Verra Mobility(VRRM) - 2023 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements The company's Q1 2023 financials show revenue growth but a significant net income decline due to higher financial expenses Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets | Metric | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | | :-------------------------------- | :-------------------------------- | :--------------------------------- | | Total Assets | 1,710,891 | 1,756,269 | | Total Liabilities | 1,473,783 | 1,525,199 | | Total Stockholders' Equity | 237,108 | 231,070 | | Cash and cash equivalents | 64,267 | 105,204 | | Intangible assets, net | 355,678 | 377,420 | | Long-term debt, net of current portion | 1,140,712 | 1,190,045 | Condensed Consolidated Statements of Operations and Comprehensive Income Condensed Consolidated Statements of Operations and Comprehensive Income | Metric | Three Months Ended March 31, 2023 ($ in thousands) | Three Months Ended March 31, 2022 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------------------------- | :------------------------------------------------- | :------------------------------------------------- | :---------------------- | :--------- | | Total Revenue | 191,903 | 170,385 | 21,518 | 12.6% | | Income from Operations | 50,101 | 32,006 | 18,095 | 56.5% | | Interest Expense, net | 22,687 | 14,279 | 8,408 | 58.9% | | Change in fair value of private placement warrants | 14,601 | 3,734 | 10,867 | 291.0% | | Loss on interest rate swap | 2,798 | — | 2,798 | n/a | | Loss on extinguishment of debt | 1,349 | — | 1,349 | n/a | | Net Income | 4,577 | 10,040 | (5,463) | (54.4%) | | Basic EPS | 0.03 | 0.06 | (0.03) | (50.0%) | | Diluted EPS | 0.03 | 0.06 | (0.03) | (50.0%) | Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Stockholders' Equity | Metric | Balance as of Dec 31, 2022 ($ in thousands) | Net Income ($ in thousands) | Stock-based Compensation ($ in thousands) | Employee Tax Withholding ($ in thousands) | Balance as of Mar 31, 2023 ($ in thousands) | | :-------------------------------- | :---------------------------------------- | :-------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Total Stockholders' Equity | 231,070 | 4,577 | 3,378 | (2,526) | 237,108 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2023 ($ in thousands) | Three Months Ended March 31, 2022 ($ in thousands) | Change ($ in thousands) | | :------------------------------------------ | :------------------------------------------------- | :------------------------------------------------- | :---------------------- | | Net cash provided by operating activities | 45,217 | 31,247 | 13,970 | | Net cash used in investing activities | (19,584) | (11,865) | (7,719) | | Net cash used in financing activities | (66,626) | (28,652) | (37,974) | | Net decrease in cash, cash equivalents and restricted cash | (41,298) | (7,039) | (34,259) | | Cash, cash equivalents and restricted cash - end of period | 67,817 | 97,393 | (29,576) | Notes to the Condensed Consolidated Financial Statements 1. Description of Business - Verra Mobility operates in three segments: Commercial Services, Government Solutions, and Parking Solutions, offering integrated technology solutions globally[26] - Commercial Services provides toll and violation management, and title/registration for commercial fleets and rental cars[27] - Government Solutions offers end-to-end photo enforcement for speed, red-light, school bus stop arm, and bus lane violations to government agencies[28] - Parking Solutions delivers integrated parking software and hardware for universities, municipalities, healthcare, and commercial operators[29] 2. Significant Accounting Policies - Financial statements are prepared under GAAP, relying on significant management estimates for revenue recognition, credit losses, and fair value measurements[31][33] Concentration of Credit Risk | Customer | Q1 2023 Revenue Concentration | Q1 2022 Revenue Concentration | Q1 2023 Accounts Receivable Concentration | Q4 2022 Accounts Receivable Concentration | | :---------------------------------- | :---------------------------- | :---------------------------- | :---------------------------------------- | :---------------------------------------- | | City of New York Dept. of Trans. | 17.8% | 19.3% | 26% | 22% | | Hertz Corporation | 11.2% | 11.1% | <10% | <10% | | Avis Budget Group, Inc. | 12.7% | 11.4% | <10% | <10% | | Enterprise Holdings, Inc. | 10.1% | 9.0% | <10% | <10% | Allowance for Credit Losses | Segment | Balance at Jan 1, 2023 ($ in thousands) | Credit Loss Expense ($ in thousands) | Write-offs, net of recoveries ($ in thousands) | Balance at Mar 31, 2023 ($ in thousands) | | :-------------------------------- | :-------------------------------------- | :----------------------------------- | :--------------------------------------------- | :--------------------------------------- | | Commercial Services (Driver-billed) | 9,600 | 3,033 | (972) | 11,661 | | Commercial Services (All other) | 1,577 | (467) | 5 | 1,115 | | Government Solutions | 4,573 | (839) | — | 3,734 | | Parking Solutions | 157 | (30) | (168) | (41) | | Total | 15,907 | 1,697 | (1,135) | 16,469 | - The increase in Commercial Services (Driver-billed) credit loss estimate is due to increased revenue and transaction volume from COVID-19 recovery[41] Deferred Revenue | Segment | March 31, 2023 ($ in millions) | December 31, 2022 ($ in millions) | | :-------------------- | :----------------------------- | :------------------------------- | | Government Solutions | 16.0 | 12.2 | | Parking Solutions | 18.0 | 21.2 | Interest Rate Swap - Company entered a $675.0 million notional interest rate swap in December 2022 to hedge variable interest rate exposure on its 2021 Term Loan[43] - A $2.8 million loss was recorded on the interest rate swap for Q1 2023, including $1.6 million from fair value re-measurement and $1.2 million from cash payments[44] Recent Accounting Pronouncements - Adopted ASU 2020-04 for LIBOR to Term SOFR transition on 2021 Term Loan, with no material financial statement impact[45][46] - Evaluating ASU 2022-03 regarding fair value measurement of equity securities with sale restrictions, effective after December 15, 2023[47] 3. Prepaid Expenses and Other Current Assets Prepaid Expenses and Other Current Assets | Category | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | | :------------------------------ | :------------------------------ | :------------------------------- | | Prepaid services | 9,762 | 9,171 | | Prepaid tolls | 8,544 | 9,978 | | Prepaid computer maintenance | 4,871 | 5,492 | | Costs to fulfill a customer contract | 4,413 | 3,193 | | Prepaid insurance | 2,254 | 3,112 | | Prepaid income taxes | 1,424 | 4,629 | | Deposits | 1,665 | 2,057 | | Other | 325 | 1,972 | | Total | 33,258 | 39,604 | 4. Goodwill and Intangible Assets Goodwill and Intangible Assets | Metric | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | | :------------------------ | :------------------------------ | :------------------------------- | | Goodwill | 834,299 | 833,480 | | Intangible assets, net | 355,678 | 377,420 | - Amortization expense for Q1 2023 was $22.0 million, contributing to the decrease in net intangible assets[50] 5. Accrued Liabilities Accrued Liabilities | Category | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | | :---------------------------------- | :------------------------------ | :------------------------------- | | Accrued salaries and wages | 12,484 | 19,109 | | Accrued interest payable | 9,080 | 4,459 | | Current deferred tax liabilities | 7,559 | 7,559 | | Current portion of operating lease liabilities | 6,869 | 6,355 | | Income tax payable | 3,794 | 269 | | Restricted cash due to customers | 3,196 | 3,541 | | Payroll liabilities | 3,293 | 2,136 | | Current portion of interest rate swap liability | 1,413 | 977 | | Other | 4,356 | 4,442 | | Total | 52,044 | 48,847 | 6. Long-term Debt Long-term Debt | Metric | March 31, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | | :------------------------------------ | :------------------------------ | :------------------------------- | | 2021 Term Loan, due 2028 | 821,351 | 886,106 | | Senior Notes, due 2029 | 350,000 | 350,000 | | Total long-term debt, net of current portion | 1,140,712 | 1,190,045 | - Early repayments of $62.5 million were made on the 2021 Term Loan during Q1 2023, reducing the principal outstanding to $821.4 million[58][164] - Weighted average effective interest rate on outstanding borrowings increased to 7.4% at March 31, 2023, from 7.0% at December 31, 2022[64] 2021 Term Loan and Senior Notes - 2021 Term Loan (totaling $900.0 million originally) matures March 26, 2028, and Senior Notes ($350.0 million) mature April 15, 2029[54][55][57] - The 2021 Term Loan transitioned from LIBOR to Term SOFR in March 2023, with an all-in interest rate of 8.17% as of March 31, 2023[59][165] - Senior Notes bear a fixed interest rate of 5.50% per annum[60][166] The Revolver - Revolving Credit Agreement has a $75.0 million commitment, maturing December 20, 2026[61][168] - As of March 31, 2023, $74.8 million was available for borrowing under the Revolver, with no outstanding borrowings[61][168] Interest Expense | Metric | Three Months Ended March 31, 2023 ($ in thousands) | Three Months Ended March 31, 2022 ($ in thousands) | Change ($ in thousands) | Change (%) | | :-------------------- | :------------------------------------------------- | :------------------------------------------------- | :---------------------- | :--------- | | Interest Expense, net | 22,687 | 14,279 | 8,408 | 58.9% | 7. Fair Value of Financial Instruments Fair Value of Financial Instruments | Financial Instrument | Fair Value Hierarchy Level | March 31, 2023 Estimated Fair Value ($ in thousands) | December 31, 2022 Estimated Fair Value ($ in thousands) | | :----------------------- | :------------------------- | :------------------------------------------------- | :------------------------------------------------- | | 2021 Term Loan | 2 | 823,405 | 883,891 | | Senior Notes | 2 | 313,250 | 313,250 | - Private placement warrant liabilities are Level 3, with a fair value of $38.667 million at March 31, 2023, and a $14.601 million change in fair value recorded in Q1 2023[69] - The interest rate swap is classified as Level 2, with changes in fair value included in other non-current assets and accrued liabilities[70][71] 8. Net Income Per Share Net Income Per Share | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net Income Per Share - Basic | $0.03 | $0.06 | | Net Income Per Share - Diluted | $0.03 | $0.06 | | Weighted Average Shares - Basic (in thousands) | 149,165 | 156,130 | | Weighted Average Shares - Diluted (in thousands) | 153,129 | 160,749 | - Antidilutive shares excluded from diluted EPS totaled 13.287 million in Q1 2023, including contingently issuable shares and private placement warrants[73] 9. Income Taxes Income Taxes | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Effective Income Tax Rate | 63.2% | 40.4% | - Primary driver for the effective tax rate variance is permanent differences from the mark-to-market adjustment on private placement warrants[76] - Total unrecognized tax benefits increased by $0.2 million to $11.4 million in Q1 2023, with $2.8 million potentially impacting the effective tax rate[77] 10. Stockholders' Equity - 18,092,120 warrants outstanding as of March 31, 2023, including 6,666,666 Private Placement Warrants[79] - Approximately 1.9 million Public Warrants were exercised cashless for 632,745 Class A Common Stock shares in Q1 2023[80] Warrants - All outstanding warrants (18,092,120) expire in October 2023[79][81] - Public Warrants are redeemable if Class A Common Stock price exceeds $18.00 for 20 trading days within a 30-day period; Private Placement Warrants are nonredeemable if held by original sponsor[81] Share Repurchase Program - Board authorized a $100.0 million share repurchase program in November 2022, spanning 18 months[82] - No shares have been repurchased under the program as of March 31, 2023[82] 11. Stock-Based Compensation Stock-Based Compensation | Category | Three Months Ended March 31, 2023 ($ in thousands) | Three Months Ended March 31, 2022 ($ in thousands) | Change ($ in thousands) | Change (%) | | :-------------------------------- | :------------------------------------------------- | :------------------------------------------------- | :---------------------- | :--------- | | Operating expenses | 332 | 214 | 118 | 55.1% | | Selling, general and administrative expenses | 3,046 | 4,232 | (1,186) | (28.0%) | | Total stock-based compensation expense | 3,378 | 4,446 | (1,068) | (24.0%) | - Decrease in stock-based compensation primarily due to accelerated RSU vesting for an executive officer's separation in Q1 2022[84] 12. Other Significant Transactions Tax Receivable Agreement - TRA requires payment of 50% of net cash tax savings from increased tax basis of acquired intangibles[86] - TRA liability was $55.9 million at March 31, 2023 ($5.0 million current, $50.9 million non-current)[87] Earn-Out Agreement - Platinum Stockholder can receive up to 10,000,000 Earn-Out Shares based on Class A Common Stock price thresholds within five years of the Business Combination[88][90] - Two tranches (5,000,000 shares) have been issued; $36.6 million remains contingently issuable for future tranches as of March 31, 2023[92][93] 13. Commitments and Contingencies - $2.0 million in bank guarantees and $21.1 million in non-cancelable purchase commitments as of March 31, 2023[94] - Accrues for probable and reasonably estimable losses from claims and contingencies; no material adverse impact anticipated from current legal matters[96][97] Legal Proceedings - Defendant in Brantley v. City of Gretna, a class action regarding a safety camera program, with no estimable loss or accrued liability[98] - Defendant in PlusPass, Inc. v. Verra Mobility, an antitrust lawsuit alleging Clayton and Sherman Act violations, with trial set for November 2023[183] 14. Segment Reporting - Company operates in Commercial Services, Government Solutions, and Parking Solutions segments[99] - Segment profit excludes depreciation, amortization, stock-based compensation, interest expense, and income taxes[100][120] Segment Performance | Segment | Q1 2023 Total Revenue ($ in thousands) | Q1 2022 Total Revenue ($ in thousands) | Q1 2023 Segment Profit ($ in thousands) | Q1 2022 Segment Profit ($ in thousands) | | :-------------------- | :------------------------------------- | :------------------------------------- | :-------------------------------------- | :-------------------------------------- | | Commercial Services | 85,639 | 73,465 | 53,556 | 46,608 | | Government Solutions | 85,923 | 78,828 | 31,465 | 25,481 | | Parking Solutions | 20,341 | 18,092 | 2,850 | 3,206 | | Total | 191,903 | 170,385 | 87,871 | 75,295 | International Revenue | International Revenue Source | Q1 2023 ($ in thousands) | Q1 2022 ($ in thousands) | | :--------------------------- | :----------------------- | :----------------------- | | Australia | 9,701 | 7,782 | | Canada | 7,221 | 8,588 | | United Kingdom | 6,736 | 6,207 | | All other | 688 | 652 | | Total International Revenues | 24,346 | 23,229 | 15. Guarantor/Non-Guarantor Financial Information - VM Consolidated is the lead borrower for the 2021 Term Loan and Senior Notes, wholly owned by Verra Mobility Corporation[106] - Financial information is presented separately for the Ultimate Parent, guarantor subsidiaries, and non-guarantor subsidiaries[107] 16. Subsequent Event - On May 2, 2023, the Company made an early repayment of $10.0 million on its 2021 Term Loan[116] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses robust revenue growth, improved operating cash flows, and debt management amid declining net income Business Overview - Verra Mobility provides smart mobility technology solutions globally, including toll/violations management, automated safety enforcement, and parking management[119] - Solutions are integrated and data-driven, serving fleet owners, governments, universities, healthcare facilities, and commercial parking operators[119] Executive Summary - Total revenue increased by 12.6% to $191.9 million in Q1 2023, driven by service revenue growth in Commercial Services and Government Solutions[121] - Cash flows from operating activities increased to $45.2 million in Q1 2023 from $31.2 million in Q1 2022[121] - Company made early repayments of $62.5 million on its 2021 Term Loan in Q1 2023 as part of debt management efforts[121] Primary Components of Our Operating Results Revenues - Commercial Services generates service revenue from tolling programs and violation processing for RACs and FMCs[123] - Government Solutions service revenue comes from operating and maintaining photo enforcement systems, with drivers including system count and monthly revenue per system[124] - Product sales are from photo enforcement equipment (Government Solutions) and specialized hardware (Parking Solutions), with sales patterns varying significantly[125] Costs and Expenses - Cost of service revenue includes recurring service, collection, and third-party costs[126] - Operating expenses primarily consist of payroll, subcontractor costs, and payment processing[127] - Selling, general and administrative expenses include payroll, real estate lease, insurance, and professional services fees[128] - Non-operating expenses include interest expense, changes in fair value of private placement warrants, losses on interest rate swaps, and debt extinguishment losses[129][130][131] Results of Operations Results of Operations | Metric | Q1 2023 ($ in thousands) | Q1 2022 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------------------------- | :----------------------- | :----------------------- | :---------------------- | :--------- | | Total Revenue | 191,903 | 170,385 | 21,518 | 12.6% | | Service Revenue | 184,698 | 161,134 | 23,564 | 14.6% | | Product Sales | 7,205 | 9,251 | (2,046) | (22.1%) | | Income from Operations | 50,101 | 32,006 | 18,095 | 56.5% | | Net Income | 4,577 | 10,040 | (5,463) | (54.4%) | - Commercial Services service revenue increased by $12.2 million (16.6%) due to increased travel volume and adoption of all-inclusive fee structures[133][134] - Government Solutions service revenue increased by $10.0 million (13.7%), primarily driven by the expansion of speed programs[133][135] - Net income decreased due to increased interest expense ($8.4 million) and a significant increase in the change in fair value of private placement warrants ($10.9 million)[142][147][148] Liquidity and Capital Resources - Principal liquidity sources are cash flows from operations and available borrowing under the Revolver[149] - Management believes existing liquidity is sufficient for the next 12 months[151] - Cash provided by operating activities increased by $14.0 million to $45.2 million in Q1 2023[156] - Cash used in investing activities increased due to capital purchases and interest rate swap payments[157] - Cash used in financing activities increased significantly due to $62.5 million in early repayments on the 2021 Term Loan[158] Long-term Debt - 2021 Term Loan outstanding balance was $821.4 million at March 31, 2023, after $62.5 million in early repayments[164] - The 2021 Term Loan's all-in interest rate was 8.17% at March 31, 2023, following its transition to Term SOFR[165] - Senior Notes have an aggregate principal of $350.0 million with a fixed interest rate of 5.50%[161][166] The Revolver - Revolver commitment of $75.0 million, maturing December 20, 2026[168] - $74.8 million available for borrowing as of March 31, 2023, with no outstanding borrowings[168] Interest Expense | Metric | Three Months Ended March 31, 2023 ($ in thousands) | Three Months Ended March 31, 2022 ($ in thousands) | Change ($ in thousands) | Change (%) | | :-------------------- | :------------------------------------------------- | :------------------------------------------------- | :---------------------- | :--------- | | Interest Expense, net | 22,687 | 14,279 | 8,408 | 58.9% | Off-Balance Sheet Arrangements - No material off-balance sheet financing arrangements as of March 31, 2023[172] Critical Accounting Policies, Estimates and Judgments - Financial statements require significant management estimates and assumptions; detailed policies are in the 2022 Annual Report on Form 10-K[173] Recent Accounting Pronouncements - Refer to Note 2 for discussion of recent accounting pronouncements[175] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company details its interest rate risk from its variable-rate term loan and its use of a swap to hedge this exposure - Exposed to interest rate market risk from $821.4 million variable rate 2021 Term Loan[177] - A 1% interest rate movement would change annual interest expense by approximately $8.2 million[178] - Entered a $675.0 million notional interest rate swap in December 2022 to hedge exposure, resulting in a $2.8 million loss in Q1 2023[179] Item 4. Controls and Procedures The company confirms the effectiveness of its disclosure controls and reports no material changes to internal controls Evaluation of Disclosure Controls and Procedures - Disclosure controls and procedures were effective as of March 31, 2023[180] Changes in Internal Control Over Financial Reporting - No material changes in internal control over financial reporting during Q1 2023[181] PART II—OTHER INFORMATION Item 1. Legal Proceedings The company details its involvement in two lawsuits and does not anticipate a material adverse impact from these matters - Company is a defendant in PlusPass, Inc. v. Verra Mobility, an antitrust lawsuit alleging violations of Section 7 of the Clayton Act and Sections 1 and 2 of the Sherman Act[183] - The lawsuit concerns the 2018 merger of HTA and ATS and alleged anticompetitive practices in electronic toll payment collection for rental cars[183] - Trial is set for November 2023, and Verra Mobility intends to vigorously defend against the claims[183] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2022 Annual Report - No material changes to risk factors from the 2022 Annual Report on Form 10-K[184] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales or repurchases of its equity securities during the reporting period - No unregistered sales or purchases of equity securities[185][186] Item 3. Defaults Upon Senior Securities The company reports no defaults upon its senior securities during the period - No defaults upon senior securities[187] Item 4. Mine Safety Disclosures This section is not applicable to the company's operations - Not Applicable[188] Item 5. Other Information The company reports no other information for this period - No other information to report[189] Item 6. Exhibits This section lists all exhibits filed with or incorporated by reference into the quarterly report - Lists exhibits filed or incorporated by reference, including merger agreements, corporate documents, warrant agreements, and equity incentive plan forms[191][193][195]