Verra Mobility Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Verra Mobility provides toll, violation, title and registration services to fleets and rental-car companies, and traffic-safety enforcement solutions to government customers. Its reportable segments are Commercial Services and Government Solutions. Unless stated otherwise, financial figures below are in millions of dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $109.6 | $98.2 | $208.0 | $167.4 |
| Operating income | $17.6 | $11.8 | $35.6 | $4.5 |
| Net income (loss) | $3.6 | $(4.8) | $6.4 | $(27.0) |
| Diluted EPS | $0.02 | $(0.07) | $0.04 | $(0.40) |
| Adjusted EBITDA (non-GAAP) | $59.7 | $54.6 | $110.9 | $88.4 |
- Q2 revenue grew 11.6%; service revenue rose 6.2% to $103.1 million and product sales rose to $6.5 million from $1.2 million. Six-month revenue increased 24.2%, with service revenue up 21.1% to $201.1 million.
- Q2 operating margin was 16.1%, compared with 12.0% a year earlier. Six-month operating margin was 17.1%, versus 2.7%. Six-month Adjusted EBITDA margin was 53.3%, versus 52.8%.
- Commercial Services drove service growth: Q2 segment service revenue increased 13.9% to $68.1 million; six-month revenue increased 41.7% to $130.7 million. Government Solutions service revenue fell 6.2% in Q2 and 4.6% for the six-month period.
- For the six months, operating cash flow was $45.8 million, versus $12.5 million; investing cash outflow was $14.2 million, versus $536.5 million, largely reflecting the prior-year HTA and EPC acquisitions. Capital purchases of equipment and parts were $14.2 million. Financing cash outflow was $4.7 million.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $92.2 million, restricted cash $1.7 million, current assets $235.5 million and current liabilities $78.7 million. Total assets were $1.346 billion and stockholders’ equity $309.8 million.
- Debt carrying value was $868.2 million, including $9.1 million current; principal outstanding on the first-lien term loan was approximately $899.0 million. The loan matures February 2025 and bore a 6.15% rate at quarter-end. The company had no revolver borrowings and $74.9 million available under its $75 million revolver, net of letters of credit.
- Management said existing cash and operating cash flows should be sufficient for operating needs and debt service for at least 12 months. The company was in compliance with credit-facility covenants. Substantially all assets secure the debt.
- Variable-rate exposure is material: management estimated each 1 percentage-point interest-rate move would change annual interest expense by approximately $9 million; no hedging was in place.
Material changes, outlook and risks
- Results benefited from inclusion of HTA and EPC for more of the current period than the prior-year comparison. Management attributed $21.6 million of six-month service-revenue growth to acquisitions and $13.4 million to growth from existing products or customers. The prior-year comparison also included substantial acquisition, integration and refinancing expenses, including a $10.2 million debt-extinguishment loss; these differences affect year-over-year earnings comparisons.
- Texas legislation effective June 1, 2019 banned most red-light photo-enforcement programs, subject to certain exceptions. Verra recorded a $5.9 million impairment charge and said the Texas program losses would negatively affect service revenue for the next four quarters. The loss of Miami programs also reduced Government Solutions revenue.
- Growth in school-zone speed programs partly offset red-light declines. Management said it expected these programs to remain a growth product in fiscal 2019 and anticipated continued product-sales growth for the rest of 2019. Product sales were driven primarily by one customer’s expansion; these comments are not formal financial guidance.
- Q2 product sales carried higher cost of sales; sales patterns can vary because a small number of customers purchase equipment. Commercial Services growth reflected higher toll volumes, while title and registration revenue fluctuates with activity.
- Cash from operations was supported by earnings but affected by working-capital movements, including a $21.4 million increase in accounts receivable. Non-cancelable purchase commitments were $17.9 million. The company reported no material pending legal proceedings or material change to previously disclosed risk factors.
- ASC 606 adoption in 2019 had no material overall financial-statement impact, but changed revenue timing for certain variable-price Government Solutions contracts; the company recorded a $0.3 million reduction to opening retained earnings.
- Platinum-triggered earn-out terms resulted in 2.5 million shares issued in April 2019. Platinum’s June secondary sale generated no proceeds for Verra; the company incurred $1.1 million of related expenses. Underwriters exercised an additional 2.25 million-share option on July 8, after quarter-end, also with no company proceeds.
Important facts for investors to verify
- How much future Government Solutions revenue and asset value may be affected by Texas restrictions and other lost red-light programs, and whether exceptions preserve any existing contracts.
- Whether Commercial Services growth from existing customers and toll volumes can continue, and how concentrated the Government Solutions equipment-sales growth is in the single customer cited.
- Debt-service capacity under changing interest rates, excess-cash-flow prepayment requirements, and the approximately $67.1 million tax receivable agreement liability.
- The sustainability of reported cash conversion given receivables growth, and the distinction between GAAP earnings and management’s non-GAAP Adjusted EBITDA measure.
- Comparability of year-over-year revenue, earnings and per-share results given acquisition timing, prior-year transaction costs, and the substantially different weighted-average share counts.