Target Hospitality Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Dollar amounts below are in millions unless stated otherwise. Target provides specialty rental accommodations and hospitality services to government and natural-resources customers.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $159.6 | $89.2 | $349.5 | $209.6 |
| Gross profit | $82.8 | $33.6 | $163.2 | $72.1 |
| Gross margin | 51.9% | 37.7% | 46.7% | 34.4% |
| Operating income | $59.9 | $16.7 | $110.2 | $23.4 |
| Net income (loss) | $19.0 | $6.7 | $42.4 | $(7.4) |
| Diluted earnings (loss) per share | $0.20 | $0.07 | $0.44 | $(0.08) |
| Adjusted EBITDA (non-GAAP) | $84.4 | $37.5 | $173.9 | $85.4 |
- Q3 revenue rose 79%; nine-month revenue rose 67%. Growth reflected the expanded Government business and recovering demand in HFS–South and HFS–Midwest. Specialty rental income also increased substantially. No TCPL Keystone construction-fee revenue was recorded in 2022.
- Operating cash flow was $257.8 for the nine months, versus $99.4 in 2021. The increase included $126.8 of net additions to deferred revenue and customer deposits, so cash generation should be considered alongside the timing of customer advances.
- Investing cash outflow was $103.7, primarily for Government-segment growth; financing cash outflow was $0.6. Cash rose to $177.0 at September 30, from $23.4 at year-end 2021.
- At September 30, current assets were $227.8 and current liabilities $201.7. Current liabilities included $141.9 of deferred revenue and customer deposits; a substantial portion represents advance payments for future services.
- Debt included $340.0 principal of 9.50% senior secured notes due March 2024; net carrying value was $333.3. The $125.0 ABL facility had no outstanding balance, although $70.0 was drawn and repaid during the nine months. Capital-lease and other financing obligations were about $1.7. ABL maturity is September 2023.
Material changes and unusual items
- The Government segment’s nine-month revenue increased to $245.0 from $109.3; Q3 revenue increased to $123.3 from $46.4. Its growth was driven by an expanded agreement effective May 16, 2022, with a nonprofit partner supporting U.S. Government humanitarian efforts.
- The expanded contract provides minimum annual revenue contribution of approximately $390, fully committed during its initial term; variable services revenue is tied to monthly population, with a stated maximum initial annual total contract value of approximately $575. The maximum is not the same as committed revenue.
- Private-warrant fair-value expense was $20.0 in Q3 and $20.4 for the nine months, reducing reported income; this is a noncash remeasurement. Warrant liabilities reached $22.0 from $1.6 at year-end 2021.
- Q3 SG&A rose 49% to $19.2, primarily from stock-based compensation, including remeasurement of stock appreciation rights as the share price increased. Nine-month stock-based compensation expense was $13.7.
- The company purchased land and specialty rental assets for approximately $22.3 in Q3 to support Government growth, funded with cash. Government growth capital expenditures were the main driver of increased investing outflows.
- On November 3, 2022, after quarter-end, the board authorized a share repurchase program of up to $100.0. It has no expiration date, does not require purchases, and is subject to debt covenants.
Outlook, commentary and risks
- Management said cash on hand, operating cash flow and ABL availability should fund debt service, growth, leases and working capital for at least the next 12 months; it cautioned that future financing may not be available on acceptable terms. The ABL facility’s September 2023 maturity falls within that period.
- The filing gives no general full-year earnings or revenue guidance. Fixed-price remaining performance obligations disclosed were $287.5 through 2026, but the company notes this is only a portion of expected revenue and is not necessarily indicative of total revenue trends.
- Customer concentration is significant: two customers represented 58% and 12% of nine-month 2022 revenue. Management also identifies dependence on government policy and appropriations, natural-resource activity and commodity prices, customer collections, labor and input costs, suppliers, regulation, and operational disruptions as risks.
- The company reported ordinary-course legal matters and said it did not expect them to have a material adverse effect, while noting litigation outcomes could differ from recorded accruals. Management concluded disclosure controls were effective at September 30, 2022.
Investor verification priorities
- Confirm the expanded Government contract’s committed minimums, variable-revenue mechanics, duration, customer funding, and operating costs required to deliver the services.
- Assess whether operating cash flow is sustainable after separating customer advances and deferred-revenue movements from recurring cash generation.
- Review refinancing and repayment plans for the $340.0 notes due March 2024 and the ABL facility maturing September 2023, including applicable covenants.
- Track customer concentration, receivable collections, and exposure to government-policy changes and natural-resource demand.
- Monitor noncash warrant and stock-based compensation remeasurement effects, and whether the authorized buyback proceeds under debt covenants and liquidity needs.