Verra Mobility Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Verra Mobility provides traffic-safety enforcement, toll and violation management, and title and registration services through its Government Solutions and Commercial Services segments.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $98.5 million | $69.2 million |
| Operating income (loss) | $18.0 million | $(7.3) million |
| Net income (loss) | $2.8 million | $(22.2) million |
| Diluted earnings (loss) per share | $0.02 | $(0.35) |
| Operating cash flow | $37.4 million | $(3.2) million |
| Capital expenditures and installation/service parts purchases | $9.2 million | $5.9 million |
| Adjusted EBITDA (non-GAAP) | $51.3 million | $33.8 million |
- Revenue increased 42.2%; service revenue was $98.1 million. Commercial Services revenue rose 92.9% to $62.6 million, while Government Solutions revenue declined 2.9% to $35.9 million, including product sales.
- Operating margin was 18.2%, versus a 10.5% operating loss margin in Q1 2018. Net margin was 2.9%. Adjusted EBITDA margin was 52.1%, versus 48.8%.
- At March 31, cash and cash equivalents were $91.5 million, with a further $1.7 million of restricted cash. Current assets were $223.6 million and current liabilities $91.8 million.
- Long-term debt had $901.2 million of principal outstanding; its carrying value, net of discounts and financing costs, was $868.9 million. The first-lien term loan bore interest at 6.25% and matures in 2025. The company had no revolver borrowings and $70.0 million of availability, net of letters of credit.
Changes and management commentary
- Management attributed $21.6 million of year-over-year service-revenue growth to the HTA and EPC acquisitions; expansion in existing products and customers contributed $7.5 million. The comparison includes only one month of HTA results in Q1 2018, versus a full quarter of HTA and EPC in Q1 2019.
- Operating expenses rose 23.9% in dollars but fell as a share of revenue, from 34.2% to 29.8%. SG&A declined to $20.6 million from $33.3 million, largely because Q1 2018 included acquisition and integration costs.
- Depreciation and amortization increased to $28.9 million from $18.6 million, mainly reflecting acquired intangible assets. Interest expense rose to $16.0 million from $12.6 million as average debt increased.
- Q1 2018 included $10.2 million of debt-extinguishment loss and $18.1 million of HTA transaction expenses; these items did not recur in Q1 2019. Adjusted EBITDA is a non-GAAP measure and excludes specified expenses and other items.
- Management reported that Government Solutions red-light revenue weakened, partly because of the loss of the Miami program and lower pricing on variable contracts. It described red-light as stable but not expected to provide meaningful growth; school-zone speed programs were identified as a growth product for 2019. Revenue-generating installed camera systems totaled 4,604, versus 4,252 a year earlier.
Outlook, risks and unusual items
- No specific revenue, earnings or cash-flow guidance was provided. Management said cash on hand and operating cash flows should be sufficient for operations and debt service for at least the next 12 months, subject to business performance and other factors.
- Debt is predominantly floating-rate and secured by substantially all company assets. Management reported covenant compliance at quarter-end and no hedging; a 1% interest-rate change was estimated to affect annual interest expense by approximately $9.0 million.
- Non-cancelable vendor purchase commitments were $16.5 million; letters of credit totaled $1.0 million. The company reported no material expected adverse effect from pending legal matters, while noting litigation outcomes are uncertain. It reported ongoing federal and state tax examinations and $2.7 million of unrecognized tax benefits.
- The company adopted ASC 606 on January 1, 2019; it reported no material overall financial-statement impact and reduced opening retained earnings by $0.3 million for the cumulative adoption effect in Government Solutions.
- On April 26, 2019, the first earn-out price condition was met, triggering issuance of 2.5 million shares to the Platinum Stockholder. The filing says this would increase common stock and additional paid-in capital by $18.2 million.
- Management identified forward-looking statements as subject to risks and uncertainties and referred investors to the risk factors in its 2018 Form 10-K/A. It reported no material changes to those risk factors.
Important facts for investors to verify
- How much of reported growth is organic versus attributable to acquisitions, and whether Commercial Services growth and Government Solutions trends persist.
- Whether operating cash flow is sustainable: Q1 cash generation included a substantial increase in accounts payable and accrued liabilities, while receivables also used cash.
- Debt-service capacity and sensitivity to variable interest rates, alongside covenant terms, collateral and available revolver capacity.
- The assumptions underlying non-GAAP Adjusted EBITDA and the treatment of acquisition-related, stock-based and other adjustments.
- The earn-out share issuance and any future dilution, as well as the tax receivable agreement liability, reported at approximately $66 million.