Verra Mobility Corporation — Q1 2020 Form 10-Q
Business context and reporting period. This unaudited report covers the three months ended March 31, 2020, compared with Q1 2019. Verra Mobility provides tolling, violations, title and registration, and traffic-safety technology services. Its reportable segments are Commercial Services and Government Solutions.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $116.7 million | $98.5 million; up 18.5% |
| Service revenue | $99.5 million | $98.1 million; up 1.5% |
| Product sales | $17.2 million | $0.4 million; primarily sales to one Government Solutions customer |
| Operating income and margin | $19.4 million; 16.6% | $18.0 million; 18.2% |
| Net income and diluted EPS | $6.7 million; $0.04 | $2.8 million; $0.02 |
| Operating cash flow | $14.8 million | $37.4 million |
| Cash and restricted cash | $115.1 million | Down from $132.4 million at year-end 2019 |
| Debt | $844.6 million carrying value; $872.5 million term-loan principal | Term loan refinanced in February 2020; rate was 4.24% at quarter-end |
Net income improved mainly on higher product sales and lower interest expense, partly offset by product costs, increased credit-loss expense and taxes. Operating cash flow fell year over year, principally due to working-capital movements, including higher receivables and lower payables and accrued liabilities. Capital expenditures and installation/service-parts purchases were $8.1 million; debt repayments were $22.0 million, including a $19.7 million mandatory excess-cash-flow prepayment.
At March 31, 2020, current assets were $265.9 million and current liabilities were $72.0 million. The company reported $68.8 million of available revolver capacity, net of letters of credit, and no revolver borrowings. It stated that cash, operating cash flow and revolver availability should cover operating needs and debt service for at least 12 months. It was compliant with credit-facility covenants.
Material changes and segment trends
- Commercial Services service revenue decreased 2.2% to $61.2 million, reflecting the emerging COVID-19 impact on rental cars. Government Solutions service revenue increased 7.8% to $38.3 million, with growth in speed-enforcement programs offsetting declines in red-light and other programs.
- Government Solutions product sales rose to $17.2 million from $0.4 million, mainly from a single customer expanding a school-zone speed program. Product sales represented 14.8% of revenue, versus 0.4% a year earlier.
- Q1 included $5.4 million of credit-loss expense following adoption of the expected-credit-loss standard; the quarter-end allowance was $10.8 million. Adoption also resulted in a $0.7 million after-tax charge to opening accumulated deficit.
- The February term-loan refinancing reduced the applicable margin by 50 basis points. Net interest expense declined to $12.5 million from $16.0 million.
- Government Solutions averaged 5,002 active camera systems, compared with 4,604 a year earlier. Texas legislation ending most red-light photo-enforcement programs reduced revenue, while speed-enforcement growth more than offset that decline in Q1.
Outlook, risks and unusual items
- Management said COVID-19’s effects were expected to be greater in Q2 than Q1. Reduced travel, rental cancellations and weaker bookings were already affecting rental-car customers; the company expected rental-car revenue to decrease during 2020. School closures, lower traffic and reduced ticket-payment rates also threatened Government Solutions revenue. The duration and full financial impact were not quantifiable in the filing.
- The company reported no goodwill impairment in its March 31 interim test, although COVID-19-driven market declines had triggered the review. Further adverse changes to forecasts or market conditions could produce a potentially material future impairment.
- Customer concentration is significant: Hertz generated 15.7% of Q1 revenue; Avis Budget Group and Enterprise generated 12.7% and 10.8%. New York City DOT accounted for 25.5%, primarily reflecting increased equipment sales.
- The variable-rate term loan exposes the company to rate changes: management estimated a 1 percentage-point movement would change annual interest expense by about $8.7 million. No hedging was in place.
- Non-cancelable purchase commitments were $27.4 million; outstanding letters of credit were $6.2 million. The company reported no material litigation accruals and no off-balance-sheet arrangements.
- Disclosure controls were not effective at quarter-end because of a previously reported material weakness. Management expected remediation before fiscal year-end 2020, subject to successful operation and testing of controls.
- No numerical earnings or revenue guidance was provided. The filing also identified risks involving government contracts, customer concentration, technology and cybersecurity, and COVID-19-related operational disruption.
Investor verification points
- Track subsequent rental-car activity, traffic levels, school closures and payment rates, and compare actual segment results with management’s expected greater Q2 impact.
- Assess the sustainability and concentration of the $17.2 million equipment-sales contribution, including the timing of customer acceptance and collection of related receivables.
- Review credit-loss expense, allowance adequacy, customer collections and working-capital trends as COVID-19 affects customer finances.
- Monitor cash generation, debt repayments, revolver availability, covenant compliance and exposure to variable interest rates.
- Follow impairment assumptions and management’s progress in remediating the material weakness in internal control over financial reporting.