Filing summary
Entity and period: The supplied filing is HC2 Holdings, Inc.’s Form 10-K for the fiscal year ended December 31, 2016, filed March 9, 2017. It is not filed under the name INNOVATE Corp.; confirm that this is the intended issuer. HC2 describes itself as a diversified holding company with seven operating segments.
Financial results and liquidity
Amounts below are in U.S. dollars; millions unless otherwise stated.
| Metric | 2016 | 2015 |
|---|---|---|
| Net revenue | $1,558.1 | $1,120.8 |
| Operating income (loss) | $(1.4) | $0.7 |
| Net loss attributable to HC2 | $(94.5) | $(35.6) |
| Basic and diluted loss per share | $(2.83) | $(1.50) |
| Cash from operating activities | $79.1 | $(27.9) |
| Capital expenditures | $29.0 | $21.3 |
| Cash and cash equivalents, year-end | $115.4 | $158.6 |
| Long-term obligations, carrying value | $428.5 | $371.9 |
- Revenue increased 39.0%, led by Telecommunications, the full-year contribution from the Insurance acquisition, and Marine Services growth including CWind. Operating margin was approximately -0.1%; net margin was approximately -6.3%.
- Operating cash flow improved by $107.1 million year over year. It included working-capital movements, notably growth in insurance reserves and contracts in progress. Investing activities used $140.2 million, mainly reflecting acquisitions and investment purchases; cash declined $43.3 million overall.
- HC2 held $21.7 million of cash at the parent-company level, versus $115.4 million consolidated. Subsidiary cash may not be freely available to the parent because of financing, legal, and regulatory restrictions.
- Year-end debt included $307 million of 11.0% senior secured notes and a $35 million 11.0% bridge note, alongside subsidiary borrowings and leases. In January 2017, HC2 issued $55 million of additional 11.0% notes, used $35 million to repay the bridge note, and retained the balance for working capital and general purposes.
- Preferred stock’s accrued value was $29.5 million at year-end. The company paid no common-stock dividends in 2016 or 2015.
Material changes and segment performance
- Telecommunications: Revenue rose 59.7% to $735.0 million and operating income increased to $4.2 million. Growth came from higher wholesale traffic volumes; management noted the sales strategy produced higher volumes but lower average margins.
- Construction: Revenue decreased 2.2% to $502.7 million, while operating income improved to $49.6 million, attributed to better-than-bid performance on completed large commercial projects. Backlog was $503.5 million, with 58.9% concentrated in five commitments.
- Marine Services: Revenue grew to $161.9 million, but the segment recorded an operating loss of $0.3 million versus $10.9 million income. The filing cites unutilized vessel costs, installation-project losses, customer delays, and adverse weather. Equity-method income from joint ventures increased.
- Insurance: Revenue was $142.5 million, but operating loss was $0.8 million; Insurance adjusted operating income, a non-GAAP measure, was a loss of $15.9 million. The 2015 comparison includes only six days after the December 2015 acquisition.
- Life Sciences: Operating loss widened to $10.4 million as research, development, and clinical costs increased. These early-stage investments may require further funding and may not become profitable.
- Energy: Revenue was $6.4 million and operating loss was $0.3 million. ANG expanded through station acquisitions; the filing says it owned and operated 40 stations, including stations in process and under development.
- Company-wide Adjusted EBITDA, a non-GAAP measure excluding Insurance, increased to $60.2 million from $52.1 million. This measure is not a substitute for GAAP results.
Outlook, risks, and unusual items
- Management said it believed liquidity needs and fixed obligations could be met for at least the next 12 months through subsidiary distributions, financing, refinancing, or asset sales. It cautioned that financing or asset sales might not be available on acceptable terms or at all. No quantified earnings or revenue guidance was provided.
- HC2 is a holding company dependent on subsidiary cash distributions. Its 11.0% debt, covenant restrictions, preferred-stock obligations, and limited parent-level cash create refinancing and liquidity risks. The company reported compliance with its liquidity and collateral coverage covenants at year-end.
- The 2016 income-tax expense of $51.6 million was driven principally by $57.8 million of valuation-allowance increases on deferred tax assets. HC2 cited cumulative losses and weaker near-term projections; realization of tax assets remains uncertain.
- Insurance exposures include long-term-care reserve assumptions, approvals and timing of premium-rate increases, investment performance, reinsurance recoverability, and regulatory capital requirements. HC2 agreed to maintain CGI’s adjusted capital at no less than 400% of authorized control-level risk-based capital for five years, subject to the regulatory agreement.
- Notable disputes include the ASN marine contract dispute, with $10.7 million of GMSL invoices rejected at year-end and a further $1.4 million questioned; the Chemours arbitration seeking more than $18 million in additional damages plus an alleged $5 million mistaken payment; and an insurance-agent class action. HC2 states it disputes the claims. ICS also received a U.K. VAT assessment in February 2017 and intends to contest it; the filing does not provide a clear assessment amount.
- Other risks include aging marine vessels and a U.K. pension deficit reported at approximately £17.9 million, foreign-exchange exposure, intense competition, and potential changes to U.S. trade policy. The filing also discloses a prior-period restatement in 2016-related risk discussion and an immaterial depreciation accounting error corrected in 2016.
- Management and the auditor concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2016. The auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Confirm issuer identity and ticker: the filing is HC2 Holdings, Inc. (HCHC), not INNOVATE Corp.
- Review parent-only cash, subsidiary distribution restrictions, upcoming debt service, the January 2017 refinancing, and covenant headroom.
- Reconcile the $79.1 million operating cash flow improvement to working-capital movements and assess repeatability after $140.2 million of investing cash outflow.
- Examine the insurance valuation allowances, long-term-care reserve assumptions, rate approvals, statutory capital needs, and contingent seller consideration recorded at $11.4 million.
- Track outcomes and potential exposure from the ASN dispute, Chemours arbitration, insurance-agent litigation, and U.K. VAT assessment.
- Assess the quality and concentration of Construction backlog, execution risks in Marine Services, and the sustainability and reconciliation of non-GAAP Adjusted EBITDA.