INNOVATE Corp. (NYSE: VATE) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. INNOVATE is a diversified holding company with Infrastructure, Life Sciences, and Spectrum segments, plus Other and Non-operating Corporate activities. Figures are in millions except per-share data.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $375.3 | $423.0 | $1,062.0 | $1,228.0 |
| Gross profit | $58.7 | $58.4 | $154.9 | $158.5 |
| Gross margin | 15.6% | 13.8% | 14.6% | 12.9% |
| Operating income | $10.7 | $6.6 | $12.5 | $6.9 |
| Net loss | $(8.6) | $(6.7) | $(28.3) | $(34.7) |
| Net loss attributable to common stockholders | $(7.3) | $(6.6) | $(28.0) | $(33.8) |
| Basic and diluted loss per share | $(0.09) | $(0.09) | $(0.36) | $(0.44) |
| Adjusted EBITDA (non-GAAP) | $22.1 | $16.4 | $43.5 | $40.0 |
- Revenue and segment mix: Infrastructure generated $369.3 of Q3 revenue and $1,043.4 for the nine-month period. Q3 revenue fell 11.3% year over year, principally due to project timing and lower industrial maintenance activity at Infrastructure, and the cessation of Azteca network operations at Spectrum. Nine-month revenue declined 13.5% for similar reasons.
- Profitability: Gross margin improved year over year in both periods, while operating income increased. Q3 common-stockholder loss widened slightly; the nine-month loss narrowed. Higher interest expense partly offset operating improvement: $17.1 in Q3 and $49.0 for nine months, compared with $13.3 and $38.4, respectively.
- Cash flow: Nine-month operating cash use was $34.7, improved from $72.2 used in 2022. Investing activities provided $41.2, including $54.2 gross proceeds from the HMN investment sale. Financing activities used $30.6. Cash, cash equivalents and restricted cash declined $25.1 to $57.1; unrestricted cash was $55.7 at quarter-end.
- Liquidity and balance sheet: Total assets were $1,096.1 and total liabilities $1,223.0. Current assets of $552.5 were below current liabilities of $557.7. Total principal indebtedness was $756.8, versus $725.3 at year-end 2022; $162.8 was classified as current, versus $30.6 at year-end. Stockholders’ deficit was $135.2.
- Debt and interest: Consolidated debt includes $330.0 of 8.5% senior secured notes due 2026, $51.8 of convertible notes due 2026, and a $35.1 CGIC unsecured note due 2026. The CGIC note’s rate steps up from 9% to 16% in May 2024 and 32% in May 2025. Spectrum had $69.7 of senior secured notes; Infrastructure debt included a $117.7 revolving-line balance. The company reported covenant compliance at September 30, 2023.
Material changes and unusual items
- The sale of the remaining 19% HMN interest generated $54.2 gross proceeds and a $12.2 gain. A separate $3.8 gain arose from the MediBeacon/Huadong transaction; these contributed materially to nine-month other income of $17.2.
- Infrastructure revenue fell, but segment operating income was broadly stable for the nine-month period. Management cited delayed commercial projects and lower industrial maintenance revenue, partly offset by improved margins on newer projects.
- Spectrum revenue declined after Azteca network operations ended December 31, 2022. Q3 Spectrum operating loss increased to $2.1 from $0.6.
- INNOVATE repurchased DBMGi preferred stock from CGIC for $7.1 cash plus a $35.1 unsecured note. R2 Technologies had $17.4 of 20% related-party notes payable to Lancer at quarter-end, with maturity tied to November 15, 2023 or receipt of qualifying financing.
- Q3 included a $2.2 accounts-receivable write-off tied to a customer bankruptcy and $1.1 of restructuring costs, primarily for a foreign office closure. Spectrum recorded impairment charges on redundant equipment.
- CEO Wayne Barr died in July 2023; Paul K. Voigt became Interim CEO. COO Suzi Herbst’s employment ended October 20, 2023.
Outlook, liquidity, risks and contingencies
- No quantified earnings guidance is provided. Management describes Infrastructure work as cyclical and subject to project delays, customer funding, labor and material costs, weather, inflation, interest rates, and changing market conditions. Backlog was $1,265.5 at September 30, 2023; about 45.2% was attributable to five projects, creating concentration and cancellation/scope risk. Remaining unsatisfied performance obligations were $1,257.3, expected to be recognized over approximately 3.25 years.
- Management said available cash, potential revolver borrowings, subsidiary distributions and Lancer’s subsequent letter of support should enable the company to meet obligations for at least 12 months. The November 7, 2023 letter describes support of up to $35.0, subject to its terms; it is not the same as cash already funded. Management cautions that subsidiary distributions, refinancing, capital raising and asset sales are not assured and could dilute shareholders or worsen liquidity.
- After quarter-end, UMB indicated intent to extend Infrastructure’s revolving-line maturity to September 2025 on higher pricing, but definitive agreements were not signed as of filing. Broadcasting subsequently extended its $69.7 notes’ maturity to August 2025; the agreement requires use of certain sale proceeds for repayment and includes additional exit fees.
- Material risks include substantial debt, upcoming maturities and rising interest costs, dependence on subsidiary distributions, covenant compliance, ability to refinance or raise capital, key-person transition, customer and project concentration, and banking-system disruption. Performance bonds were $510.5 at quarter-end; letters of credit were $2.6.
- Disclosed litigation includes DTV derivative claims, a Marin hospital construction dispute for which Schuff cannot estimate potential loss, and Meruelo Television litigation for which the company cannot assess probability or range of loss. Management says it will defend these matters and does not believe pending claims will materially affect the financial statements, but outcomes are uncertain.
Important facts for investors to verify
- Availability, terms and actual funding under Lancer’s up-to-$35.0 support letter, and the company’s standalone liquidity needs and cash access.
- Refinancing and repayment plans for near-term debt, including the status of the UMB extension, Spectrum’s amended notes, and R2’s high-interest related-party notes.
- Infrastructure backlog conversion, project delays, customer concentration, margins, receivable collections and exposure to performance bonds.
- How much reported improvement depends on nonrecurring investment-sale gains, cost reductions, and non-GAAP Adjusted EBITDA adjustments.
- Developments in litigation, covenant headroom, interest-rate burden and any further financing, asset sales or potential shareholder dilution.