Verra Mobility Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Verra Mobility provides toll and violations management, title and registration, and automated traffic-safety services through Commercial Services and Government Solutions.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $393.6 million | $448.7 million |
| Service revenue | $336.3 million | $416.7 million |
| Product sales | $57.3 million | $32.0 million |
| Operating income | $37.8 million | $96.5 million |
| Net income (loss) | $(3.4) million | $33.3 million |
| Adjusted EBITDA (non-GAAP) | $181.8 million | $241.4 million |
| Adjusted EBITDA margin (non-GAAP) | 46.2% | 53.8% |
| Cash from operating activities | $46.9 million | $133.8 million |
- Revenue fell 12.3% year over year: service revenue declined 19.3%, partly offset by a 79.0% rise in product sales. Operating margin was 9.6%, versus 21.5% in 2019.
- Commercial Services revenue declined 34.6% to $180.9 million, primarily due to COVID-19’s impact on rental-car customers. Government Solutions revenue increased 23.5% to $212.7 million, including higher speed-camera equipment sales and program growth.
- Cash and cash equivalents were $120.3 million at year-end. Gross principal debt was $865.6 million, with a $842.0 million carrying value net of financing discounts and costs. The company had $48.8 million of revolver availability, net of letters of credit.
- Long-term debt matures February 2025 and carries a variable rate; the reported rate was 3.4% at year-end. Management stated the company was covenant-compliant and expected cash, operating cash flow and revolver availability to cover operating needs and debt service for at least 12 months.
- NYCDOT receivables contributed to a $77.9 million increase in accounts receivable and the sharp reduction in operating cash flow. Accounts receivable, net was $168.8 million, including a large overdue NYCDOT balance.
Fourth-quarter results
Q4 2020 revenue was $100.2 million, operating income was $10.1 million, net loss was $1.4 million and diluted loss per share was $0.01. In Q4 2019, revenue was $112.5 million, operating income was $24.2 million and net income was $9.2 million.
Material changes and unusual items
- COVID-19 reduced travel and rental-car activity, while lower traffic and school closures affected parts of Government Solutions. Commercial Services revenue dropped sharply in Q2, then improved sequentially in Q3 and Q4.
- Government Solutions speed-program revenue grew about $25.7 million year over year, supported by additional camera installations. Red-light enforcement and school-bus camera revenue were negatively affected by Texas legislation and pandemic disruptions.
- FY2020 included $14.4 million of credit-loss expense. The filing reports a 273.4% effective tax rate, attributing it primarily to low pretax income and the proportional effect of permanent tax differences.
- Interest expense declined to $40.9 million from $60.7 million, following lower rates and a February 2020 refinancing that reduced the term-loan margin by 50 basis points.
- The company recorded a $6.8 million tax receivable agreement liability adjustment expense. A $1.4 million escrow distribution and $1.4 million of insurance proceeds related to an HTA settlement were recognized as gains in other income.
- No goodwill impairment was recorded after interim quantitative tests and the annual assessment. Management cautioned that worsening forecasts or market conditions could result in a future material impairment.
Outlook, risks and contingencies
- Management expected COVID-19 effects to continue into the first half of 2021. It anticipated year-over-year Commercial Services revenue declines through March 2021 and said full-year 2021 service revenue might not return to 2019 levels. Product sales were expected to be in line with 2018 absent further customer installation orders; speed-program growth was expected to continue.
- In January 2021, Verra Mobility agreed to acquire Redflex for AUD 146.1 million, with closing expected in Q2 2021 subject to shareholder, regulatory and other conditions. Verra Mobility would also assume Redflex’s cash and indebtedness at closing.
- NYCDOT, the company’s largest customer, represented 31.3% of FY2020 revenue. The City is investigating installation work, including conduit depth and pole installations. The company reported remediation costs of $0.9 million and an additional $2.1 million accrual. The investigation’s outcome, any penalties, and the timing of customer payments remain uncertain.
- The filing gives differing NYCDOT receivable figures: $98.9 million in one disclosure and $99.4 million in another; it also states that $80.4 million or $80.9 million, respectively, was past the 45-day payment terms. The detailed contract balances are $28.8 million under the legacy contract and $70.0 million invoiced under the emergency contract, with no emergency-contract payments received by year-end. These amounts and differences warrant reconciliation.
- Other significant risks include customer concentration, rental-car industry weakness and Hertz’s Chapter 11 filing, regulatory or public opposition to photo enforcement and tolling, government contract termination and payment delays, data privacy and cybersecurity exposure, acquisition integration, and substantial variable-rate debt. Each 1% interest-rate movement was estimated to change annual interest expense by about $8.7 million.
- The company reported no material off-balance-sheet financing arrangements. It reported that a 2019 material weakness in IT access controls was remediated in 2020; management and the auditor concluded internal control over financial reporting was effective at year-end. The financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Reconcile NYCDOT receivable totals, overdue amounts, contract invoices, collectibility assumptions and the likely timing of payments; assess the investigation and remediation exposure.
- Track recovery in Commercial Services and rental-car activity, including customer concentration and the implications of Hertz’s bankruptcy.
- Monitor cash conversion, credit-loss provisions, receivable aging and revolver availability as NYCDOT balances affect eligible borrowing capacity.
- Review debt service, variable-rate exposure, refinancing needs and covenant headroom, particularly given the large 2025 maturity.
- Confirm Redflex acquisition completion, total assumed debt and cash, integration costs, financing and expected benefits.
- Distinguish recurring service revenue and earnings from variable product sales, non-GAAP Adjusted EBITDA adjustments and the effects of tax and settlement items.