INNOVATE Corp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. INNOVATE is a diversified holding company with Infrastructure, Life Sciences and Spectrum segments, plus Other and corporate activities. Amounts below are in millions, except per-share data.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $368.8 | $392.2 | $686.7 | $805.0 |
| Gross profit / margin | $52.6 / 14.3% | $50.3 / 12.8% | $96.2 / 14.0% | $100.1 / 12.4% |
| Operating income (loss) | $5.8 | $(0.4) | $1.8 | $0.3 |
| Net loss | $(11.7) | $(13.9) | $(19.7) | $(28.0) |
| Net loss attributable to common stockholders | $(10.5) | $(13.6) | $(20.7) | $(27.2) |
| Basic and diluted loss per share | $(0.13) | $(0.18) | $(0.27) | $(0.35) |
| Adjusted EBITDA (non-GAAP) | $16.5 | $12.1 | $21.4 | $23.6 |
Q2 operating improvement reflected higher gross profit, lower SG&A and lower depreciation and amortization. Interest expense increased to $16.3 from $12.5 in Q2 and to $31.9 from $25.1 for the first half. First-half other income of $16.8 included a $12.2 gain on the HMN investment sale and a $3.8 MediBeacon step-up gain.
Segment trends and material changes
- Infrastructure: Revenue was $362.4 in Q2, down $19.7 year over year; first-half revenue fell $110.2 to $674.1, primarily due to project timing and customer/general-contractor delays in commercial structural steel, plus lower industrial maintenance activity. Q2 operating income rose to $14.7 from $11.8, while first-half operating income declined to $21.0 from $23.7. Management cited improved margins on newer commercial projects, partly offset by weaker contributions in other businesses. Backlog was $1,462.2; five projects accounted for $708.4.
- Life Sciences: Revenue was $0.7 in Q2 and $1.2 for the first half, below prior-year periods. Operating losses narrowed to $3.9 in Q2 and $8.3 for six months, helped by cost reductions. R2 reported payment delays that resulted in shipping holds.
- Spectrum: Revenue declined to $5.7 in Q2 and $11.4 for six months, primarily following the shutdown of the Azteca America network at the end of 2022. Operating losses narrowed, partly reflecting lower costs and the prior-year program-license impairment.
- HMN disposition: INNOVATE sold its remaining 19% HMN interest on March 6 for $54.2 gross proceeds; $4.4 was withheld for foreign tax and $15.9 was distributed to non-controlling and redeemable non-controlling holders by June 30.
Cash flow, debt and liquidity
- Cash and cash equivalents were $28.8 at June 30, versus $80.4 at December 31, 2022; including restricted cash, period-end cash was $30.2.
- For the first half, operating cash outflow was $60.8, compared with $42.7 in 2022. Investing activities provided $46.7, largely from the HMN sale; financing activities used $37.3. Cash, cash equivalents and restricted cash decreased $52.0.
- Consolidated debt principal was $749.7, up from $725.3 at year-end; reported debt obligations were $742.0 after unamortized discounts and financing costs. The current portion was $222.4, versus $30.6 at year-end, making near-term maturities a key liquidity issue.
- Current assets were $531.2 and current liabilities $618.9. Total liabilities were $1,197.5, exceeding total assets of $1,079.5; stockholders’ deficit was $128.1.
- On May 9, the Company repurchased DBMGi preferred stock, paying $7.1 cash and issuing CGIC a $35.1 subordinated unsecured note. Its stated rate steps from 9% to 16% and then 32% if outstanding, with maturity in February 2026.
- INNOVATE drew its $20.0 revolving-credit commitment in full by July 31, after reporting $13.0 drawn at June 30. The filing also reports an August 8 extension of Spectrum debt maturity to August 15, 2024.
- Management said it expects to meet obligations for at least 12 months, citing cash, available facility borrowings, subsidiary distributions and an August 8 related-party support letter for up to $35.0 through August 11, 2024. The filing cautions that subsidiary distributions and additional financing are not assured and could be constrained or dilutive.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management emphasizes that results can fluctuate with project timing, customer funding, margins, weather, inflation, interest rates and economic conditions. Remaining unsatisfied performance obligations were $1,446.9, which DBMG expects to recognize over approximately 3.5 years; contracts may be cancelable.
- CEO and President Wayne Barr died unexpectedly on July 23, 2023. Paul K. Voigt was named interim CEO on July 25. The filing identifies the transition and retention of key personnel as risks.
- Management reported compliance with debt covenants at June 30, but warned future compliance may depend on cash management, asset monetizations, refinancing or new capital. A covenant default could accelerate debt and permit collateral remedies.
- Related-party funding is material: Lancer Capital, controlled by the Board chairman, provided R2 with 20% notes. R2’s balance was $15.7 at quarter-end and increased to $16.8 in July; the amended maturity was the earlier of August 15, 2023 or shortly after qualifying financing proceeds.
- DBMG had $699.9 of performance bonds outstanding at June 30. In the Marin Hospital litigation, Schuff Steel disputes liability and says it cannot reasonably estimate potential loss. The Company otherwise stated it did not expect pending litigation to materially affect the financial statements. The FVI action was dismissed with prejudice in June; DTV derivative litigation remains pending.
- A tax-benefits rights plan treats ownership of 4.9% or more as a potential trigger, subject to exceptions. The plan is intended to protect tax attributes and can have anti-takeover effects.
Investor facts to verify
- Near-term debt maturities, refinancing progress and the economics and enforceability of the related-party support commitment.
- Whether operating cash burn and working-capital outflows improve, particularly as receivables and contract assets rose while cash declined.
- Infrastructure project execution, margin trends, backlog conversion and exposure to a small number of large contracts and customers.
- R2’s ability to raise financing and repay or refinance high-coupon related-party notes.
- Subsequent developments in CEO succession, covenant compliance, Spectrum’s extended maturities and the disclosed litigation matters.