Target Hospitality Corp. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unless stated otherwise, dollar amounts below are in millions. Target provides workforce lodging, rentals, and hospitality services. The March 2019 business combination was accounted for as a reverse recapitalization; acquisitions and transaction-related costs affect period comparability.
Financial performance
- Third-quarter revenue: $81.6, up 35% from $60.3 a year earlier. Services income was $64.2, specialty rental income $14.2, and construction fee income $3.2.
- Third-quarter earnings: Gross profit was $38.6, a 47.2% margin versus 43.7%. Operating income was $23.0, compared with $7.9; net income was $9.6, compared with $0.8. Diluted EPS was $0.10 versus $0.02.
- Nine-month revenue: $245.0, up 70% from $144.4. Services income rose to $185.1 from $100.4; construction fee income rose to $16.8 from $2.7; specialty rental income was $43.1 versus $41.3.
- Nine-month earnings: Gross profit was $115.5, a 47.1% margin versus 44.4%. Operating income was $36.7 versus $18.7; net income was $6.2 versus $1.1. Diluted EPS was $0.07 versus $0.04. Interest expense increased to $24.1 from $15.0.
- Adjusted EBITDA, a non-GAAP measure: $40.6 for Q3 versus $31.2; $123.1 for nine months versus $72.9.
- Cash flow and investment: Nine-month operating cash flow was $44.2 versus $15.9. Investing cash outflow was $103.1, including $74.0 for specialty rental assets and $30.0 for the Superior acquisition. Cash declined by $8.7 to $3.5.
- Liquidity: Current assets were $56.0 and current liabilities $59.1, implying negative working capital of about $3.1. The $125.0 asset-based revolving facility had $70.0 outstanding; reported availability is not clearly stated in the provided filing text.
- Debt: $340.0 principal amount of 9.50% senior secured notes due 2024 and $70.0 drawn on the ABL facility due 2023. Total debt, net of financing discounts and costs and including financing obligations, was $392.9.
Changes and operating drivers
- Growth was led by the Permian Basin, where Q3 revenue increased 65% to $56.5, largely reflecting Signor, organic investment, and the 2019 Superior and ProPetro acquisitions. Government revenue was nearly flat at $16.8; Bakken revenue declined 19% to $6.0.
- Management reported 12,485 available Permian beds and 82.8% utilization in September 2019, versus 8,595 beds and 85.6% utilization in September 2018. For the nine-month comparison, it reported 11,687 available beds at 85.3% utilization versus 7,313 at 82.4%.
- Revenue and profit comparisons reflect acquisition timing, including Signor’s acquisition in September 2018 and Superior and ProPetro in 2019. Management noted a deceleration in Permian drilling activity during Q3. Bakken revenue also weakened, with lower daily rates and utilized bed nights.
- Nine-month SG&A rose to $66.8 from $35.1, including $38.1 of business-combination-related costs: $28.5 in transaction bonuses, $8.0 in transaction expenses, and $1.6 in officer-loan forgiveness. Q3 SG&A declined year over year as prior-year transaction costs fell.
Outlook, risks, and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management stated that cash, operating cash flow, and revolver borrowings were expected to cover debt service, working capital, growth plans, and other needs for at least the next 12 months, while cautioning that financing may not be available on acceptable terms.
- Demand depends on oil-and-gas activity and government housing programs. Commodity prices affect the business indirectly through customer activity; the company does not hedge crude-oil exposure. A 100-basis-point increase in floating rates was estimated to raise annual interest expense by about $0.7.
- Other stated risks include customer concentration, credit and collections, labor and material costs, supplier reliance, environmental and safety regulation, operational disruptions, acquisitions, and the ability to service debt. CoreCivic and Halliburton represented 20.6% and 12.6% of nine-month revenue, respectively.
- After quarter-end, the company auctioned non-strategic land and related assets with carrying value of about $8.1; estimated net proceeds were $1.2 and a pre-tax disposal loss of about $6.9 was expected in Q4 2019.
- The company authorized a $75.0 million share-repurchase program and had repurchased 828,600 shares for about $5.6 million by September 30. It reported no pending legal matter expected by management to materially affect its financial condition, and management concluded disclosure controls were effective.
Most important facts to verify
- How much borrowing capacity remained under the ABL facility after applying its borrowing-base limits and reserves.
- Whether Permian demand and utilization stabilized after the Q3 activity deceleration, and how the Bakken decline developed.
- Cash conversion and capital needs: operating cash flow was $44.2, while specialty rental asset purchases were $74.0 and cash ended at $3.5.
- The final Superior purchase-price allocation and the realized proceeds and loss on the post-quarter land sale.
- How recurring profitability compares with company-defined Adjusted EBITDA after separating acquisition, transaction, and other adjustment items.