Target Hospitality Corp. — Q1 2022 Form 10-Q
Business context and reporting period. The company provides specialty lodging rentals and hospitality services to energy and natural-resource customers and government-related programs. This unaudited report covers the three months ended March 31, 2022, compared with Q1 2021. Target operated 29 communities at quarter-end.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $80.3 million | $45.5 million |
| Gross profit | $27.9 million | $11.5 million |
| Gross margin | 34.7% | 25.2% |
| Operating income (loss) | $12.4 million | ($4.1) million |
| Net income (loss) | $0.5 million | ($13.1) million |
| Adjusted EBITDA (non-GAAP) | $33.4 million | $16.0 million |
| Cash flow from operations | ($30.6) million | ($8.0) million |
- Revenue comprised $58.7 million of services income and $21.7 million of specialty rental income. Adjusted EBITDA was 41.6% of revenue, versus 35.1% in Q1 2021.
- Operating cash outflow included a $25.6 million decrease in deferred revenue and customer deposits; the company said approximately $24.9 million of revenue recognized in Q1 had been collected in 2021. Investing cash outflow was $2.8 million and financing cash inflow was $15.8 million, including $16.0 million borrowed under the ABL facility.
- Cash was $5.8 million at March 31, down from $23.4 million at year-end. Current assets were $54.6 million and current liabilities $32.8 million.
- Debt carrying value was $348.9 million, including $340 million face value of 9.50% secured notes due March 2024 and $16 million drawn on a $125 million ABL facility maturing September 2023. Notes interest is payable semiannually. The ABL has financial covenant tests when availability falls below specified thresholds.
Changes versus the prior comparable period
- Revenue rose 77%, driven mainly by Government segment growth and increased demand in HFS–South. Government revenue increased to $46.8 million from $18.0 million; HFS–South revenue rose to $31.6 million from $25.1 million.
- Management said Q1 consolidated revenue, adjusted gross profit and Adjusted EBITDA exceeded Q1 2020 pre-pandemic levels, largely due to Government growth. HFS–South and Midwest utilization, however, had not returned to pre-pandemic levels.
- The TCPL Keystone contract was terminated in 2021; no revenue was recorded in Q1 2022, versus $1.5 million in Q1 2021, and no further segment activity is expected.
- Net income improved from a loss to a small profit. Higher operating income was partly offset by income tax expense and a $1.2 million non-cash loss from the increase in fair value of warrant liabilities.
Outlook, risks and unusual items
- Management believed cash on hand, operating cash flow and ABL availability would fund debt service, working capital, leases and growth needs for at least the next 12 months. The filing provides no numerical earnings or revenue guidance.
- Key exposures include government-contract and customer demand, natural-resource activity and commodity-price-driven demand, COVID-19 or other disruptions, labor and supply costs, interest rates, customer collections, and environmental and regulatory obligations. The company does not hedge commodity exposure.
- Two customers represented 41% and 17% of Q1 revenue; the largest represented 18% of receivables at quarter-end. One supplier represented 21.5% of purchases.
- The 2024 notes require $340 million principal repayment in 2024; scheduled interest payments through maturity were estimated at $64.6 million. Management stated it could not assure future financing would be available on acceptable terms.
- Management reported ordinary-course lawsuits and claims and did not expect pending matters to materially affect financial condition or results, while noting litigation outcomes are uncertain. Disclosure controls were assessed as effective.
- Q1 included cancellation of 5.0 million escrowed founder shares, reclassified to treasury stock. The warrant liability rose to $2.8 million from $1.6 million, producing a non-cash expense. The effective tax rate was 68.8%, reflecting, among other items, state taxes on gross receipts and nonrecognition of certain tax benefits.
Important facts for investors to verify
- Whether Government-segment growth and concentrated customer relationships are durable, and how contract terms or funding affect revenue.
- Cash conversion and working-capital trends, particularly deferred revenue, receivables and the significant Q1 operating cash outflow.
- Liquidity and refinancing plans for the ABL maturity in 2023 and $340 million notes maturity in 2024, including covenant headroom and borrowing availability.
- Whether HFS–South and Midwest utilization recovers to pre-pandemic levels and how commodity activity, labor and operating costs affect margins.
- Changes in warrant and liability-based compensation valuations, which can create earnings volatility and additional expense.