HC2 Holdings, Inc. — Form 10-Q summary
Reporting period: Three months ended March 31, 2016. The supplied filing is for HC2 Holdings, Inc. (NYSE MKT: HCHC), not a registrant identified as INNOVATE Corp.
Business context
HC2 is a diversified holding company with operations spanning manufacturing, marine services, insurance, telecommunications, utilities, life sciences and other investments. Results include the insurance businesses acquired in December 2015 and CWind, acquired by GMSL in February 2016; therefore, year-over-year comparisons are affected by acquisitions and changes in the business mix.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net revenue | $331.7 million | $201.8 million |
| Operating income (loss) | $(19.7) million | $0.1 million |
| Net loss attributable to HC2 | $(30.5) million | $(5.2) million |
| Loss per common share | $(0.89) | $(0.26) |
| Operating cash flow | $16.8 million | $(49.0) million |
| Capital expenditures | $6.5 million | $3.1 million |
Revenue rose 64.4%, mainly from telecommunications growth and the addition of the insurance segment. Operating margin was approximately (5.9%), versus approximately 0.1% a year earlier. The larger net loss reflects operating losses, increased interest expense, equity-investee losses and the insurance segment’s contribution. Management-reported Adjusted EBITDA, a non-GAAP measure, was $0.3 million versus $5.9 million; the filing attributes the decline in part to a $5.5 million loss on a marine installation project.
By segment, telecommunications revenue increased to $149.8 million from $46.7 million, but operating income was only $0.2 million as higher wholesale volumes carried lower average margins. Manufacturing operating income improved to $8.2 million despite lower revenue. Marine Services recorded a $4.2 million operating loss, compared with $3.3 million income, largely due to the installation-project loss. Insurance recorded a $9.4 million operating loss.
Balance sheet, debt and liquidity
- At March 31, 2016, cash and cash equivalents were $137.7 million, down from $158.6 million at year-end. HC2 corporate cash was $40.9 million; consolidated cash should not be assumed to be freely available to the parent.
- Total assets were $2.765 billion and total liabilities were $2.594 billion. Investments totaled $1.391 billion, largely insurance-related.
- Reported long-term obligations were $394.2 million, compared with $371.9 million at year-end. The debt schedule reports $403.5 million before unamortized discount and issuance costs, including $307 million principal of 11% senior secured notes due 2019. The notes’ stated rate is high, and $324.2 million of aggregate debt maturities are shown for 2019.
- Preferred stock liquidation value was approximately $52.7 million; it carries cumulative cash dividends at a 7.5% annual rate and quarterly accretion provisions.
- Operating cash flow improved substantially year over year, while investing activities used $33.1 million and financing activities used $6.2 million. Cash fell by $20.9 million during the quarter. Management said it expected to meet liquidity needs for at least 12 months through subsidiary distributions, financing, refinancing or asset sales, while noting there is no assurance financing will be available on satisfactory terms.
Changes, outlook and significant items
- Telecommunications revenue growth was driven by wholesale traffic volumes and expansion of customer relationships; management noted the shift toward larger carriers brought lower average margins.
- GMSL acquired 60% of CWind for approximately $7.8 million and committed to purchase the remaining interest in stages, subject to agreed financial targets. HC2 also obtained control of BeneVir in February.
- The marine installation project off Russia’s northeastern coast incurred $5.5 million of costs due to customer administrative delays and early adverse weather. This materially affected segment results.
- Insurance results included $19.9 million in earned premiums, $14.1 million in net investment income and $4.9 million in realized investment losses. The segment’s insurance reserves totaled $1.614 billion. The company has five-year commitments to maintain acquired insurers’ capital at specified risk-based capital levels; reported capital remained above 400% of the required control level at quarter-end.
- HC2 recorded an $18.6 million after-tax unrealized gain on available-for-sale securities in other comprehensive income. It also recognized investment impairments and losses; these accounting and market-value movements differ from recurring operating performance.
- No quantitative company-wide earnings or revenue guidance is provided. Management described its strategy as acquiring and growing businesses for long-term sustainable free cash flow, but cautioned that quarterly results are not necessarily indicative of full-year results.
- Key risks include substantial debt and refinancing needs, dependence on subsidiary distributions, regulated insurers’ reserve and capital requirements, foreign exchange and interest-rate exposure, and the ability to raise capital. A disclosed telecommunications risk is that two credit insurers cancelled coverage on PTGi-ICS, potentially making supplier credit harder to obtain.
- Xplornet litigation seeks $50 million in damages; HC2 disputes the claim and a summary-judgment hearing was scheduled for September 2016. The filing states the company did not believe pending claims would materially adversely affect its consolidated financial statements.
Most important facts for investors to verify
- Whether telecommunications volume growth can produce stronger margins and whether the disclosed supplier-credit insurance issue constrains operations.
- Marine Services’ exposure to project execution, customer delays and weather, and whether the Russia project loss is isolated.
- Parent-level cash availability, subsidiary distribution restrictions, covenant headroom and the company’s ability to address 2019 debt maturities and high interest costs.
- Insurance reserve adequacy, investment credit quality, reinsurance recoverability and future capital contributions or indemnity obligations.
- Acquisition integration, CWind’s assumed debt and staged purchase commitments, and the performance of early-stage and equity-method investments.
- Developments in the $50 million Xplornet claim and other contingencies, and the distinction between GAAP results and management’s non-GAAP Adjusted EBITDA.