Omnitracs Under Review: Weaker Debt Position, But Tech Investments Roll On

Omnitracs, the manufacturer of electronic logging devices (ELDs) and other telematics systems, got a mixed financial review from S&P Global Ratings in an infrequent look at a few of the company's financials.

Omnitracs is privately held, with Vista Equity Partners as its majority owner. Vista had been reported last year to be looking to sell Omnitracs but no movement has been reported. 

In its action, S&P Global Ratings affirmed the company's "B" rating on its corporate debt. However, it lowered the outlook on that debt to negative. A negative rating is defined as meaning a company's rating is at risk to be lowered.

The move comes a few weeks after Moody's, another leading ratings service, completed a review of Omnitracs' debt rating, taking no action and leaving its "stable" outlook intact. Moody's B2 rating is considered on par with the B rating at S&P.

At that rating, Omnitracs' debt is considered noninvestment grade and therefore speculative. S&P defines B as "more vulnerable to nonpayment" than debt at the BB level, a step up. But the definition also says the issuer of the debt "currently has the capacity to meet its financial commitments on the obligation."

As a private company, Omnitracs' financials are not regularly disclosed. But since its debt is publicly traded, and the ratings agencies' resorts are public, reviews of the debt do provide the occasional window into the financial status of Omnitracs, as it does for similar private companies with publicly held debt.

Cash flow positive but way down

The financial numbers in the two reports show that free operating cash flow at Omnitracs is expected to be in the $23 million to $28 million range in the current fiscal year, according to S&P. That is a significant drop from the $58.5 million it generated in fiscal 2019. Omnitracs' fiscal year runs through Sept. 30.

Moody's reported Omnitracs' revenue at $465 million. Neither the S&P nor the Moody's report disclosed earnings before interest, taxes, depreciation and amortization (EBITDA). 

S&P sees the company as being negatively affected by trends that are hitting all freight-related companies: "lower business and consumer confidence resulting in generally lower freight volumes and more underutilized fleet capacity."

"This has reduced hardware shipments and software bookings, with some of its customers being more capital-constrained to make significant investments," the report said. 

S&P Global does not offer its views on whether a company's strategy is the correct one; it provides debt analysis, not equity analysis. The company is concerned only with the likelihood of a corporate debt getting paid. 

Investment spending is accelerating

So it doesn't judge whether it's positive or negative that Omnitracs, according to the report, is "carrying out significant product investments and restructuring to improve its competitive positions and profitability coming out of the downturn." But because making such capital expenditures takes away from cash flow, it is considered credit negative. 

S&P notes that the investment spending is likely to be a contributing factor in having the  company's investment leverage rise to nine times free operating cash flow (FOCF) this year before declining to seven times FOCF in fiscal 2021. 

And S&P sees Omnitracs continuing its investment. "We expect margins to be affected by elevated spending on strategic product development projects, including the Omnitracs One platform and a next-generation hardware device," S&P wrote.

Moody's also talks about the Omnitracs One platform, noting that spending on it will cut cash flow in 2020. But Moody's added that it believes "investments in a broad cloud-based platform will provide for additional market share expansion and expansion in recurring revenue stream, while pressuring near-term margins and cash flow generation over the course of 2020." 

The S&P report says Omnitracs has set up a "relief program" for some of its customers. The program "temporarily downsizes" fleet coverage "in exchange for term extensions." That move is expected to help contribute to a mid-single-digit decline in revenue in fiscal 2020, S&P said. 

Omnitracs is also suffering from an inventory buildup of equipment not shipped because of the slump in the economy, according to S&P, and "upcoming customer migrations to newer hardware given U.S. wireless carriers' planned shutdowns of 3G networks."

There aren't liquidity problems at Omnitracs, according to the report. It has a cash stockpile of $114 million and a "fully available" revolving credit facility of $50 million, on top of its positive FOCF. 

Returning to the theme of Omnitracs continuing its investment spending, S&P cites three areas impacting that: supporting product development, a "buildout" of its Mexican operations and unspecified "infrastructure modernization activities."

And Omnitracs is turning to its vendors and customers for some new terms: "Omnitracs is aiming to improve cash collection and extend payment terms with its vendors in order to improve its near-term cash generation," the S&P report said. 

Moody's described Omnitracs as having a "solid position as a comprehensive full-service provider of technology service solutions for fleet operators, (with a) recurring nature of its revenue stream and the necessary nature of the electronic logging devices required by federal mandate." But it also said its ratings are "constrained by high financial leverage, small overall revenue base compared to Service industry peers, and exposure to the economically cyclical trucking industry."