Target Hospitality Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Target Hospitality was formed on March 15, 2019, when the business combination closed. The statements use reverse-recapitalization accounting and include the operating history of Target and Signor; Signor’s results are included from its September 2018 acquisition. Comparisons with Q1 2018 are therefore affected by the acquisition and transaction-related items.
Business context and performance
The company provides workforce lodging, specialty rentals, and hospitality services to energy, government, and other customers. It reported 21 locations at quarter-end. Management attributed growth primarily to Signor and organic Permian Basin expansion, as well as construction work on the TransCanada/Keystone XL project.
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $82.0 million | $38.6 million |
| Gross profit | $37.8 million | $16.1 million |
| Operating loss | $(10.9) million | $(1.2) million |
| Net loss | $(14.0) million | $(4.2) million |
| Net loss per share, basic and diluted | $(0.18) | $(0.16) |
| Net cash from operating activities | $(6.7) million | $3.5 million |
| Capital expenditures | $14.7 million for specialty rental assets; $0.04 million for other property and equipment | $21.9 million and $0.2 million, respectively |
| Adjusted EBITDA (non-GAAP) | $41.3 million | $18.2 million |
Gross margin was approximately 46.0%, versus 41.7% a year earlier; operating margin was approximately negative 13.3%. Adjusted EBITDA is a company-defined non-GAAP measure and includes substantial adjustments, including transaction-related costs.
Revenue drivers and material changes
- Revenue increased $43.3 million, or 112%, year over year. Services income rose to $61.1 million from $24.9 million; specialty rental income was $13.7 million in both periods; construction fee income contributed $7.2 million versus none a year earlier.
- Permian Basin revenue increased to $52.7 million from $15.7 million, largely due to Signor and organic growth. Management reported total beds rising from 6,796 to 11,768, utilization increasing from 77% to 87%, and overall average daily rate increasing from $80.8 to $82.4. Permian available beds increased from 2,070 to 7,279.
- Government revenue was approximately flat at $16.6 million. Bakken revenue declined 14% to $4.8 million, with lower utilization and average daily rate cited as factors. All Other revenue rose to $7.9 million, principally reflecting the TCPL construction project.
- Net loss widened despite higher revenue. Selling, general and administrative expense increased to $44.8 million and included approximately $38.1 million of business-combination costs: $28.5 million in transaction bonuses, $8.0 million in transaction expenses, and $1.6 million of officer-loan compensation expense. Lower restructuring costs partly offset the increase.
Cash, debt, and liquidity
- Cash and cash equivalents were $23.1 million at March 31, 2019, up from $12.2 million at December 31, 2018. Current assets were $82.6 million and current liabilities $80.4 million.
- Operating cash flow was negative $6.7 million, compared with positive $3.5 million in Q1 2018. Management identified the $28.5 million transaction-bonus payment as a principal driver. Investing cash outflow was $14.0 million; financing provided $31.7 million, reflecting the business combination and new borrowing.
- At quarter-end, debt included $340 million of 9.50% senior secured notes due March 2024 and $40 million drawn under a new asset-based revolving facility with commitments of up to $125 million and maturity in September 2023. Net carrying debt, including the revolver and after note discount and financing costs, was approximately $360.5 million; gross principal debt was $380 million, excluding leases. The company also had $1.0 million of current capital-lease obligations.
- The notes require semiannual interest payments; the filing estimates $32.3 million of annual interest on their face amount. The ABL is floating-rate. Management estimated that a 100-basis-point rate increase would raise annual interest expense by about $0.4 million based on quarter-end floating-rate borrowings.
- Management stated that cash on hand, operating cash flow, and revolver borrowings were expected to fund debt service, working capital, and planned needs for at least the next 12 months, while cautioning that future financing may not be available on acceptable terms.
Outlook, risks, and unusual items
- No specific revenue, earnings, or capital-spending guidance was provided. Management described 2019 capital spending as discretionary and dependent in part on contracts and growth opportunities.
- Demand is indirectly exposed to oil and gas activity and prices, as well as government housing programs. The company said it does not hedge crude-oil exposure.
- Customer and supplier concentration is material: CoreCivic and Halliburton represented 19.8% and 12.7% of Q1 revenue. One customer accounted for 22.6% of accounts receivable at quarter-end. Four suppliers represented 27.7%, 25.3%, 12.5%, and 11.4% of goods purchased.
- The ABL facility includes financial tests that apply when excess availability falls below specified thresholds, including a minimum fixed-charge coverage ratio of 1.00:1.00 and maximum total net leverage ratio of 4.00:1.00. The notes and ABL also contain restrictive covenants and collateral arrangements.
- Other disclosed risks include changing energy-market demand, labor and materials costs, environmental and regulatory compliance, severe weather or operational disruption, collection of receivables, and litigation. Management said pending claims were not expected to have a material effect, while noting litigation outcomes remain uncertain.
- The business combination involved substantial one-time expenses and financing changes. The new notes were issued at 9.50%; the filing also reported a $0.9 million loss on extinguishment of debt related to the ABL modification. The company reported no material off-balance-sheet arrangements and no further restructuring costs expected as of quarter-end.
- Subsequent to quarter-end, the company filed resale and warrant registration statements. An April 17 share distribution reduced TDR’s ownership from approximately 71% to 62%.
Important facts for investors to verify
- How much of the revenue and Permian growth is sustainable organic growth versus acquired Signor activity, and how occupancy and rates develop after quarter-end.
- The cash cost and nonrecurrence of transaction bonuses, transaction expenses, and officer-loan forgiveness; reconcile reported losses with management’s adjusted EBITDA presentation.
- Actual availability under the borrowing-base-limited ABL facility, covenant headroom, cash requirements for interest, and the company’s ability to manage its debt burden.
- Progress, costs, margins, and timing on the TCPL/Keystone XL construction work, including exposure to project estimates and change orders.
- Customer receivable concentration and collection performance, alongside dependence on energy-sector activity and key suppliers.