Verra Mobility Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Verra Mobility provides commercial toll and violation management, government traffic enforcement, and parking technology and services.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $204.5M | $187.5M | $396.4M | $357.9M |
| Operating income | $56.2M | $45.2M | $106.3M | $77.2M |
| Net income | $19.1M | $29.6M | $23.7M | $39.7M |
| Diluted EPS | $0.13 | $0.15 | $0.16 | $0.23 |
| Operating margin | 27.5% | 24.1% | 26.8% | 21.5% |
- Revenue mix and growth: Q2 service revenue increased 12.3% to $196.1M, while product sales fell 35.2% to $8.4M. First-half service revenue rose 13.4% to $380.7M; product sales declined 29.8% to $15.6M.
- Cash flow: First-half operating cash flow was $107.9M, versus $96.4M. Investing activities used $31.5M, including $30.1M for installation and service parts and property and equipment. Financing activities provided $27.9M, principally reflecting warrant exercises and debt repayments.
- Liquidity: June 30 cash and cash equivalents were $210.1M, with $3.4M restricted cash. Current assets were $542.6M and current liabilities $180.8M. Revolver availability was $74.8M, net of letters of credit, with no revolver borrowings outstanding.
- Debt and interest: Carrying value of long-term debt was $1,138.7M; principal included $809.1M on the 2021 Term Loan and $350.0M of Senior Notes. The Term Loan’s all-in rate was 8.5% at quarter-end; the Notes carry a fixed 5.50% coupon. Q2 interest expense was $22.8M, up from $14.5M; first-half expense was $45.5M, up from $28.8M. The company made $72.5M of early Term Loan repayments in the first half.
- Segment profit: Q2 Commercial Services $61.1M, Government Solutions $30.4M, and Parking Solutions $3.5M, compared with $56.5M, $29.2M, and $3.0M, respectively, in Q2 2022. Segment profit is a company-defined measure and excludes certain items.
Material changes and notable items
- Total revenue increased 9.1% in Q2 and 10.8% for the first half. Management attributed service growth primarily to increased travel and tolling activity, broader adoption of all-inclusive offerings by rental-car customers, and expansion of government speed-enforcement programs. Parking Solutions also grew service revenue.
- Net income declined 35.5% in Q2 and 40.3% in the first half despite higher revenue and operating income. Higher interest expense and adverse changes in the fair value of private placement warrant liabilities were key factors. The warrant remeasurement generated losses of $10.9M in Q2 and $25.5M in the first half; it is a non-cash fair-value item.
- Operating expenses increased 19.0% in Q2 and 20.0% in the first half, with management citing higher wages, subcontractor costs, and recurring service costs. Lower amortization helped offset costs, as certain intangible assets were fully amortized.
- Warrant exercises generated $105.8M in cash by June 30, with another $52.7M received in July. The company processed exercises of approximately 17.0M warrants, issuing 14.8M shares. The final 2.5M-share earn-out tranche was triggered July 26; the company also reported an additional $100.0M Term Loan repayment on August 7. These subsequent events were not reflected in June 30 balances.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the filing. Management said existing cash, operating cash flows, and revolver availability should be sufficient for operating needs and debt service for at least the next 12 months, while noting that performance and financing needs depend on factors outside its control.
- Interest-rate exposure remains material: the company disclosed that a 1% rate movement would change annual interest expense by approximately $8.1M based on the June 30 Term Loan balance. A $675M-notional interest-rate swap pays a fixed 5.17% and receives a variable rate; the company may begin terminating it in December 2023.
- Customer concentration is significant. New York City DOT represented 16.9% of Q2 revenue and 17% of net receivables at June 30. Hertz and Avis each accounted for more than 10% of Q2 revenue. Management deemed NYCDOT receivables collectible, with no material reserve.
- Other disclosed risks include substantial indebtedness, government contract changes or termination, competition and technology shifts, cybersecurity, vendor reliance, international operations, and litigation. The filing also identifies potential tax increases from OECD global minimum-tax rules as countries implement them.
- PlusPass antitrust litigation remains pending: Verra Mobility’s summary-judgment motion was pending and trial was set for November 2023. A Louisiana class action concerning a safety-camera program also remains unresolved. The company said it could not reasonably estimate potential losses in these matters and recorded no associated accruals; it stated pending matters were not considered probable to have a material adverse effect.
- The company reported compliance with debt covenants and effective internal control over financial reporting as of June 30, 2023.
Investor verification priorities
- Track whether service-revenue growth persists and whether operating-cost growth moderates, particularly in Commercial and Government Solutions.
- Review debt reduction, cash generation, interest costs, swap terms, and the impact of the August 2023 $100M repayment on leverage and liquidity.
- Assess dilution and warrant/earn-out share issuance, including the shares issued after quarter-end and the updated share count.
- Monitor customer concentration and collection trends, especially NYCDOT receivables and dependence on major rental-car partners.
- Follow the PlusPass and Gretna litigation, and developments in international minimum-tax legislation.