HC2 Holdings, Inc. — Q1 2021 Form 10-Q
Quarter ended March 31, 2021. The filing is by HC2 Holdings, Inc. (NYSE: HCHC), a diversified holding company with Infrastructure, Life Sciences, Spectrum, Insurance and Other businesses. Insurance, along with certain other divested businesses, is presented as discontinued operations; comparative results were recast accordingly. Amounts are in millions except per-share data.
Financial performance
- Revenue: $171.8, down $14.8 (7.9%) from $186.6. Infrastructure revenue fell to $161.3 from $176.5, mainly from project timing, backlog mix and lower power and industrial maintenance work. Spectrum revenue rose to $10.5 from $10.1.
- Gross profit and margin: Gross profit was $30.5 versus $29.8; gross margin was approximately 17.8%, up from 16.0%, as cost of revenue declined faster than revenue.
- Operating results: Operating loss improved to $10.9 from $13.6. Adjusted EBITDA, a non-GAAP measure, improved to $1.0 from a loss of $2.9. Infrastructure Adjusted EBITDA was $11.3; Life Sciences was a $6.2 loss; Spectrum was $0.8; corporate was a $4.0 loss.
- Net income: Continuing-operations loss was $42.9 versus $29.9. Net income was $9.0 versus a net loss of $101.0, primarily reflecting discontinued-operations income of $51.9 versus a loss of $71.1. The 2021 discontinued result included $40.4 of gains on sales and liquidation; common and participating preferred stockholders’ income was $12.2, or $0.15 per share.
- Cash flow: Continuing-operations operating cash use was $23.2 versus $4.3; including discontinued operations, operating cash use was $2.5 versus cash provided of $35.3. Investing cash provided by continuing operations was $66.4, including $71.2 of net disposition proceeds. Financing cash use was $31.6. Cash and cash equivalents were $54.2 at quarter-end; total cash, cash equivalents and restricted cash, including amounts classified as held for sale, were $269.9.
- Debt and liquidity: Consolidated indebtedness was $549.4 at March 31, versus $576.6 at year-end; HC2 standalone debt was $385.0. The company refinanced its 11.5% notes due 2021 with $330.0 of 8.5% secured notes due 2026 and exchanged $51.8 of 7.5% convertible notes due 2022 for convertible notes due 2026. The amended revolving facility has a $20.0 commitment, matures in 2024 and had no borrowings outstanding. HC2 reported compliance with debt covenants.
- Balance sheet: Total assets were $6,406.0 and total stockholders’ equity was $413.5. Assets and liabilities held for sale were $5,592.8 and $5,166.0, respectively, largely reflecting the Insurance segment.
Material changes and developments
- Beyond6 was sold on January 15, 2021; HC2 received approximately $70.0 in net cash proceeds and recorded a $39.2 gain.
- HC2 agreed to sell its Insurance segment for approximately $90.0, including $65.0 in cash plus certain assets. The transaction remained subject to regulatory approval at quarter-end and involves a buyer controlled by a company director and 6.6% shareholder.
- DBM Global agreed to acquire Banker Steel for approximately $145.0, expected to close in Q2 2021.
- DBM Global backlog was $522.7 at quarter-end; five projects represented 41.5% of backlog. The filing also reports $513.8 of remaining unsatisfied performance obligations.
- R2 Technologies received $10.0 of investment from Huadong Medicine to support product launches; Huadong received exclusive distribution rights in China and selected Asia-Pacific markets.
Outlook, risks and contingencies
- Management said it expected liquidity sources to cover obligations and operating needs for at least 12 months, relying on cash, subsidiary distributions, financing, refinancing and asset or investment sales. It cautioned that these sources are not assured; subsidiary distributions are restricted by financing, regulatory and other conditions.
- External preferred shareholders could require redemption beginning May 29, 2021. Management said it believed available liquidity, revolving capacity and DBM Global distributions and tax-sharing payments could cover redemption obligations. The sale agreement provides for a five-year maturity extension for preferred shares held by the Insurance subsidiary; extensions for external holders were not assured.
- COVID-19 caused $3.9 of Infrastructure costs in Q1. Management cited possible project delays, workforce and supply-chain disruption, higher costs, weaker advertising and potential adverse effects on future revenue, profitability and liquidity. No quantified full-year guidance was provided.
- Key risks include project cyclicality and cost overruns, dependence on subsidiary distributions, substantial debt and covenant requirements, refinancing and capital-raising access, regulatory approval of transactions, and litigation. The company described fiduciary-duty lawsuits concerning DBM Global and DTV, and an arbitration dispute with former CEO Philip Falcone. Management said it intended to defend these matters and did not expect pending claims to materially affect the financial statements.
- The quarter’s results included $10.8 of debt-extinguishment or restructuring losses, $21.4 of interest expense, and $3.4 of other income, primarily from a litigation settlement. Management cautioned that quarterly results may not indicate full-year performance.
Important facts for investors to verify
- Whether the Insurance sale received regulatory approval, closed on the disclosed terms, and generated the anticipated cash and asset transfers.
- The amount, timing and funding source for any external preferred-stock redemption after May 29, 2021, and any agreed maturity extensions.
- Cash available at the parent company, the capacity for subsidiary distributions, and ongoing compliance with liquidity and collateral covenants.
- Completion and financing of the Banker Steel acquisition, and the effect on consolidated debt and liquidity.
- Infrastructure project execution, COVID-related costs, backlog conversion and concentration in the five largest projects.
- Underlying continuing-business performance separately from divestiture gains and other discontinued-operation items; also review the company’s non-GAAP Adjusted EBITDA reconciliation.