Filing summary
Entity note: The supplied filing identifies the registrant as HC2 Holdings, Inc., not INNOVATE Corp. This summary reflects the filing as provided. The 10-Q covers the three months ended March 31, 2015; financial amounts below are in U.S. dollars and millions unless stated otherwise.
Business context and reporting period
HC2 describes itself as a diversified holding company with six operating segments: Manufacturing (Schuff), Marine Services (GMSL), Utilities (ANG), Telecommunications, Life Sciences and Other. Schuff, ANG and GMSL were acquired in 2014, so reported first-quarter 2015 results include businesses not present in the first-quarter 2014 reported comparison. Management’s strategy is to pursue acquisitions and grow acquired businesses.
Financial performance and position
- Revenue: $201.8, up from $43.4 in Q1 2014. The 2015 total included $126.9 Manufacturing, $27.0 Marine Services, $46.7 Telecommunications and $1.2 Utilities. On a pro forma basis including acquired businesses in both periods, revenue rose 4.3% to $201.8 from $193.4.
- Profitability: Operating income was $0.8, versus an operating loss of $4.1. Cost of revenue was $172.5, or 85.5% of revenue, versus 94.8% in the prior-year reported period; reported gross margin was approximately 14.5%, versus 5.2%. Net loss was $5.3; loss attributable to HC2 was $5.1, and loss attributable to common and participating preferred stockholders was $6.1, or $0.25 per share. The comparable loss attributable to HC2 in Q1 2014 was $4.9, or $0.34 per share.
- Cash flow: Operating cash use was $49.0, compared with $2.1 provided in Q1 2014, principally reflecting working-capital movements, including a $45.8 increase in receivables and an $18.9 decrease in accounts payable. Investing cash use was $20.8; financing provided $90.5. Cash increased by $20.9 to $128.9.
- Liquidity and debt: Current assets were $420.8 and current liabilities $232.9 at March 31, 2015. Total debt obligations were $415.4 net of note discount, including $38.8 current; debt was concentrated in $300.0 of 11% senior secured notes due 2019. The company reported $128.9 cash and stated it expected available cash to fund fixed obligations and operating needs for at least 12 months. It reported compliance with applicable note and subsidiary credit-facility covenants.
- Other measures: Adjusted EBITDA, a company-defined non-GAAP measure, was $5.9. Total assets were $803.1; total liabilities were $645.8, in addition to $53.4 of preferred stock presented as temporary equity. Preferred stock accrued a 7.5% annual cash dividend and quarterly accretion.
Material changes versus the prior comparable period
- Reported revenue expanded mainly because Schuff and GMSL were included after their 2014 acquisitions. On a pro forma basis, Manufacturing revenue increased 20.7%, while Marine Services revenue declined 39.9%; management attributed the latter to prior-year vessel charters and installation work that did not recur.
- Pro forma revenue growth was 4.3%, a more comparable view than the large reported increase. Manufacturing projects beginning in late 2014 supported growth; management said both Manufacturing and Marine Services revenue were budgeted to be lower in Q1 than in later quarters.
- Interest expense increased to $8.6 from near zero, principally reflecting the 11% notes. SG&A rose to $23.1 from $6.2 as the acquired businesses and corporate costs expanded; on a pro forma basis, SG&A increased 13.3%.
- HC2 issued $50.0 of additional 11% secured notes in March and received $14.0 net from a January Series A-2 preferred-stock issuance. It also increased its Novatel Wireless investment and acquired convertible debt investments.
Outlook, commentary, risks and unusual items
- No specific company-wide revenue or earnings guidance was provided. Management said it expects cash and investments to remain liquidity sources, while noting that subsidiary distributions, capital needs, debt covenants and access to additional financing affect parent-company liquidity.
- Schuff reported $306.1 of backlog, including $52.8 under letters of intent; five commitments represented 56.3% of backlog. Schuff had recognized revenue on $66.9 of unapproved change orders, which may not be approved.
- Key risks include substantial indebtedness and 11% note interest, variable-rate borrowing exposure, foreign-exchange movements (27.1% of continuing-operations revenue was generated outside the U.S.), working-capital demands, acquisition and integration execution, project timing and cost overruns, and reliance on subsidiary cash distributions.
- Contingencies include Schuff shareholder litigation challenging the buyout and the Xplornet dispute, which includes a $50.0 damages claim and a related cross-claim against the company. HC2 said it intends to defend the claims; it did not quantify a probable loss.
- Unusual items include a $5.8 income-tax benefit, a $2.7 loss from equity investees, a $0.8 foreign-currency transaction loss and $4.4 of foreign-currency translation loss in other comprehensive income. Management reported that the prior-year material weakness concerning income-tax controls had been remediated and disclosure controls were effective.
- Subsequent events: in April, HC2 agreed to acquire two insurance companies for approximately $7.0 plus a $13.0 capital contribution, subject to adjustments and approvals; it also invested approximately $16.0 in Gaming Nation convertible debentures.
Important facts for investors to verify
- Confirm the registrant identity and whether this HC2 filing is the intended filing for INNOVATE Corp.
- Assess operating cash conversion and receivables collection, given $49.0 of operating cash use and the large receivables increase.
- Review debt maturities, the 11% notes and covenant requirements, along with the availability of cash distributions from subsidiaries.
- Track Schuff’s backlog concentration and approval or collection of the $66.9 in unapproved change orders.
- Monitor the outcome and potential exposure from the disclosed litigation, insurance-company transaction and other post-quarter investments.
- Separate acquisition-driven reported growth from underlying pro forma segment trends, particularly Marine Services’ decline and Manufacturing’s project timing.