INNOVATE Corp. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; filed May 4, 2022. INNOVATE is a diversified holding company with Infrastructure, Life Sciences and Spectrum segments, plus Other. Amounts below are in millions unless noted.
Financial performance
- Revenue: $412.8, up $241.0 (140%) from $171.8. Infrastructure contributed $402.2, including $136.1 of incremental revenue from Banker Steel, acquired in May 2021. Life Sciences reported $0.8; Spectrum revenue declined to $9.8 from $10.5.
- Profitability: Gross profit was $49.8 versus $30.5; gross margin was approximately 12.1% versus 17.7%. Operating income was $0.7 versus an operating loss of $10.9. Continuing-operations net loss was $14.1 versus $42.9; loss attributable to INNOVATE was $12.4, and loss attributable to common and participating preferred stockholders was $13.6, or $0.18 per share.
- Adjusted EBITDA: $11.5 versus $1.0, a non-GAAP measure. Infrastructure was $20.5; Life Sciences $(5.8); Spectrum $1.3; Non-operating Corporate $(4.6); and Other and Eliminations $0.1.
- Cash flow: Continuing operating cash outflow was $63.4 versus $23.2. Investing cash outflow was $7.4 versus $66.4 provided, with the prior period benefiting from Beyond6 sale proceeds. Financing provided $51.2 versus $31.6 used. Cash, cash equivalents and restricted cash ended at $28.4, down $19.1. Capital expenditures were $4.6.
- Liquidity and balance sheet: Cash and cash equivalents were $26.4, compared with $45.5 at year-end; current assets were $476.6 and current liabilities $441.5. Total assets were $1,112.2, total liabilities $1,115.3, and total stockholders’ deficit $69.3.
- Debt: Consolidated debt principal was $684.6, up $53.8 from year-end, primarily due to a $60.0 increase in DBMG’s revolving credit line to fund working capital. Balance-sheet debt obligations, net of discounts and financing costs, totaled $681.1. INNOVATE reported $390.0 of standalone indebtedness. Interest expense was $12.6, down from $21.4.
Material changes and operating context
- Infrastructure revenue growth reflected Banker Steel and higher demand/larger projects. Segment operating income increased to $11.9 from $2.2; management said legacy businesses continued to work through lower-margin projects, while newer contracted work was beginning to show higher point-of-sale margins.
- DBMG backlog was $1,382.9 at quarter-end; $729.3, or 52.7%, was attributable to five projects. Remaining unsatisfied performance obligations totaled $1,367.1, which DBMG expects to recognize over the next 36 months.
- Life Sciences operating loss was $5.0 versus $4.8. R2 began selling Glacial Spa products during Q1; supply constraints affected materials for its devices. MediBeacon was preparing an FDA Investigational Device Exemption application for a planned U.S. pivotal study.
- Spectrum operating loss narrowed to $0.4 from $1.2. Lower Azteca Network advertising, including from a reduced Los Angeles footprint, offset higher station revenue and lower salaries and severance expense.
- Q1 2021 included $51.9 of discontinued-operations income, including a $40.4 disposal gain. Q1 2022 had no discontinued-operations income; consequently, reported net income of $9.0 in the prior period is not directly comparable with the current-period net loss.
Outlook, risks and unusual items
- Management stated it expects available cash and subsidiary distributions to cover liquidity needs and fixed obligations for at least 12 months from issuance of the financial statements. This depends on subsidiary cash availability and distribution permissions; management also noted that refinancing, new financing or asset sales may be needed and cannot be assured on acceptable terms.
- The $3.2 of 7.5% convertible notes due June 1, 2022 and Spectrum secured notes totaling $52.2 due November 30, 2022 are near-term maturities disclosed in the filing. The filing reported covenant compliance at March 31, but warned that future compliance may require cash management, asset monetizations, refinancing, debt issuance or equity capital.
- COVID-19-related labor, materials and freight constraints may delay projects and raise costs that may not be fully passed to customers, pressuring margins. Management said DBMG was not materially affected by COVID-19 in Q1; R2 faced supplier material difficulties.
- DBMG had $13.5 of letters of credit and $779.0 of performance bonds. Backlog is concentrated, and projects may be delayed, reduced or canceled; fixed-price work also carries cost-overrun and labor/productivity risks.
- Disclosed litigation includes the surviving claims in the Fair Value Investments action and the DTV derivative action; the company said it would defend both vigorously. The company reported a favorable February 2022 U.K. tax tribunal decision on a VAT assessment and expected repayment of the outstanding VAT payment. Management did not believe pending litigation would materially affect the financial statements.
- No quantified company-wide earnings or revenue guidance was provided. Management cautioned that quarterly results may fluctuate because of project timing, cyclicality and market conditions. Subsequent events were reported as none.
Most important facts for investors to verify
- How Q1 working-capital use, receivable collections and DBMG revolver borrowings affect cash generation and liquidity.
- Repayment, refinancing or other treatment of the June 2022 convertible notes and Spectrum’s 2022 notes.
- Whether DBMG converts its concentrated backlog into revenue and margins as expected, and whether supply, labor or project risks alter outcomes.
- How the company sustains covenant compliance and upstream distributions given debt, preferred dividends and restrictions at subsidiaries.
- Progress and outcomes in the disclosed litigation, VAT reimbursement, and R2’s supply and regulatory milestones.