Target Hospitality Corp. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. The company provides specialty-rental lodging and hospitality services, operating approximately 13,800 beds across 25 sites, primarily in the Permian and Bakken basins, and a family residential center in Texas.
Financial and operating performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $321.1 million | $240.6 million |
| Gross profit / gross margin | $147.0 million / 45.8% | $90.2 million / 37.5% |
| Operating income / operating margin | $48.2 million / 15.0% | $40.9 million / 17.0% |
| Net income / diluted EPS | $6.2 million / $0.07 | $5.0 million / $0.12 |
| Adjusted EBITDA / margin | $159.2 million / 49.6% | $116.8 million / 48.6% |
| Cash from operations | $60.5 million | $26.2 million |
| Cash and cash equivalents at year-end | $6.8 million | $12.2 million |
| Total debt, net of discounts and financing costs | $405.2 million | $23.0 million |
Amounts are in U.S. dollars. Adjusted EBITDA and its margin are non-GAAP measures; adjusted EBITDA is not cash available for discretionary use.
Fourth-quarter results
Q4 2019 revenue was $76.1 million, gross profit $31.5 million, operating income $11.5 million, and net income $0.1 million (reported EPS: $0.00). Q4 2018 revenue was $96.2 million, gross profit $26.0 million, operating income $22.2 million, and net income $3.9 million. The filing does not provide a clear explanation for the full year-over-year quarterly revenue decline in the excerpted discussion; it identifies a $6.9 million loss on land sales in Q4 2019.
Business mix and changes versus prior year
- Revenue increased 33% year over year, primarily from Permian growth, acquisitions and organic expansion. The Permian generated $214.5 million (66.8% of revenue), up 78%; Government generated $67.0 million (20.9%), approximately flat; Bakken generated $20.6 million (6.4%), down 20%; and All Other generated $19.0 million.
- Adjusted EBITDA increased 36% to $159.2 million, and operating cash flow rose 131%. Average utilization was 82.7%, versus 83.7%; average daily rate declined to $81.20 from $82.70.
- Signor was included for a full year in 2019 but only from September 2018 in the prior-year results. 2019 also included the Superior and ProPetro acquisitions. The Business Combination closed March 15, 2019; historical periods reflect the accounting predecessors, so comparisons are not fully like-for-like.
- Net income improved modestly despite higher revenue because interest expense rose to $33.4 million from $24.2 million, and SG&A included $38.1 million of Business Combination costs. These included $28.5 million of transaction bonuses, $8.0 million of transaction expenses and $1.6 million of forgiven executive loans. 2018 included a $15.3 million impairment charge; 2019 did not.
Cash, debt and liquidity
Year-end current assets were $60.8 million and current liabilities $60.9 million, with cash of $6.8 million and accounts receivable of $48.5 million. Cash declined $5.6 million during 2019. Investing activities used $112.7 million, including $84.7 million of specialty-rental asset purchases and $30.0 million for the Superior acquisition. The company reported $85.9 million of capital expenditures excluding Superior.
Debt comprised $340 million of 9.50% senior secured notes due March 2024 and $80 million drawn under a $125 million asset-based revolver maturing September 2023, plus approximately $2.0 million of lease and other financing obligations. Scheduled interest on the notes is $32.3 million annually. Management said available cash, operating cash flow and revolver access were expected to fund obligations and needs for at least the next 12 months, while cautioning that future financing may not be available on acceptable terms. The filing reports no material off-balance-sheet arrangements.
Outlook, commentary and risks
- No quantified company revenue or earnings guidance is provided. Management cited multi-year customer contracts, contract renewals and Permian activity as support for revenue visibility, while noting that demand depends on customer capital spending, energy activity and government immigration programs.
- Management reported fourth-quarter renewals and extensions with four oil-and-gas customers representing about 20% of 2019 energy-segment revenue. It also described disciplined growth spending, generally tied to contracted demand, and estimated maintenance capital at approximately 1% of annual revenue.
- Contracted future revenue disclosed for fixed-price, fixed-quantity performance obligations lasting more than one year was $58.7 million. This is only a subset of expected revenue and is not necessarily indicative of total future revenue.
- Customer and segment concentration are material: CoreCivic represented 20.8% of 2019 revenue and Halliburton 12.5%; the top five customers represented approximately 52%. Government-segment revenue depends on federal funding and the CoreCivic agreement, scheduled to expire in September 2021, is exposed to policy, legal and renewal risks.
- Other principal risks include energy-sector downturns and commodity-driven customer spending reductions, customer credit and payment risk, labor and operating-cost inflation, competition, regulation and environmental compliance, litigation and reputational risks tied to family residential facilities, and the company’s substantial debt and covenant restrictions. The Keystone XL pipeline contract remains subject to a final investment decision, formal notice to proceed and legal challenges; it is terminable by TCPL on ten days’ notice, subject to specified fees for work performed.
- The company repurchased 4.4 million shares for approximately $23.6 million under a $75 million authorization and paid no cash dividend. Management assessed disclosure controls and internal control over financial reporting as effective at year-end; the auditor issued an unqualified opinion on the financial statements but was not engaged to audit internal control.
Most important facts for investors to verify
- Whether operating cash generation and the $125 million borrowing-base revolver provide adequate liquidity given low cash balances, growth spending and substantial debt service.
- The sustainability of Permian growth and pricing, and the causes of the Q4 revenue decline and lower average daily rate.
- CoreCivic contract funding, renewal prospects and exposure to immigration-policy or legal changes before its September 2021 expiration.
- The extent to which reported adjusted EBITDA depends on add-backs, including transaction bonuses, transaction expenses and other adjustments.
- Customer concentration, receivables collectability and the increase in the doubtful-account allowance from $0.04 million to $0.99 million.
- Progress and potential value of the Keystone XL contract, which had not received full release and remained contingent on project approval.