Verra Mobility Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; financial statements are unaudited. Verra Mobility provides toll, violation, title and registration services to commercial fleets and rental-car companies, and traffic-safety enforcement solutions to government customers.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2018 period.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Service revenue | $110.8 | $105.2 | $311.9 | $271.3 |
| Product sales | $17.5 | $2.4 | $24.4 | $3.8 |
| Total revenue | $128.2 | $107.6 | $336.3 | $275.0 |
| Operating income | $36.7 | $26.2 | $72.3 | $30.7 |
| Net income (loss) | $17.8 | $6.5 | $24.2 | $(20.4) |
| Adjusted EBITDA (non-GAAP) | $70.8 | $61.9 | $181.8 | $150.3 |
- Total revenue grew 19.2% in Q3 and 22.3% year to date. Q3 operating margin was 28.6% versus 24.3%; nine-month operating margin was 21.5% versus 11.2%. Net income margin was 13.8% in Q3; the nine-month period moved from a 7.4% net loss margin to 7.2% net income margin.
- Q3 service revenue rose 5.3%, led by Commercial Services growth of 7.9%; Government Solutions service revenue was roughly flat. Nine-month Commercial Services service revenue increased 26.9%, including $21.6 million of growth attributed to HTA and EPC acquisitions and $18.5 million to higher tolling volumes. Government Solutions service revenue fell 3.3%.
- Product sales growth was principally from a single Government Solutions customer expanding a school-zone speed program. Product sales are variable and depend on customer purchasing patterns.
- Nine-month operating cash flow was $95.6 million, up from $46.1 million. Investing cash outflow was $17.5 million, compared with $545.0 million, primarily because 2018 included HTA and EPC acquisition spending. Financing cash outflow was $7.1 million, versus $542.7 million of inflows in 2018.
- Cash and cash equivalents were $135.6 million at September 30, 2019, up from $65.0 million at December 31, 2018; restricted cash was a further $2.2 million. Accounts receivable rose to $108.7 million from $87.5 million.
- Debt carrying value was $867.3 million, including $9.1 million current; the term loan principal was $896.7 million. The term loan’s rate was 5.79%, with maturity in February 2025. No revolver borrowings were outstanding; $74.9 million was available. The company reported compliance with credit-facility covenants.
Changes, outlook and material items
- Year-over-year results reflect different acquisition periods: HTA and EPC were acquired in 2018, so 2019 includes fuller periods of their operations. The filing notes 2018 acquisition, refinancing and integration expenses also depressed comparisons. 2019 results include $7.4 million of stock-based compensation.
- Management attributed lower SG&A as a share of revenue (18.6% versus 30.0% for nine months) mainly to the absence of 2018 acquisition, transformation and sponsor-related costs. Adjusted EBITDA is non-GAAP and excludes specified expenses; it is not a substitute for GAAP results or cash flow.
- Texas legislation effective June 1, 2019 banned most red-light camera enforcement programs, prompting a $5.9 million property-and-equipment impairment. Management said the program losses would weigh on year-over-year Government Solutions service revenue comparisons for the next three quarters. Florida program losses and the exit from a non-core street-light maintenance offering also reduced revenue.
- Growth in speed-enforcement programs partly offset those declines. The company reported an average 4,759 revenue-generating camera systems in Q3, versus 4,318 a year earlier, and said it expected school-zone speed programs to continue growing in fiscal 2019.
- Management anticipated continued product-sales growth for the remainder of 2019, driven by the same customer expansion. No comprehensive numerical revenue, earnings or cash-flow guidance is provided.
- On October 31, 2019, after quarter-end, the company acquired Pagatelia for a preliminary $27.9 million, funded with cash on hand. Its operating results were not expected to be material. Management stated existing cash and operating cash flow should cover operating needs and debt service for at least 12 months, while noting acquisitions or higher-than-expected requirements could require additional capital.
- Key risks include variable-rate debt exposure and LIBOR’s planned phase-out: management estimated a 1 percentage-point rate movement would change annual interest expense by approximately $9.0 million and reported no hedging. The company also disclosed tax audits and $2.0 million of unrecognized tax benefits; it said pending legal matters were not expected to have a material adverse impact. The filing identifies no material change to previously reported risks other than LIBOR transition risk.
- Revenue accounting changed to ASC 606 in 2019 using the modified retrospective method; prior periods were not restated. Adoption reduced opening retained earnings by $0.3 million, and certain Government Solutions variable-price revenue is recognized upon citation payment.
Important facts for investors to verify
- How much of revenue and earnings growth reflects underlying volume and pricing versus acquisitions, prior-year one-time costs, and the unusually large product-sales contribution from one customer.
- Whether Government Solutions can offset Texas and Florida red-light program losses through speed and school-zone programs, and the actual duration and size of the expected revenue headwind.
- Receivables and working-capital trends, including whether strong operating cash flow is sustainable as receivables and prepaid expenses increase.
- Debt repayment capacity, covenant headroom, mandatory excess-cash-flow prepayments, and sensitivity to interest rates and LIBOR replacement terms.
- Pagatelia’s final purchase price and performance, and any further capital needs if the company pursues acquisitions.