INNOVATE Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. INNOVATE is a diversified holding company with Infrastructure, Life Sciences, Spectrum, and Other operations. Unless noted, amounts are in millions of dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $423.0 | $394.8 | $1,228.0 | $810.4 |
| Gross profit / margin | $58.4 / 13.8% | $55.1 / 14.0% | $158.5 / 12.9% | $122.0 / 15.1% |
| Operating income (loss) | $6.6 | $1.1 | $6.9 | $(17.5) |
| Net loss attributable to INNOVATE | $(5.4) | $(211.9) | $(30.2) | $(222.8) |
| Net loss per share attributable to common and participating preferred stockholders | $(0.09) | $(2.75) | $(0.44) | $(2.92) |
| Adjusted EBITDA (non-GAAP) | $16.4 | $14.3 | $40.0 | $21.8 |
Revenue growth was concentrated in Infrastructure: $412.7 in Q3 and $1,197.0 for the nine months. The nine-month comparison primarily reflects Banker Steel, acquired in May 2021, as well as higher demand and project activity. Infrastructure operating income was $18.5 in Q3 and $42.2 year to date. Life Sciences and Spectrum remained loss-making for the nine months; Spectrum revenue declined amid lower Azteca advertising and paid programming. Adjusted EBITDA is a company-defined non-GAAP measure and should not be viewed as a substitute for GAAP results.
Cash, debt and liquidity
- Cash and cash equivalents were $25.8 at September 30, 2022, down from $45.5 at year-end 2021; cash, cash equivalents and restricted cash totaled $27.7. Working capital was approximately $46.2 ($544.3 current assets less $498.1 current liabilities).
- Continuing operating activities used $72.2 of cash in the first nine months, versus $48.1 used in 2021. The filing attributes the increase mainly to working-capital needs, including receivables and contract assets, alongside greater activity. Capital expenditures were $16.3. Continuing financing activities provided $73.2, chiefly through increased borrowings.
- Consolidated debt principal was $711.5, up from $630.8 at December 31, 2021, principally reflecting a $77.3 increase in DBMG’s revolving credit line. Balance-sheet debt obligations, net of financing costs, totaled $709.3, including $81.4 current and $627.9 long-term.
- Management said it expects to meet liquidity needs for at least 12 months using available cash and subsidiary distributions. It cautioned that distributions are subject to subsidiary cash availability, financing restrictions and board approval, and that additional financing or asset sales may not be available on acceptable terms.
Changes, outlook and key risks
- Infrastructure drove improved consolidated operating results, supported by Banker Steel and stronger fabrication and erection project contributions. Gross margin declined year over year for the nine-month period, despite higher gross profit.
- Management planned to wind down the Azteca Network business in Q4 2022, citing a reduced footprint, declining ratings and advertising revenue, and increased costs.
- Life Sciences’ R2 business faced supplier delays and China lockdown-related order delays. MediBeacon’s clinical study increased equity-method losses. The filing describes continuing exposure to labor shortages, supply-chain disruption, freight and input-cost inflation, and the possibility that increased costs cannot be fully passed to customers.
- DBMG’s backlog was $1,916.5 at September 30, 2022; five projects represented $953.0, or 49.7%. Project cancellations, scope reductions, cost overruns, customer payment timing and labor or materials constraints could affect results. Outstanding performance bonds were $1,057.8.
- Life Sciences had $10.0 of principal debt and Spectrum $52.2, both maturing in Q4 2022. The company said it was negotiating refinancing and intended to satisfy the loans through a debt or equity event; there was no assurance of completion on acceptable terms.
- INNOVATE reported compliance with debt covenants as of September 30, but warned future compliance could depend on cash management, asset monetization, refinancing or equity transactions. It also disclosed a risk that future covenant noncompliance could trigger default remedies.
- On October 27, 2022, NYSE notified the company that its average closing share price had been below $1.00 for 30 consecutive trading days. INNOVATE had six months to regain compliance and had not done so as of the filing date.
- Litigation includes surviving derivative claims in the DTV matter after an October 28, 2022 court ruling; the company says the remaining claims are without merit and intends to defend them. Management did not believe pending litigation would materially affect the financial statements. A stockholder books-and-records demand concerning the Palm Beach lease and other matters could lead to litigation, but the outcome was undetermined.
Important facts for investors to verify
- Whether the Q4 2022 Spectrum and Life Sciences maturities were refinanced or repaid, and the resulting borrowing costs and covenants.
- Cash generation and collections, particularly as accounts receivable rose to $327.9 and contract assets to $156.0; continuing operating cash flow was materially negative.
- Progress toward NYSE’s minimum share-price requirement and any resulting effects on trading liquidity or access to capital.
- Execution and financial effects of the planned Network wind-down, and trends in Spectrum advertising and station economics.
- Whether DBMG can convert its concentrated backlog into profitable, timely cash flows amid inflation, supply-chain and project risks.
- Availability of subsidiary distributions and any additional financing, asset sales or equity issuance needed to support parent-level obligations.