Filing summary
Entity note: The supplied filing is HC2 Holdings, Inc.’s Form 10-K, not a filing identified as INNOVATE Corp. It covers the fiscal year ended December 31, 2015; the filing was signed March 15, 2016. The figures below summarize HC2 as reported in the supplied text.
Business context and reporting period
HC2 was a diversified holding company with seven operating segments: Manufacturing (Schuff), Marine Services (GMSL), Insurance (UTA and CGI), Telecommunications (ICS), Utilities (American Natural Gas), Life Sciences, and Other. Acquisitions during 2014 and 2015 substantially changed the business mix, so reported year-over-year growth is not wholly comparable on an organic basis.
Financial performance, cash flow and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net revenue | $1,120.8 million | $547.4 million |
| Operating income (loss) | $2.2 million | $(13.6) million |
| Loss from continuing operations | $(35.7) million | $(11.7) million |
| Net loss attributable to HC2 | $(35.6) million | $(14.4) million |
| Adjusted EBITDA, a non-GAAP measure | $51.9 million | $75.3 million pro forma |
| Cash from (used in) operating activities | $(32.6) million | $3.7 million |
| Capital expenditures | $21.3 million | $5.8 million |
| Cash and cash equivalents, year-end | $158.6 million | $108.0 million |
| Long-term obligations, including current portion | $371.9 million | $335.5 million |
| Preferred stock accrued value | $52.6 million | $39.8 million |
Revenue increased 104.7%, largely reflecting a full-year contribution from acquisitions and higher ICS wholesale traffic. Operating results improved, but interest expense rose to $39.0 million from $12.3 million, principally due to the 11% senior secured notes. The resulting operating margin was approximately 0.2% of revenue. The filing does not provide a clear consolidated gross-margin figure.
Operating cash flow turned negative, with management attributing the $36.2 million deterioration mainly to a $54.4 million working-capital decline. Year-end consolidated cash includes cash held in subsidiaries; HC2 reported $41.1 million at the corporate level. Liquidity can be constrained by subsidiary debt covenants, insurance regulation, and GMSL pension funding obligations. Management said it expected to meet liquidity needs and fixed obligations for at least the next 12 months.
Material changes versus the prior period
- Manufacturing revenue rose to $513.8 million from $348.3 million as reported, but declined 2.3% against 2014 pro forma revenue of $526.1 million. Schuff cited weaker industrial work, including oil and gas projects, partly offset by Pacific-region commercial projects.
- Marine Services revenue rose to $134.9 million from $35.3 million as reported, but fell 19.5% versus 2014 pro forma revenue of $167.7 million. Fewer installation projects and unfavorable currency movements were partly offset by higher maintenance revenue. GMSL also reported lower installation margins amid competition.
- Telecommunications revenue increased 184.3% to $460.4 million as wholesale traffic volumes and customer relationships grew. HC2 said the shift toward larger carriers reduced collection risk but brought lower average margins.
- Adjusted EBITDA decreased from $75.3 million pro forma to $51.9 million. HC2 cited weaker Marine Services activity, losses from equity investments—particularly Novatel—and higher early-stage Life Sciences and Other costs.
- On December 24, 2015, HC2 acquired the insurance companies for stated consideration of approximately $18.6 million. The acquisition added substantial insurance assets and policy liabilities to the balance sheet but contributed only $2.9 million of 2015 revenue because it closed near year-end.
Outlook, risks and unusual items
- Outlook: No quantified consolidated earnings or revenue guidance is provided. Management described continued acquisition-led growth as its strategy. GMSL could bid again in offshore power after its non-compete expired in November 2015; it also planned vessel and equipment investment. GMSL subsequently announced a majority investment in CWind in February 2016.
- Insurance: CIG’s long-term-care block is closed to new sales. Its strategy depends partly on actuarially justified premium increases that require regulatory approval. HC2 agreed to maintain each insurer’s capital at no less than 400% of its authorized control level RBC for five years; year-end ratios were approximately 455% for CGI and 514% for UTA. Insurance-company dividends were restricted following the acquisition.
- Debt and capital: The $307 million principal balance of HC2’s 11% secured notes matures in 2019. Debt and preferred-stock covenants restrict distributions, financing and other actions. The notes’ liquidity and collateral-coverage covenants were met at year-end. Preferred stock carried quarterly cash dividends and accretion; common-stock dividends were not paid in 2015.
- Accounting and controls: HC2 restated 2014 and 2015 interim financial statements for errors involving the ANG acquisition valuation, taxes, complex transactions and cash-flow classification. Management and the auditor reported remediation of the identified material weaknesses and effective controls at year-end, but the acquired insurers—71% of consolidated assets—were excluded from the control assessment because of the timing of the acquisition.
- Contingencies: Chemours sought approximately $5.0 million for an alleged mistaken payment and more than $18 million in additional damages from Schuff; Schuff disputed the claims and counterclaimed. Xplornet alleged $50 million in damages in litigation involving former telecom assets. Schuff also faced coordinated California wage-and-hour cases and a stockholder suit relating to its tender offer. HC2 said it intended to defend the claims; outcomes remain uncertain.
- Other risks: Schuff recognized $165.2 million of revenue on unapproved change orders, which may not be approved. Five commitments represented 44.1% of Schuff’s $380.8 million backlog, including letters of intent. GMSL’s fleet averaged approximately 22 years of age, and its UK pension recovery plan, currency exposure, oil-and-gas weakness and project concentration may affect cash generation.
- Other unusual items: HC2 raised approximately $53.8 million net in its November 2015 common-stock offering. ANG’s $0.50-per-GGE federal alternative-fuel tax credit was scheduled to remain available through 2016, subject to renewal. No material fixed-maturity or equity-security impairments were recorded in 2015.
Most important facts for investors to verify
- Confirm the issuer identity: the supplied 10-K names HC2 Holdings, Inc.; it does not identify INNOVATE Corp.
- Review the restatement filings and verify the effects on comparative results, taxes, acquisition accounting and cash flows.
- Assess operating cash conversion, working-capital needs, corporate-level cash availability, debt maturities and covenant headroom.
- Evaluate the sustainability of segment earnings, particularly ICS margins, GMSL installation demand and Schuff project execution and change-order collections.
- Review CIG reserve assumptions, reinsurance collectability, premium-rate approvals, RBC capital requirements and the integration of acquired-company controls.
- Track the status and potential financial exposure of the disclosed litigation, Schuff backlog concentration and unapproved change orders.
- Distinguish reported growth from acquisition-driven growth and assess the assumptions underlying management’s non-GAAP Adjusted EBITDA measure.