HC2 Holdings, Inc. — Q2 2017 Form 10-Q
Entity note: The request metadata names INNOVATE Corp., but the filing identifies the registrant as HC2 Holdings, Inc. (NYSE: HCHC). The filing covers the quarter and six months ended June 30, 2017; amounts below are in U.S. dollars.
Business context and reporting period
HC2 is a diversified holding company with seven operating segments: Construction, Marine Services, Energy, Telecommunications, Insurance, Life Sciences and Other. Its strategy includes acquiring and developing businesses. The filing compares Q2 and first-half 2017 results with the corresponding 2016 periods.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenue | $378.7 million | $359.3 million | $769.2 million | $691.0 million |
| Operating income (loss) | ($11.2) million | $6.0 million | ($10.2) million | ($13.3) million |
| Net income (loss) | ($20.5) million | $1.3 million | ($36.4) million | ($30.1) million |
| Net income (loss) attributable to common and participating preferred stockholders | ($18.7) million | $0.9 million | ($33.8) million | ($30.6) million |
| Basic and diluted EPS | ($0.44) | $0.02 | ($0.80) | ($0.87) |
| Adjusted EBITDA, excluding Insurance | $4.6 million | $15.2 million | $21.3 million | $15.5 million |
- Q2 revenue rose 5.4%, but operating results swung to a loss; the implied operating margin was approximately (3.0%), versus 1.7% in Q2 2016. First-half revenue increased 11.3%.
- Q2 Adjusted EBITDA fell substantially, chiefly reflecting Marine Services project cost overruns and lower equity-method income, weaker Construction comparisons, and higher Life Sciences losses. First-half Adjusted EBITDA improved, supported by Marine Services joint-venture income, Telecommunications growth, Energy expansion and lower losses in Other.
- Six-month operating cash flow was $16.9 million, down from $46.2 million. Investing used $38.5 million; financing provided $49.1 million. Cash increased $27.8 million to $143.1 million.
- At June 30, total assets were $2.94 billion, total liabilities $2.84 billion, and stockholders’ equity $71.2 million. Investments totaled $1.51 billion, including $1.33 billion of available-for-sale fixed maturities.
- Consolidated debt principal was $502.9 million (balance-sheet carrying amount $494.7 million), up from $438.4 million at year-end. Cash was $143.1 million. HC2 standalone debt was $400 million, consisting of 11% senior secured notes due 2019; standalone cash was $56.0 million.
- HC2 issued $55 million of 11% notes in January and $38 million in June. The January proceeds partly repaid $35 million of bridge notes. Interest expense was $12.1 million in Q2 and $26.2 million for the first half.
Material changes versus prior periods
- Q2 revenue growth was led by Construction, while Marine Services revenue also increased; Telecommunications revenue declined modestly in the quarter. For the first half, Telecommunications, Marine Services and Construction were major contributors to growth.
- Construction operating income declined to $8.0 million in Q2 from $14.9 million, partly because the prior-year period included better-than-bid project performance.
- Marine Services posted a $7.3 million Q2 operating loss versus a $0.5 million loss a year earlier, as challenging offshore power installation and repair projects raised costs. The segment’s first-half operating loss narrowed to $1.5 million from $5.0 million.
- Insurance first-half operating results improved to $3.2 million income from a $5.6 million loss, with higher investment income and improved realized investment results. First-half net investment income rose to $32.2 million from $27.8 million.
- HC2 recorded $1.8 million of Other-segment impairment charges, including a $1.2 million fixed-asset impairment and $0.6 million goodwill impairment related to NerVve’s deteriorating business conditions. The Insurance segment recorded $2.8 million of investment impairment expense in Q2.
Outlook, risks and unusual items
- Management said it believed liquidity would be sufficient for at least the next 12 months, relying on subsidiary distributions, additional debt or equity, refinancing, other financing, or asset and investment sales. It cautioned that these sources may not be available on acceptable terms, or at all, and subsidiary distributions face contractual and regulatory restrictions. No specific earnings or revenue guidance was provided.
- DBMG backlog was $590.0 million at June 30, including $101.2 million under letters of intent; five commitments represented 63.6% of backlog. Cancellation or reduced scope of major projects could materially reduce backlog.
- GMSL is disputing claims by ASN alleging contract breaches and asserting $30 million in damages plus $1.2 million in liquidated damages, interest and costs. GMSL disputes liability. Of $12.6 million of invoices, $4.5 million remained unpaid and at risk.
- Other disclosed exposures include a putative CGI producer class action and related indemnification dispute, a UK VAT assessment disputed by ICS, and the ongoing DBMG stockholder litigation. Management stated it did not believe pending claims would materially adversely affect the financial statements; outcomes remain uncertain.
- HC2 announced a proposed series of transactions to obtain majority ownership of DTV America, subject to FCC approval. The filing also reports an impairment of HC2’s original DTV investment.
- Risks include high-cost debt and covenant restrictions, dependence on subsidiary distributions, insurance reserve and reinsurance exposure, project execution and cost overruns, foreign exchange and interest-rate movements, and uncertainty around CNG incentives and fuel economics. HC2 reported compliance with its 11% notes liquidity and collateral coverage covenants at June 30.
- Management reported effective disclosure controls as of June 30 and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for HC2 Holdings, Inc., not an entity named INNOVATE Corp.
- Track whether Marine Services resolves project delays and cost overruns, and whether the ASN dispute affects collections or creates a liability.
- Review the composition, availability and restrictions on HC2’s cash, subsidiary distributions, and compliance with debt covenants; assess the 11% notes refinancing needs before 2019.
- Monitor DBMG’s concentrated backlog, project profitability and the status of commitments under letters of intent.
- Assess Insurance reserve adequacy, reinsurance recoverability, investment credit quality and impairment risk, alongside regulatory limits on dividends.
- Check FCC approval and subsequent transaction terms for DTV America, and progress toward implementation of the revenue-recognition standard expected in 2018.