Verra Mobility Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 18, 2019. Verra Mobility provides toll and violation management, vehicle title and registration, and automated traffic-safety solutions through Commercial Services and Government Solutions. The October 17, 2018 business combination with Gores was accounted for as a reverse acquisition and recapitalization, with Greenlight as accounting acquirer.
Financial performance and liquidity
Dollar amounts are in millions unless stated otherwise.
| Metric | FY 2018 | Context |
|---|---|---|
| Total revenue | $370.1 | Service revenue was $365.1 (98.6%); product sales were $5.1. |
| Commercial Services revenue | $222.6 | Approximately 60% of total revenue. |
| Government Solutions revenue | $147.5 | Approximately 40% of total revenue. |
| Operating income | $12.6 | 3.4% of revenue; depreciation and amortization were $103.3. |
| Net loss | $(58.4) | Includes $69.6 interest expense and $26.5 loss on extinguishment of debt; tax benefit was $16.2. |
| Adjusted EBITDA | $197.6 | Non-GAAP; 53.4% margin. Includes substantial transaction and other adjustments, so it is not a substitute for GAAP results or cash flow. |
| Operating cash flow | $46.0 | Audited cash flow statement figure. MD&A also cites $34.7 of operating cash flow, a discrepancy to verify. |
| Capital expenditures | $26.6 | Primarily camera systems and related items. |
| Cash and restricted cash | $67.1 | Includes $65.0 cash and cash equivalents and $2.0 restricted cash at year-end. |
| Debt | $903.5 principal | Balance-sheet debt, net of current maturities, discounts and financing costs, was $869.4. |
| Liquidity | $116.4 working capital | $67.2 available under the revolving facility, net of letters of credit; no revolver borrowings at year-end. |
Fourth quarter: Unaudited revenue was $95.1; operating loss was $18.1, net loss was $38.0, and diluted loss per share was $0.27. The company recorded $4.2 of out-of-period revenue reductions in the quarter and said their impact was not material.
Changes versus prior periods
- Reported 2018 revenue includes HTA from its March acquisition and EPC from its April acquisition; the two acquisitions contributed $114.0 of service revenue during 2018. Revenue comparisons with 2017 are not straightforward: the filing separates predecessor and successor accounting periods and reflects purchase-accounting changes.
- Cash from operations was $46.0 in the audited cash flow statement, versus $8.3 for the seven-month 2017 successor period. The filing attributes pressure on 2018 operating cash flow to transaction and transformation costs and increased receivables; its narrative separately reports $34.7, which should be reconciled.
- Debt increased to $903.5 principal after acquisition financing. In October, the company repaid the $200.0 second-lien loan, funded in part by a $70.0 increase to the first-lien facility and business-combination proceeds. The first-lien loan carried a 6.27% rate at year-end; management said interest expense should be lower following the refinancing.
- Government Solutions had 4,489 installed systems at year-end, up from 4,303; additions were partly offset by lost red-light systems, primarily in Miami.
Outlook, risks, contingencies, and unusual items
- Management said cash and expected operating cash flows should cover operating needs and debt service for at least 12 months. No numerical revenue or earnings guidance is provided. Management cites recurring service revenue, acquisitions, product development, and international expansion as growth priorities; it estimates 98% of revenue is recurring.
- Key risks include customer concentration in rental-car and fleet markets; changes in public policy or law affecting tolling and photo enforcement; government contract funding, termination, and audit risks; competition and technology shifts; cybersecurity and privacy compliance; and acquisition integration and international expansion.
- Debt is substantial, variable-rate, secured by substantially all assets, and subject to restrictive covenants and potential excess-cash-flow prepayments. The filing estimates that a 1 percentage-point rate move would change annual interest expense by approximately $9.0. The company reported covenant compliance at year-end.
- The company recorded a $70.0 liability under a tax receivable agreement, generally requiring payment to Platinum Equity of 50% of realized tax savings from specified HTA tax-basis increases. The agreement may accelerate in certain circumstances.
- Up to 10 million earn-out shares may be issued to the Platinum Stockholder if specified share-price thresholds are met within five years; none of the thresholds had been met by year-end. The filing recorded a $73.15 fair value for the contingent shares.
- In February 2019, the company and a Commercial Services customer agreed to a $3.65 settlement with San Francisco and changes to disclosures and business practices. Verra Mobility’s half was accrued at $1.83 at year-end.
- Management concluded disclosure controls were effective, but did not assess internal control over financial reporting because post-combination control design was still in development. The auditor issued an unqualified opinion on the financial statements and did not opine on internal controls.
Important facts for investors to verify
- Reconcile the $46.0 audited operating cash flow with the $34.7 figure in MD&A, and assess cash conversion after capital expenditures and one-time costs.
- Evaluate acquisition-related revenue and earnings contribution, purchase-accounting amortization, and progress integrating HTA and EPC.
- Review debt service, variable-rate exposure, covenant headroom, refinancing terms, and the effect of mandatory prepayments.
- Assess customer concentration and the potential effect of changes in photo-enforcement or rental-car tolling rules and pricing.
- Track the San Francisco settlement, tax receivable agreement payments, earn-out dilution, and the company’s progress in completing internal-control design and implementation.