Target Hospitality Corp. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are to the corresponding 2020 periods. Amounts are in U.S. dollars. Target provides modular workforce accommodations and related hospitality services, serving government and energy customers, among others. It operated 26 communities at quarter-end.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $89.2m | $48.3m | $209.6m | $173.5m |
| Gross profit | $33.6m | $11.7m | $72.1m | $47.1m |
| Gross margin | 37.7% | 24.3% | 34.4% | 27.1% |
| Operating income (loss) | $16.7m | $(0.9)m | $23.4m | $6.7m |
| Net income (loss) | $6.7m | $(7.6)m | $(7.4)m | $(15.8)m |
| Adjusted EBITDA | $37.5m | $17.0m | $85.4m | $62.7m |
| Net cash from operating activities | Not stated for the quarter | $99.4m | $28.6m |
Q3 revenue rose 85%, primarily from Government segment growth and recovering demand in the South segment. For the first nine months, revenue increased 21%; Government revenue more than doubled to $109.3m, while South and Midwest revenue remained below prior-year levels. Q3 net income improved to $0.07 per share from a loss of $0.08 per share; the nine-month loss was $0.08 per share.
Nine-month operating cash flow included a $49.5m cash-flow benefit from deferred revenue and customer deposits, as well as growth in Government collections. Investing cash outflow was $24.0m, mainly specialty rental asset purchases; financing cash outflow was $51.8m, including repayment of ABL borrowings. Cash was $30.6m at September 30, 2021, versus $7.0m at year-end 2020.
Debt included $340m principal of 9.50% senior secured notes due March 2024, recorded net of discounts and financing costs at $329.2m. The $125m ABL facility had no outstanding balance at quarter-end; it matures in September 2023. Capital lease and other financing obligations were approximately $0.1m. Management said cash on hand and expected funding sources should cover debt service, working capital, and other needs for at least the next 12 months. The notes require substantial interest payments; the filing estimates $80.8m over their remaining term.
Material changes, outlook, and risks
- Demand and margins: Management reported improving customer activity from 2020 lows, particularly in the South and Government segments, but energy-region utilization remained below pre-pandemic levels. Nine-month average daily rate fell to $74.57 from $79.62, reflecting lower South and Midwest rates.
- TC Energy contract termination: The Keystone XL project was suspended and canceled; the contract was terminated under a July 2021 settlement. The company collected an approximately $5m termination fee and recognized approximately $4.9m of deferred revenue as construction fee income. No further revenue is expected from the contract.
- One-time and non-cash items: Q3 results included a $1.1m gain from changes in warrant fair value; the nine-month period included a $1.6m warrant fair-value loss. Prior-year 2020 figures were restated for warrant accounting; the restatement decreased 2020 net loss by approximately $0.3m for Q3 and $2.5m for the nine-month period. Nine-month SG&A also included costs related to a withdrawn $1.50-per-share acquisition proposal; the company said no further proposal-related costs were expected.
- COVID-19 and operating exposure: The filing cites continuing uncertainty from COVID-19 variants, economic demand, and oil and gas activity. Government vaccination or testing requirements could affect staffing and supplier costs. The company also identifies labor, input-cost, regulatory, weather, customer-credit, and contract risks.
- Concentration: Two customers represented 32% and 20% of nine-month revenue. Four suppliers accounted for 21.6%, 19.3%, 15.8%, and 12.7% of purchases. The company depends substantially on government contracts and geographically remote workforces.
- Other developments: On October 1, 2021, the company purchased primarily modular assets used in its Government segment for $6.2m, funded with cash. It reported no material legal contingencies expected by management, and no off-balance-sheet arrangements with a material effect.
The filing provides no specific forward financial guidance. Management’s outlook is conditional on maintaining contracts, securing new business, customer demand, and managing operating costs. The company reported disclosure controls and procedures were effective as of September 30, 2021.
Investor verification priorities
- Assess how much of the strong nine-month operating cash flow came from customer advances and deferred revenue, and whether those balances convert into recognized revenue and cash collections as expected.
- Review Government contract terms, customer concentration, contract duration, and the sustainability of the segment’s growth and margins.
- Monitor South and Midwest utilization and average daily rates relative to pre-pandemic levels, as well as energy-sector customer credit and collections.
- Evaluate refinancing or repayment plans for the $340m notes due in 2024, their 9.50% coupon, and ABL availability and covenant conditions.
- Confirm the implications of the TC Energy termination for future revenue, costs, and segment reporting, and track the use of cash for asset purchases and capital investment.
- Consider the effect of warrant-liability remeasurement and the 2020 restatement when comparing reported earnings across periods.