Target Hospitality Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; financial statements are unaudited. Amounts below are in U.S. dollars. The company provides workforce lodging, specialty rentals and hospitality services, with significant exposure to oil and gas customers. It operated 26 locations at quarter-end. The filing was delayed under SEC COVID-19 relief, citing reduced staffing, restricted facility and system access, and additional work on COVID-related analysis and disclosures.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $71.7 million | $82.0 million | Down $10.3 million (13%) |
| Gross profit / margin | $27.1 million / 37.9% | $37.8 million / 46.0% | Down $10.6 million |
| Adjusted gross profit (non-GAAP) | $40.0 million | $47.7 million | Down 16% |
| Operating income (loss) | $14.1 million | $(10.9) million | Improved $24.9 million |
| Net income (loss) / margin | $3.8 million / 5.3% | $(14.0) million / (17.1%) | Improved $17.8 million |
| Adjusted EBITDA (non-GAAP) | $32.4 million | $41.3 million | Down $9.0 million (22%) |
| Operating cash flow | $10.6 million | $(6.7) million | Improved |
Revenue included $53.9 million of services, $16.6 million of specialty rental and $1.1 million of construction fees. Revenue from services fell 12%; construction fees fell about $6.0 million as TCPL project activity declined. Specialty rental income rose 21%, helped by new communities and acquisitions. Permian revenue fell 7%, with lower utilization and average daily rates (ADR); Government revenue was broadly stable, while Bakken revenue fell 12%. Total ADR declined to $77.82 from $83.00.
Net income improved largely because Q1 2019 included $38.1 million of Business Combination-related SG&A costs, including transaction bonuses and expenses. Excluding those costs, SG&A increased about $3.3 million year over year, reflecting public-company costs, severance, higher headcount and professional services, and stock compensation. Interest expense rose to $10.0 million from $4.0 million, primarily due to the post-combination debt. Adjusted EBITDA declined as lower revenue and segment profitability outweighed the lower one-time costs.
Financial position, debt and liquidity
- Cash and cash equivalents were $7.5 million at March 31, 2020, versus $6.8 million at year-end. Accounts receivable was $49.3 million, net of a $1.4 million doubtful-account allowance, up from $1.0 million.
- Total assets were $593.2 million; total liabilities were $465.3 million; stockholders’ equity was $127.9 million.
- Gross borrowings were $425.0 million: $340.0 million of 9.50% senior secured notes due 2024 and $85.0 million drawn under the asset-based revolving credit facility (ABL), against a stated facility size of up to $125 million. Availability depends on the borrowing base; the filing does not provide a clear amount of remaining borrowing availability.
- Capital lease and other financing obligations were $2.7 million. The notes’ carrying value, net of discounts and financing costs, was $324.0 million. The ABL matures in September 2023; the notes mature in March 2024. Contractual interest payments on the notes over the remaining term were estimated at $129.2 million.
- Operating cash flow of $10.6 million was below reported specialty-rental and other property purchases of $10.8 million. The company reported $9.9 million of “discretionary cash flows,” a non-GAAP measure defined as operating cash flow less maintenance capital expenditures; it is not equivalent to cash available after all capital spending.
- The company said cash on hand, operating cash flow and revolving borrowings were expected to support liquidity needs for at least 12 months, while cautioning that future financing and cash flows were uncertain. It reported $6.7 million of capital expenditures in Q1 and reduced planned 2020 growth capital spending by 50% to $5–$10 million; maintenance spending was estimated at $2–$4 million.
Material developments, outlook and risks
- Management expected further declines in revenue and profitability during the remainder of 2020 and said the pandemic’s full financial and liquidity effects could not be estimated reliably. It reported no material operating or supply-chain disruption in Q1, but the situation was changing rapidly.
- Cost actions initiated primarily in April included salary and workforce reductions, furloughs, lower discretionary spending and elimination of nonessential travel. Communities were temporarily closed or consolidated in the Permian in April; all Bakken communities were temporarily closed in May.
- In May, the company modified several oil and gas customer contracts, extending terms while reducing some 2020 minimum commitments. Management said the multi-year extensions were intended to preserve contract value and improve visibility into longer-term revenue and cash flow. The filing does not quantify the overall financial effect of these modifications.
- The company identified a goodwill impairment trigger and tested goodwill and long-lived assets. No impairment was recorded, but the Permian reporting unit’s estimated fair value exceeded its carrying value by less than 20%; further deterioration in forecasts or market conditions could result in impairment charges.
- Oil and gas sector weakness, customer liquidity and potential defaults, lower utilization, contract renegotiations, community closures, workforce reductions, and possible reductions in ABL borrowing-base availability were key risks. The company had $85 million of floating-rate borrowings; a 100-basis-point rate increase was estimated to raise annual interest expense by about $0.8 million. It does not hedge crude oil exposure.
- CoreCivic and Halliburton represented 23.2% and 10.6% of Q1 revenue, respectively. Management said it had not observed significant deterioration in receivable collectability to date, but future assessments could change. Ordinary-course lawsuits were not expected by management to have a material financial effect.
- Disclosure controls were judged effective as of March 31, 2020. A new accounting system and chart of accounts were implemented during Q1; management said it monitored controls through the conversion.
Most important facts for investors to verify
- Post-quarter customer contract modifications: revised minimum commitments, extensions, and implications for expected revenue, utilization and cash flow.
- Actual closure duration and reopening status of Permian and Bakken communities, and subsequent demand and ADR trends.
- ABL borrowing-base availability, covenant headroom and compliance, particularly if asset values or eligible receivables decline.
- Customer collections, receivable allowance adequacy and exposure to customer distress or bankruptcy.
- Whether updated operating forecasts trigger goodwill or long-lived-asset impairment, given the less-than-20% valuation cushion for the Permian reporting unit.
- Execution of the reduced capital budget and cash generation after total—not only maintenance—capital expenditures and debt service.