INNOVATE Corp. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. INNOVATE is a diversified holding company with Infrastructure, Life Sciences, Spectrum and Other operations. Its common stock trades on the NYSE as VATE. Unless stated otherwise, amounts are in millions of dollars.
Financial highlights
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $394.8 | $170.5 | $810.4 | $538.9 |
| Gross profit | $55.1 | $31.7 | $122.0 | $91.2 |
| Gross margin | 14.0% | 18.6% | 15.1% | 16.9% |
| Operating income (loss) | $1.1 | $(16.1) | $(17.5) | $(38.6) |
| Net loss | $(214.5) | $(21.6) | $(230.7) | $(94.1) |
| Net loss attributable to common and participating preferred stockholders | $(213.0) | $(17.7) | $(224.5) | $(88.5) |
| Basic and diluted loss per share | $(2.75) | $(0.37) | $(2.92) | $(1.89) |
- Revenue growth was acquisition-led: Infrastructure generated $383.0 million in Q3 revenue and $776.3 million for the nine months, up from $160.8 million and $509.6 million, respectively. The May acquisition of Banker Steel contributed $114.3 million in Q3 revenue and $153.8 million since acquisition. Spectrum revenue was $10.2 million in Q3; Life Sciences contributed $1.6 million.
- Profitability: Q3 operating results improved to $1.1 million of income, but nine-month operations remained loss-making. Gross margin narrowed year over year in both periods, with management citing project timing, backlog mix and continued pressure on point-of-sale project margins. Company-reported Adjusted EBITDA, a non-GAAP measure, was $14.3 million for Q3 and $21.8 million for the nine months, compared with $7.8 million and $15.5 million.
- Discontinued operations drove the reported net loss: Q3 included a $200.3 million loss from discontinued operations, principally the loss on the July 2021 sale of CIG/Insurance. Nine-month discontinued-operations loss was $149.9 million, including $159.9 million of net losses on sales, partly offset by operating results and prior or subsequent disposition adjustments. Continuing-operations losses were $14.2 million in Q3 and $80.8 million for the nine months.
- Cash flow: For the nine months, cash used in operating activities was $48.1 million including discontinued operations; continuing operating cash use was $14.6 million, versus $77.4 million provided in the prior-year comparable period. Continuing investing activities used $214.9 million, including the Banker Steel acquisition; continuing financing activities provided $54.6 million. Cash, cash equivalents and restricted cash ended at $64.1 million, up $18.8 million from the start of the year.
- Liquidity and debt: September 30 cash and cash equivalents were $55.5 million; current assets were $592.2 million and current liabilities $533.4 million. Consolidated debt principal was $676.0 million, versus $576.6 million at year-end 2020; balance-sheet debt carrying value was $602.8 million after unamortized items and current classification. INNOVATE standalone debt was $390.0 million. Management said it expected to meet obligations for at least 12 months through cash and subsidiary distributions, while noting those distributions and potential refinancing, financing or asset sales are not assured. The Company reported compliance with debt covenants at quarter-end.
- Backlog: Infrastructure backlog was $1,605.9 million. Five projects represented approximately 62.5% of backlog, creating customer/project concentration exposure.
Material changes and notable items
- Banker Steel was acquired for gross consideration of $145.0 million, funded through new borrowing, seller notes, assumed debt and cash. Purchase accounting remained preliminary at quarter-end.
- CIG was sold on July 1, 2021 to an entity controlled by an INNOVATE director and significant shareholder; the company recorded a $200.8 million sale loss. The sale followed a $62.5 million extraordinary dividend and a $26.7 million investment distribution to INNOVATE.
- INNOVATE refinanced its 11.5% notes due 2021 with $330.0 million of 8.5% senior secured notes due 2026 and exchanged approximately $51.8 million of 2022 convertible notes for 2026 convertible notes. Refinancing and other debt extinguishments contributed to $12.5 million of nine-month debt extinguishment/restructuring losses. Interest expense declined to $46.6 million from $56.2 million.
- Series A and A-2 preferred shares were partly redeemed for $10.4 million and partly exchanged into Series A-3 and A-4 preferred shares, with a July 2026 maturity. Preferred shares and redeemable noncontrolling interests totaled $70.3 million of temporary equity at quarter-end.
- Accumulated other comprehensive income fell from $396.9 million at year-end to $3.2 million, largely reflecting disposition-related changes. Total stockholders’ equity moved from $600.2 million to a deficit of $54.7 million.
- Subsequent to quarter-end, HC2 Broadcasting extended $52.2 million of senior secured notes to November 30, 2022 and completed repurchases of DTV notes. A new 10-year lease announced in November is expected to carry annual payments of $2.1 million, escalating 3% annually, beginning in November 2023 or later subject to permits and renovations.
Outlook, risks and contingencies
- No specific revenue, earnings or cash-flow guidance is provided. Management described results as potentially cyclical and not necessarily indicative of future periods.
- Management cited COVID-19-related labor and supply-chain disruption, higher freight and trucking costs, project delays and possible inability to pass cost increases to customers. DBMG incurred $8.3 million of COVID-related expenses in the first nine months of 2021. Management noted improving backlog as delayed projects resumed, while cautioning that future effects remain uncertain.
- Liquidity depends in part on subsidiary distributions, which can be limited by financing covenants, regulation, subsidiary cash availability and board approval. Management cautioned that additional financing or asset sales may not be available on acceptable terms and could adversely affect long-term liquidity.
- Risk exposures include substantial debt and covenant requirements, project execution and margin pressure, concentrated Infrastructure backlog, customer concentration, COVID-19 effects, broadcast advertising and regulatory risks, and development-stage Life Sciences investments. The Company also disclosed litigation, including shareholder fiduciary-duty actions, and an ongoing former-CEO arbitration settlement process; management did not expect pending claims to materially affect the financial statements.
- The Tax Benefits Preservation Plan adopted in August 2021 is intended to protect tax attributes by discouraging acquisitions of 4.9% or more of common stock. The filing warns of possible limits on tax-attribute use following an ownership change. The Company reported approximately $170.3 million of federal NOL carryforwards and $175.3 million of Section 163(j) interest limitation carryforwards in its risk-factor discussion.
Important facts for investors to verify
- How much of revenue growth and backlog conversion reflects Banker Steel and other acquired activity versus organic, sustainable demand—and whether margins recover from the year-over-year decline.
- The cash and debt position at the parent-company level, upcoming debt and preferred-dividend obligations, covenant headroom, and the availability of subsidiary distributions.
- The final Banker Steel purchase-price allocation and integration results, including any changes to acquired asset values, liabilities or goodwill.
- The final economic impact of CIG’s related-party sale, including sale proceeds, extraordinary distributions, transaction terms and any remaining indemnity or litigation exposure.
- Whether the concentrated backlog and customer exposures convert to cash as scheduled, and the effects of supply, labor and transportation costs on project profitability and working capital.
Controls: Management concluded disclosure controls and procedures were effective as of September 30, 2021, and reported no material change in internal control over financial reporting during the quarter.