Verra Mobility Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Verra Mobility provides toll, violation-management, title and registration, and traffic-safety technology services through its Commercial Services and Government Solutions segments. Unless otherwise indicated, financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $96.9 million | $128.2 million | $293.4 million | $336.3 million |
| Operating income | $15.3 million | $36.7 million | $27.7 million | $72.3 million |
| Operating margin | 15.8% | 28.6% | 9.5% | 21.5% |
| Net income (loss) | $6.7 million | $17.8 million | $(2.0) million | $24.2 million |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $44.4 million | $95.6 million |
Q3 net margin was 6.9%, versus 13.8% a year earlier; the nine-month 2020 net margin was negative 0.7%. Q3 service revenue fell 25.1% year over year, while product sales fell 20.3%. For the first nine months, service revenue declined 21.4%, partly offset by a 97.4% increase in product sales.
- Segment trends: Q3 Commercial Services service revenue decreased 43.1% to $44.2 million, while Government Solutions service revenue increased 17.2% to $38.8 million. Nine-month service revenue decreased 36.3% in Commercial Services and increased 8.7% in Government Solutions.
- Cash and working capital: Cash and cash equivalents were $129.2 million at September 30, 2020, compared with $131.5 million at December 31, 2019. Nine-month capital spending on equipment and property was $18.3 million. Accounts receivable, net, rose to $141.0 million from $93.5 million at year-end 2019.
- Debt and liquidity: Long-term debt had a balance-sheet carrying value of $842.7 million, including $9.1 million current and $833.6 million long-term. The term loan’s principal outstanding was $867.9 million; it matures in February 2025 and bore interest at 3.4% at quarter-end. The company had no revolver borrowings and $44.0 million of available capacity, net of letters of credit. It reported compliance with credit-facility covenants. Management said cash, operating cash flow and revolver availability should cover operating requirements and debt service for at least 12 months.
Material changes and notable items
- Management attributed the sharp Commercial Services decline primarily to COVID-19’s effect on travel, rental-car demand and rental-fleet sizes. Hertz, a major customer, filed for Chapter 11 bankruptcy in May 2020. The company reported modest Q3 improvement, but still expected year-over-year revenue declines in the rental-car business through March 2021.
- Government Solutions benefited from expanded speed-camera programs and product sales to a large customer. COVID-19-related traffic reductions, inactive school-zone cameras and school closures weighed on service revenue. Texas legislation banning most red-light camera programs also reduced revenue and contributed to a $5.9 million property-and-equipment impairment in 2019; there was no comparable impairment in 2020.
- Nine-month operating cash flow fell by $51.2 million year over year. Management cited lower earnings and working-capital pressure, including slower collections on NYCDOT receivables and reductions in accounts payable and accrued liabilities.
- The company refinanced its term loan in February 2020, reducing its applicable interest margin by 50 basis points. Nine-month net interest expense decreased to $31.6 million from $46.6 million.
- Q3 other income included a $1.4 million gain from an HTA settlement and a $1.4 million gain for related insurance proceeds. Nine-month results also included a $4.4 million charge from adjusting the tax-receivable-agreement liability. The nine-month effective tax rate was 276.9%, which the company attributed primarily to low pretax income and the disproportionate effect of permanent tax differences.
Outlook, risks and controls
No specific numerical revenue or earnings guidance is provided. Management reported modest signs of recovery in Q3 but expected COVID-19 effects to continue into Q4 2020; it said the full duration and impact remained uncertain. The company cited risks from rental-car customer concentration and financial distress, travel and traffic patterns, school closures, government-contract terms and collection timing, competition, technology changes and cybersecurity. It also warned that changing economic conditions could lead to future goodwill impairment, although it found no impairment indicators at September 30, 2020.
NYCDOT represented 50.1% of net accounts receivable and 32.7% of Q3 revenue. The company had invoiced NYCDOT $43.6 million for product revenue and $9.5 million for service revenue under an emergency contract, with no payments received against that contract by quarter-end; it said it was working to resolve administrative hurdles. Separately, $8.0 million of a $16.6 million legacy-contract receivable was past NYCDOT’s 45-day payment terms.
Disclosure controls were deemed ineffective at September 30, 2020 because of a previously reported material weakness in internal control over financial reporting. Management said remediation was underway and expected to be completed before fiscal year-end, subject to controls operating effectively and successful testing. The company reported no material change in internal control during the quarter.
Important facts for investors to verify
- Subsequent NYCDOT payments, collection timing and any allowance or credit-loss effects related to its concentrated receivables.
- Hertz’s bankruptcy developments and the financial condition, payment behavior and contract actions of other major rental-car customers.
- Post-quarter trends in travel, toll usage, camera activity, school operations and customer demand, including whether management’s stated recovery expectations changed.
- Term-loan amortization, any required excess-cash-flow prepayments, covenant headroom and sensitivity to interest rates; the filing estimates a 1% rate move would change annual interest expense by about $8.7 million.
- Progress and testing results for remediation of the material weakness, and any subsequent impairment indicators or updated tax and credit-loss estimates.