Business context and reporting period
The supplied filing is HC2 Holdings, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2016—not a filing identified as INNOVATE Corp. Investors should verify the issuer and ticker before relying on this summary. HC2 is a diversified holding company with operating segments in manufacturing, marine services, insurance, telecommunications, utilities, life sciences and other businesses.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $413.1m | $277.5m | $1,104.1m | $760.3m |
| Income (loss) from operations | $6.9m | $1.9m | $(6.4)m | $4.3m |
| Net loss | $(5.4)m | $(7.9)m | $(35.5)m | $(24.1)m |
| Loss attributable to common and participating preferred stockholders | $(7.5)m | $(9.0)m | $(38.1)m | $(27.3)m |
| Basic and diluted loss per share | $(0.20) | $(0.35) | $(1.07) | $(1.09) |
Q3 operating margin was approximately 1.7%, versus 0.7% a year earlier; nine-month operating margin was approximately negative 0.6%, versus positive 0.6%. Nine-month Adjusted EBITDA, a non-GAAP measure excluding Insurance, was $33.7m versus $39.7m; Q3 was $18.2m versus $14.2m.
For the first nine months, operating cash flow was $55.0m, compared with cash use of $31.2m in 2015. Investing used $80.1m and financing used $10.9m. Cash and cash equivalents were $121.3m at September 30, 2016, down from $158.6m at year-end 2015; HC2 parent-company cash was $29.4m.
Long-term obligations were $396.7m at September 30, 2016, versus $371.9m at December 31, 2015. The principal parent obligation was $307.0m of 11% senior secured notes due 2019. Total assets were $2,888.0m and stockholders’ equity was $178.4m. Insurance reserves included $1,637.5m of life, accident and health reserves and $254.3m of annuity reserves.
Material changes versus comparable periods
- Q3 revenue rose 48.9%; nine-month revenue rose 45.2%. Growth reflected higher telecommunications wholesale traffic, the insurance business acquired in December 2015, and marine-services activity including CWind.
- Telecommunications revenue increased 66.3% in Q3 and 90.0% for the nine months, but operating income remained modest. Manufacturing revenue was down 2.1% for the nine months as major prior-period projects neared completion.
- Marine Services reported a nine-month operating loss of $0.2m, versus operating income of $10.5m in 2015, including $4.0m of expected loss costs on a Russian installation project affected by customer delays and adverse weather.
- The insurance business contributed $99.8m of nine-month revenue and a $5.9m operating loss. Its results were not included in the 2015 reported comparison because the acquisition closed in December 2015.
- Accumulated other comprehensive income improved, primarily reflecting $71.3m of nine-month unrealized gains on available-for-sale securities, net of tax.
Outlook, risks and unusual items
HC2 gave no specific consolidated revenue or earnings guidance. Management stated it believed liquidity would cover obligations and operating needs for at least 12 months, relying on subsidiary distributions, potential additional financing or refinancing, and possible asset or investment sales. Management cautioned that these sources are not assured; parent liquidity is constrained by subsidiary financing terms, regulatory limits and other restrictions.
HC2 reported compliance with its 11% notes’ liquidity and collateral covenants at quarter-end. The notes require minimum liquidity equal to six months of debt service and preferred dividends while collateral coverage exceeds 2.0x; the collateral coverage minimum is 1.25:1. The filing also describes five-year commitments to maintain each acquired insurer’s capital at 400% of its authorized control level risk-based capital, potentially requiring HC2 contributions.
Key risks include substantial debt and refinancing needs; dependence on subsidiary distributions; restricted insurer dividends; insurance reserve, investment and reinsurance risks; foreign exchange and interest-rate exposure; and the possibility that ICS suppliers may restrict credit after two credit insurers cancelled coverage. Brexit could affect UK operations and markets. DBM Global backlog was $318.2m, of which $74.4m was supported by letters of intent; five commitments represented 50.2% of backlog.
Reported nine-month loss attributable to common and participating preferred stockholders included a $1.3m favorable correction of prior-period depreciation and asset-disposal accounting. Excluding this adjustment, the filing states the loss would have been $39.4m, or $1.10 per diluted share. The October 2016 conversion of preferred shares reduced their cumulative accrued value from $42.7m to $30.0m but involved significant common-share issuance. The Xplornet litigation was settled in October 2016 and dismissed by consent order in November; a separate DBM Global stockholder case remained in discovery. Management reported effective disclosure controls and no material internal-control changes during the quarter.
Important facts for investors to verify
- Confirm the filing issuer: the provided document is HC2 Holdings, Inc., while the request identifies INNOVATE Corp.
- Assess whether telecommunications revenue growth produces durable margins and cash generation, given its high associated cost of revenue.
- Review cash available at the parent level, debt maturities and refinancing options, and the restrictions on upstream subsidiary distributions.
- Evaluate insurance reserve adequacy, reinsurance recoverability, investment credit quality and potential capital contributions.
- Track the Russian marine project, CWind purchase obligations, major manufacturing backlog commitments and the status or financial impact of litigation.
- Account for preferred-stock conversions, associated dilution and the $1.3m prior-period correction when comparing reported results.