HC2 Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The supplied filing is for HC2 Holdings, Inc. (ticker HCHC), although the request metadata names INNOVATE Corp.
Business context
HC2 was a diversified holding company with operating segments in Construction, Energy, Telecommunications, Insurance, Life Sciences, Broadcasting and Other. Results are compared with Q1 2019; GMSL was classified as discontinued operations following its February 28, 2020 sale.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net revenue | $444.8 million | $449.0 million; down $4.2 million |
| Operating income (loss) | $(26.8) million | $25.6 million |
| Continuing operations loss | $(41.0) million | $0.3 million income |
| Net loss | $(101.0) million | $(6.3) million |
| Net loss attributable to HC2 common and participating preferred stockholders | $(83.5) million; $(1.82) per share basic and diluted | $(1.6) million; $(0.03) basic |
| Cash from continuing operating activities | $36.1 million | $34.0 million |
| Cash and cash equivalents | $186.9 million at March 31 | $228.8 million at December 31, 2019 |
| Consolidated debt principal | $711.7 million | $805.0 million at December 31, 2019 |
Consolidated debt obligations had a $686.0 million carrying value after unamortized discount and financing costs. Interest expense was $21.3 million, versus $18.8 million. Cash, cash equivalents and restricted cash fell by $42.1 million during the quarter. Continuing investing activities provided $67.1 million, including GMSL sale proceeds; continuing financing activities used $145.8 million, including debt repayment and payments to noncontrolling holders. Capital expenditures were $6.1 million.
HC2 reported total assets of $6.34 billion, liabilities of $6.26 billion and total stockholders’ equity of $60.5 million. HC2’s standalone cash was $3.6 million, compared with $11.6 million at year-end. The filing states that HC2 drew a further $10.0 million under its revolving credit agreement on April 16.
Material changes and unusual items
- Insurance investment marks and claims costs were major drivers of deterioration: net realized and unrealized investment losses were $19.1 million, compared with gains of $5.5 million; policy benefits, reserve changes and commissions rose to $72.4 million from $52.7 million. The Insurance segment’s operating loss was $12.6 million, versus $34.4 million of operating income.
- Other comprehensive loss was $253.0 million, including $276.0 million of unrealized losses on available-for-sale securities, partly offset by a $22.8 million disposition-related item. Comprehensive loss attributable to HC2 was $362.9 million.
- GMSL’s sale generated approximately $144.0 million of net proceeds at GMH, of which approximately $98.6 million reached HC2. HC2 recorded a $39.3 million discontinued-operations sale loss, including $31.3 million from realization of accumulated other comprehensive loss. Proceeds were used in part to repay a $15.0 million revolver and redeem $76.9 million of senior secured notes; the debt transactions contributed $5.8 million of extinguishment losses.
- Segment revenue diverged: Telecommunications rose to $186.4 million from $155.5 million, while Construction fell to $176.5 million from $192.1 million and Insurance revenue fell to $63.8 million from $88.8 million. Energy revenue increased to $10.4 million from $5.1 million, partly reflecting the 2019 ampCNG station acquisition.
- The $12.6 million income tax benefit primarily reflected a one-time benefit from carrying back Insurance-segment net operating losses under the CARES Act. Tax benefits for certain HC2 losses remained subject to a full valuation allowance.
Outlook, risks and contingencies
- Management said COVID-19’s future effects could not be reasonably estimated and could materially reduce revenue growth, profitability, cash flows and liquidity. Advertising weakness affected Broadcasting; Construction faced workforce and potential project or supply-chain disruption; and market volatility affected Insurance investments. Management reported no material Construction operating impact in Q1 through March 31.
- Management believed liquidity sources would cover obligations for at least 12 months, relying on subsidiary distributions, financing, refinancing and asset or investment sales. It cautioned that subsidiary distributions are restricted and there is no assurance that financing or asset sales will be available on acceptable terms. HC2 reported compliance with its specified debt maintenance covenants at March 31, 2020, but noted future compliance could depend on additional transactions.
- The expected sale of 30% of HMN was anticipated to close in Q2 2020; HC2 expected an overall gain from the Marine segment disposition. Completion and financial impact were not yet certain in the filing.
- A proposed revised settlement framework in the DBMG stockholder litigation contemplated approximately $20.4 million for former tendering stockholders, with insurers contributing approximately $12.4 million and DBMG funding the balance, plus approximately $1.0 million of HC2-funded payments to public DBMG stockholders. Court approval remained uncertain.
- The filing also describes a stockholder lawsuit concerning consent-solicitation disclosures and preferred-stock change-of-control provisions. The parties’ actions and preferred holders’ waivers were reported to have mooted the immediate request for expedited proceedings and a preliminary injunction.
- HC2 reported that the Broadcasting segment’s COVID-related impairment review found no impairment at March 31, but further deterioration could trigger future impairment. The filing also identifies insurance reserve, reinsurer credit, debt-refinancing, covenant, litigation and operating risks.
- No quantified full-year earnings or revenue guidance was provided. Management noted that Q1 results are not necessarily indicative of full-year results. Disclosure controls were concluded to be effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Confirm the issuer identity: the filing is HC2 Holdings, Inc. (HCHC), not an entity named INNOVATE Corp. in the supplied request metadata.
- Track parent-company cash, the April revolver draw, upcoming debt service and covenant headroom; consolidated cash should not be treated as freely available to the holding company.
- Review subsequent Insurance portfolio values, credit losses, reserve development and the sensitivity of investment marks to market conditions.
- Verify completion, proceeds and realized gain or loss for the HMN transaction, as well as any settlement approvals, funding obligations or other litigation developments.
- Monitor COVID-19 effects on Construction backlog and project execution, Broadcasting advertising and station builds, and segment cash flows; DBMG reported backlog of $485.5 million at March 31, including $108.0 million concentrated in five projects.