Target Hospitality Corp. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Target provides workforce lodging, specialty rentals, and hospitality services, primarily to energy and government customers. Comparative Q1 2020 figures were restated for warrant accounting.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020, restated |
|---|---|---|
| Revenue | $45.5 million | $71.7 million |
| Gross profit | $11.5 million | $27.1 million |
| Operating income (loss) | $(4.1) million | $14.1 million |
| Net income (loss) | $(13.1) million; $(0.14) per share | $5.5 million; $0.06 per share |
| Adjusted EBITDA, non-GAAP | $16.0 million | $32.4 million |
| Cash from operating activities | $(8.0) million | $10.6 million |
| Capital expenditures | $3.2 million | $10.8 million for specialty rental assets, plus other PP&E |
Revenue fell 37%; gross profit fell 58%. Gross margin was approximately 25% versus 38% in the prior-year quarter. Adjusted EBITDA declined approximately 51%. The filing attributes the deterioration principally to lower energy-market activity and utilization.
Cash and cash equivalents were $6.4 million at March 31, versus $7.0 million at year-end 2020. Total liabilities were $435.8 million. Debt included $340 million principal on 9.50% senior secured notes due March 2024 and $60 million drawn on the asset-based revolver, up $12 million during the quarter. The revolver has a $125 million stated facility size, subject to borrowing-base limits, and matures in September 2023. April 2021 subsequent to quarter-end, the company paid down approximately $21 million of the ABL balance; the filing does not state the resulting balance.
Operating cash outflow and lower cash balances indicate liquidity pressure. Management said cash on hand, operating cash flow, and revolver borrowings were expected to provide sufficient liquidity for at least 12 months, while cautioning that future financing may not be available on acceptable terms. The notes require $340 million principal repayment in 2024; the ABL has $60 million scheduled in 2023 under the maturity table.
Material changes and business developments
- Permian revenue decreased 49% to $25.1 million; adjusted gross profit decreased 60% to $10.7 million. Bakken revenue fell 86% to $0.6 million, with adjusted gross loss of $0.5 million.
- Government revenue increased 9% to $18.0 million, supported in part by a new contract that began March 18. The company described the approximately $118 million agreement as fully committed over its initial one-year term and backed by a committed U.S. Government contract.
- The TCPL Keystone project was suspended in January 2021 after revocation of the Keystone XL Presidential Permit. The company expects construction and related segment revenue to be substantially eliminated going forward.
- The company reported 26 communities. Average daily rate across Government, Permian, and Bakken was $70.01, down from $77.82.
- The prior-year quarter was restated for private-warrant liability accounting; the restatement increased Q1 2020 net income by approximately $1.7 million.
Outlook, risks, and unusual items
No quantified full-year financial guidance is provided. Management reported improving Permian customer activity during Q1 from the 2020 lows, but said the outlook remained uncertain and it could not reliably estimate the continuing impact of COVID-19. The company cited cost reductions, community closures and consolidations, and contract modifications with extended terms and lower minimum commitments as responses to reduced energy demand.
- Key risks include continued COVID-19 effects, oil and gas price and activity volatility, customer payment delays or defaults, customer and industry concentration, and the company’s ability to collect receivables. One customer represented 29.7% of Q1 revenue; the largest customer represented 14% of receivables at quarter-end.
- The company had $30.9 million in accounts receivable and an allowance for doubtful accounts of $2.7 million. Management reported deterioration in collectability and anticipated further collection challenges amid uncertainty.
- Interest-rate exposure: $60 million of floating-rate debt at quarter-end; a 100-basis-point increase would raise annual interest expense by approximately $0.6 million, based on quarter-end balances and rates.
- Q1 included a $0.6 million loss from warrant fair-value changes, compared with a $1.7 million gain in Q1 2020. The 2021 result is a non-cash valuation item.
- SG&A increased to $11.3 million, partly due to legal and advisory costs related to a non-binding $1.50-per-share acquisition proposal from a TDR affiliate; the proposal was withdrawn March 29, and the company did not expect further related costs.
- Management stated that disclosure controls were effective at March 31 and that the previously reported warrant-accounting material weakness had been remediated as of April 30, 2021.
- Management said pending ordinary-course lawsuits were not expected to materially affect financial condition, while noting litigation outcomes remain uncertain. The filing reports no off-balance-sheet arrangements with a material effect.
Investor verification priorities
- Track utilization, customer activity, and revenue recovery in the Permian and Bakken, and assess how much improvement is reflected in subsequent results.
- Verify performance, duration, and cash collection under the new approximately $118 million Government-supported contract, including customer concentration implications.
- Confirm the post-April ABL balance, borrowing-base availability, covenant headroom, and ability to meet the 2023 revolver and 2024 note maturities.
- Review operating cash flow, receivables aging, customer credit quality, and allowance adequacy.
- Monitor the Keystone suspension’s revenue and asset implications, and any impairment indicators as market assumptions change.
- Review the restated warrant accounting and the effectiveness of controls implemented to prevent recurrence.