. First-half Commercial Services service revenue fell 32.3%.
- Government Solutions Q2 service revenue increased 1.7% to $35.5 million, but traffic reductions, school closures, and temporarily inactive cameras weighed on results. Active camera systems averaged 3,293 in Q2 versus 4,636 a year earlier. First-half segment service revenue rose 4.8%, driven by speed-program growth, partly offset by Texas program losses and COVID-related disruption.
- Product sales growth was primarily driven by sales to one Government Solutions customer expanding a school-zone speed program. Cost of product sales rose with those sales.
- Q2 operating expenses declined 16.0% to $26.7 million, but remained higher as a share of revenue. First-half SG&A rose 12.8% to $46.7 million, including $10.7 million of first-half credit-loss expense under the new expected-credit-loss standard; a $3.5 million provision related to a Commercial Services customer that filed for Chapter 11 bankruptcy.
- First-half interest expense fell $9.7 million to $22.0 million following the February 2020 term-loan refinancing and lower interest rates. The company also recorded a $4.4 million charge from an adjustment to its tax receivable agreement liability.
Outlook, risks, contingencies, and unusual items
- Management said COVID-19’s duration and full effects could not be predicted, expected impacts to continue into Q3 2020, and anticipated lower rental-car customer revenue for the remainder of 2020. It also expected lower purchasing-card rebates for the rest of 2020. No numerical earnings or revenue guidance was provided.
- Hertz filed for Chapter 11 protection on May 22, 2020. Rental-car customers including Hertz, Avis Budget Group, and Enterprise were significant revenue sources. The filing reports that Hertz represented 19.6% of Q2 revenue and Avis and Enterprise each exceeded 10%; NYC Department of Transportation accounted for 40.5% of Q2 revenue and 42.2% of net accounts receivable at quarter-end.
- Management stated that existing cash, operating cash flows, and revolver availability were expected to meet operating needs and debt service for at least the next 12 months. This assessment depends on future performance and is subject to COVID-19 and other risks.
- COVID-related uncertainty also affected goodwill impairment assessments. Interim tests through June 30 found both reporting units’ fair values exceeded carrying values; management cautioned that adverse forecast or market changes could lead to a potentially material future impairment.
- Other notable items: a $19.7 million mandatory excess-cash-flow debt prepayment in Q1; $16.0 million of non-cancelable purchase commitments and $6.3 million of letters of credit; and $0.5 million accrued for employee exit costs, expected to be paid by year-end. The company reported no material pending legal contingency accruals and no off-balance-sheet arrangements.
- Disclosure controls were deemed ineffective at June 30 because of a previously disclosed material weakness in internal control over financial reporting. The company said remediation was underway and expected completion before the end of 2020, subject to effective operation and testing of controls.
Important facts for investors to verify
- Subsequent rental-car customer performance, especially Hertz’s bankruptcy-related collections, contract terms, and the concentration of Commercial Services revenue.
- Whether Government Solutions camera activity and service revenue recover as traffic and school operations change, and the sustainability and customer concentration of product sales.
- Receivable collection trends, the adequacy of the credit-loss allowance, and the concentration of receivables with NYC DOT.
- Operating cash generation, cash availability, debt repayment requirements, covenant compliance, and exposure to variable interest rates; management estimated a 1% rate change would alter annual interest expense by approximately $8.7 million.
- Progress and testing of the material-weakness remediation, and any subsequent goodwill impairment or other changes to management’s COVID-19 outlook.