Target Hospitality Corp. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Financial statement amounts are in $ millions unless otherwise noted. The company provides workforce lodging, specialty rentals, and hospitality services across energy, government, and other markets. The March 2019 business combination was accounted for as a reverse recapitalization; the 2018 periods reflect the accounting predecessors. Comparisons are affected by the September 2018 Signor acquisition and are not fully like-for-like.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $81.4 | $45.5 | $163.3 | $84.1 |
| Gross profit | $39.2 | $21.7 | $76.9 | $37.8 |
| Operating income | $24.6 | $11.9 | $13.7 | $10.7 |
| Net income (loss) | $10.6 | $4.4 | $(3.4) | $0.2 |
| Net income (loss) per diluted share | $0.11 | $0.17 | $(0.04) | $0.01 |
| Adjusted EBITDA (non-GAAP) | $41.2 | $22.9 | $82.5 | $40.6 |
| Cash from operations | Not stated for quarter | Not stated for quarter | $18.8 | $7.0 |
Q2 gross margin was approximately 48.1% versus 47.8%; operating margin was approximately 30.2% versus 26.2%. Revenue increased 79% in Q2, driven mainly by Signor and organic Permian Basin growth, plus construction-fee revenue. The Permian Basin produced $52.0 million of Q2 revenue, up 153%; Government revenue was broadly flat at $16.7 million, while Bakken revenue declined 19% to $5.7 million. Q2 total available beds increased to 11,401 from 6,770 a year earlier, with reported utilization of 86% versus 84%.
For the first half, revenue increased 94%, but reported net loss was $3.4 million. Selling, general and administrative expense rose to $55.7 million, including $38.1 million of business-combination-related expenses: $28.5 million in transaction bonuses, about $8.0 million of transaction costs, and $1.6 million of officer-loan forgiveness expense. Higher interest and depreciation also weighed on results. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as operating cash flow or freely available cash.
Balance sheet, debt, liquidity, and cash flow
- At June 30, cash and cash equivalents were $10.4 million; current assets were $66.1 million and current liabilities $64.9 million. Accounts receivable was $51.7 million, net of a $0.335 million allowance.
- Debt included $340 million principal of 9.50% senior secured notes due March 2024 and $70 million drawn on the asset-based revolving facility (ABL), with capacity up to $125 million subject to the borrowing base. Debt carrying value, net of note discount and financing costs, was $391.8 million; gross principal borrowings were $410 million. The ABL matures in September 2023.
- Six-month operating cash flow was $18.8 million; investing cash outflow was $75.9 million, including $46.7 million of specialty-rental asset purchases and the $30 million Superior acquisition; financing cash inflow was $55.4 million. Cash ended the period at $10.4 million.
- Management stated that cash, operating cash flow, and revolver borrowings were expected to provide sufficient liquidity for at least the next 12 months. The company incurred $48.9 million of capital expenditures in the first half, excluding Superior; 2019 growth-capex timing and amount were described as discretionary.
Material changes, outlook, and risks
- The March 15 business combination involved approximately $1.311 billion of consideration, including $563.1 million cash paid to the Algeco seller, funded in part by $340 million of notes, ABL borrowings, and recapitalization proceeds. Shares outstanding were 105.2 million at June 30; 5.0 million founder shares were held in escrow subject to stock-price earnout triggers.
- In June, the company acquired three Superior workforce communities for $30 million, adding 575 rooms; purchase-price allocations were provisional. On July 1, it acquired a 168-room community for $5 million, with an amended customer agreement to lease additional rooms.
- No specific quantitative earnings or revenue guidance was provided. Management cited elevated Permian activity and expected sustained regional activity, while noting demand depends on customer activity, workforce levels, oil and gas investment, and government programs. The company is not directly exposed to oil prices but may be affected indirectly through customer activity.
- Key risks include oil-and-gas demand volatility, customer and government-program concentration, immigration-facility-related policy, reputational and legal risks, environmental and regulatory compliance, weather and operational disruptions, labor and input-cost increases, customer credit and collection risk, and the ability to service or refinance debt. A 100-basis-point increase in floating rates was estimated to raise annual interest expense by about $0.7 million. The company does not hedge crude-oil exposure.
- The company reported ordinary-course legal claims and stated management did not expect pending matters to materially affect its financial condition; outcomes remain uncertain. Management concluded disclosure controls were effective as of June 30, 2019.
Important facts for investors to verify
- How much of revenue and adjusted EBITDA growth reflects acquisition and construction activity versus sustainable organic demand, particularly in the Permian and Bakken regions.
- Whether operating cash flow and available ABL borrowing capacity can fund debt service, working capital, acquisitions, and planned capital expenditures; confirm borrowing-base availability and covenant headroom.
- The recurring earnings impact of 9.50% notes, higher depreciation and amortization, and public-company costs after excluding transaction-related items.
- Customer concentration and exposure to government immigration-policy changes, including the South Texas Family Residential Center contract.
- The filing reports cash decreasing by $1.801 million in the cash-flow statement, while the MD&A cash-flow summary states a $1.657 million decrease. The filing text does not reconcile this discrepancy; verify the correct figure.