CONDITION AND RESULTS OF OPERATIONS
The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and capital resources ofTarget Hospitality Corp. and is intended to help the reader understandTarget Hospitality Corp. , our operations and our present business environment. This discussion should be read in conjunction with the Company's unaudited consolidated financial statements and notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. References to "we," "us," "our," or "the Company" refer toTarget Hospitality Corp. and its consolidated subsidiaries at and afterMarch 15, 2019 and toPlatinum Eagle Acquisition Corp. , our legal predecessor, for all periods prior toMarch 15, 2019 . For purposes of this section, references to "we," "us," "the Companies," "Algeco US Holdings LLC ," or "Target Parent" refers toAlgeco US Holdings LLC and its consolidated subsidiaries for periods from and afterDecember 22, 2017 throughMarch 15, 2019 andTarget Logistics Management, LLC and its consolidated subsidiaries for periods prior toDecember 21, 2017 .
Executive Summary and Outlook
Target Hospitality Corp. is one of the largest vertically integrated specialty rental and hospitality service providers inthe United States . The Company provides vertically integrated specialty rental and comprehensive hospitality services including catering and food services, maintenance, housekeeping, grounds-keeping, security, health and recreation services, overall workforce community management, concierge services and laundry service. As ofSeptember 30, 2020 , our network includes 26 locations to better serve our customers across the US.
COVID – 19 and Economic Update
The global outbreak of the Coronavirus Disease 2019 ("COVID-19") and the
declaration of a pandemic by the World Health Organization on March 11, 2020
presented new risks to the Company's business. Further, in the first quarter of
2020, crude oil prices fell sharply, due to the spread of COVID-19 and actions
by Saudi Arabia and Russia . The Company's ability to operate and supply chain
have not experienced material disruptions in the third quarter and the Company
continues to work with suppliers to ensure there is no service disruption or
shortage of critical products at our communities. However, the situation
surrounding COVID-19 remains fluid and the potential for a material impact on
the Company increases the longer the virus impacts the level of economic
activity in the United States and globally. The financial results for the third
quarter of 2020 reflect the reduced customer activity experienced during the
quarter. However, the Company did experience increases in demand for its
hospitality and accommodation services, including demand for the Company's
Permian Basin accommodations as customer activity levels steadily increased
during the third quarter, from the lows experienced during the second quarter of
2020. We took significant steps to reduce our costs in response to the reduced
demand, including reducing headcount, temporarily closing and consolidating
several of our communities, salary reductions, and streamlining our support
functions. However, as customer activity levels began increasing during the
third quarter, we began re-opening several communities in July of 2020 as a
result of increased customer demand. Additionally, the Company executed
contract modifications with several customers in the oil and natural gas
industry resulting in extended terms and reduced minimum contract commitments in
2020. These modifications utilize multi-year contract extensions to maintain
contract value and provide the Company with greater visibility on long-term
revenue and cash flow. This mutually beneficial approach balances average daily
rates with contract term and positions the Company to take advantage of a more
balanced market. As a result of the continued uncertainty surrounding COVID-19,
we cannot reasonably estimate with any degree of certainty the future impact
COVID-19 may have on the Company's results of operations, financial position,
and liquidity. Nevertheless, we will maintain our commitment to service quality
for our customers and continue to focus on generating returns and cash flow.
Refer to the section titled “Risk Factors” included elsewhere in this report
for additional discussion around COVID-19.
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For the three months ended
performance included:
Decreased revenue of
? driven by a decrease in services income revenue of approximately
due to reduced activity associated with the negative effects of oil price
volatility, compounded by the effects of COVID-19.
Decreased revenue in the
? revenues for the three months ended
as compared to the same period in 2019 as a result of declines in utilization
due to oil price volatility and impacts of COVID-19.
Generated a net loss of approximately
?
the three months ended
the decrease in revenue.
Generated consolidated Adjusted EBITDA of
? of
primarily by the decrease in revenue.
In addition to the above, the Company renewed its government services contract
? and extended the term through
as the previous agreement.
Adjusted EBITDA is a non-GAAP measure. The GAAP measure most comparable to
Adjusted EBITDA is Net Income (loss). Please see “Non-GAAP Financial Measures”
for a definition and reconciliation to the most comparable GAAP measure.
Our proximity to customer activities influences occupancy and demand. We have built, own and operate the two largest specialty rental and hospitality services networks available to oil and gas customers operating in the Permian and Bakken regions. Our broad network often results in us having communities that are the closest to our customers' job sites, which reduces commute times and costs, and improves the overall safety of our customers' workforce. Our communities provide customers with cost efficiencies, as they are able to jointly use our communities and related infrastructure (i.e., power, water, sewer and IT) services alongside other customers operating in the same vicinity. Demand for our services is dependent upon activity levels, particularly our customers' capital spending on exploration, development, production and transportation of oil and natural gas and government immigration housing programs.
Factors Affecting Results of Operations
We expect our business to continue to be affected by the key factors discussed below, as well as factors discussed in the section titled "Risk Factors" included elsewhere in this report. Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about, or interpretations of, available information prove to be incorrect, our actual results may vary materially from our expected results. Public health threats or outbreaks of communicable diseases, including COVID-19, could have a material adverse effect on the Company's operations and financial results. The Company may face risks related to public health threats or outbreaks of communicable diseases, including COVID-19. A widespread healthcare crisis, such as an outbreak of a communicable disease, like COVID-19, could adversely affect the economy and the Company's ability to conduct business for an indefinite period of time. This situation combined with the oil and gas price volatility discussed below has had, and could continue to, have a material adverse effect on the Company's results of operations. Refer to section titled "Risk Factors" included elsewhere in this report for further information on this situation.
Supply and Demand for Oil and Gas
As a provider of vertically integrated specialty rental and hospitality
services, we are not directly impacted by oil and gas price fluctuations.
However, these price fluctuations indirectly influence our activities and
results of operations because the exploration and production ("E&P") workforce
is directly affected by price fluctuations and the industry's expansion or
contraction as a result of these fluctuations. Our occupancy volume depends on
the size of the workforce within the oil
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and gas industry and the demand for labor. Oil and gas prices are volatile and influenced by numerous factors beyond our control, including the domestic and global supply of and demand for oil and gas. The commodities trading markets, as well as other supply and demand factors, may also influence the selling prices of oil and gas. As a result of the recent oil and gas price volatility, the Company temporarily closed and consolidated communities in the Permian and Bakken basins. However, these communities began re-opening in July of 2020 as conditions started to improve. Additionally, this recent disruption in the oil and gas markets as well as the impact of COVID-19 has increased the risk of delayed customer payments and payment defaults associated with customer liquidity issues and bankruptcies leading to increased bad debt expense in the current period.
Availability and Cost of Capital
Capital markets conditions could affect our ability to access the debt and equity capital markets to the extent necessary to fund our future growth. Interest rates on future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly, and could limit our ability to raise funds, or increase the price of raising funds, in the capital markets and may limit our ability to expand.
Regulatory Compliance
We are subject to extensive federal, state, local, and foreign environmental, health and safety laws and regulations concerning matters such as air emissions, wastewater discharges, solid, and hazardous waste handling and disposal and the investigation and remediation of contamination. The risks of substantial costs, liabilities, and limitations on our operations related to compliance with these laws and regulations are an inherent part of our business, and future conditions may develop, arise, or be discovered that create substantial environmental compliance or remediation liabilities and costs.
Natural Disasters or Other Significant Disruption
An operational disruption in any of our facilities could negatively impact our financial results. The occurrence of a natural disaster, such as earthquake, tornado, severe weather, including hail storms, flood, fire, or other unanticipated problems such as labor difficulties, equipment failure, capacity expansion difficulties or unscheduled maintenance could cause operational disruptions of varied duration. These types of disruptions could materially adversely affect our financial condition and results of operations to varying degrees dependent upon the facility, the duration of the disruption, our ability to shift business to another facility or find alternative solutions.
Overview of Our Revenue and Operations
We derive the majority of our revenue from specialty rental accommodations and vertically integrated hospitality services. Approximately 60% of our revenue was earned from specialty rental with vertically integrated hospitality services, specifically lodging and related ancillary services, whereas the remaining 40% of revenues were earned through leasing of lodging facilities (24%) and Construction fee income (16%) for the nine months endedSeptember 30, 2020 . Our services include temporary living accommodations, catering food services, maintenance, housekeeping, grounds-keeping, on-site security, workforce community management, and laundry services. Revenue is recognized in the period in which lodging and services are provided pursuant to the terms of contractual relationships with our customers. In certain of our contracts, rates may vary over the contract term, in these cases, revenue is generally recognized on a straight-line basis over the contract term. We enter into arrangements with multiple deliverables for which arrangement consideration is allocated between lodging and services based on the relative estimated standalone selling price of each deliverable. The estimated price of lodging and services deliverables is based on the prices of lodging and services when sold separately or based upon the best estimate of selling price. The Company also originated a contract in 2013 withTransCanada Pipelines ("TCPL" or "TC Energy") to construct, deliver, cater and manage all accommodations and hospitality services in conjunction with the planned construction of the Keystone XL pipeline project. During the construction phase of the contract, the Company recognizes revenue as costs are incurred in connection with the project under the percentage of completion method of accounting as more fully discussed in Note 1 of the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q. One of these communities was completed and opened during the three months endedSeptember 30, 2020 . The revenue 40 Table of Contents
recognized on the community post construction for the three months ended
revenue from specialty rental with vertically integrated hospitality services.
The Company also originated a contract onMarch 1, 2019 with a customer to construct, deliver, cater and manage all accommodations and hospitality services in conjunction with the construction of an accommodation facility in thePermian Basin . During the construction phase of the contract, the Company recognizes revenue as costs are incurred in connection with the project under the percentage of completion method of accounting. The construction phase of this contract was substantially completed inAugust 2019 with additional expansions throughMarch 31, 2020 .
Key Indicators of Financial Performance
Our management uses a variety of financial and operating metrics to analyze our performance. We view these metrics as significant factors in assessing our operating results and profitability and intend to review these measurements frequently for consistency and trend analysis. We primarily review the following profit and loss information when assessing our performance:
Revenue
We analyze our revenues by comparing actual revenues to our internal budgets and projections for a given period and to prior periods to assess our performance. We believe that revenues are a meaningful indicator of the demand and pricing for our services. Key drivers to change in revenues may include average utilization of existing beds, levels of drilling activity in the Permian and Bakken basins, and the consumer price index impacting government contracts.
Adjusted Gross Profit
We analyze our adjusted gross profit, which is a Non-GAAP measure that we define as revenues less cost of sales, excluding impairment and depreciation of specialty rental assets to measure our financial performance. Please see "Non-GAAP Financial Measures" for a definition and reconciliation to the most comparable GAAP measure. We believe adjusted gross profit is a meaningful metric because it provides insight on financial performance of our revenue streams without consideration of our overhead. Additionally, using adjusted gross profit gives us insight on factors impacting cost of sales, such as efficiencies of our direct labor and material costs. When analyzing adjusted gross profit, we compare actual adjusted gross profit to our internal projections and to prior period results for a given period in order to assess our performance. We also use Non-GAAP measures such as EBITDA, Adjusted EBITDA, and Discretionary cash flows to evaluate the operating performance of our business. For a more in-depth discussion of the Non-GAAP measures, please refer to the "Non-GAAP Financial Measures" section.
Segments
We have identified three reportable business segments:
Basin
Permian Basin
Basin
Mexico
Basin
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Government
The government segment ("Government") includes the facilities and operations of
the family residential center and the related support communities in Dilley,
Texas (the "South Texas Family Residential Center") provided under a lease and
services agreement with CoreCivic ("CoreCivic").
All Other
Our other facilities and operations which do not meet the criteria to be a separate reportable segment are consolidated and reported as "All Other" which represents the facilities and operations of one community in theAnadarko basin ofOklahoma , the catering and other services provided to communities and other workforce accommodation facilities for the oil, gas and mining industries not owned by us and initial work and future plans for facilities and services to be provided in connection with the TCPL project.
Key Factors Impacting the Comparability of Results
The historical results of operations for the periods presented may not be
comparable, either to each other or to our future results of operations, for the
reasons described below:
COVID-19 and Oil and Gas Price Volatility
The COVID-19 pandemic and the disruption in the oil and gas industry has had, and continues to have, a material adverse effect on our business and results of operations. The financial results for the three and nine months endedSeptember 30, 2020 reflect the reduced activity in the Permian and Bakken basins resulting from the negative effects of the oil and gas price volatility compounded by the effects of COVID-19 as these disruptions have created significant challenges for our energy end-market customers. This has driven a significant reduction in our utilization in these segments during the three and nine months endedSeptember 30, 2020 and has also impacted our energy end-market customer's liquidity, resulting in increased bad debt expense during 2020.
Acquisitions
OnJune 19, 2019 , TLM entered into the Superior Purchase Agreement with the Superior Sellers, and certain other parties named therein, pursuant to which TLM acquired substantially all of the assets in connection with the seller communities. This acquisition further expanded our presence in theTexas Permian Basin , adding 575 rooms. Prior to the acquisition, TLM was providing management and catering services to the Superior Sellers, which was terminated upon the closing of the acquisition.
On
OnJuly 1, 2019 , in connection with the purchase of this community, TLM and ProPetro entered into an amendment to its existing Network Lease and Services Agreement resulting in ProPetro leasing from the Company an additional 166 rooms per night for one year subject to three one-year extension options. The extension options were not exercised and resulted in the Company earning a termination fee of approximately$0.5 million for the nine months endedSeptember 30, 2020 . The ProPetro acquisition further expanded the Company's presence in thePermian Basin .
Business Combination Costs
We incurred approximately$38.1 million in incremental costs related to the Business Combination that have been recognized as selling, general, and administrative expenses in the unaudited consolidated statement of comprehensive income (loss) for the nine months endedSeptember 30, 2019 . These costs include$8.0 million in transaction expenses relating to the consummation of the Business Combination. Additionally, certain members of the Company's management and employees received bonus payments as a result of the Business Combination being consummated in the aggregate amount of$28.5 million . Finally, as part of the Business Combination being consummated, we recorded$1.6 million of compensation expense for the full loan forgiveness of certain executive members of management which has been recognized as a non-cash expense within the consolidated financial statements. 42 Table of Contents Public Company Costs
As part of becoming a public company inMarch 2019 , we also expect to incur additional significant and recurring expenses as a publicly traded company, including costs associated with the employment of additional personnel, compliance under the Exchange Act, annual and quarterly reports to common shareholders, registrar and transfer agent fees, national stock exchange fees, legal fees, audit fees, incremental director and officer liability insurance costs and director and officer compensation.
Results of Operations
The period to period comparisons of our results of operations have been prepared using the historical periods included in our unaudited consolidated financial statements. The following discussion should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere in this document. Consolidated Results of Operations for the three months endedSeptember 30, 2020 and 2019. For the Three Months Ended Amount of Percentage Change September 30, Increase Favorable 2020 2019 (Decrease) (Unfavorable) Revenue: Services income$ 24,331 $ 64,189 $ (39,858) -62% Specialty rental income 12,827 14,230 (1,403) -10% Construction fee income 11,105 3,224 7,881 244% Total revenue 48,263 81,643 (33,380) -41% Costs: Services 21,990 29,470 (7,480) -25% Specialty rental 2,560 2,395 165 7%
Depreciation of specialty rental assets 11,995 11,222 773 7% Gross Profit 11,718 38,556 (26,838) -70% Selling, general and administrative 8,508 11,141 (2,633) -24% Other depreciation and amortization 4,341 4,021
320 8% Currency gains, net - (77) 77 -100% Other expense (income), net (183) 440 (623) -142% Operating income (loss) (948) 23,031 (23,979) -104% Interest expense, net 9,913 10,172 (259) -3%
Income (loss) before income tax (10,861) 12,859
(23,720) -184% Income tax expense (benefit) (2,991) 3,290 (6,281) -191% Net income (loss)$ (7,870) $ 9,569 $ (17,439) -182%
For the three months ended
ended
Total Revenue. Total revenue was$48.3 million for the three months endedSeptember 30, 2020 and consisted of$24.3 million of services income,$12.8 million of specialty rental income, and$11.1 million of construction fee income. Total revenues for the three months endedSeptember 30, 2019 was$81.6 million which consisted of$64.2 million of services income,$14.2 million of specialty rental income and$3.2 million of construction fee income.
Services income consists primarily of specialty rental accommodations with
vertically integrated hospitality services, and comprehensive hospitality
services including catering and food services, maintenance, housekeeping,
grounds-keeping, on-site security, overall workforce community management,
health and recreation facilities, concierge services, and laundry service.
The
main driver of the decline in services income revenue year over year was the reduction of customer activity in thePermian Basin and the temporary closure of communities in theBakken Basin inMay 2020 , due to the effects of oil price volatility and COVID-19. However, as customer activity levels began increasing during the third quarter, we began re-opening several communities in July of 2020 as a result of increased customer demand. 43
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Specialty rental income decreased mainly as a result of a contract modification for one of our energy end-market customers, which resulted in the contract no longer being treated as a lease for accounting purposes and as such, the revenue associated is now being reported within services income. Termination of the ProPetro lease as previously mentioned also contributed to this decrease. Such decreases were partially offset by community expansions that came online later in 2019. The decrease in services income and specialty rental income was offset by an increase in construction fee income, which was due to an increase in activity related to the construction of TC Energy Corporation's Keystone XL Pipeline project compared to the same period in 2019.
Cost of services. Cost of services was
The decrease in services costs is primarily due to the decrease in costs in the Permian and Bakken basins driven by cost containment measures implemented in response to the decrease in utilization for the three months endedSeptember 30, 2020 as compared to the same period in 2019. This decrease was partially offset with an increase of approximately$8.4 million in costs associated with the increase in activity on TC Energy Corporation's Keystone XL Pipeline project. Specialty rental costs. Specialty rental costs were$2.6 million for the three months endedSeptember 30, 2020 as compared to$2.4 million for the three months endedSeptember 30, 2019 . This increase in specialty rental costs is primarily driven by community expansions that came online later in 2019. This increase in specialty rental costs was partially offset by the termination of the ProPetro lease and a modification of a contract for one of our energy end-market customers, which resulted in all such costs and related revenue now being recognized in services income and costs, as it no longer meets the definition of a lease. Depreciation of specialty rental assets. Depreciation of specialty rental assets was$12.0 million for the three months endedSeptember 30, 2020 as compared to$11.2 million for the three months endedSeptember 30, 2019 .
The increase in depreciation expense is mainly due to an increase in assets
placed into service as part of the capital expenditure program in 2019 as well
as 2019 acquisitions of Pro Petro and Superior.
Selling, general and administrative. Selling, general and administrative was$8.5 million for the three months endedSeptember 30, 2020 as compared to$11.1 million for the three months endedSeptember 30, 2019 . The decrease in selling, general and administrative expense of$2.6 million was primarily driven by decreased travel and entertainment expenses, public company costs, including legal and professional fees, severance, sales commissions (driven by a decrease in utilization), and labor. These decreases were partially offset increases in bad debt expense, insurance, new system implementation cost non-cash amortization expense, and non-cash stock compensation expense driven by the granting of stock compensation in September of 2019, as well as March, April and May of 2020. Other depreciation and amortization. Other depreciation and amortization expense was$4.3 million for the three months endedSeptember 30, 2020 as compared to$4.0 million for the three months endedSeptember 30, 2019 . The increase in other depreciation and amortization expense is due primarily to an increase in depreciation expense associated with an increase in depreciable capital expenditures. Other expense (income), net. Other expense (income), net was$(0.2) million for the three months endedSeptember 30, 2020 as compared to$0.4 million for the three months endedSeptember 30, 2019 . The change in other expense (income), net is primarily attributable to prior period non-cash charges and loss on involuntary conversion, which did not recur in 2020.
Interest expense, net. Interest expense, net was
months ended
months ended
The change in interest expense is driven by a reduction of the interest rate on
the New ABL facility.
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Income tax expense (benefit). Income tax benefit was $3.0 million for the three
months ended September 30, 2020 as compared to an expense of $3.3 million for
the three months ended September 30, 2019 . The decrease in income tax expense is
primarily attributable to the decrease in income before taxes, resulting from a
loss for the three months ended September 30, 2020 .
Consolidated Results of Operations for the nine months ended September 30, 2020
and 2019.
For the Nine Months Ended Amount of Percentage Change
September 30, Increase Favorable
2020 2019 (Decrease) (Unfavorable)
Revenue:
Services income $ 103,526 $ 185,094 $ (81,568) -44%
Specialty rental income 42,379 43,103 (724) -2%
Construction fee income 27,634 16,786 10,848 65%
Total revenue 173,539 244,983 (71,444) -29%
Costs:
Services 82,456 91,215 (8,759) -10%
Specialty rental 6,864 7,203 (339) -5%
Depreciation of specialty
rental assets 37,158 31,083 6,075 20%
Gross Profit 47,061 115,482 (68,421) -59%
Selling, general and
administrative 28,599 66,817 (38,218) -57%
Other depreciation and
amortization 12,555 11,600 955 8%
Restructuring costs - 168 (168) -100%
Currency gains, net - (77) 77 -100%
Other expense (income), net (752) 279 (1,031) -370%
Operating income (loss) 6,659 36,695 (30,036) -82%
Loss on extinguishment of
debt - 907 (907) -100%
Interest expense, net 30,113 24,056 6,057 25%
Income (loss) before income
tax (23,454) 11,732 (35,186) -300%
Income tax expense
(benefit) (5,187) 5,562 (10,749) -193%
Net Income (loss) $ (18,267) $ 6,170 $ (24,437) -396%
For the nine months ended
Total Revenue. Total revenue was$173.5 million for the nine months endedSeptember 30, 2020 and consisted of$103.5 million of services income,$42.4 million of specialty rental income, and$27.6 million of construction fee income. Total revenues for the nine months endedSeptember 30, 2019 was$245.0 million which consisted of$185.1 million of services income,$43.1 million of specialty rental income and$16.8 million of construction fee income. Services income consists primarily of specialty rental accommodations with vertically integrated hospitality services, and comprehensive hospitality services including catering and food services, maintenance, housekeeping, grounds-keeping, on-site security, overall workforce community management, health and recreation facilities, concierge services, and laundry service. The main driver of the decline in services income revenue year over year was the reduction of customer activity in thePermian Basin and the temporary closure of communities in theBakken Basin inMay 2020 , due to the effects of oil price volatility and COVID-19. However, as customer activity levels began increasing during the third quarter, we began re-opening several communities in July of 2020 as a result of increased customer demand. Specialty rental income decreased mainly as a result of a contract modification for one of our energy end-market customers, which resulted in the contract no longer being treated as a lease for accounting purposes and as such, the revenue associated is now being reported within services income. Such decreases were partially offset by community expansions that came online later in 2019. 45
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The decrease in services income and specialty rental income was offset by an increase in construction fee income, due to an increase in activity related to the construction of TC Energy Corporation's Keystone XL Pipeline project, compared to the same period in 2019.
Cost of services. Cost of services was
The decrease in services costs is primarily due to the decrease in costs
incurred driven by cost containment measures implemented in response to the
decrease in utilization in the Permian and Bakken basins for the nine months
ended
decreases were partially offset by an increase of costs approximately
million
Keystone XL Pipeline project.
Specialty rental costs. Specialty rental costs were$6.8 million for the nine months endedSeptember 30, 2020 as compared to$7.2 million for the nine months endedSeptember 30, 2019 . The decrease in specialty rental costs is driven by the reduction in utility and other variable costs as a result of decreased occupancy within the Government segment combined with a modification of a contract for one of our energy end-market customers, which resulted in all such costs and related revenue now being recognized in services income and costs as it no longer meets the definition of a lease. These decreases were offset by increases driven by expansion and acquisition activity subsequent toMarch 31, 2019 . Depreciation of specialty rental assets. Depreciation of specialty rental assets was$37.2 million for the nine months endedSeptember 30, 2020 as compared to$31.1 million for the nine months endedSeptember 30, 2019 .
The increase in depreciation expense is mainly due to an increase in assets
placed into service as part of the capital expenditure program in 2019 as well
as 2019 acquisitions of Pro Petro and Superior.
Selling, general and administrative. Selling, general and administrative was$28.6 million for the nine months endedSeptember 30, 2020 as compared to$66.8 million for the nine months endedSeptember 30, 2019 . The decrease in selling, general and administrative expense of$38.2 million is primarily due to the$39.5 million of costs associated with the Business Combination and other transactions recognized for the nine months endedSeptember 30, 2019 that did not recur for the nine months endedSeptember 30, 2020 . Additionally, sales commission expenses declined from 2019 to 2020 driven by a decrease in utilization. Public company costs, including legal and professional fees, as well as travel and entertainment costs, and marketing and advertising costs also decreased from 2019 to 2020. These decreases were slightly offset by increases in non-cash stock compensation expense driven by the granting of stock compensation in May of 2019, September of 2019, as well as March, April and May of 2020. Additional increases are attributable to an increase in bad debt expense, new system implementation cost non-cash amortization expense, and insurance expense driven by growth of the business and public company related insurance. Other depreciation and amortization. Other depreciation and amortization expense was$12.6 million for the nine months endedSeptember 30, 2020 as compared to$11.6 million for the nine months endedSeptember 30, 2019 . The increase in other depreciation and amortization expense is due primarily to the amortization of customer relationship intangible assets from the Superior acquisition and an increase in depreciation expense associated with an increase in depreciable capital expenditures. Restructuring costs. Restructuring costs associated with a restructuring that originated in 2017 were$0 for the nine months endedSeptember 30, 2020 as compared to$0.2 million , for the nine months endedSeptember 30, 2019 which is primarily related to employee severance payments resulting from the closure of ourBaltimore, MD corporate office. The decrease in Restructuring costs is due to the final payments to the employees that have left or taken other positions related to the restructuring described above and no additional expense related to this restructuring event is expected. 46 Table of Contents
Other expense (income), net. Other expense (income), net was$(0.8) million for the nine months endedSeptember 30, 2020 as compared to$ 0.3 million for the nine months endedSeptember 30, 2019 . The change in other expense (income), net is primarily attributable to the receipt of insurance proceeds in 2020 associated with an involuntary asset conversion that occurred in 2019. Additionally, amounts for the nine months endedSeptember 30, 2020 include various costs related to the effects of COVID-19, which did not occur in the prior period. Conversely, prior period included non-cash charges and a loss on involuntary conversion, which did not recur in 2020. Loss on extinguishment of debt. Loss on extinguishment of debt of$0.9 million for the nine months endedSeptember 30, 2019 related to the write-off of deferred financing costs pertaining to non-continuing lenders associated with the modification of our ABL facility onMarch 15, 2019 .
Interest expense, net. Interest expense, net was
months ended
ended
The change in interest expense is driven by increased interest expense driven by the New ABL Facility and the 2024 Senior Secured Notes, which were originated onMarch 15, 2019 , as compared to the affiliate debt that was outstanding for the period prior toMarch 15, 2019 . Both the New ABL Facility and the 2024 Senior Secured Notes were outstanding for all nine months of 2020 driving more interest expense in 2020. Income tax expense (benefit). Income tax benefit was$5.2 million for the nine months endedSeptember 30, 2020 as compared to an expense of$5.6 million for the nine months endedSeptember 30, 2019 . The decrease in income tax expense is primarily attributable to the decrease in income before taxes, resulting from a loss for the nine months endedSeptember 30, 2020 .
Segment Results
The following table sets forth our selected results of operations for each of our reportable segments for the three months endedSeptember 30, 2020 and 2019. Percentage For the Three Months Ended Amount of Change September 30, Increase Favorable 2020 2019 (Decrease) (Unfavorable) Revenue: Government$ 16,264 $ 16,830 $ (566) -3% Permian Basin 18,968 56,524 (37,556) -66% Bakken Basin 1,154 6,019 (4,865) -81% All Other 11,877 2,270 9,607 423% Total Revenues$ 48,263 $ 81,643 $ (33,380) -41% Adjusted Gross Profit Government$ 13,213 $ 12,817 $ 396 3% Permian Basin 8,606 33,285 (24,679) -74% Bakken Basin 87 2,895 (2,808) -97% All Other 1,807 781 1,026 131% Total Adjusted Gross Profit$ 23,713 $ 49,778 $ (26,065) -52% Average Daily Rate Government$ 72.27 $ 74.50 $ (2.23) Permian Basin$ 89.56 $ 84.20 $ 5.36 Bakken Basin$ 98.11 $ 77.40 $ 20.71 Total Average Daily Rate$ 81.28 $ 80.80 $ 0.48 47 Table of Contents Note: Adjusted gross profit for the chief operating decision maker's ("CODM") analysis includes the services and rental costs recognized in the financial statements and excludes depreciation on specialty rental assets and loss on impairment. Average daily rate is calculated based on specialty rental income and services income received over the period indicated, divided by utilized
bed nights. Government
Revenue for the Government segment was
Adjusted gross profit for the Government segment was
months ended
months ended
Revenue decreased as a result of lower non-cash deferred revenue amortization inSeptember 2020 driven by a contract extension modification, which extended the term throughSeptember 2026 compared to the previous term throughSeptember 2021 . This extended the period over which the unamortized deferred revenue is spread, which reducedSeptember 2020 amortization by$0.5 million . As a result of extending the amortization period for the deferred revenue associated with the amended agreement over the extended term of the agreement, we expect non-cash revenue associated to decrease by approximately$3 million per quarter, from$3.4 million to$0.4 million , effective beginning in the fourth quarter of 2020. The increase in adjusted gross profit of$0.4 million is due to declines in occupancy for the three months endedSeptember 30, 2020 , as compared to the same period in 2019, which helped reduce costs with no decline in revenue, other than the decrease previously mentioned, as revenue is based on a fixed price regardless of utilization or occupancy.
Revenue for the
ended
ended
Adjusted gross profit for the
three months ended
three months ended
The decrease in revenue of$33.1 million and decrease in adjusted gross profit of$24.7 million is primarily attributable to the decline in utilization in thePermian Basin due to oil price volatility and impacts of COVID-19.
Revenue for the
Adjusted gross profit for the
three months ended
months ended
The decrease in revenue of$4.9 million and decrease in adjusted gross profit of$2.8 million was primarily driven by the temporary closure of communities in theBakken Basin in early May due to oil price volatility and impacts of COVID-19. However, as customer activity levels began increasing during the third quarter, we began re-opening several communities in July of 2020 as a result of increased customer demand. 48 Table of Contents Segment Results The following table sets forth our selected results of operations for each of our reportable segments for the nine months endedSeptember 30, 2020 and 2019. For the Nine months ended Amount of Percentage Change September 30, Increase Favorable 2020 2019 (Decrease) (Unfavorable) Revenue: Government$ 49,527 $ 50,115 $ (588) -1% Permian Basin 89,163 161,270 (72,107) -45% Bakken Basin 5,705 16,530 (10,825) -65% All Other 29,144 17,068 12,076 71% Total Revenues$ 173,539 $ 244,983 $ (71,444) -29% Adjusted Gross Profit Government$ 37,701 $ 36,985 $ 716 2% Permian Basin 42,257 98,529 (56,272) -57% Bakken Basin 323 7,228 (6,905) -96% All Other 3,938 3,823 115 3% Total Adjusted Gross Profit$ 84,219 $ 146,565 $ (62,346) -43% Average Daily Rate Government$ 73.87 $ 74.60 $ (0.73) Permian Basin$ 83.36 $ 85.00 $ (1.64) Bakken Basin$ 80.60 $ 77.40 $ 3.20 Total Average Daily Rate$ 79.62 $ 81.30 $ (1.68) Note: Adjusted gross profit for the chief operating decision maker's ("CODM") analysis includes the services and rental costs recognized in the financial statements and excludes depreciation on specialty rental assets and loss on impairment. Average daily rate is calculated based on specialty rental income and services income received over the period indicated, divided by utilized
bed nights. Government
Revenue for the Government segment was
Adjusted gross profit for the Government segment was$37.7 million for the nine months endedSeptember 30, 2020 as compared to$37.0 million for the nine months endedSeptember 30, 2019 . Revenue decreased as a result of lower non-cash deferred revenue amortization inSeptember 2020 driven by a contract extension modification, which extended the term throughSeptember 2026 compared to the previous term throughSeptember 2021 . This extended the period over which the unamortized deferred revenue is spread, which reducedSeptember 2020 amortization by$0.5 million . The increase in adjusted gross profit of$0.7 million is due to declines in occupancy for the nine months endedSeptember 30, 2020 , as compared to the same period in 2019, which helped reduce costs with no decline in revenue, other than the decrease previously mentioned, as revenue is based on a fixed price regardless of utilization or occupancy.
Revenue for the
ended
ended
49
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Adjusted gross profit for the Permian Basin segment was $42.3 million for the
nine months ended September 30, 2020 , as compared to $98.5 million for the nine
months ended September 30, 2019 .
The decrease in revenue of $72.1 million and decrease in adjusted gross profit
of $56.3 million is primarily attributable to the decline in utilization due to
the effects of oil price volatility and COVID-19.
Revenue for the
Adjusted gross profit for theBakken Basin segment was$0.3 million for the nine months endedSeptember 30, 2020 , as compared to$7.2 million for the nine months endedSeptember 30, 2019 . The decrease in revenue of$10.8 million and decrease in adjusted gross profit of$6.9 million was primarily driven by the temporary closure of communities in theBakken Basin in early May due to oil price volatility and impacts of COVID-19. However, as customer activity levels began increasing during the third quarter, we began re-opening several communities in July of 2020 as a result of increased customer demand.
Liquidity and Capital Resources
Historically, our primary sources of liquidity have been capital contributions from our owners and cash flow from operations. We depend on cash flow from operations, cash on hand and borrowings under our revolving credit facility to finance our acquisition strategy, working capital needs, and capital expenditures. We currently believe that our cash on hand, along with these sources of funds will provide sufficient liquidity to fund debt service requirements, support our growth strategy, lease obligations, contingent liabilities and working capital investments for at least the next 12 months. However, we cannot assure you that we will be able to obtain future debt or equity financings adequate for our future cash requirements on commercially reasonable terms or at all. If our cash flows and capital resources are insufficient, we may be forced to reduce or delay additional acquisitions, future investments and capital expenditures, and seek additional capital. Significant delays in our ability to finance planned acquisitions or capital expenditures may materially and adversely affect our future revenue prospects.
For additional discussion of risks related to our liquidity and capital
resources, including the impact of COVID-19 as well as the impact of declining
oil and gas prices, refer to the section titled “Risk Factors” included
elsewhere in this report.
Capital Requirements
During for the nine months endedSeptember 30, 2020 we incurred$7.7 million in capital expenditures. Our total annual 2020 capital budget included growth projects to increase community capacity. However, in response to anticipated lower utilization levels resulting from the impact of oil price volatility and COVID-19 as previously discussed, the Company has reduced its anticipated 2020 capital expenditures by 50% to$8 -$12 million (excluding acquisitions). As we pursue growth in the future, we monitor which capital resources, including equity and debt financings, are available to us to meet our future financial obligations, planned capital expenditure activities and liquidity requirements. However, future cash flows are subject to a number of variables, including the ability to maintain existing contracts, obtain new contracts and manage our operating expenses. The failure to achieve anticipated revenue and cash flows from operations could result in additional reductions in future capital spending. We cannot assure you that operations and other needed capital will be available on acceptable terms or at all. In the event we make additional acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to further reduce the expected level of capital expenditures or seek additional capital. We cannot assure you that needed capital will be available on acceptable terms
or
at all.
50
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The following table sets forth general information derived from our unaudited
consolidated statements of cash flows:
For the Nine Months Ended
September 30,
2020 2019
Net cash provided by operating activities $ 28,592 $ 44,077
Net cash used in investing activities (10,288) (103,132)
Net cash provided by (used in) financing activities
(16,027) 50,327
Effect of exchange rate changes on cash, cash equivalents
and restricted cash
(14) (17) Net increase (decrease) in cash, cash equivalents and restricted cash$ 2,263 $ (8,745)
For the nine months ended
Cash flows provided by operating activities. Net cash provided by operating
activities was
compared to net cash provided by operating activities of
nine months ended
Prior period cash from operating activities included a transaction bonus of$28.5 million paid inMarch 2019 in connection with the closing of the Business Combination, which was fully funded by a capital contribution included in cash flows from financing activities. The current period also included an increase in cash outflow for interest of approximately$11.3 million driven by an increase in debt obligations originated with the closing of the Business Combination. After factoring out the effects of these items, the current period is down by approximately$32.7 million when compared to 2019 driven primarily by a decline in revenue resulting from the negative impacts of the oil and gas price volatility and COVID-19. Cash flows used in investing activities. Net cash used in investing activities was$10.3 million for the nine months endedSeptember 30, 2020 compared to$103.1 million for the nine months endedSeptember 30, 2019 . This decrease was primarily related to the decrease in discretionary capital expenditures and acquisition activity.
Cash flows provided by financing activities. Net cash flows provided by
financing activities was
reflects the decrease in cash received from the Business Combination and
issuance of the 2024 Senior Secured Notes that occurred in
Indebtedness
Capital lease and other financing obligations
The Company's capital lease and other financing obligations as ofSeptember 30, 2020 consisted of$1.1 million of capital leases and$0.4 of other financing arrangements. InDecember 2019 , the Company entered into a lease for certain equipment with a lease term expiringNovember 2022 and an effective interest rate of 4.3%. The Company's lease relates to commercial-use vehicles.
New ABL Facility
On the Closing Date, in connection with the closing of the Business Combination, Topaz, Bidco, Target, Signor and each of their domestic subsidiaries entered into an ABL credit agreement that provides for a senior secured asset-based revolving credit facility in the aggregate principal amount of up to$125 million (the "New ABL Facility"). Approximately$40 million of proceeds from the New ABL Facility were used to finance a portion of the consideration payable and fees and expenses incurred in connection with the Business Combination. Additionally,$30 million was drawn on the New ABL Facility duringJune 2019 to fund the Superior acquisition. During the three months endedSeptember 30, 2020 ,$15 million of the amounts drawn previously was repaid. The maturity date of the New ABL Facility isSeptember 15, 2023 . 51
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Refer to Note 10 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q for additional discussion of the New ABL Facility. Senior Secured Notes In connection with the closing of the Business Combination, Bidco issued$340 million in aggregate principal amount of 9.50% senior secured notes dueMarch 15, 2024 (the "2024 Senior Secured Notes" or "Notes") under an indenture datedMarch 15, 2019 (the "Indenture"). The Indenture was entered into by and among Bidco, the guarantors named therein (the "Note Guarantors"), andDeutsche Bank Trust Company Americas , as trustee and as collateral agent. Interest is payable semi-annually onSeptember 15 andMarch 15 beginningSeptember 15, 2019 .
Refer to Note 10 of the notes to our unaudited consolidated financial
statements included elsewhere within this Form 10-Q for additional discussion of
the 2024 Senior Secured Notes.
Concentration of Risks
In the normal course of business, we grant credit to customers based on credit evaluations of their financial condition and generally require no collateral or other security. Major customers are defined as those individually comprising more than 10% of our revenues or accounts receivable. Our largest customers for the nine months endedSeptember 30, 2020 , wereCoreCivic of Tennessee, LLC andTransCanada Keystone Pipeline, LP ,who accounted for 29% and 16% of revenues. The largest customers accounted for 27% and 23% of accounts receivable, respectively, while no other customer accounted for more than 10% of the accounts receivable balance as ofSeptember 30, 2020 . Our largest customers for the nine months endedSeptember 30, 2019 , wereCoreCivic of Tennessee LLC and Halliburton Energy Serviceswho accounted for 20.6% and 12.6% of revenues. The largest customers accounted for 9.4% and 13.9% of accounts receivable, respectively, while no other customer accounted for more than 10% of the accounts receivable balance as ofSeptember 30, 2019 . Major suppliers are defined as those individually comprising more than 10% of the annual goods purchased. for the nine months endedSeptember 30, 2020 , our major suppliers wereJR Civil LLC and Sysco representing 15.0% and 13.0%, of goods purchased, respectively. For the nine months endedSeptember 30, 2019 , our major supplier was Palomar Modular Buildings representing 12.9%, of goods purchased, respectively We provide services almost entirely to customers in the governmental and oil and gas industries and as such, we are almost entirely dependent upon the continued activity of such customers. 52 Table of Contents Contractual Obligations
In the ordinary course of business, we enter into various contractual
obligations for varying terms and amounts. The table below presents our
significant contractual obligations as of
Contractual Obligations Total 2020 2021 and 2022 2023 and 2024 2025 and beyond Capital lease and other financing obligations$ 1,481 $ 1,094 $ 387 $ - $ - Asset retirement obligations 3,683 -
746 - 2,937 Interest payments(1) 113,050 - 64,600 48,450 - New ABL Facility 70,000 - - 70,000 - 2024 Senior Secured Notes 340,000 - - 340,000 - Total$ 528,214 $ 1,094 $ 65,733 $ 458,450 $ 2,937
Pursuant to our 2024 Senior Secured Notes, we will incur and pay interest
(1) expense at 9.50% of the face value of
million. Over the remaining term of the Notes, interest payments total
million.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Commitments and Contingencies
We lease certain land, community units, and real estate under non-cancelable operating leases, the terms of which vary and generally contain renewal options. Total rent expense under these leases is recognized ratably over the initial term of the lease. Any difference between the rent payment and the straight-line expense is recorded as a liability. Rent expense included in services costs in the unaudited consolidated statements of comprehensive income (loss) for cancelable and non-cancelable leases was$4.2 million and$11.1 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Rent expense included in services costs in the unaudited consolidated statements of comprehensive income (loss) for cancelable and non-cancelable leases was$1.3 million and$0.2 million for the three months endedSeptember 30, 2020 and 2019, respectively. Rent expense included in the selling, general, and administrative expenses in the unaudited consolidated statements of comprehensive income (loss) for cancelable and non-cancelable leases was$0.4 million and$0.4 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Rent expense included in the selling, general, and administrative expenses in the unaudited consolidated statements of comprehensive income (loss) for cancelable and non-cancelable leases was$0.1 million and$0.2 million for the three months endedSeptember 30, 2020 and 2019, respectively.
Future minimum lease payments at
aggregate, under non-cancelable operating leases are as follows:
Rest of 2020$ 860 2021 1,887 2022 960 2023 459 2024 295 Total$ 4,461 53 Table of Contents
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our unaudited consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles ("US GAAP"). For a discussion of the critical accounting policies and estimates that we use in the preparation of our audited consolidated financial statements, refer to Note 1 of the notes to our audited consolidated financial statements included in Part II, Item 8 within our Annual Report on Form 10-K filed onMarch 13, 2020 . Additionally, refer to Note 1 of our notes to our unaudited consolidated financial statements included in this Form 10-Q for additional discussion of our summary of significant accounting policies and use of estimates. These estimates require significant judgments and assumptions. There have been no material changes during the three and nine months endedSeptember 30, 2020 to the judgments, assumptions and estimates upon which our critical accounting estimates are based. Principles of Consolidation
Refer to Note 1 of the notes to our unaudited consolidated financial statements
included in this Form 10-Q for a discussion of principles of consolidation.
Recently Issued Accounting Standards
Refer to Note 1 of the notes to our unaudited consolidated financial statements included in this Form 10-Q for our assessment of recently issued and adopted accounting standards. Non-GAAP Financial Measures We have included Adjusted gross profit, EBITDA, Adjusted EBITDA, and Discretionary cash flows which are measurements not calculated in accordance with US GAAP, in the discussion of our financial results because they are key metrics used by management to assess financial performance. Our business is capital-intensive and these additional metrics allow management to further evaluate our operating performance.
depreciation of specialty rental assets and loss on impairment.
Target Hospitality defines EBITDA as net income (loss) before interest expense and loss on extinguishment of debt, income tax expense (benefit), depreciation of specialty rental assets, and other depreciation and amortization. Adjusted EBITDA reflects the following further adjustments to EBITDA to exclude certain non-cash items and the effect of what management considers transactions or events not related to its core business operations:
Other expense (income), net: Other expense (income), net includes consulting
expenses related to certain projects, financing costs not classified as
? interest expense, gains and losses on disposals of property, plant, and
equipment, involuntary asset conversions, COVID-19 related expenses, and other
immaterial non-cash charges.
? Currency (gains) losses, net: Foreign currency transaction gains and losses.
? Restructuring costs: Target Parent incurred certain costs associated with
restructuring plans designed to streamline operations and reduce costs.
Transaction bonus amounts: Target Parent paid certain transaction bonuses to
certain executives and employees related to the closing of the Business
? Combination. As discussed in Note 3 of our notes to our unaudited consolidated
financial statements included in this Form 10-Q, these bonuses were fully
funded by a cash contribution from Algeco Seller in March of 2019.
54
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Transaction expenses:
including legal and professional fees, associated with the Business
? Combination. Such amounts were funded by proceeds from the Business
Combination. The current period primarily included residual tax advisory filing
related expenses associated with the Business Combination.
? Acquisition-related expenses:
costs associated with the acquisition of Superior.
Officer loan expense: Non-cash charge associated with loans to certain
? executive officers of the Company that were forgiven and recognized as selling,
general, and administrative expense upon consummation of the Business Combination. Such amounts are not expected to recur in the future.
Target Parent selling, general and administrative costs: Target Parent incurred
? certain costs in the form of legal and professional fees as well as transaction
bonus amounts, primarily associated with a restructuring transaction that
originated in 2017.
Stock-based compensation: Non-cash charges associated with stock-based
? compensation expense, which has been, and will continue to be for the
foreseeable future, a significant recurring expense in our business and an
important part of our compensation strategy.
Other adjustments: System implementation costs, including primarily non-cash
? amortization of capitalized system implementation costs, claim settlement,
business development, accounting standard implementation costs and certain
severance costs.
We define Discretionary cash flows as cash flows from operations less
maintenance capital expenditures for specialty rental assets.
EBITDA reflects net income (loss) excluding the impact of interest expense and loss on extinguishment of debt, provision for income taxes, depreciation, and amortization. We believe that EBITDA is a meaningful indicator of operating performance because we use it to measure our ability to service debt, fund capital expenditures, and expand our business. We also use EBITDA, as do analysts, lenders, investors, and others, to evaluate companies because it excludes certain items that can vary widely across different industries or among companies within the same industry. For example, interest expense can be dependent on a company's capital structure, debt levels, and credit ratings. Accordingly, the impact of interest expense on earnings can vary significantly among companies. The tax positions of companies can also vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the jurisdictions in which they operate. As a result, effective tax rates and provision for income taxes can vary considerably among companies. EBITDA also excludes depreciation and amortization expense, because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets. These differences can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies.Target Hospitality also believes that Adjusted EBITDA is a meaningful indicator of operating performance. Our Adjusted EBITDA reflects adjustments to exclude the effects of additional items, including certain items, that are not reflective of the ongoing operating results ofTarget Hospitality . In addition, to derive Adjusted EBITDA, we exclude gains or losses on the sale of depreciable assets and impairment losses because including them in EBITDA is inconsistent with reporting the ongoing performance of our remaining assets. Additionally, the gain or loss on sale of depreciable assets and impairment losses represents either accelerated depreciation or excess depreciation in previous periods, and depreciation is excluded from EBITDA.Target Hospitality also presents Discretionary cash flows because we believe it provides useful information regarding our business as more fully described below. Discretionary cash flows indicate the amount of cash available after maintenance capital expenditures for specialty rental assets for, among other things, investments in our existing business. 55
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Adjusted gross profit, EBITDA, Adjusted EBITDA, and Discretionary cash flows are not measurements ofTarget Hospitality's financial performance under GAAP and should not be considered as alternatives to gross profit, net income or other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as measures ofTarget Hospitality's liquidity. Adjusted gross profit, EBITDA, Adjusted EBITDA, and Discretionary cash flows should not be considered as discretionary cash available toTarget Hospitality to reinvest in the growth of our business or as measures of cash that is available to it to meet our obligations. In addition, the measurement of Adjusted gross profit, EBITDA, Adjusted EBITDA, and Discretionary cash flows may not be comparable to similarly titled measures of other companies.Target Hospitality's management believes that Adjusted gross profit, EBITDA, Adjusted EBITDA, and Discretionary cash flow provide useful information to investors aboutTarget Hospitality and its financial condition and results of operations for the following reasons: (i) they are among the measures used byTarget Hospitality's management team to evaluate its operating performance; (ii) they are among the measures used byTarget Hospitality's management team to make day-to-day operating decisions, (iii) they are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results across companies inTarget Hospitality's industry.
The following table presents a reconciliation of
consolidated gross profit to Adjusted gross profit:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Gross Profit$ 11,718 $ 38,556 $ 47,061 $ 115,482 Depreciation of specialty rental assets 11,995 11,222
37,158 31,083 Adjusted gross profit$ 23,713 $ 49,778 $ 84,219 $ 146,565
The following table presents a reconciliation of
consolidated net income (loss) to EBITDA and Adjusted EBITDA:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net income (loss) $ (7,870) $ 9,569 $ (18,267) $ 6,170
Income tax expense (benefit) (2,991) 3,290 (5,187) 5,562
Interest expense, net 9,913 10,172 30,113 24,056
Loss on extinguishment of debt - - - 907
Other depreciation and
amortization 4,341 4,021 12,555 11,600
Depreciation of specialty rental
assets 11,995 11,222 37,158 31,083
EBITDA 15,388 38,274 56,372 79,378
Adjustments
Other expense (income), net 99 723 94 1,141
Restructuring costs - - - 168
Currency gains, net - (77) - (77)
Transaction bonus amounts - - - 28,519
Transaction expenses 26 35 382 9,509
Acquisition-related expenses - 67 - 370
Officer loan expense - - - 1,583
Target Parent selling, general,
and administrative costs - - - 246
Stock-based compensation 886 433
2,808 643 Other adjustments 611 1,155 3,071 1,664 Adjusted EBITDA$ 17,010 $ 40,610 $ 62,727 $ 123,144 56 Table of Contents
The following table presents a reconciliation of
provided by operating activities to Discretionary cash flows:
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