INNOVATE Corp. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. INNOVATE is a diversified holding company with Infrastructure, Life Sciences, and Spectrum segments, plus Other and non-operating corporate activities. Amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $392.2 | $243.8 | $805.0 | $415.6 |
| Gross profit / margin | $50.3 / 12.8% | $36.4 / 14.9% | $100.1 / 12.4% | $66.9 / 16.1% |
| Operating income (loss) | $(0.4) | $(7.7) | $0.3 | $(18.6) |
| Continuing operations net loss | $(13.9) | $(23.7) | $(28.0) | $(66.6) |
| Net loss attributable to common stockholders | $(13.6) | $(23.7) | $(27.2) | $(11.5) |
| Adjusted EBITDA, non-GAAP | $12.1 | $6.5 | $23.6 | $7.5 |
Revenue rose 61% in Q2 and 94% for the first half, primarily from Infrastructure and the inclusion of Banker Steel, acquired in May 2021, as well as stronger commercial structural-steel activity. Infrastructure generated $382.1 of Q2 revenue and $20.9 of Q2 Adjusted EBITDA. Life Sciences and Spectrum remained loss-making at the operating level; Spectrum revenue declined, while its Q2 operating loss included a $1.5 impairment of a program license agreement. Gross margin declined year over year in both periods.
Prior-year discontinued operations materially affect comparisons: six-month 2021 results included $50.4 of discontinued-operations income, including a $40.4 disposal gain. Thus, common-stockholder net loss increased year over year for the first half even as continuing-operations losses narrowed.
Cash flow, debt and liquidity
- Cash and cash equivalents were $24.9 at June 30, down from $45.5 at year-end 2021; cash, cash equivalents and restricted cash totaled $26.7.
- First-half cash used in continuing operations was $42.7, versus $34.7 in 2021, mainly due to Infrastructure working-capital needs and timing of receivables. Capital expenditures were $8.8. Cash used in continuing investing was $11.5; continuing financing provided $34.8.
- Consolidated principal indebtedness was $669.9, versus $630.8 at year-end. Balance-sheet debt obligations, net of discounts and financing costs, were $667.1, including $73.0 current. The increase in principal debt was mainly a $57.3 rise in DBMG’s revolving-line borrowings, partly offset by repayments.
- INNOVATE standalone cash was $3.6 and standalone debt was $386.8 at June 30; its $330.0 senior secured notes bear 8.5% interest and mature in 2026. The company’s $5.0 revolving-credit balance at quarter-end increased to $20.0 after a further $15.0 draw on July 29, 2022.
- Management stated it expected to meet liquidity needs for at least 12 months using available cash and subsidiary distributions, while warning that distributions are restricted and additional financing or asset sales may not be available on acceptable terms. The current ratio was approximately 1.04, based on reported current assets and liabilities.
Changes, outlook and risks
- DBMG was out of compliance with its Fixed Coverage Ratio covenant at June 30 while an amendment was pending. On August 2, UMB finalized a retroactive covenant amendment and increased the revolving-line commitment from $110.0 to $135.0; the filing states DBMG was then in compliance. INNOVATE reported compliance with its own debt covenants at quarter-end.
- DBMG backlog was $1,485.3; five contracts represented $740.2, or 49.8%, creating project-concentration and execution risk. One customer accounted for 24.0% of Q2 revenue.
- Management cited supply-chain constraints, labor shortages, and higher transportation and material costs as potential sources of delays and margin pressure. R2 reported supplier-related delays obtaining device materials. Management said COVID-19 did not materially affect DBMG or Spectrum during the first half.
- No specific numeric full-year guidance is provided. Management cautioned that project timing, cyclicality, customer cancellations, costs, financing availability, subsidiary distributions, and covenant compliance could affect results and liquidity.
- Notable contingencies include ongoing shareholder litigation concerning DBMG transactions and DTV, and stockholder books-and-records demands. Management said it did not believe pending litigation would materially affect the financial statements; outcomes remain uncertain.
- The proposed sale of the remaining 19% HMN interest was amended in June; it may not close on the expected timetable or terms. If it does not close by October 31, 2022, the company may exercise its put option under the original agreement.
- R2 received $5.0 of 12% related-party financing from an entity controlled by INNOVATE’s chairman in July, including settlement of a prior $0.5 bridge loan. The note is due by December 31, 2022 or shortly after a qualifying financing event.
Important facts for investors to verify
- Whether DBMG’s amended credit facility and revised covenant terms provide adequate borrowing capacity and whether it remains compliant in later periods.
- Cash conversion and working-capital trends, particularly receivables and contract assets, alongside the company’s ability to upstream cash from subsidiaries.
- Infrastructure project margins, backlog conversion, customer concentration, and the impact of cost inflation and project delays.
- Funding needs and repayment terms for R2, as well as progress and commercial prospects for its products and MediBeacon’s clinical study.
- Completion and cash proceeds, if any, from the HMN interest sale, and developments in the disclosed litigation and books-and-records demands.