Verra Mobility Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Verra Mobility provides mobility technology and services through Commercial Services, Government Solutions and Parking Solutions. Unless otherwise noted, financial amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $209.9M | $197.7M | $606.3M | $555.5M |
| Operating income | $59.2M | $45.5M | $165.5M | $122.7M |
| Operating margin | 28.2% | 23.1% | 27.3% | 22.1% |
| Net income | $30.3M | $24.6M | $54.0M | $64.3M |
| Diluted EPS | $0.18 | $0.15 | $0.34 | $0.38 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $170.4M | $148.8M |
Q3 revenue rose 6.2% year over year, led by service revenue growth of 11.3%; product sales fell 47.7%. For the first nine months, revenue increased 9.1%, while net income declined 16.0%. Nine-month net margin was 8.9%, compared with 11.6% a year earlier; Q3 net margin was 14.4%, compared with 12.4%.
- Growth by segment: Q3 service revenue increased 14.1% in Commercial Services, 9.9% in Government Solutions and 3.9% in Parking Solutions. Management cited higher travel and tolling activity, increased adoption of all-inclusive rental-car toll products and expansion of government speed-enforcement programs.
- Cash and liquidity: Cash and cash equivalents were $114.4M at September 30, 2023; restricted cash was $4.0M. The company reported $74.8M of available revolver capacity and no revolver borrowings. Management expects cash, operating cash flow and revolver access to cover operating requirements and debt service for at least 12 months.
- Debt: Carrying value of long-term debt was $1.039B, including $706.8M principal on the variable-rate term loan and $350.0M of senior notes. The term loan matures in 2028; the notes mature in 2029 and carry a fixed 5.50% rate. The term loan’s all-in rate was 8.7% at quarter-end. The company prepaid $172.5M of term-loan principal in the first nine months and reported compliance with all debt covenants.
- Interest-rate exposure: A $675M-notional swap fixes the company’s payment rate at 5.17% on the hedged variable-rate exposure. Management estimates a 1 percentage-point rate move would change annual interest expense by approximately $7.1M, based on the quarter-end loan balance.
Material changes and notable items
- Operating income improved in both periods, supported by revenue growth and lower depreciation and amortization as certain intangible assets became fully amortized. Operating expenses increased 17.7% year to date, faster than revenue, primarily due to wages, recurring service costs, subcontractors and IT.
- Nine-month interest expense increased to $65.8M from $49.0M, primarily reflecting higher variable rates. The nine-month results also included a $25.0M loss from warrant fair-value changes, versus a $5.1M gain in the prior-year period, and a $3.5M debt-extinguishment loss. These items contributed to lower year-to-date net income despite higher operating income.
- Warrant exercises generated $161.4M of cash proceeds; all warrants had been exercised or redeemed by September 30. The company spent $100.0M on repurchases under its 2022 authorization, including an accelerated share repurchase whose final share settlement was expected in Q1 2024. On October 30, the board authorized a further repurchase program of up to $100M.
- Operating cash flow exceeded the prior-year period, while investing cash outflow was $41.7M and financing cash outflow was $118.5M. Financing outflows principally reflected term-loan repayments and share repurchases, partly offset by warrant proceeds.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings or margin guidance. Management describes a strategy of organic growth and recurring service revenue, and attributes recent growth to travel recovery, product adoption and program expansion.
- Customer concentration remains notable: the City of New York DOT represented 17.1% of nine-month revenue and 13% of net accounts receivable at September 30. Hertz, Avis Budget Group and Enterprise each generated more than 10% of nine-month revenue.
- Key disclosed risks include customer concentration, substantial indebtedness and interest-rate exposure, dependence on government contracts and legislative or payment changes, technology and cybersecurity risks, competition and international operations. The company said there were no material changes to previously disclosed risk factors.
- Two legal matters are described: a class action concerning a traffic-camera program, with trial scheduled for March 2025, and PlusPass’s antitrust action, with trial moved to April 2024 and a summary-judgment motion pending. The company has not accrued liabilities for these matters because it cannot reasonably estimate a loss range; it states resolution is not currently expected to materially affect its financial position, results or cash flows.
- The company reported $20.0M of non-cancelable purchase commitments, mostly expected within 12 months, and $1.9M of bank guarantees. Management reported effective disclosure controls and no material quarter changes to internal control over financial reporting.
Important facts for investors to verify
- Whether service-revenue momentum and government program expansion continue, and whether variable product-sales timing affects reported growth.
- Whether rising operating costs and elevated interest expense affect future margins and cash generation.
- Term-loan repayment requirements, covenant headroom, variable-rate exposure and the ongoing effectiveness and termination options of the interest-rate swap.
- Collection trends and exposure to major customers, particularly New York City DOT and large rental-car partners.
- Final settlement of the 2023 accelerated share repurchase and the execution, funding and capital-allocation effects of the new $100M authorization.
- Developments in the PlusPass and Gretna litigation, for which potential loss amounts are not estimable in the filing.