Business context and reporting period
Target Hospitality Corp. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. It provides workforce accommodations and hospitality services, primarily to oil and gas customers, as well as government and construction customers. The company operated 26 locations. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $53.6 | $81.4 | $125.3 | $163.3 |
| Gross profit | $8.2 | $39.2 | $35.3 | $76.9 |
| Operating income (loss) | $(6.5) | $24.6 | $7.6 | $13.7 |
| Net income (loss) | $(14.2) | $10.6 | $(10.4) | $(3.4) |
| Adjusted EBITDA | $13.4 | $41.2 | $45.7 | $82.5 |
- Q2 gross margin was approximately 15.3%, versus 48.1% a year earlier; operating margin was approximately (12.0)%, versus 30.2%; net margin was approximately (26.5)%, versus 13.0%.
- For the six months, gross margin was approximately 28.2%, versus 47.1%; operating margin was 6.1%, versus 8.4%; net margin was (8.3)%, versus (2.1%).
- Six-month operating cash flow was $25.4, investing cash outflow $11.8, and financing cash outflow $0.4. Cash and cash equivalents were $19.9 at June 30, up from $6.8 at year-end 2019.
- At June 30, total debt principal was $425.0: $340.0 of 9.50% secured notes due 2024 and $85.0 outstanding on a revolving asset-based facility with a $125.0 stated commitment, subject to borrowing-base limits. Debt net of discounts and financing costs was $411.8, including lease and other financing obligations. Six-month net interest expense was $20.2.
- Current assets were $69.3 and current liabilities $53.9. Accounts receivable was $43.1, net of a $1.9 allowance for doubtful accounts. Total assets were $587.2 and stockholders’ equity $114.7.
Material changes versus prior comparable periods
- Q2 revenue fell 34%, mainly as services income declined $34.6 amid sharply lower Permian activity and temporary Bakken community closures. Permian Q2 revenue fell 60% and Bakken revenue 94%; government revenue was essentially unchanged.
- Q2 construction fee income increased to $15.4 from $6.4, primarily reflecting increased TransCanada Pipeline construction activity. Q2 adjusted gross profit fell 58% to $20.5.
- For the first half, revenue declined 23% and adjusted gross profit declined 37%. The six-month SG&A comparison benefited from $39.5 of Business Combination and related costs in the 2019 period; those costs did not recur in 2020. Interest expense rose $6.3 year over year, partly reflecting the post-combination debt structure.
- Operating cash flow exceeded the prior-year amount, but management attributed much of the comparison to the $28.5 transaction bonus paid in 2019. Excluding identified effects, management said current-period cash flow was down approximately $10.6, primarily due to lower revenue.
Outlook, management commentary, risks and unusual items
- Management said COVID-19 and oil and gas market disruption materially harmed results and that the duration and financial impact remained uncertain. It reported no material supply-chain or operating disruption in Q2.
- Cost actions included workforce reductions and furloughs, salary reductions, reduced discretionary spending, and closing or consolidating communities, including all Bakken communities in May. Contract modifications extended certain customer agreements while reducing 2020 minimum commitments, with multi-year extensions intended to support longer-term contract value and visibility.
- The company reduced planned 2020 growth capital expenditures by 50% to $5–$10; maintenance capital expenditures were estimated at $2–$4. It reported $7.8 of capital expenditures in the first half. Management believed cash, operating cash flow and revolver access would meet requirements for at least 12 months, but noted financing availability and borrowing-base values could change.
- Management’s March 2020 impairment test found no impairment of long-lived assets or goodwill, but Permian reporting-unit fair value exceeded carrying value by less than 20%. Further deterioration in forecasts or market conditions could lead to impairment. No further impairment trigger was identified at June 30.
- Customer payment risk increased: the company recognized approximately $1.6 of additional bad-debt expense in Q2 and reported customer bankruptcies. CoreCivic and TransCanada Keystone accounted for 27% and 13% of first-half revenue, respectively; one supplier represented 43% of goods purchased.
- The ABL facility’s fixed-charge and leverage covenants apply when excess availability falls below specified thresholds. Falling asset values could reduce borrowing availability. The company also faces floating-rate exposure: a 100-basis-point increase was estimated to add about $0.9 of annual interest expense.
- Management reported no pending lawsuit or claim expected to materially affect financial condition, while noting litigation outcomes remain uncertain. Disclosure controls were deemed effective; accounting software and chart-of-accounts changes implemented in Q1 were being monitored.
- As an unusual corporate matter, the company ratified and validated its amended and restated certificate of incorporation after discovering a clerical filing error. The filing also reports no share repurchases in the first half of 2020; the repurchase program had approximately $51.4 of remaining authorization at June 30.
Important facts for investors to verify
- Whether customer demand, occupancy and collections in the Permian and Bakken recover, and whether customer contract modifications preserve expected economics.
- Current revolver borrowing-base availability, covenant headroom, and the impact of any collateral-value changes on liquidity.
- Receivable aging, subsequent collections, customer bankruptcies and the adequacy of the doubtful-account allowance.
- Whether the Permian goodwill valuation cushion remains adequate given its less-than-20% excess fair value over carrying value.
- How much of reported cash generation is sustainable after separating working-capital movements and the prior-year transaction-related cash effects.
- Progress against reduced growth and maintenance capital budgets, and the status of the incorporation ratification’s related legal challenge period.