INNOVATE Corp. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are with FY2021. This is an annual report, not a standalone fourth-quarter report. Amounts are in millions of dollars unless stated otherwise.
Business context
INNOVATE is a diversified holding company with three reportable operating segments: Infrastructure (DBM Global, or DBMG), Life Sciences (Pansend) and Spectrum (Broadcasting), plus Other and Non-operating Corporate. Infrastructure is the dominant business, accounting for about 97% of consolidated revenue in 2022.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $1,637.3 | $1,205.2 |
| Gross profit / gross margin | $221.4 / 13.5% | $183.7 / 15.2% |
| Operating income (loss) / margin | $13.4 / 0.8% | $(10.6) / (0.9)% |
| Net loss attributable to INNOVATE | $(35.9) | $(227.5) |
| Net loss attributable to common stockholders | $(40.8) | $(229.7) |
| Cash used in continuing operations | $(9.5) | $(6.5) |
| Capital expenditures | $20.7 | $24.1 |
| Adjusted EBITDA (non-GAAP) | $68.1 | $43.9 |
Revenue rose 35.9%, mainly from Banker Steel, acquired in May 2021, and stronger commercial structural-steel activity. Operating results improved, but the gross margin declined. The smaller net loss primarily reflects the absence of the large 2021 discontinued-operations loss, including the CIG sale loss; continuing-operations loss narrowed to $42.0 from $86.3.
Segment results: Infrastructure revenue was $1,594.3 and operating income was $57.5, versus $1,159.7 and $35.2. Life Sciences revenue was $4.3 and operating loss was $20.1, versus $3.5 and $19.9. Spectrum revenue was $38.7 and operating loss was $3.8, versus $42.0 and $0.8. DBMG backlog was $1,782.3 at year-end, with 52.0% attributable to five projects or commitments.
Year-end consolidated cash and cash equivalents were $80.4, excluding restricted cash; Non-operating Corporate held $9.1 on a standalone basis. Consolidated principal debt was $725.3, up from $630.8, primarily due to increased DBMG revolver borrowings for working capital. Total current assets were $536.4 and current liabilities $417.2. Stockholders’ deficit was $90.6. The company paid no common-stock dividends; preferred dividends continued.
Material changes and unusual items
- DBMG’s revenue growth included $298.3 from Banker Steel’s contribution to the year-over-year increase. DBMG recorded $6.5 of one-time restructuring costs.
- Broadcasting shut down the Azteca America network on December 31, 2022, terminated its related agreements, and recorded $0.7 in employee termination costs. Spectrum revenue and Adjusted EBITDA declined.
- Broadcasting extended its secured notes to May 2024. The rate on $32.9 of notes increased to 11.45%; accrued interest and fees were capitalized, and effective rates on the notes ranged from 12.8% to 19.6%.
- R2 borrowed from Lancer Capital, an entity controlled by INNOVATE’s board chair. The notes totaled $10.8 at year-end, with an 18% rate after amendments and near-term maturity terms; additional notes were issued after year-end.
- On March 6, 2023, INNOVATE completed the sale of its remaining 19% HMN interest and received approximately $32 in cash after taxes and transaction fees.
- Management reported compliance with debt covenants at year-end and stated it expects available cash and subsidiary distributions to fund obligations for at least 12 months after issuance of the financial statements. It cautioned that subsidiary distributions, refinancing, additional capital and asset sales are not assured and may be constrained.
Outlook, risks and contingencies
No numerical revenue or earnings guidance is provided. Management expects to focus on Infrastructure, Life Sciences and Spectrum, while continuing to evaluate acquisitions and dispositions. Principal risks include substantial debt and interest costs, dependence on subsidiary cash distributions, covenant compliance and refinancing, project concentration and cost estimates at DBMG, inflation and labor or supply-chain disruption, and the development, financing and regulatory risks of early-stage Life Sciences businesses. Spectrum faces competition from streaming and other media, as well as FCC licensing and regulatory risks. COVID-related disruption and higher transportation costs affected operations and margins in 2022.
DBMG’s construction revenue depends on estimates of costs to complete. The independent auditor identified this as a critical audit matter. The auditor gave an unqualified opinion on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective as of December 31, 2022. The filing describes pending shareholder and construction litigation; management believes the disclosed matters are not expected to have a material effect, while Schuff Steel stated it could not reasonably estimate potential loss in the Marin hospital case.
Important facts for investors to verify
- DBMG’s project margins, estimated costs to complete, customer concentration and ability to convert backlog into profitable cash receipts.
- Whether DBMG’s higher working-capital borrowing and the company’s consolidated debt burden remain manageable under covenant and liquidity requirements.
- Whether Broadcasting can replace Azteca-related revenue and service its extended, high-cost debt.
- R2’s ability to meet near-term obligations, obtain additional financing and commercialize its products; also verify the terms and governance of related-party Lancer financing.
- Whether the HMN sale proceeds are available for corporate liquidity and how proceeds are applied.
- Developments in disclosed litigation, FCC license renewals, and other material contingencies.