Target Hospitality Corp. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; filed November 9, 2020. Amounts are in U.S. dollars. The company provides workforce lodging, specialty rentals, hospitality services and construction services across energy, government and other markets.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $48.3M | $81.6M | $173.5M | $245.0M |
| Gross profit | $11.7M | $38.6M | $47.1M | $115.5M |
| Gross margin | 24.3% | 47.2% | 27.1% | 47.1% |
| Operating income (loss) | ($0.9M) | $23.0M | $6.7M | $36.7M |
| Net income (loss) | ($7.9M) | $9.6M | ($18.3M) | $6.2M |
| Adjusted EBITDA (non-GAAP) | $17.0M | $40.6M | $62.7M | $123.1M |
- Q3 revenue fell 41% year over year; services income declined $39.9M, partly offset by higher construction fee income. Nine-month revenue decreased 29%.
- Energy-market weakness drove steep drops in Permian revenue (down 66% in Q3) and Bakken revenue (down 81%). Government revenue was relatively stable. Keystone XL-related construction revenue supported the All Other category.
- Interest expense was $9.9M in Q3 and $30.1M for the nine months. Q3 diluted loss per share was $0.08; nine-month diluted loss per share was $0.19.
- Cash from operations was $28.6M for the nine months, versus $44.1M in 2019. Investing used $10.3M and financing used $16.0M; cash increased $2.3M to $9.1M.
Balance sheet, debt and liquidity
- At September 30, cash was $9.1M, accounts receivable $33.5M, current assets $48.5M and current liabilities $33.1M. Total assets were $551.5M and stockholders’ equity $107.8M.
- Borrowings comprised $340M of 9.50% senior secured notes due March 2024 and $70M drawn on the asset-based revolving credit facility, which has a stated $125M maximum commitment, is subject to a borrowing base and matures in September 2023. The company also reported $1.5M of capital lease and other financing obligations.
- Management said cash on hand, operating cash flow and revolver borrowings were expected to provide sufficient liquidity for at least 12 months, while warning that financing access and borrowing-base availability could change.
- Accounts receivable declined from $48.5M at year-end 2019; the allowance for doubtful accounts rose to $2.5M from $1.0M. The filing cites customer financial distress, bankruptcies and collection risks.
Material changes, outlook and risks
- COVID-19 and the oil-and-gas downturn materially reduced customer activity and utilization. The company cut costs, reduced staffing and discretionary spending, and temporarily closed or consolidated communities; it began reopening Permian and Bakken locations in July as demand improved.
- Management reduced planned 2020 capital expenditures by 50% to $8M–$12M, excluding acquisitions; $7.7M had been incurred through September. It said uncertainty prevented a reliable estimate of the pandemic’s future effects.
- Customer contract modifications extended terms while reducing minimum commitments in 2020. The Government services contract was extended through September 2026 on substantially similar economics. The extension spreads deferred revenue over a longer term; management expected associated non-cash revenue to fall by about $3M per quarter beginning Q4 2020.
- First-quarter impairment testing found no impairment, but Permian goodwill fair value exceeded carrying value by less than 20%. Management reported no further impairment trigger in Q3; changed forecasts or market conditions could still lead to impairment.
- CoreCivic and TransCanada Keystone Pipeline represented 29% and 16% of nine-month revenue, respectively. Customer concentration and collection exposure are material considerations.
- On November 5, 2020, a TDR affiliate made an unsolicited, non-binding proposal to acquire shares it did not already own for $1.50 per share. An independent-director special committee was to review it; no transaction was assured.
- The company disclosed ordinary-course lawsuits and claims, with management not expecting pending matters to materially affect financial condition or results. It reported no off-balance-sheet arrangements considered materially consequential.
Important facts for investors to verify
- Whether improving Permian and Bakken activity translated into sustained utilization, revenue and cash flow after Q3.
- Receivable aging, subsequent collections, customer bankruptcies and adequacy of the doubtful-account allowance.
- Revolver borrowing-base availability, covenant headroom, debt-service capacity and refinancing needs ahead of the 2023 and 2024 maturities.
- Progress and economics of the non-binding $1.50-per-share proposal, including the independent committee’s review and any subsequent company announcement.
- Whether the Permian reporting unit’s limited goodwill valuation cushion or continued market weakness resulted in later impairment charges.