Business context and reporting period
This is HC2 Holdings, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2018. The request identifies INNOVATE Corp.; however, the filing names HC2 Holdings, Inc. as the registrant. HC2 is a diversified holding company with operations in construction, marine services, energy, telecommunications, insurance, life sciences, broadcasting and other businesses.
Financial results and liquidity
- Revenue: Consolidated net revenue was $453.7 million, up 16.2% from $390.6 million. The statement separately reports $415.5 million of revenue from contracts and $40.2 million of insurance premiums, net investment income and investment gains.
- Profitability: Operating loss was $13.8 million versus operating income of $1.0 million. Operating margin on net revenue was approximately negative 3.0%, compared with positive 0.2%. Net loss was $38.9 million versus $15.9 million; loss attributable to common and participating preferred stockholders was $35.7 million, or $0.81 per diluted share, versus $15.1 million, or $0.36 per share.
- Key cost and earnings drivers: Interest expense rose to $19.3 million from $14.1 million. Loss from equity investees was $5.2 million, compared with income of $7.7 million. Non-GAAP Adjusted EBITDA was a loss of $6.9 million, versus income of $16.7 million; this measure excludes the Insurance segment and should not be treated as GAAP earnings.
- Cash flow: Operating cash flow was $0.8 million, down from $32.8 million, with management citing a $28.0 million working-capital increase, largely related to construction projects. Investing cash outflow was $56.7 million, including $33.0 million for broadcasting acquisitions. Financing provided $49.2 million. Cash and cash equivalents ended at $92.1 million; cash, cash equivalents and restricted cash totaled $92.9 million.
- Debt and equity: Consolidated debt obligations were $655.4 million on the balance sheet ($661.6 million before discounts and deferred financing costs), up from $593.2 million. HC2 parent-level debt was $400.0 million. Total stockholders’ equity was $126.3 million; HC2 stockholders’ equity was $14.3 million.
- Other metrics: Total assets were $3.23 billion. Insurance reserves were $1.71 billion. Unrealized losses on available-for-sale securities drove a $28.7 million other comprehensive loss; comprehensive loss was $63.0 million.
Material changes versus the prior comparable period
- Net revenue increased $63.1 million, led by construction growth, newly consolidated broadcasting businesses and higher telecommunications traffic; lower marine-services activity partly offset the increases.
- Operating results deteriorated by $14.7 million. Broadcasting, whose acquired businesses were not in the comparable quarter, recorded a $7.7 million operating loss. Marine Services moved from $5.7 million operating income to a $2.8 million loss, reflecting lower offshore-power work and vessel underutilization.
- The equity-investee result swung by $12.9 million, primarily because Marine Services’ HMN investment recorded a loss rather than the prior-year income.
- Cash from operations declined substantially, while acquisition-related investing outflows and borrowing-supported financing increased.
- HC2 adopted ASC 606 revenue recognition and ASU 2016-01 for financial assets on January 1, 2018. The latter moved equity-security fair-value changes into earnings and produced a $3.3 million opening retained-earnings adjustment. Broadcasting became a separately reportable segment.
Outlook, risks and unusual items
- Management gave no quantified full-year earnings or revenue guidance. It said it expected to meet liquidity needs for at least 12 months through subsidiary distributions and possible additional financing, refinancing or asset sales, while cautioning that these options may not be available on acceptable terms. Subsidiary distributions are subject to restrictions and approvals.
- At March 31, the company reported compliance with debt covenants. Its 11.0% senior secured notes mature in 2019. Subsequent to quarter-end, HC2 issued $110 million of 11.0% notes to refinance Broadcasting bridge loans; the DBMG credit facility was also amended to increase capacity and extend maturities.
- Subsequent to quarter-end, BeneVir agreed to be acquired for $140 million upfront plus up to $900 million in milestone payments. HC2 expected approximately $75 million at closing, excluding about $10 million held in escrow; closing remained subject to conditions. These proceeds were not quarter-end cash.
- ANG expected to recognize approximately $2.6 million of retroactive alternative-fuel tax credits in Q2 2018.
- Material contingencies include a marine contract dispute: ASN asserted $30 million of damages and $1.2 million of liquidated damages; $8.9 million of GMSL invoices remained unpaid and at risk. The filing also describes insurance producer litigation, a DBMG stockholder action and a UK VAT assessment that ICS disputes.
- Other risks include construction backlog concentration (five projects represented 60.4% of DBMG backlog), seasonal and project-timing volatility, foreign-exchange and interest-rate exposure, insurance reserve and investment risks, acquisition integration, and reliance on subsidiary cash distributions. The company reported $430.1 million of Marine Services backlog; backlog is not a guarantee of future revenue.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for HC2 Holdings, Inc., not a registrant named INNOVATE Corp.
- Track operating cash flow, working capital and parent-level cash against interest and preferred-dividend obligations.
- Review the terms, use of proceeds and refinancing impact of the $110 million notes and the amended subsidiary facilities.
- Assess the outcome and potential financial exposure of the ASN dispute and other litigation or tax matters.
- Verify BeneVir transaction closing, escrow release, HC2’s actual proceeds and any milestone-payment prospects.
- Evaluate whether backlog converts to revenue and whether marine utilization, broadcasting costs and investee performance improve.