HC2 Holdings, Inc. — Form 10-Q summary
Entity note: The supplied filing is HC2 Holdings, Inc. (NYSE: HCHC), not INNOVATE Corp. It covers the quarter and nine months ended September 30, 2019; amounts are in millions unless noted.
Business context
HC2 is a diversified holding company with operations spanning Construction, Marine Services, Energy, Telecommunications, Insurance, Life Sciences, Broadcasting and Other. The Insurance segment is a major contributor to consolidated assets and investment income.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $475.7 | $501.4 | $1,485.7 | $1,451.8 |
| Operating income (loss) | $9.6 | $(24.3) | $62.1 | $(43.6) |
| Net income (loss) | $(8.3) | $151.5 | $(5.4) | $192.4 |
| Net income (loss) attributable to HC2 | $(7.1) | $153.5 | $(0.5) | $173.8 |
| Net income (loss) attributable to common and participating preferred stockholders | $(7.5) | $152.8 | $(0.1) | $171.7 |
| Interest expense | $24.0 | $17.5 | $69.3 | $54.0 |
Operating margin was approximately 2.0% in Q3 2019 versus negative 4.8% in Q3 2018, and 4.2% for the first nine months versus negative 3.0% a year earlier. The filing reports no consolidated gross-margin measure. Revenue from contracts with customers was $397.5 in Q3 and $1,242.3 year to date; reported net revenue also includes insurance premiums and investment income, among other items.
- Cash flow: Operating cash flow was $95.5 for the first nine months, down from $136.7. Investing used $201.5, versus $525.4 provided in 2018; financing provided $53.4 versus $75.7. Cash, cash equivalents and restricted cash ended at $278.4, down $52.0 from the beginning of the year. Cash and cash equivalents on the balance sheet were $276.9.
- Balance sheet and debt: Total assets were $6,945.5 and total liabilities $6,422.8 at September 30. Debt obligations, net of discounts and financing costs, were $820.4; principal debt was $851.0, compared with $781.0 at December 31, 2018. HC2 standalone principal debt was $540.0. The filing does not provide a conventional current ratio or a single unrestricted-liquidity total in the supplied text.
- Equity and investments: Total stockholders’ equity was $501.4, up from $193.7 at year-end, mainly reflecting $309.5 of nine-month other comprehensive income, including unrealized gains on available-for-sale securities. Total investments were $4,349.0, largely fixed maturities.
Material changes and drivers
- Nine-month net revenue rose $33.9, led by Insurance (+$90.2) and Construction (+$25.0), partly offset by Telecommunications (−$73.6) and Marine Services (−$19.9). Q3 revenue declined $25.7, principally from Construction and Telecommunications.
- Operating results improved from losses in 2018, driven primarily by Insurance, including incremental premiums and investment income following the 2018 KIC acquisition. Marine Services also improved in Q3 as prior-period project cost overruns and underutilized vessel costs eased; Broadcasting reduced costs.
- Bottom-line comparisons are distorted by prior-year nonrecurring items. 2018 included a $109.1 bargain-purchase gain, a $105.1 gain on sale/deconsolidation, and substantial other income, including gains associated with Inseego and a reinsurance recapture. These were absent or materially lower in 2019. Interest expense increased $15.3 year to date, largely with higher debt.
- Telecommunications remained under pressure from lower wholesale voice volumes, customer mix and pricing; the segment recorded a $1.4 goodwill impairment in the first nine months. Marine Services’ year-to-date revenue and Adjusted EBITDA also declined from 2018.
Outlook, risks and unusual items
- Management gave no specific earnings or revenue guidance. It stated that it expected to meet liquidity needs and fixed obligations for at least the next 12 months through subsidiary distributions, financing, refinancing and/or asset sales, while warning that these options are not assured and may be constrained by subsidiary restrictions and debt agreements.
- HC2 reported compliance with its Senior Secured Notes’ liquidity, collateral coverage and secured net leverage covenants at quarter-end. The fixed-charge coverage test begins with fiscal 2019 year-end; management cautioned that future compliance may require cash management, asset monetization, new financing or equity. Failure to comply could trigger default and acceleration.
- On October 24, 2019, Broadcasting issued $78.7 of notes to refinance existing 8.5% notes and support acquisitions, working capital and general purposes. The new notes carry a blended 9.6% PIK coupon and mature in October 2020.
- On October 30, 2019, Marine Services announced the sale of its 49% interest in Huawei Marine Networks; the stake was valued at approximately $140.0. The filing does not state that the sale had closed by the report date.
- Insurance reserve estimates, reinsurance recoverables, investment valuation and regulatory capital requirements are material exposures. Management reported favorable long-term-care claims reserve development of $46.9 for the first nine months, attributed to claims experience and estimates; this may not recur at the same level.
- Other risks include substantial debt and reliance on subsidiary distributions; variable interest rates, foreign exchange and investment-market volatility; cyclical and seasonal project activity; telecommunications pricing and volume pressure; broadcasting license and FCC requirements; and litigation. A producer class-action settlement received final court approval on October 7, 2019, subject to the appeal period; the company’s contribution was stated as $0.25, contingent on final approval. Management said it did not expect pending claims to materially affect the financial statements. The filing also describes a disputed UK VAT assessment and a continuing DBMG class action.
- Management said disclosure controls were effective at September 30, 2019, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm the intended issuer: the supplied document identifies HC2 Holdings, Inc., not INNOVATE Corp.
- Review HC2’s standalone cash, debt-service requirements, covenant headroom and access to subsidiary distributions; consolidated cash may not be freely available to the parent.
- Assess debt maturities, refinancing costs and the implications of Broadcasting’s October 2019 high-coupon PIK financing.
- Evaluate whether Insurance earnings and favorable claims development are sustainable, and scrutinize reserve assumptions, reinsurance counterparties and investment credit quality.
- Track Telecommunications revenue and margin trends, Marine Services backlog conversion, and the completion and proceeds of the announced HMN sale.
- Distinguish recurring operating performance from prior-year bargain-purchase, asset-sale, investment and reinsurance gains when comparing earnings.