Business context and reporting period
This is HC2 Holdings, Inc.’s Form 10-K for the fiscal year ended December 31, 2019—not a quarterly report. The filing describes a diversified holding company with eight operating segments: Construction, Marine Services, Energy, Telecommunications, Insurance, Life Sciences, Broadcasting and Other. Although the request metadata names INNOVATE Corp., the filing itself identifies the registrant as HC2 Holdings, Inc. (NYSE: HCHC).
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Net revenue | $1,984.1 million | $1,976.7 million |
| Income (loss) from operations | $29.1 million | $(55.8) million |
| Interest expense | $95.1 million | $75.7 million |
| Net income (loss) attributable to HC2 | $(31.5) million | $162.0 million |
| Net income (loss) attributable to common and participating preferred stockholders | $(31.5) million | $155.6 million |
| Operating cash flow | $110.5 million | $341.4 million |
| Cash and cash equivalents at year-end | $239.0 million | $325.0 million |
| Capital expenditures | $41.4 million | $39.7 million |
Revenue increased 0.4%. Operating margin was approximately 1.5%; net loss attributable to HC2 was approximately 1.6% of net revenue. Operating cash flow less capital expenditures was approximately $69.1 million in 2019; this is a simple calculation, not a company-defined free-cash-flow measure.
- Segment trends: Construction revenue was $713.3 million and operating income was $45.1 million. Marine Services revenue fell to $172.5 million, with an operating loss of $6.1 million. Energy revenue rose to $39.0 million and operating income was $10.1 million. Telecommunications revenue declined to $696.1 million and the segment recorded an operating loss of $1.8 million. Insurance revenue increased to $331.6 million and operating income was $37.3 million. Broadcasting revenue was $41.8 million and its operating loss narrowed to $11.4 million.
- Non-GAAP measure: Adjusted EBITDA was $90.8 million, versus $44.5 million in 2018. It excludes the Insurance segment and is not a substitute for GAAP results.
- Debt: Consolidated debt obligations were $870.7 million gross, or $839.3 million net of unamortized discounts and deferred financing costs, at year-end. HC2’s standalone debt was $540.0 million: $470.0 million of 11.5% secured notes due 2021, $55.0 million of 7.5% convertible notes due 2022, and a fully drawn $15.0 million revolving facility. Interest expense increased by $19.4 million.
- Liquidity: Year-end cash was $239.0 million consolidated, including $170.5 million in the Insurance segment; HC2 corporate-level cash was $11.6 million. Cash declined by $89.8 million including restricted cash. Cash from operations fell by $230.9 million, primarily because 2018 benefited from insurance reinsurance recaptures. The filing says management expected to meet liquidity needs for at least 12 months through subsidiary distributions, financing or asset sales, while warning that these sources are not assured.
- Margins and balance sheet: The filing does not present a single consolidated gross-margin metric. Total assets were $6.96 billion and stockholders’ equity was $443.6 million, compared with $6.50 billion and $193.7 million, respectively, at year-end 2018. The increase in equity included $288.4 million of unrealized gains on available-for-sale securities in other comprehensive income.
Material changes versus 2018
- Net income attributable to HC2 swung from $162.0 million to a $31.5 million loss. The comparison is affected by 2018 one-time gains, including a $105.1 million gain on sale/deconsolidation, a $115.4 million bargain-purchase gain, and $77.9 million of other income. Interest expense also rose.
- Operating results improved by $84.9 million, led by Insurance, lower Broadcasting losses, Energy’s alternative-fuel tax credit and improved Marine Services project profitability. Insurance benefited from the KIC acquisition, higher investment income and favorable claims development, but recorded a $47.3 million goodwill impairment.
- Energy revenue included $10.6 million of alternative-fuel tax credits recognized in 2019, including credits related to earlier fuel sales and acquired ampCNG stations. ANG acquired 20 stations for $41.2 million.
- Telecommunications revenue decreased $97.5 million, reflecting customer mix, lower wholesale traffic volumes and market pressure on call termination rates. The segment recorded a $4.5 million goodwill impairment.
- Marine Services revenue declined $21.8 million and backlog fell from $483.4 million to $377.4 million. Construction backlog fell from $528.5 million to $497.7 million.
Outlook, risks, contingencies and unusual items
- Outlook and transactions: No quantified company-wide earnings guidance is provided. HC2 said it would continue evaluating acquisitions, dispositions and other strategic alternatives. It was exploring strategic options for DBMG and was in advanced discussions concerning a possible Insurance divestiture. After year-end, GMSL was sold on February 28, 2020 for $250 million base consideration, subject to adjustments, plus a potential earn-out of up to $12.5 million. HC2 reported net proceeds of approximately $98.6 million after transaction-related uses, repaid the $15 million revolver and gave notice to redeem $76.9 million of secured notes.
- Debt and cash access: HC2 is a holding company dependent on distributions from subsidiaries, which may be restricted by subsidiary debt agreements, insurance regulation and other conditions. The secured-note indenture imposes financial covenants; HC2 reported compliance at year-end but said future compliance could require asset sales, refinancing, new capital or other transactions. Debt principal and interest payments due in 2021 are substantial.
- Insurance exposure: Long-term-care liabilities depend on actuarial assumptions, claims and persistency experience, investment returns and regulatory approval of premium increases. Reinsurance recoverables were $953.7 million, with continuing exposure if reinsurers fail to pay. The insurer’s statutory capital and dividend capacity are regulated; the filing reported that no dividend could be paid in 2019 or 2018 without prior approval based on statutory earned deficit.
- Other key risks: Construction contract estimates, cost overruns, project timing and customer payments; competition and continued decline in wholesale voice; fuel-price movements and expiry of incentives; broadcast license renewals and acquisition integration; foreign exchange and regulatory exposure; and the company’s significant leverage. The filing also identifies the emerging coronavirus outbreak as a potential source of disruption whose financial impact could not then be estimated.
- Contingencies and governance: HC2 disclosed a disputed UK VAT assessment involving ICS and a DBMG stockholder class action for which a proposed settlement faced court concerns. A CGI producer class action was settled and the related Delaware indemnification action was closed in January 2020. The filing also disclosed an activist stockholder campaign seeking board changes, which could create costs and potentially trigger preferred-stock redemption provisions.
- Controls and audit: Management and the auditor concluded that internal control over financial reporting was effective at December 31, 2019. The independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the registrant and security identity: this filing is for HC2 Holdings, Inc. (HCHC), despite the request metadata naming INNOVATE Corp.
- Reconcile consolidated debt figures: $870.7 million gross versus $839.3 million net carrying value, and assess maturities, covenants and corporate-level cash available for debt service.
- Review the GMSL sale proceeds, pension funding, note redemption and post-sale liquidity; distinguish proceeds received by HC2 from the headline purchase price.
- Assess the sustainability of Insurance earnings and the adequacy of long-term-care reserves, premium increases, reinsurance recoverables and statutory capital.
- Separate recurring operating performance from 2018 transaction gains and 2019 tax-credit recognition, valuation-allowance release and goodwill impairments.
- Track the status and financial terms of any DBMG or Insurance disposition, the activist campaign, and material litigation or regulatory developments.