INNOVATE Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Amounts are in U.S. dollars; financial figures are in millions unless otherwise indicated. INNOVATE is a diversified holding company with Infrastructure, Life Sciences, Spectrum, and Other activities. Infrastructure is primarily DBM Global (DBMG).
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $317.9 | $412.8 |
| Gross profit / gross margin | $43.6 / 13.7% | $49.8 / 12.1% |
| Operating income (loss) | $(4.0) | $0.7 |
| Net loss | $(8.0) | $(14.1) |
| Net loss attributable to common stockholders | $(10.2) | $(13.6) |
| Basic and diluted loss per share | $(0.13) | $(0.18) |
| Adjusted EBITDA (non-GAAP) | $4.9 | $11.5 |
| Cash used in operating activities | $(77.0) | $(63.4) |
- Revenue and margins: Revenue declined $94.9 million, or about 23%, primarily because of delayed Infrastructure projects; Spectrum revenue also fell following the Azteca America network shutdown. Gross profit declined $6.2 million, though gross margin improved to 13.7% from 12.1%.
- Segments: Infrastructure revenue was $311.7 million, down $90.5 million, and operating income fell to $6.3 million from $11.9 million. Life Sciences reported a $4.4 million operating loss; Spectrum reported a $0.5 million operating loss. Infrastructure Adjusted EBITDA was $16.3 million, down from $20.5 million; Life Sciences Adjusted EBITDA loss widened to $7.8 million.
- Cash flow: Operating cash use increased by $13.6 million, reflecting lower earnings and working-capital outflows, among other items. Investing activities provided $51.2 million, mainly from the HMN investment sale; financing activities used $38.0 million. Cash and cash equivalents were $16.6 million at quarter-end, versus $80.4 million at December 31, 2022. Cash including restricted cash was $18.0 million.
- Debt and liquidity: Consolidated principal indebtedness was $706.5 million at quarter-end, down from $725.3 million at year-end. Current debt obligations were $32.9 million; long-term debt obligations were $664.3 million, net of discounts and financing costs. Management said it expected to meet liquidity needs for at least 12 months using cash, revolving-credit availability, and subsidiary distributions, but noted that distributions and external financing are uncertain and may be restricted or dilutive. The company reported compliance with debt covenants at March 31.
- Other balance-sheet items: Total assets were $1,044.1 million; total liabilities were $1,150.1 million; stockholders’ deficit was $118.1 million. Contract assets were $180.2 million and contract liabilities were $104.9 million.
Material changes and unusual items
- INNOVATE sold its remaining 19% interest in HMN on March 6 for $54.2 million gross proceeds, recognized a $12.3 million gain, and paid $15.9 million of proceeds to noncontrolling and redeemable noncontrolling holders by quarter-end. A $4.4 million foreign tax payment was withheld.
- Q1 other income included the $12.3 million HMN sale gain and a $3.8 million gain from a MediBeacon investment transaction. These gains are not a measure of recurring operating performance. The MediBeacon transaction also resulted in $3.8 million of additional equity-method losses being recognized.
- Interest expense increased to $15.6 million from $12.6 million, attributed primarily to higher rates, debt-cost amortization, and higher subsidiary debt balances.
- DBMG backlog was $1,595.6 million at March 31; five contracts accounted for $844.7 million, or 52.9%. The filing notes that project delays, cancellations, or scope reductions could materially affect backlog and results.
- In Q1, R2 Technologies consolidated prior related-party borrowings into a $13.0 million note bearing 20% interest, due by June 30, 2023 or shortly after qualifying financing. The lender, Lancer Capital, is controlled by INNOVATE’s Board Chairman.
Outlook, risks and subsequent events
- Management described Infrastructure activity as cyclical and said customer and general-contractor delays shifted work out of Q1. It identified project timing, customer access to capital, inflation, interest rates, labor and supply constraints, and regional economic conditions as factors that can cause significant period-to-period variation. No quantitative full-year guidance is provided in the supplied filing text.
- After quarter-end, the corporate revolving-credit facility was extended to March 16, 2025 and moved to SOFR-based rates. INNOVATE drew an additional $8.0 million on May 8, bringing the balance to $13.0 million.
- After quarter-end, INNOVATE paid $7.1 million and issued CGIC a $35.1 million subordinated unsecured note to settle redemption of DBMGi preferred stock. The note is due February 28, 2026, with interest stepping from 9% to 16% and then 32%; it includes mandatory prepayment provisions tied to certain asset and equity-sale proceeds.
- Liquidity depends partly on subsidiaries’ ability to distribute cash, subject to financing restrictions and other conditions. The company cautioned that refinancing, new capital, and asset sales may not be available on acceptable terms, and could worsen liquidity or dilute common shareholders. Future covenant compliance may depend on managing outflows or completing financing or asset transactions.
- Disclosed legal matters include shareholder litigation involving DBMG and DTV, and a construction-related claim against DBMG subsidiary Schuff Steel. Management said it does not believe pending matters will materially affect the financial statements; Schuff stated it cannot reasonably estimate potential loss in its case.
- The prior tax-benefits rights plan expired March 31; a replacement plan was adopted April 1. It generally addresses acquisitions of 4.9% or more of common stock and may have anti-takeover effects. The filing also added bank-failure and uninsured-deposit exposure as a risk factor.
Important facts for investors to verify
- Whether Infrastructure project delays ease, and whether backlog converts to revenue and cash as expected; assess the concentration in five major projects.
- Cash burn, working-capital needs, subsidiary distributions, and availability under credit facilities against near-term debt service and other obligations.
- Terms, cash cost, and covenant implications of the CGIC note and the additional revolving-credit draw, including the sharply increasing stated interest rate.
- Whether management maintains covenant compliance and secures financing or other liquidity sources without materially diluting shareholders.
- Underlying recurring performance excluding the HMN and MediBeacon-related gains, and the drivers of the increase in equity-method losses and interest expense.
- Potential financial effects of the disclosed litigation, the related-party R2 financing, and the replacement tax-benefits rights plan.