HC2 Holdings, Inc. (INNOVATE Corp. in request metadata) — Q1 2019 Form 10-Q
Filing identity and period: The supplied filing is HC2 Holdings, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2019, filed May 7, 2019. The filing itself names HC2 Holdings, Inc.; the difference from the company name in the request metadata should be verified. HC2 was a diversified holding company with operating segments in construction, marine services, energy, telecommunications, insurance, life sciences and broadcasting.
Financial performance and liquidity
- Revenue: Net revenue was $491.4 million, up $37.7 million from $453.7 million. Revenue from contracts with customers was $404.9 million, down from $415.5 million; the difference includes insurance premiums, investment income and investment gains.
- Profit and margins: Operating income was $21.6 million, versus an operating loss of $13.8 million. Using net revenue, operating margin was approximately 4.4%, compared with negative 3.0%. Net loss was $6.3 million, versus $38.9 million; loss attributable to HC2 was $2.8 million, and loss attributable to common and participating preferred stockholders was $1.6 million, or $0.04 per share, versus $35.7 million, or $0.81 per share.
- Drivers: Insurance operating income rose to $34.4 million from $3.0 million, principally reflecting the 2018 KIC acquisition, its investment income and premiums, and negative VOBA amortization. Construction revenue increased following the GrayWolf acquisition. Telecommunications revenue declined $46.8 million amid changes in customer mix and wholesale traffic volumes.
- Cash flow: Operating activities provided $38.1 million, compared with $0.8 million. Investing activities used $58.4 million and financing activities used $6.4 million. Cash, cash equivalents and restricted cash decreased $26.6 million to $303.8 million; balance-sheet cash and cash equivalents were $302.2 million.
- Balance sheet and debt: Total assets were $6.68 billion and total stockholders’ equity was $332.2 million at quarter-end. Debt obligations were $762.0 million net of discounts and financing costs; disclosed principal debt was $796.4 million, compared with $781.0 million at year-end 2018. Consolidated cash is not all available to the parent: HC2 reported only $1.3 million of standalone cash, while the Insurance segment held $255.6 million.
- Other notable item: Comprehensive income attributable to HC2 was $146.0 million, largely reflecting $148.2 million of unrealized gains on available-for-sale securities in other comprehensive income; this is distinct from the quarterly net loss.
Changes versus the prior-year quarter
- Insurance segment net revenue increased $48.7 million and operating income increased $31.4 million, largely due to KIC, acquired in August 2018, and changes in investment mix and yields.
- Construction revenue rose $33.2 million, primarily due to GrayWolf, acquired in November 2018, and increased project work. Construction operating income nevertheless declined $0.4 million to $5.7 million.
- Telecommunications revenue fell $46.8 million to $155.5 million; lower traffic volumes and call termination rates contributed to weaker operating income.
- Marine Services revenue increased $5.7 million, but its operating loss widened to $4.1 million, partly because the prior-year period included a vessel-sale gain. Energy revenue increased modestly; Broadcasting reduced its operating loss through cost reductions despite slightly lower revenue.
- Interest expense increased $3.0 million to $22.3 million, which HC2 attributed largely to increased corporate debt. The improvement in consolidated operating income was therefore not enough to produce net income.
Outlook, risks and unusual items
- Outlook and liquidity: No specific consolidated earnings or revenue guidance is provided. Management said it expected to meet obligations and operating cash needs for at least 12 months through subsidiary distributions, financing, refinancing and/or asset or investment sales. It cautioned that these sources are not assured, and distributions depend on subsidiary cash, debt restrictions, regulatory limits and board approval.
- Debt and covenants: HC2’s standalone debt included $470 million of 11.5% senior secured notes due 2021 and $55 million of 7.5% convertible notes due 2022. The company reported compliance with the collateral coverage and secured net leverage tests at March 31; the liquidity covenant compliance statement cited in the filing is as of December 31, 2018. A $15 million secured revolving facility was entered into on April 3, after quarter-end, bearing LIBOR plus 6.75% and maturing June 1, 2021.
- Insurance and investment exposures: Insurance reserves were $4.55 billion and reinsurance recoverables were $975.8 million. Recoverables were concentrated among a small number of reinsurers, including one rated B+. Insurance operations face reserve, investment, interest-rate, regulatory, capital and reinsurance-counterparty risks. A $36.0 million favorable development in prior-year long-term-care claims reserves improved results; management said it was too early to determine whether it would persist.
- Legal matters: GMSL disputed an ASN claim alleging $38.2 million in damages plus $1.2 million in liquidated damages and interest. GMSL disputed liability; $8.9 million of its invoices remained unpaid and at risk. A producer class-action settlement was subject to final court approval; the agreement called for a $1.25 million payment by GAFRI, with CGI to contribute $250,000 under a related settlement arrangement. HC2 also described a continuing DBMG stockholder lawsuit and a disputed UK VAT assessment.
- Other risk factors: Management highlighted seasonality and project timing, fixed-price construction cost overruns, volatile wholesale telecom traffic and pricing, foreign exchange and interest-rate exposure, investment valuation risk, and reliance on subsidiary distributions. Backlog was $558.6 million for Construction and $455.1 million for Marine Services; backlog may not convert to revenue on schedule, and portions are concentrated in a small number of contracts.
- Accounting changes: Adoption of lease accounting brought $67.1 million of right-of-use assets and $74.1 million of lease liabilities onto the balance sheet; an adoption-related $5.1 million impairment reduced retained earnings and noncontrolling interests. The company expected the credit-loss standard effective in 2020 and long-duration insurance standard effective in 2021 to require significant system and process work; it was still evaluating their effects.
Key facts for investors to verify
- Confirm the entity identity: the supplied filing is for HC2 Holdings, Inc., although the request metadata identifies INNOVATE Corp.
- Review standalone parent liquidity and the practical ability to receive subsidiary distributions, given $1.3 million of parent cash versus $525 million of standalone principal debt.
- Assess the sustainability of insurance earnings, including KIC contributions, investment yields, favorable reserve development and the large insurance reserve and reinsurance balances.
- Monitor the GMSL–ASN dispute, unpaid invoices, and the status and ultimate cost of the producer settlement and other litigation.
- Distinguish reported earnings from noncash investment gains in other comprehensive income, and track debt principal, interest costs, covenant headroom and the post-quarter revolver.