HC2 Holdings, Inc. — Form 10-Q Summary
Entity note: The supplied filing is for HC2 Holdings, Inc. (formerly PTGi Holding, Inc.), not a registrant identified in the filing as INNOVATE Corp. The reporting period ended September 30, 2014; financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
HC2 described itself as a diversified holding company pursuing acquisitions. During 2014 it acquired controlling interests in Schuff International (steel fabrication), American Natural Gas (CNG fueling), and Global Marine Systems (subsea cable services), and invested in Novatel Wireless. It also completed the divestiture of the remaining North American telecom business in July. Acquisitions and disposals substantially changed the company’s business mix, so comparisons with 2013 are not directly comparable.
Financial performance and position
- Revenue: Third-quarter revenue was $179.4 million, up 193.8% year over year; nine-month revenue was $319.4 million, up 78.9%. Schuff contributed $137.7 million in the quarter and $192.2 million year to date. GMSL’s post-acquisition results were excluded from reported operating results as immaterial.
- Profit and margins: Third-quarter operating income was $0.1 million versus an operating loss of $4.1 million a year earlier. Nine-month operating loss was $5.1 million versus $21.1 million. Gross margin was approximately 11.6% in Q3 and 11.5% year to date, compared with 3.8% and 4.9%, respectively, in the comparable 2013 periods. Net loss attributable to HC2 was $15.9 million for Q3 and $24.4 million for nine months; basic loss per share was $0.72 and $1.39. Nine-month 2013 net income of $127.4 million included a $150.7 million gain on sale of discontinued operations.
- Cash flow: Nine-month operating cash flow was positive $11.8 million, versus negative $14.7 million in 2013. Investing used $173.1 million, mainly for acquisitions and investments; financing provided $266.3 million. Cash rose by $102.7 million to $111.7 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $111.7 million and current assets were $363.6 million, against current liabilities of $212.3 million (working capital of approximately $151.3 million). Total debt was $312.8 million, including $22.4 million current and $290.4 million long-term; cash less debt was approximately negative $201.1 million. Management said existing cash was expected to cover fixed obligations and operating cash needs for at least 12 months.
- Other metrics: Total assets were $729.9 million, up from $87.7 million at year-end 2013, principally reflecting acquisitions. Schuff reported backlog of $409.7 million, including $131.0 million under letters of intent. HC2 reported an estimated $195 million of NOL carryforwards, subject to Section 382 annual limits following an ownership change.
Material changes versus the prior comparable period
- Revenue growth primarily reflects the Schuff acquisition; telecommunications revenue declined as domestic and international terminations fell. The business mix shifted from telecommunications to manufacturing and newly acquired businesses.
- Q3 SG&A rose to $20.2 million from $6.3 million, including acquisition-related professional fees and Schuff expenses. Nine-month SG&A increased to $40.5 million from $29.7 million.
- Interest expense increased with new borrowing. HC2 recorded a $6.9 million loss on early extinguishment or restructuring of debt in 2014, primarily related to paying off prior facilities.
- 2013 results included a $14.9 million gain from contingent value rights valuation and substantial proceeds and gains from business disposals; these items make year-over-year net income comparisons especially misleading.
Outlook, risks, contingencies, and unusual items
- No quantitative earnings or revenue guidance was provided. Management said it was evaluating strategic alternatives, including further acquisitions, growth of existing operations, or winding down or selling operations.
- The September 2014 senior secured facility provided a $214 million term loan and $36 million delayed-draw facility. The main term loan carried floating-rate pricing starting at 7.5% for base-rate loans or 8.5% for LIBOR loans, with margins increasing quarterly. HC2 reported compliance with its covenants at quarter-end. The facility was secured by substantially all HC2 assets other than Schuff and GMSL assets.
- Schuff had $30.3 million of unapproved change orders included in recognized contract revenue; approval was not assured. Five contracts or commitments represented 59.4% of its backlog, creating potential concentration and cancellation risk.
- Interest-rate and foreign-exchange exposure were identified risks. Approximately 10.1% of Q3 continuing-operations revenue came from outside the U.S.; debt included substantial variable-rate obligations. GMSL also faced vessel age, marine-incident, project execution, international operations, and customer-payment risks. ANG faced adoption, competition, regulatory, and safety risks.
- At September 30, Schuff had $3.9 million of letters of credit and $20.8 million of performance bonds. HC2 also disclosed contractual obligations, including $68.6 million of capital leases and $27.2 million of operating leases.
- Subsequent events: HC2 increased its Schuff ownership to 90.6% and said it intended to complete a short-form merger. A November 2014 stockholder lawsuit challenged the Schuff minority buyout; HC2 said it would defend the case. HC2 also announced a proposed $250 million senior secured notes offering.
- Management concluded disclosure controls were effective and reported no material quarter-period change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the registrant and ticker: the supplied filing identifies HC2 Holdings, Inc. and ticker HCHC, despite the request metadata naming INNOVATE Corp.
- Review subsequent filings for the final Schuff merger, litigation and any SEC investigation, and for the outcome and terms of the proposed senior notes offering.
- Track acquisition integration, segment profitability, cash conversion, and whether Schuff’s backlog and unapproved change orders convert into revenue and cash.
- Assess debt maturities, floating-rate exposure, covenant headroom, capital-lease commitments, and the availability of subsidiary distributions to fund holding-company needs.
- Verify final purchase-price allocations and impairment assessments for recent acquisitions, and the practical value and utilization limits of HC2’s NOL carryforwards.