Target Hospitality Corp. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Unless noted otherwise, financial amounts below are in millions of dollars. The financial statements received an unqualified audit opinion.
Business context
Target Hospitality provides specialty workforce accommodations and hospitality services, operating 26 communities with approximately 13,770 beds. Its principal markets are the Permian and Bakken oil-and-gas basins and U.S. government services. Revenue comes from lodging and hospitality, facility leasing, and construction services. The business is contract-based, but is exposed to customer activity, commodity cycles, government policy and major-customer concentration.
Financial and operating results
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Revenue | $225.1 | $321.1 |
| Gross profit | $57.2 | $147.0 |
| Operating income | $4.1 | $48.2 |
| Net income (loss) | $(27.5) | $6.2 |
| Adjusted EBITDA (non-GAAP) | $78.5 | $159.2 |
| Cash from operating activities | $46.8 | $60.5 |
| Cash and cash equivalents at year-end | $7.0 | $6.8 |
| Total debt, net of discounts and financing costs | $378.3 | $405.2 |
- Gross margin was approximately 25.4%, compared with 45.8% in 2019; operating margin was approximately 1.8%, compared with 15.0%.
- Revenue mix: 58.8% specialty rental with vertically integrated hospitality, 23.5% facility leasing and 17.7% construction fee income.
- By segment, revenue was $112.1 Permian Basin (49.8% of total), $63.3 Government (28.1%), $41.9 TCPL Keystone (18.6%), $6.6 Bakken Basin (2.9%) and $1.2 All Other.
- Average utilization fell to 47.8% from 82.7%; average daily rate decreased to $77.40 from $81.20.
- Fourth-quarter 2020 revenue was $51.6, gross profit $10.1, operating loss $2.6 and net loss $9.2.
- Year-end current assets were $43.6 and current liabilities $45.5. The $125 million asset-based revolving facility had $48 million outstanding; remaining borrowing availability is not clearly stated in the supplied filing text.
- The company reported $9.1 of 2020 capital expenditures. Operating cash flow less maintenance capital expenditures was $45.9, a non-GAAP measure defined by the company.
Material changes versus the prior comparable period
- Revenue declined $95.9, or 30%, and Adjusted EBITDA fell $80.7, or 50.7%; the company moved from net income to a net loss.
- The main driver was reduced customer activity amid COVID-19 and oil-price volatility. Permian revenue declined 48% and Bakken revenue 68%; communities were temporarily closed or consolidated, then some reopened from July as demand improved.
- TCPL Keystone revenue increased to $41.9 from $15.7, primarily from construction work. This increase was temporary: the project was suspended in January 2021 after revocation of the Keystone XL Presidential Permit, substantially reducing expected future project revenue.
- Operating cash flow declined 22.7%. The company attributed the decrease to lower revenue and higher interest payments, partly offset by working-capital movements. Investing cash outflow decreased to $10.9 from $112.7, reflecting lower capital spending and no 2020 acquisitions.
- Debt declined from $405.2 to $378.3 net carrying value, primarily as the company repaid $32 million of previously drawn ABL borrowings. The $340 million 9.50% senior secured notes remain due March 2024; the ABL facility matures September 2023.
Outlook, risks and unusual items
- Management said it could not reliably estimate COVID-19’s future effects. It described improving demand in the second half of 2020, while emphasizing continued uncertainty and a focus on service quality, returns and cash flow. No quantified FY 2021 guidance is provided.
- In March 2021, the company entered a government-backed humanitarian-services agreement valued at approximately $118 million, fully committed for an initial one-year term beginning March 18, 2021.
- Management stated that cash on hand, operating cash flow and ABL borrowings were expected to support liquidity needs for at least the next 12 months, while noting that future financing may not be available on acceptable terms.
- Customer concentration is significant: CoreCivic accounted for 28.1% and TC Energy Keystone Pipeline for 18.6% of 2020 revenue; the top five customers accounted for approximately 65%. The Government segment depends on government funding and policy, and the CoreCivic contract is scheduled through September 2026 but may be affected by government action or termination provisions.
- COVID-19 and the energy downturn contributed to higher credit risk: bad-debt expense, net of recoveries, was approximately $4.0, and the allowance for doubtful accounts rose to $3.0 from $1.0.
- Leverage and debt service are important risks: the notes carry a 9.50% coupon, and 2024 notes principal of $340 million is due that year. Debt covenants, borrowing-base changes and floating-rate exposure may constrain liquidity; a 100-basis-point rate increase was estimated to add about $0.5 of annual interest expense on year-end floating-rate debt.
- Other key risks include oil-and-gas spending and commodity prices, immigration policy and public opposition to family residential facilities, contract renewals, regulatory and environmental compliance, labor and operating costs, litigation, and possible impairment. Goodwill was not impaired in 2020, but the Permian reporting unit’s estimated fair value exceeded carrying value by less than 20% at the March assessment.
- The board’s special committee stopped evaluating an affiliate’s non-binding $1.50-per-share acquisition proposal after it was withdrawn on March 29, 2021. No cash dividends were paid in 2020.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor did not express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Current utilization, customer activity and contract economics—especially whether Permian and Bakken demand recovery is sufficient to restore margins and cash generation.
- The post-suspension revenue and asset implications of Keystone XL, including any remaining cancellation fees or compensation; the supplied filing text does not quantify these future amounts.
- Actual availability under the ABL borrowing base, covenant headroom, cash needs and the company’s ability to refinance the 2023 facility and 2024 notes.
- Execution, costs, payment terms and renewal prospects for the $118 million humanitarian-services contract, and the degree to which it diversifies the customer base.
- Government policy, funding and contract-continuation risk for the CoreCivic facility, alongside the company’s substantial exposure to its largest customers.
- Bad-debt trends, collections and impairment assumptions, particularly given the elevated receivable allowance and the limited fair-value cushion reported for the Permian unit.