INNOVATE Corp. (then HC2 Holdings, Inc.) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The filing reports HC2 Holdings, Inc.; it describes a diversified holding company spanning Infrastructure, Clean Energy, Telecommunications, Insurance, Life Sciences, Spectrum and Other.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $393.3 million | $427.5 million | $1,215.1 million | $1,355.7 million |
| Operating income (loss) | $(2.1) million | $7.5 million | $(24.0) million | $66.7 million |
| Continuing-operations income (loss) | $(21.6) million | $(8.9) million | $(34.1) million | $8.3 million |
| Net income (loss) | $(21.6) million | $(8.3) million | $(94.1) million | $(5.4) million |
| Cash from continuing operating activities | — | $78.2 million | $82.5 million |
- Q3 net revenue fell 8.0% year over year; nine-month net revenue fell 10.4%. Telecommunications and Infrastructure were the main revenue declines. Clean Energy grew, including from acquired stations and alternative-fuel tax credits.
- Q3 operating margin was approximately -0.5%, versus 1.8% a year earlier; nine-month operating margin was approximately -2.0%, versus 4.9%. These are calculated from reported net revenue and operating income (loss).
- Nine-month net loss included $60.0 million from discontinued operations, including a $39.3 million loss on the sale of GMSL. Q3 comprehensive income was $42.9 million despite the net loss, reflecting $64.5 million of other comprehensive income, principally investment valuation changes.
- At September 30, cash and cash equivalents were $163.6 million, down from $228.8 million at year-end 2019; only $8.9 million was held at HC2 standalone, while Insurance held $114.7 million. Nine-month consolidated cash, cash equivalents and restricted cash declined $65.1 million.
- Debt obligations were $646.4 million net of issuance discounts and financing costs ($665.0 million gross), down from $773.6 million net at year-end. Standalone HC2 debt was $412.4 million. Reported scheduled 2021 debt payments, including interest, were $517.0 million, highlighting near-term refinancing and repayment needs.
- Total assets were $6,688.4 million; total liabilities were $6,252.8 million; stockholders’ equity was $412.7 million. Insurance reserves were $4,622.9 million and recoverables from reinsurers were $961.4 million.
- Adjusted EBITDA, a non-GAAP measure excluding Insurance, was $11.9 million for Q3 versus $11.8 million; nine-month Adjusted EBITDA was $28.5 million versus $35.1 million. Management’s measure adds back specified costs, including COVID-related costs, and should not be treated as GAAP earnings or cash flow.
Material changes and notable items
- GMSL was sold in February 2020; net proceeds were approximately $144.0 million, with proceeds applied in part to debt repayment. The filing recorded a $39.3 million disposal loss. In May, the company sold part of its HMN interest, receiving $85.5 million and recognizing a $71.1 million gain, including the fair value of a put option.
- Debt principal declined following redemptions of $76.9 million and $50.6 million of senior secured notes. The company recorded $13.4 million of early-extinguishment or restructuring losses during the first nine months.
- Insurance operating results weakened year to date: segment operating income was $16.7 million versus $75.9 million, primarily due to prior-year favorable claims experience, current-year reserve developments and investment losses. Q3 improved year over year, partly due to favorable claims activity.
- Spectrum reported operating losses of $11.7 million for Q3 and $15.8 million for nine months, including impairment of channel-sharing arrangements and other spectrum assets. Management reported no goodwill impairment at September 30, but noted future impairment risk if conditions worsen.
- The company launched a rights offering for up to 28.6 million common shares at $2.27 per share. A related-party investment fund led by the board chair committed to backstop up to $35.0 million; it funded $5.56 million in September through Series B preferred stock.
- After quarter-end, the company sold 100% of ICS; the transaction closed October 31, 2020. ICS was not classified as held for sale at September 30.
Outlook, risks and contingencies
- Management believed liquidity would cover obligations for at least 12 months, relying on subsidiary distributions, additional debt or equity, refinancing and asset or investment sales. It cautioned that subsidiary distributions and asset sales may be restricted and financing may not be available on acceptable terms. Standalone cash was limited.
- Management reported compliance with debt covenants at September 30. It warned that future compliance could depend on asset monetizations, refinancing, new borrowing or equity issuance; a covenant default could accelerate debt and permit collateral remedies.
- COVID-19 effects remained uncertain. The filing cites project delays, supply-chain and workforce disruption, higher Infrastructure costs ($15.2 million year to date), weaker Spectrum advertising, and potential effects on insurance claims, investment values and liquidity. Management could not reliably quantify future effects.
- Principal additional risks include substantial indebtedness and 2021 maturities, dependence on subsidiary distributions, insurance reserve and investment risk, cyclical project activity, and management and board transitions. No quantified earnings or revenue guidance is provided.
- Legal matters include a newly filed derivative and class action challenging DBMG/HC2 transactions, an OSHA whistleblower complaint against an insurance subsidiary (denied by the company; no agency determination reported), and an ongoing Canadian tax audit. Management did not expect pending litigation to materially affect the financial statements, but outcomes remain uncertain.
Investor verification priorities
- Verify the rights offering’s completion, proceeds, dilution and final Series B/backstop treatment.
- Assess the company’s standalone liquidity and its ability to meet or refinance the reported 2021 debt payments and maintain covenants.
- Review the final proceeds and accounting for the ICS sale, along with how sale proceeds were applied.
- Track segment trends, especially Infrastructure backlog and COVID-related costs, Insurance claims/reserves and investment valuations, and Spectrum advertising and impairment exposure.
- Review subsequent developments in the DBMG litigation, OSHA complaint and Canadian tax audit, and evaluate the assumptions underlying management’s 12-month liquidity assessment.