Target Hospitality Corp. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Financial statement amounts below are in millions of dollars unless noted. The 2020 comparative figures were restated for warrant accounting.
Business context
Target provides modular workforce accommodations and hospitality services, including lodging, catering, maintenance and community management. It operated 26 communities across the U.S. Its markets include energy, government and infrastructure projects. TDR Capital owned approximately 64% of the company.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $75.0 | $53.6 | $120.5 | $125.3 |
| Gross profit | $27.1 | $8.2 | $38.5 | $35.3 |
| Operating income (loss) | $10.9 | $(6.5) | $6.7 | $7.6 |
| Net loss | $(0.9) | $(13.7) | $(14.1) | $(8.2) |
| Adjusted EBITDA | $31.9 | $13.4 | $47.9 | $45.7 |
| Cash from operations | Not provided for quarter | Not provided for quarter | $59.4 | $25.4 |
- Q2 revenue rose 40%, driven chiefly by government-contract growth and improving activity in the South segment. Six-month revenue fell 4%, as government growth and higher specialty rental income were more than offset by lower TCPL construction revenue and weaker first-half energy-market activity.
- Q2 gross margin was approximately 36.1%, versus 15.3% a year earlier; six-month gross margin was approximately 32.0%, versus 28.2%. Q2 operating margin was approximately 14.5%, compared with a 12.0% operating loss margin in Q2 2020; six-month operating margin was approximately 5.6%, versus 6.1%.
- Q2 Adjusted EBITDA increased 139% year over year. Six-month Adjusted EBITDA rose about 5%. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
- Six-month operating cash flow included a $27.8 million increase in deferred revenue and customer deposits. Investing outflow was $14.2 million, including $14.1 million for specialty rental assets; financing outflow was $45.8 million, principally reflecting net ABL repayments.
- Cash was $6.5 million at June 30. The company reported $340 million principal of 9.50% secured notes due in 2024 and $5 million outstanding on its ABL facility; the ABL balance was paid off on July 6. Total debt and lease obligations had a reported carrying value of $334.5 million, net of note discount and financing costs.
- Current assets were $41.8 million and current liabilities $77.0 million. Current liabilities included $35.7 million of deferred revenue and customer deposits. Management said available cash and operating and financing sources were expected to fund needs for at least 12 months.
Material changes, outlook and risks
- Government-segment revenue increased substantially, including from a new contract begun in March 2021. Government revenue was $44.8 million in Q2, versus $16.7 million a year earlier. The South segment also improved year over year in Q2, although its six-month revenue remained below 2020. The Midwest segment remained small and reported a six-month adjusted gross loss.
- TCPL Keystone project work was suspended in January and canceled in June 2021 after revocation of the Keystone XL Presidential Permit. The company expected segment revenue to be substantially eliminated prospectively. On July 23 it agreed to terminate the contract, received an approximately $5 million termination fee on July 27, and recognized approximately $4.9 million of deferred revenue upon termination.
- Management reported demand recovery from 2020 lows but said South and Midwest activity remained below pre-pandemic levels. It provided no specific financial guidance and said the future effects of COVID-19 could not be estimated reliably. Risks include renewed pandemic disruption, oil-and-gas activity and customer liquidity, customer concentration, labor and input costs, and debt service and refinancing.
- Two customers represented 29% and 23% of six-month revenue. The company also identified two suppliers accounting for 23.1% and 19.8% of purchases.
- A $2.7 million six-month noncash loss from the change in fair value of private warrant liabilities contributed to the year-over-year increase in the six-month net loss. The 2020 comparative statements were restated for warrant accounting; the restatement reduced reported 2020 net loss by approximately $0.5 million for Q2 and $2.2 million for the first half.
- Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting litigation outcomes are uncertain. Disclosure controls were concluded effective as of June 30, 2021.
Important facts for investors to verify
- Terms, performance requirements and renewal prospects of the new government contract, and the effect of customer concentration on revenue and receivables.
- How much reported operating cash flow reflects recurring collections versus advance customer payments and deferred revenue.
- Final accounting and cash-flow impact of the TCPL termination, including the fee and deferred-revenue recognition.
- Plans and capacity to address the $340 million notes due in 2024, including any refinancing or redemption costs.
- Warrant liability valuation and the potential effects of future fair-value changes on reported earnings.
- Whether energy-market utilization and COVID-related demand continue to recover, and how that affects margins and liquidity.