HC2 Holdings, Inc. — Form 10-Q summary
Entity note: The supplied filing is for HC2 Holdings, Inc. (NYSE MKT: HCHC), not a registrant named INNOVATE Corp. It covers the quarter and nine months ended September 30, 2015; the financial statements are unaudited. Amounts below are in millions of dollars unless noted.
Business context and reporting period
HC2 is a diversified holding company focused on acquiring and growing businesses. Its segments include Telecommunications, Manufacturing (Schuff), Marine Services (GMSL), Utilities (American Natural Gas), Life Sciences and Other. Comparisons with 2014 are affected by the 2014 acquisitions of Schuff, GMSL and ANG; management also presents pro forma comparisons that assume those acquisitions occurred at the start of 2014.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net revenue | $277.5 | $179.4 | $760.3 | $319.4 |
| Gross profit | $36.0 | $20.8 | $100.8 | $36.8 |
| Gross margin | 13.0% | 11.6% | 13.3% | 11.5% |
| Operating income (loss) | $2.4 | $0.1 | $6.5 | $(5.1) |
| Net loss attributable to HC2 | $(4.6) | $(15.9) | $(20.8) | $(24.4) |
| Net loss per share attributable to HC2 | $(0.22) | $(0.72) | $(0.96) | $(1.39) |
| Adjusted EBITDA | $14.1 | Not provided | $39.4 | Not provided |
Q3 revenue increased 54.6% year over year, but rose 23.9% against 2014 pro forma revenue. For the nine-month period, reported revenue increased 138.1%; against 2014 pro forma, it increased 20.7%. Telecommunications growth, including expansion in Latin America and other emerging markets, was a key driver. On a pro forma basis, Marine Services revenue declined, reflecting lower installation activity and vessel utilization; Manufacturing faced softer project activity in certain regions in Q3.
- Cash flow: Operating cash flow was $(33.6) for the nine months, versus $11.8 provided in 2014. Investing cash outflow was $44.2, versus $173.1, while financing provided $55.5, versus $266.3. Cash fell $26.9 to $81.1.
- Balance sheet: At September 30, cash was $81.1; short-term investments were $3.6; current assets were $359.7 and current liabilities $219.3 (working capital $140.5; current ratio about 1.64). Total assets were $765.0.
- Debt and capital: Debt obligations totaled $387.9, including $13.5 current and $374.4 long-term, up from $343.4 at year-end 2014. The $305.0 of 11% senior secured notes due 2019 is a major component. Preferred stock temporary equity was $53.4, up from $39.8.
- Other metrics: Nine-month capital expenditures were $16.8. Schuff reported backlog of $381.6, including $135.7 under letters of intent; five large commitments accounted for 32.1% of backlog.
Material changes versus the prior comparable period
- Revenue and operating results reflect the expanded consolidation of acquired businesses. On the company’s pro forma basis, Q3 revenue grew 23.9%, while nine-month revenue grew 20.7%.
- Interest expense rose to $10.3 in Q3 and $29.0 for nine months, largely due to the 11% notes, compared with $2.1 and $3.1, respectively, in 2014.
- Operating cash flow weakened substantially, principally amid higher receivables and contract assets, lower accounts payable and lower contract billings in excess of costs.
- Telecommunications cost of revenue rose to 97.9% of segment revenue in Q3; management attributed margin pressure to a shift toward lower-margin, lower-risk customers. The nine-month ratio was 97.8%.
- Comprehensive loss attributable to HC2 was $12.7 in Q3 and $33.9 for nine months, including foreign currency translation and unrealized investment losses.
Outlook, commentary, risks and unusual items
- Management said it expected to meet liquidity needs and fund operations for at least the next 12 months. It also noted reliance on subsidiary distributions, which may be limited by subsidiary financing terms, available funds and board decisions. The company reported compliance with its note covenants at September 30, 2015; liquidity covenant requirements were scheduled to become more demanding beginning November 20, 2015 unless a specified collateral coverage ratio was met.
- HC2 had agreed to acquire two insurance companies, with closing expected in Q4 2015 subject to approvals and other conditions. The estimated purchase price was $12.5–$17.5, with additional capital contributions and potential reserve-related payments; final terms were not settled in the filing.
- After quarter-end, HC2 sold 8,452,500 common shares for gross proceeds of approximately $59.2 at $7 per share, before expenses. The company said proceeds could support subsidiary investments, acquisitions, debt repayment, preferred-stock repurchase or redemption, and general corporate purposes. This financing is not reflected in September 30 cash or shares outstanding.
- Unusual items included $1.1 of telecommunications lease-termination costs, a $2.0 gain on asset disposals in Q3, and $6.9 of share-based compensation for the nine months. Investment valuations included a $3.4 unrealized loss on Gaming Nation convertible debt.
- Principal disclosed risks include acquisition execution and integration, substantial debt and high-cost interest, liquidity and access to additional capital, foreign exchange exposure, cyclical/project risks in steel fabrication, vessel utilization and project timing in Marine Services, and competitive pricing pressure in Telecommunications. The filing describes a Schuff stockholder suit and an Xplornet dispute seeking $50 in damages; HC2 said it believed the claims were without merit and did not expect pending matters to have a material adverse effect. The Xplornet summary-judgment hearing was rescheduled for March 31, 2016.
Important facts for investors to verify
- Confirm the filing’s registrant and ticker: the document identifies HC2 Holdings, Inc. (HCHC), notwithstanding the request metadata naming INNOVATE Corp.
- Assess recurring cash generation and working-capital demands, especially receivables, contract assets and operating cash outflow.
- Review debt maturity, 11% note interest, covenant headroom and the effect of the later equity offering on liquidity and dilution.
- Compare segment performance on a consistent pro forma basis, with attention to Telecommunications margins, Manufacturing backlog quality and Marine Services utilization.
- Track the insurance acquisitions’ final purchase price, required capital and reserve obligations, as well as the status and potential exposure of disclosed litigation.