# Target Hospitality Corp. (TH) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Target Hospitality Corp.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1712189/000155837025003703/th-20241231x10k.htm
Accession: 0001558370-25-003703
Filing date: 2025-03-26
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/TH/
All MD&A years: /company/TH/mda/
Previous year: /company/TH/mda/fy2023/ (FY 2023)
Next year: /company/TH/mda/fy2025/ (FY 2025)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and capital resources of Target Hospitality Corp. and is intended to help the reader understand Target Hospitality Corp., our operations and our present business environment. This discussion should be read in conjunction with the Company’s audited consolidated financial statements and notes to those statements included in Part II, Item 8 within this Annual Report on Form 10-K. References to “we,” “us,” “our”, “Target Hospitality,” or “the Company” refer to Target Hospitality Corp. and its consolidated subsidiaries.

Executive Summary

Target Hospitality Corp. is one of North America’s largest providers of vertically integrated specialty rental and value-added hospitality services including: catering and food services, maintenance, housekeeping, grounds-keeping, security, health and recreation facilities, overall workforce community management, concierge services and laundry service. As of December 31, 2024, our network included 26 communities to better serve our customers across the US and Canada. We also operate 2 communities not owned or leased by the Company.

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Economic Update

On June 10, 2024, the Company received notice that the U.S. government intended to terminate the STFRC Contract, effective in 60 days, on August 9, 2024. As such effective on August 9, 2024, the STFRC Contract was terminated. The STFRC Contract was based on a fixed minimum lease revenue amount and for the year ended December 31, 2023, contributed approximately $55.9 million in total consolidated revenue compared to approximately $38.3 million of revenue for the year ended December 31, 2024, all of which is related to the Company’s Government segment. These assets associated with the STFRC Contract were reactivated on March  5, 2025 pursuant to the DIPC Contract. During the year ended December 31, 2024, the Company’s Government segment continued to benefit from the PCC Community and the contract (the New PCC Contract and the amendment) thereof with our NP Partner that became effective November 16, 2023 (with the exercise of the first of four one-year extension options on November 16, 2024). However, the PCC Community contributed lower revenues as compared to 2023 driven primarily by lower non-cash revenue amortization of $118.2 million related to an advanced payment for community expansion associated with the prior contract that became fully amortized as of November 2023, and to a lesser extent, by a decrease of $22 million in the minimum lease revenue component of the New PCC Contract amendment compared to the prior contract that ended in November 2023 as well as $21 million of lower variable services revenue generated by the New PCC Contract. The New PCC Contract terminated effective February 21, 2025 as discussed in Note 20 of our audited consolidated financial statements located in Part II, Item 8 within this annual report on Form 10-K.  The Company generated positive cash flows from operations of approximately $151.7 million representing a decrease in cash flows from operations of approximately $5.1 million or 3% for the year ended December 31, 2024 compared to the year ended December 31, 2023 driven by a $22.8 million increase in cash paid for income taxes, and a decrease in cash collections of $21.2 million, partially offset by a decrease in operating expenses of $24.4 million, and an $11.3 million decrease in cash paid for interest driven by a significant reduction in the average amount of debt outstanding during the current year compared to the prior year, and an increase in interest income of $3.2 million. During the year ended December 31, 2024, the Company also purchased 3,866,265 shares of Common Stock for an aggregate price of approximately $33.4 million (exclusive of estimated excise taxes of approximately $0.2 million).

​

For the year ended December 31, 2024, key drivers of financial performance included:

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[[GREPCENT_TABLE]]
[["","\u25cf","Decreased consolidated revenue by ($177.3) million or (31)% compared to the year ended 2023, driven by lower revenue generated from the Government segment primarily from lower non-cash revenue amortization of an advanced payment for community build-out and mobilization of asset activities associated with the Company\u2019s PCC community, which was fully amortized as of November 2023, partially by lower minimum lease revenue as well as lower variable services revenue generated by the New PCC contract in the current period, and the"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","","termination of the STFRC Contract, partially offset by an increase in revenue in the HFS \u2013 South segment by $1.3 million or 1% as compared to the year ended December 31, 2023 as a result of an increase in customer demand."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Generated consolidated net income of approximately $71.4 million for the year ended December 31, 2024 as compared to a net income of approximately $173.7 million for the year ended December 31, 2023. This decrease in net income is primarily attributable to a decrease in revenue, the change in the estimated fair value of warrant liabilities, partially offset by a decrease in costs of services driven primarily by lower costs in the Government segment as a result of operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC Community, a decrease in specialty rental costs, a decrease in depreciation of specialty rental assets, a decrease in selling, general and administrative expenses led by a decrease in stock compensation expense, a decrease in interest expense, net driven by a decrease in interest expense led by a reduction in the average amount of debt outstanding during the current year and an increase in interest income earned on cash equivalents funded by the increase in available cash as a result of cash flows from operations, a decrease in loss on extinguishment of debt, and a decrease in income tax expense led by a decrease in income before income tax."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Generated consolidated Adjusted EBITDA of $196.7 million representing a decrease of ($147.5) million or (43)% as compared to the year ended December 31, 2023, driven primarily by the decrease in revenue led by the lower non-cash revenue amortization mentioned above that ended in November 2023 associated with the prior PCC Contract, partially offset by a decrease in operating expenses comprised of a decrease in services costs and specialty rental costs."]]
[[/GREPCENT_TABLE]]

Adjusted EBITDA is a non-GAAP measure. The GAAP measure most comparable to Adjusted EBITDA is Net income.  Please see “Non-GAAP Financial Measures” for a definition and reconciliation to the most comparable GAAP measure.

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Our Government segment, including several communities in West, Texas supporting critical U.S. government efforts, deliver essential services and accommodations near the southern U.S. border where there is insufficient housing and infrastructure solutions to appropriately address immigration and deportation.    

​

Our proximity to customer activities influences occupancy and demand. We have built, own and operate the largest specialty rental and hospitality services network available to customers operating in the HFS – South region. 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 natural resource development activities.

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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.

Supply and Demand for Natural Resources

As a provider of vertically integrated specialty rental and hospitality services, we are not directly impacted by commodity price fluctuations. However, these price fluctuations indirectly influence our activities and results of operations because the natural resource development 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 natural resources industry and the demand for labor. Commodity prices are volatile and influenced by numerous factors beyond our control, including the domestic and global supply of and demand for natural resources, the commodities trading markets, as well as other supply and demand factors that may influence commodity prices.

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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. In addition, we may be subject, indirectly, to various statutes and regulations applicable to doing business with the U.S. government as a result of our contracts with U.S. government contractor clients.  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 compliance or environmental remediation liabilities and costs.

Public Policy

We have derived, and in the future may derive, a significant portion of our revenues from our subcontracts with U.S. government contractors. The U.S. government and, by extension, our U.S. government contractor customers, may from time to time adopt, implement or modify certain policies or directives that may adversely affect our business. Changes in government policy, presidential administration or other changes in the political landscape relating to immigration policies may similarly result in a decline in our revenues in the Government segment.

We are continuing to pursue an expanding pipeline of government services growth opportunities, and we believe there is significant opportunity to continue to assist the federal government. However, available government funding and economic incentives are subject to change for a variety of reasons that are beyond our control, including budget and policy initiatives and priorities of current and future administrations at the federal and state level. We cannot predict what actions the new Trump administration may take with respect to government contracts that were previously executed.  

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 public health threats or outbreaks, 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 68.8% of our revenue was earned from specialty rental with vertically integrated hospitality services, specifically lodging and related ancillary services, whereas the remaining 31.2% of revenues were earned through leasing of lodging facilities for the year ended December 31, 2024. 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.

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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 development activity in the HFS – South segment, the consumer price index impacting government contracts, and government spending on housing programs.

Adjusted Gross Profit

We analyze our adjusted gross profit, which is a Non-GAAP measure, which we define as revenues less services and specialty rentals costs, excluding impairment, certain severance costs, 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 company overhead, noncash impairment and depreciation expenses, and certain severance costs not reflective of the ongoing results of Target Hospitality. 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 budgets and 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 two reportable business segments: HFS – South and Government:

HFS - South

The HFS – South segment reflects our facilities and operations in the HFS – South region from customers in the natural resources development industry and includes our 16 communities located across Texas and New Mexico.

Government

The Government segment includes facilities and operations provided under a lease and services agreement with our NP Partner, backed by a committed U.S. government contract, to provide a suite of comprehensive service offerings in support of their aid efforts.  As discussed in Note 20 of our audited consolidated financial statements located in Part II, Item 8 within this annual report on Form 10-K, the lease and services agreement with the NP Partner was terminated effective February 21, 2025.

Additionally, this segment includes the facilities and operations of the DIPC provided under the STFRC Contract, which was terminated effective August 9, 2024, but was reactivated under the DIPC Contract effective March 5, 2025.

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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 Canada, three communities in North Dakota, and the catering and other services provided to communities and other workforce accommodation facilities for the natural resource development industries not owned by us.

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:

Government Segment

During the year ended December 31, 2022, the Company executed the Expanded Contract that went into effect in May 2022 to provide enhanced infrastructure and comprehensive facility services that support the critical hospitality solutions the Company provides to the NP Partner and the U.S. government in their missions. The Expanded Contract provided for a significant scope expansion and term extension for the continuation of services provided under the prior agreement that originated in March 2021. The Expanded Contract operated with similar structure to the Company’s prior government services subcontracts, which are centered around minimum revenue amounts supported by the U.S. government. Additionally, the Expanded Contract included occupancy-based variable services revenue that aligned with active community population. The minimum revenue amount, which consisted of annual lease revenue and nonrecurring infrastructure enhancement revenue, provided for a minimum annual revenue contribution of approximately $390 million and was fully committed over its initial contract term. Inclusive of all potential occupancy-based variable services revenue, the Expanded Contract provided for a maximum initial annual total contract amount of approximately $575 million. On May 15, 2023, the Company executed a six-month extension of the Expanded Contract, which extended the period of performance through November 15, 2023 and increased the contract value, with no change to contract structure or any other existing economic terms. The Expanded Contract terminated on November 15, 2023. The non-recurring infrastructure enhancement revenue was generated from an advance payment made during the year ended December 31, 2022 for the community build-out, and mobilization of asset activities related to the community expansion associated with the Expanded Contract.  The advanced payment was determined to be related to future services to be amortized to revenue over the estimated term of the Expanded Contract.  This advance payment revenue amortization ended when the Expanded Contract terminated on November 15, 2023.  As such, the prior period for the year ended December 31, 2023 included this revenue amortization in the amount of approximately $118.2 million, whereas the current period does not. Additionally, the Expanded Contract included an annual minimum lease revenue amount of approximately $196 million that impacted the prior period compared to the current period being impacted by an annual minimum lease revenue amount of approximately $178 million to $168 million under the New PCC Contract explained below.  

During the year ended December 31, 2023, the Company executed the New PCC Contract, pursuant to an Indefinite Delivery, Indefinite Quantity Task Order between our NP Partner and the U.S. government, that replaced the Expanded Contract and became effective on November 16, 2023. The New PCC Contract includes a one year base period through November 15, 2024, an option to extend for up to four additional one year periods, and an option to extend for up to six months upon the conclusion of the base period or any of the option periods. Under the New PCC Contract, the Company maintains similar facility size and operational scope compared to the Expanded Contract. The New PCC Contract operates with similar structure to the Company’s prior government services subcontracts, which are centered around minimum revenue amounts supported by the U. S. government. Additionally, the New PCC Contract includes occupancy-based variable services revenue that align with active community population.  During the year ended December 31, 2024, the Company executed the first of four one-year extension options on the New PCC Contract along with an amendment, effective November 16, 2024, which supports a community capable of serving up to 6,000 individuals. The minimum revenue amount, which consist of annual lease revenue, provide for a minimum annual revenue contribution of approximately $168 million, which decreased from $178 million pursuant to the amendment of the New PCC Contract on November 16, 2024. Assuming all option periods are exercised, the 5-year cumulative minimum revenue amount of the New PCC Contract is expected to be approximately $851 million through 2028. As discussed in Note 20 of our audited

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consolidated financial statements located in Part II, Item 8 within this annual report on Form 10-K, the New PCC Contract with the NP Partner was terminated effective February 21, 2025.

Additionally, the termination of the STFRC Contract as well as the change from the prior Expanded Contract to the New PCC Contract impacts comparability between periods.  

Results of Operations

The period to period comparisons of our results of operations have been prepared using the historical periods included in our audited consolidated financial statements. The following discussion should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this document.

Consolidated Results of Operations for the years ended December 31, 2024, 2023 and 2022($ in thousands):

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[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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Comparison of Years Ended December 31, 2024 and 2023

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Total Revenue. Total revenue was $386.3 million for the year ended December 31, 2024 as compared to $563.6 million for the year ended December 31, 2023, and consisted of $265.9 million of services income and $120.4 million of specialty rental income. Total revenue for the year ended December 31, 2023 consisted of $365.6 million of services income and $198.0 million of specialty rental income.

Services income consists primarily of specialty rental and vertically integrated and comprehensive hospitality services including room revenue, catering and food services, maintenance, housekeeping, grounds-keeping, security, overall workforce community management services, health and recreation facilities, concierge services, and laundry service. The main drivers of the decrease in services income revenue year over year was lower revenue in the Government segment in the current period from the decrease in the non-cash revenue amortization that ended in November 2023 associated with the advanced payment from the prior Expanded Contract that terminated on November 15, 2023, partially by lower minimum lease revenue as well as lower variable services revenue generated by the New PCC contract and the New PCC Contract amendment in the current period, and the termination of the STFRC Contract.

Specialty rental income consists primarily of revenues from leasing rooms and other facilities at certain communities that include contractual arrangements with customers that are considered leases under the authoritative accounting guidance

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for leases. Specialty rental income decreased primarily as a result of lower revenue in the Government segment from the decrease in the non-cash revenue amortization that ended in November 2023 associated with the advanced payment from the prior Expanded Contract that terminated on November 15, 2023, partially by lower minimum lease revenue as well as lower variable services revenue generated by the New PCC contract in the current period, and the termination of the STFRC Contract.

Cost of services. Cost of services was $132.1 million for the year ended December 31, 2024 as compared to $151.6 million for the year ended December 31, 2023. The decrease in services costs is primarily due to a decrease in services costs in the Government segment driven primarily by operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC Community, including lease terminations as a result of the purchase of certain previously leased equipment, and partially driven by lower occupancy at the PCC Community. Approximately $1 million of this decrease was driven by a community in the All Other Category that incurred lodge removal and transportation costs in the prior period that did not recur in the current period, while approximately $3.3 million of this decrease was driven by the termination of the STFRC Contract.  These decreases were partially offset by an increase of approximately $1.9 million in the HFS-South segment related to an increase in operational costs from community expansion to support increased customer demand in the HFS-South segment, partially offset by the prior period including asset mobilization and integration costs associated with a new community acquired in January 2023 that did not recur in the current period and operational efficiencies achieved in the current period.

Specialty rental costs. Specialty rental costs were approximately $18.8 million for the year ended December 31, 2024 as compared to $30.1 million for the year ended December 31, 2023. The decrease in specialty rental costs is primarily due to a decrease in costs from the Government segment driven by operational efficiencies and reduced leasing costs associated with certain leases terminated at the PCC Community and termination of the STFRC Contract in the Government segment.

Depreciation of specialty rental assets. Depreciation of specialty rental assets was $57.2 million for the year ended December 31, 2024 as compared to $68.6 million for the year ended December 31, 2023. The decrease in depreciation expense is primarily attributable to a decrease in depreciation on certain specialty rental assets and related leasehold improvements acquired or built in 2022 to support growth of the Government segment related to the Expanded Contract, which became fully depreciated during the year ended December 31, 2023, while approximately $3 million of this decrease was driven by a decrease in depreciation of specialty rental assets in the HFS-South segment for certain assets that became fully depreciated during 2024.

Selling, general and administrative. Selling, general and administrative was $54.3 million for the year ended December 31, 2024 as compared to $56.1 million for the year ended December 31, 2023. The decrease in selling, general and administrative expenses of ($1.9) million was primarily driven by a decrease in stock compensation expense of approximately $3.9 million largely from the liability-based stock appreciation right awards (“SARs”) driven by a lower number of SAR awards outstanding during the current period compared to the prior period as approximately 50% of such awards were outstanding as of December 31, 2023 compared to 0% in the current period as there are no remaining awards outstanding as of December 31, 2024 as these awards vested and were exercised as of December 31, 2024. Amortization of system implementation costs also decreased by approximately $0.7 million from the prior year as such costs became fully amortized in May of 2024 as scheduled. Recruiting expenses also decreased by approximately $0.4 million from the prior year. These decreases were partially offset by an increase in severance of approximately $1.0 million for certain terminated employees during the year ended December 31, 2024, other compensation and benefits cost increases of approximately $0.4 million, audit fee increases of approximately $0.4 million, other professional fee increases of approximately $0.5 million, and an increase in expense for a non-cash share settlement on December 12, 2024 with a former non-employee director of the Company of approximately $0.8 million based on the value of the settlement shares on the settlement date.

Other depreciation and amortization. Other depreciation and amortization expense was $15.6 million for the year ended December 31, 2024 as compared to $15.4 million for the year ended December 31, 2023. The increase in other depreciation and amortization is primarily driven by an increase in depreciation associated with an increase in finance leases for commercial use vehicles.

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Other expense, net. Other expense (income), net was ($0.5) million for the year ended December 31, 2024 as compared to $1.2 million for the year ended December 31, 2023. This decrease in expense is primarily driven by costs incurred on the disposal of assets in the All Other segment category in the prior year, which did not recur in the current year.  

Loss on extinguishment of debt. Loss on extinguishment of debt was $0 for the year ended December 31, 2024 as compared to $2.3 million for the year ended December 31, 2023. The decrease in loss on extinguishment of debt is due to the partial redemption of Arrow Bidco’s 9.50% Senior Secured Notes due 2024 (the “2024 Senior Secured Notes”) on March 15, 2023, which was accounted for as a partial extinguishment of debt and resulted in a charge of approximately $1.7 million related to the write-off of unamortized deferred financing costs and unamortized original issue discount. Approximately $0.4 million of the change related to the write-off of unamortized deferred financing costs for non-continuing lenders in connection with the First Amendment to the ABL Facility on February 1, 2023. The remainder of the change relates to the write-off of approximately $0.2 million of the remaining unamortized deferred financing costs and unamortized original issue discount associated with the redemption on November 21, 2023 of the remaining portion of the 2024 Senior Secured Notes that were not exchanged for the new 2025 Senior Secured Notes in Arrow Bidco’s offer to exchange (the “Notes Exchange Offer”) any and all of its outstanding 2024 Senior Secured Notes for cash and for the 2025 Senior Secured Notes. No such activity occurred in the current period. Refer to Note 8 of the notes to our audited consolidated financial statements in Part II, Item 8 within this Annual Report on Form 10-K for further discussion regarding extinguishment of debt and the Notes Exchange Offer.

Interest expense, net. Interest expense, net was $16.6 million for the year ended December 31, 2024 as compared to interest expense, net of $22.6 million for the year ended December 31, 2023. The change in interest expense, net was primarily driven by a decrease in interest expense on the Senior Secured Notes by approximately $2.9 million driven by a lower outstanding debt balance in current year as approximately $153.1 million of the Senior Secured Notes were paid off during the year ended December 31, 2023. Approximately $1.9 million of this decrease was driven by lower deferred financing cost amortization on the Senior Secured Notes during the current year due to the write-off of unamortized deferred financing costs during the year ended December 31, 2024 driven by the partial extinguishment of debt associated with the partial redemption of the 2024 Senior Secured Notes discussed above. Approximately $2.6 million of this decrease was driven by an increase in interest income earned on cash equivalents funded by the increase in available cash as a result of cash flows from operations. These decreases were partially offset by an increase in Senior Secured Note original issue discount amortization of approximately $1 million driven by fees incurred in connection with the Senior Note Exchange that closed on November 1, 2023 as more fully discussed in Note 8 of the notes to our audited consolidated financial statements in Part II, Item 8 within this Annual Report on Form 10-K. Additionally, these decreases were partially offset by an increase in ABL Facility deferred financing costs amortization and unused line fee expenses combined of approximately $0.3 million driven by the ABL Facility amendments completed in the prior year.

Change in fair value of warrant liabilities. Change in fair value of warrant liabilities represents the fair value adjustments to the outstanding Private Warrant liabilities based on the change in their estimated fair value at each reporting period end. The change in fair value of the warrant liabilities was ($0.7) million for the year ended December 31, 2024 as compared to ($9.1) million for the year ended December 31, 2023. The change in the fair value of the warrant liabilities is the result of changes in market prices deriving the value of the financial instruments. The estimated value of the Private Warrants decreased in the current year, generating an increase to income in the current year. There was also a lower number of outstanding Private Warrants in the current year compared to the prior year given the Private Warrants expired March 15, 2024 as discussed in Note 9 of the notes to our audited consolidated financial statements in Part II, Item 8 within this Annual Report on Form 10-K.

Income tax expense.  Income tax expense was $21.4 million for the year ended December 31, 2024 as compared to $51.1 million for the year ended December 31, 2023. The decrease in income tax expense is primarily attributable to a decrease in income before income tax for the year ended December 31, 2024 led by a decrease in revenue, partially offset by cost decreases previously mentioned.

​

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Comparison of the Years Ended December 31, 2023 and 2022

​

For discussion of the comparison of our operating results for the years ended December 31, 2023 and 2022, please read the “Comparison of Years Ended December 31, 2023 and 2022” section located in the Management Discussion & Analysis section in our Annual Report on From 10-K for the year ended December 31, 2023 filed on March 13, 2024 and is incorporated herein by reference.

Segment Results

The following table sets forth our selected results of operations for each of our reportable segments for the years ended December 31, 2024, 2023 and 2022 ($ in thousands, except for Average Daily Rate amounts).

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","For the Years Ended December 31,","\u200b","\u200b","Amount of Increase (Decrease)","\u200b","Percentage Change Increase (Decrease)","\u200b","","Amount of Increase (Decrease)","\u200b","Percentage Change Increase (Decrease)"],["Revenue:","2024","\u200b","2023","\u200b","2022","\u200b","\u200b","2024 vs. 2023","\u200b","2024 vs. 2023","\u200b","\u200b","2023 vs. 2022","\u200b","2023 vs. 2022"],["Government","$","224,650","\u200b","$","403,724","\u200b","$","360,294","\u200b","$","(179,074)","\u200b","(44)%","\u200b","$","43,430","\u200b","12%"],["HFS - South","\u200b","149,931","\u200b","\u200b","148,677","\u200b","\u200b","132,373","\u200b","\u200b","1,254","\u200b","1%","\u200b","\u200b","16,304","\u200b","12%"],["All Other","\u200b","11,691","\u200b","\u200b","11,207","\u200b","\u200b","9,318","\u200b","\u200b","484","\u200b","4%","\u200b","\u200b","1,889","\u200b","20%"],["Total revenues","$","386,272","\u200b","$","563,608","\u200b","$","501,985","\u200b","$","(177,336)","\u200b","(31)%","\u200b","$","61,623","\u200b","12%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Adjusted Gross Profit","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Government","$","185,268","\u200b","$","332,480","\u200b","$","246,598","\u200b","$","(147,212)","\u200b","(44)%","\u200b","$","85,882","\u200b","35%"],["HFS - South","\u200b","50,822","\u200b","\u200b","51,444","\u200b","\u200b","54,558","\u200b","\u200b","(622)","\u200b","(1)%","\u200b","\u200b","(3,114)","\u200b","(6)%"],["All Other","\u200b","(747)","\u200b","\u200b","(1,974)","\u200b","\u200b","(1,195)","\u200b","\u200b","1,227","\u200b","(62)%","\u200b","\u200b","(779)","\u200b","65%"],["Total Adjusted Gross Profit","$","235,343","\u200b","$","381,950","\u200b","$","299,961","\u200b","$","(146,607)","\u200b","(38)%","\u200b","$","81,989","\u200b","27%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Average Daily Rate","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["HFS - South","$","73.57","\u200b","$","75.22","\u200b","$","73.39","\u200b","$","(1.65)","\u200b","\u200b","\u200b","$","1.83","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

​

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, certain severance costs, 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.

​

Comparison of Years Ended December 31, 2024 and 2023

​

Government

Revenue for the Government segment was $224.7 million for the year ended December 31, 2024 as compared to $403.8 million for the year ended December 31, 2023.

Adjusted gross profit for the Government segment was $185.3 million for the year ended December 31, 2024 as compared to $332.5 million for the year ended December 31, 2023.

Revenue decreased primarily due to the decrease in the non-cash revenue amortization of approximately $118.2 million that ended in November 2023 associated with the advanced payment from the prior Expanded Contract that terminated on November 15, 2023 and partially by lower minimum lease revenue of approximately $22 million as well as lower variable services revenue of approximately $21 million generated by the New PCC contract in the current year. This was also partially driven by a decrease in revenue of approximately $18 million from the South Texas Family Residential Center led by the STFRC Contract termination as previously discussed.

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Adjusted gross profit decreased as a result of the decrease in revenue mentioned above, partially offset by lower costs due to operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC Community, including lease terminations as a result of the purchase of certain previously leased equipment. This was also partially offset by a decrease in costs of approximately $6.4 million from the South Texas Family Residential Center led by the STFRC Contract termination previously discussed.

Hospitality & Facilities Services - South

Revenue for the HFS – South segment was $149.9 million for the year ended December 31, 2024, as compared to $148.7 million for the year ended December 31, 2023.

​

Adjusted gross profit for the HFS – South segment was $50.8 million for the year ended December 31, 2024, as compared to $51.4 million for the year ended December 31, 2023.

The increase in revenue of approximately $1.3 million was primarily attributable to an increase in customer demand and more communities in operation during the year ended December 31, 2024.

​

The decrease in adjusted gross profit of approximately $0.6 million was primarily attributable to an increase in operational costs from community expansion to support increased customer demand, partially offset by a decrease in service costs driven by the prior year including asset mobilization and integration costs associated with the new community acquired in January 2023 that did not recur in the current year and by operational efficiencies achieved in the current year. The increase in revenue noted above also partially offset this decrease.

​

Comparison of the Years Ended December 31, 2023 and 2022

​

For discussion of the comparison of our operating results for the years ended December 31, 2023 and 2022, please read the “Comparison of Years Ended December 31, 2023 and 2022” section located in the Management Discussion & Analysis section in our Annual Report on Form 10-K for the year ended December 31, 2023 filed on March 13, 2024 and is incorporated herein by reference.

Liquidity and Capital Resources

We depend on cash flow from operations, cash on hand and borrowings under our ABL Facility to finance our acquisition strategy, working capital needs, principal debt payments, debt service requirements, and capital expenditures. As of December 31, 2024, the ABL Facility had unused available borrowing capacity of $175 million. 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, acquisition, and diversification strategy discussed in Item 1, “Business” of this Annual Report on Form 10-K, 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.  

We continue to review available acquisition opportunities with the awareness that any such acquisition may require us to incur additional debt to finance the acquisition and/or to issue shares of our Common Stock or other equity securities as acquisition consideration or as part of an overall financing plan. We will continue to evaluate alternatives to optimize our capital structure, which could include the issuance or repurchase of additional unsecured and secured debt, equity securities and/or equity-linked securities.  There can be no assurance as to the timing of any such issuance or repurchase.  From time to time, we may also seek to streamline our capital structure and improve our financial position through refinancing or restructuring our existing debt or retiring certain of our securities for cash or other consideration. For additional discussion of risks related to our liquidity and capital resources, refer to the section titled “Risk Factors” in Part I Item 1A of this Annual Report on Form 10-K.

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Capital Requirements

During the year ended December 31, 2024, we incurred approximately $32.5 million in capital expenditures, which decreased by approximately $33.1 million compared to the year ended December 31, 2023 largely driven by lower growth capital expenditures, led by the HFS-South segment and partially driven by the Government segment, partially offset by higher maintenance capital expenditures of approximately $6.5 million, and an increase in finance lease assets of approximately $1 million. Our total annual 2024 capital spending included approximately $15.8 million of capital expenditures driven by the HFS-South segment and approximately $15.5 million driven by the Government segment, most of which was comprised of maintenance capital expenditures. In 2022, capital expenditures incurred increased from 2021, primarily driven by growth projects to increase community capacity, mainly in the Government segment.  Although growth capital expenditures are largely discretionary, our long-lived specialty rental assets require a certain level of maintenance capital expenditures, which have ranged from approximately 0.4% to 5.4% of annual revenue between 2020 and 2024, with an average cost of approximately 2.9% of annual revenue. Maintenance capital expenditures for specialty rental assets amounted to approximately $20.7 million, $14.2 million, and $12.3 million for the years ended December 31, 2024, 2023 and 2022, respectively.  As we pursue growth, 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 a reduction 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 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.

The following table sets forth general information derived from our audited consolidated statements of cash flows:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","For the Years Ended"],["($ in thousands)","\u200b","December 31,"],["\u200b","","2024","","2023","\u200b","2021"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net cash provided by operating activities","\u200b","$","151,675","\u200b","$","156,801","\u200b","$","305,612"],["Net cash used in investing activities","\u200b","","(28,842)","\u200b","","(68,180)","\u200b","\u200b","(140,228)"],["Net cash used in financing activities","\u200b","","(36,064)","\u200b","","(166,369)","\u200b","\u200b","(7,098)"],["Effect of exchange rate changes on cash and cash equivalents","\u200b","\u200b","(30)","\u200b","\u200b","4","\u200b","\u200b","(19)"],["Net increase (decrease) in cash and cash equivalents","\u200b","$","86,739","\u200b","$","(77,744)","\u200b","$","158,267"]]
[[/GREPCENT_TABLE]]

​

Comparison of Years Ended December 31, 2024 and 2023

​

Cash flows provided by operating activities. Net cash provided by operating activities was $151.7 million for the year ended December 31, 2024 compared to $156.8 million for the year ended December 31, 2023. This decrease in net cash provided by operating activities relates primarily to a $22.8 million increase in cash paid for income taxes, and a decrease in cash collections of $21.2 million, partially offset by a decrease in operating expenses of $24.4 million driven by a decrease of approximately $3.9 million in cash payments for the vested SAR awards, and by a decrease in operating expenses led by the Government segment driven by operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC Community, including lease terminations as a result of the purchase of certain previously leases equipment, and partially driven by lower occupancy at the PCC Community as well as the termination of the STFRC Contract, and an $11.3 million decrease in cash paid for interest driven by a significant reduction in the average amount of debt outstanding during the current year compared to the prior year, and an increase in interest income of $3.2 million.

​

Cash flows used in investing activities. Net cash used in investing activities was $28.8 million for the year ended December 31, 2024 compared to $68.2 million for the year ended December 31, 2023. This decrease in net cash used in investing activities was primarily related to a decrease in growth capital expenditures in the HFS – South segment with the largest single driver being the $18.6 million acquisition of community assets and related intangibles in January 2023,

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supporting continued customer demand. To a lesser extent, the net decrease was related to a $5.0 million acquisition of community assets in April 2023 and $1.3 million worth of land acquisitions during the year ended December 31, 2023, supporting Government segment growth. The remainder of the decrease was driven by a decrease in other growth capital expenditures in the Government segment as the prior period included expansion related activities associated with the Expanded Contract that became effective on May 16, 2022 and drove a significant amount of capital expenditure spend into 2023.

Cash flows used in financing activities. Net cash used in financing activities was $36.1 million for the year ended December 31, 2024 compared to $166.4 million for the year ended December 31, 2023. The decrease in net cash used in financing activities was driven primarily by the prior year including approximately $153.1 million of combined repayments related to the 2024 Senior Secured Notes on March 15, 2023 and November 21, 2023. The prior year also included payments of deferred financing costs of approximately $5.2 million associated with the ABL Facility amendments and the issuance of the 2025 Senior Secured Notes on November 1, 2023 in connection with the Notes Exchange Offer, whereas the current year had no such payments. The decrease in net cash used in financing activities was also driven by the prior year including the payment of accrued issuance costs from the warrant exchange of $1.5 million that closed in December of 2022, and taxes paid related to net share settlement of equity awards of approximately $6.8 million. These decreases in net cash used in financing activities were partially offset by the current year increase in net cash used in financing activities of approximately $33.4 million for the repurchase of Common Stock as part of the share repurchase program, combined with taxes paid related to net share settlement of equity awards of $2.6 million in the current year.

Comparison of the Years Ended December 31, 2023 and 2022

​

For discussion of the comparison of our operating results for the years ended December 31, 2023 and 2022, please read the “Comparison of Years Ended December 31, 2023 and 2022” section located in the Management Discussion & Analysis section in the our Annual Report on Form 10-K for the year ended December 31, 2023 filed on March 13, 2024 and is incorporated herein by reference.

Indebtedness

The Company’s finance lease and other financing obligations as of December 31, 2024 consisted of $3.3 million of finance leases. The finance leases pertain to leases entered into during 2022 through December 31, 2024, for commercial-use vehicles with 48 to 36-month terms (and continue on a month-to-month basis thereafter) expiring through 2028. Refer to Notes 1, 8, and 13 of the notes to our audited consolidated financial statements included in Part II, Item 8 within this Annual Report on Form 10-K for further discussion regarding finance leases.

The Company’s finance lease and other financing obligations as of December 31, 2023, consisted of approximately $2.4 million of finance leases related to commercial-use vehicles with the same terms as described above.

ABL Facility

On March 15, 2019, as amended on February 1, 2023, August 10, 2023, and October 12, 2023, Topaz, Arrow 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 $175 million (the “ABL Facility”) with a termination date of February 1, 2028, which termination date is subject to a springing maturity that will accelerate the maturity of the ABL Facility if any of the 2025 Senior Secured Notes remain outstanding on the date that is ninety-one days prior to the stated maturity date thereof.  During the year ended December 31, 2022, $70 million was drawn and $70 million was repaid on the ABL Facility.  During the years ended December 31, 2024 and 2023, respectively no amounts were drawn or repaid on the ABL Facility resulting in an outstanding balance of $0 as of December 31, 2024 and 2023, respectively. Refer to Note 8 of the notes to our audited consolidated financial statements located in Part II, Item 8 within this Annual Report on Form 10-K for additional information on the ABL Facility.  

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Senior Secured Notes

On March 15, 2019, Arrow Bidco issued $340 million in aggregate principal amount of 2024 Senior Secured Notes under an indenture dated March 15, 2019 (the “2024 Notes Indenture”). The 2024 Notes Indenture was entered into by and among Arrow Bidco, the guarantors named therein (the “2024 Senior Secured Note Guarantors”), and Deutsche Bank Trust Company Americas, as trustee and as collateral agent. Interest was payable semi-annually on September 15 and March 15 and began September 15, 2019. During the year ended December 31, 2022, the Company made an elective repayment of approximately $5.5 million on the 2024 Senior Secured Notes, reducing the principal balance outstanding to $334.5 million from an original principal balance of $340 million. On March 15, 2023, Arrow Bidco redeemed $125 million in aggregate principal amount of the outstanding 2024 Senior Secured Notes. The redemption was accounted for as a partial extinguishment of debt. In connection with the Notes Exchange Offer, on November 1, 2023 (the “Notes Exchange Offer Settlement Date”), approximately $181.4 million of 2024 Senior Secured Notes were exchanged by Arrow Bidco and Arrow Bidco issued approximately $181.4 million in aggregate principal amount of the 2025 Senior Secured Notes pursuant to an indenture, dated November 1, 2023, by and among Arrow Bidco, the guarantors from time to time party thereto and Deutsche Bank Trust Company Americas, as trustee and collateral agent (the “2025 Senior Secured Notes Indenture”). Interest is payable semi-annually on March 15 and September 15 of each year, beginning March 15, 2024. Following this issuance and related transactions, approximately $28.1 million aggregate principal amount of 2024 Senior Secured Notes remained outstanding, which were subsequently redeemed on November 21, 2023 resulting in an outstanding balance of $0. As of December 31, 2024, none of the 2024 Senior Secured Notes remain outstanding and the 2025 Senior Secured Notes had an outstanding principal balance of $181.4 million. Refer to Note 8 of the notes to our audited consolidated financial statements located in Part II, Item 8 within this Annual Report on Form 10- K for additional discussion of the 2024 Senior Secured Notes, the Notes Exchange Offer, and the 2025 Senior Secured Notes.

Cash requirements

We expect that our principal short-term (over the next 12 months) and long-term needs for cash relating to our operations will be to primarily fund (i) operating activities and working capital, (ii) maintenance capital expenditures for specialty rental assets, (iii) payments due under finance and operating leases, and (iv) debt service interest payments. We plan to fund such cash requirements from our existing sources of liquidity as previously discussed. The table below presents information on payments coming due under the most significant categories of our needs for cash (excluding operating cash flows pertaining to normal business operations, other than operating lease obligations) as of December 31, 2024 ($ in thousands):

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","Total","","2025","\u200b","2026","\u200b","2027","\u200b","2028","\u200b","2029"],["Interest Payments(1)","\u200b","$","14,629","\u200b","$","14,629","\u200b","$","\u2014","\u200b","$","\u2014","\u200b","$","\u2014","\u200b","$","\u2014"],["2025 Senior Secured Notes","\u200b","","181,446","\u200b","\u200b","181,446","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014"],["Operating lease obligations, including imputed interest(2)","\u200b","\u200b","30,948","\u200b","\u200b","8,927","\u200b","\u200b","9,325","\u200b","\u200b","6,181","\u200b","\u200b","5,467","\u200b","\u200b","1,048"],["Total","\u200b","$","227,023","\u200b","$","205,002","\u200b","$","9,325","\u200b","$","6,181","\u200b","$","5,467","\u200b","$","1,048"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","We will incur and pay interest expense at 10.75% of the remaining face value of $181.4 million annually in connection with our 2025 Senior Secured Notes due June 15, 2025. Over the remaining term of the 2025 Senior Secured Notes, interest payments total approximately $14.6 million."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]