This Current Report on Form 8-K (including this Exhibit 99.1, the “Form 8-K”) is being filed to reflect certain retrospective revisions for the discontinued operations and changes in reportable segments described under the heading “General Development of Business” below that have been made to the consolidated financial statements of HC2 Holdings, Inc. (“we”, “us”, “HC2” or the “Company”) in its Annual Report on Form 10-K for the year ended December 31, 2019 that was previously filed with the Securities and Exchange Commission by HC2 on March 16, 2020, as amended on April 29, 2020 (the “2019 Form 10-K”). In particular, this Form 8-K contains revised information in portions of the following sections of the 2019 Form 10-K: Part 1, Item 1 “Business”, Part I, Item 2 “Properties”, Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 8 “Financial Statements and Supplementary Data”.
Additionally, in connection with the preparation of our recasted Consolidated Financial Statements included herein to reflect the discontinued operations of Global Marine Holdings, Ltd., we identified an immaterial error in the calculation of basic and diluted loss per share under the two-class method for the year ended December 31, 2019, whereby the loss was not allocated to only common shares during a period of net loss, resulting in an understatement of loss by $0.04 per common shareholder. This adjustment has been reflected in our recasted Consolidated Financial Statements for the year ended December 31, 2019.
ITEM 1. BUSINESS
General Development of Business
On February 28, 2020, the Company completed the previously announced sale of Global Marine Services Limited (“GMSL”).
As discussed in Note 23. Discontinued Operations, GMSL met the criteria to be reported as discontinued operations because it was a strategic shift in business that had a major effect on the Company's operations and financial results. Therefore, the Company is reporting the historical results of GMSL, including the results of operations and cash flows as discontinued operations, and related assets and liabilities were retrospectively reclassified as assets and liabilities held for sale for all periods presented herein. Unless otherwise noted, the accompanying Notes to the Consolidated Financial Statements have all been revised to reflect the effect of the separation of GMSL and all prior year balances have been revised accordingly to reflect continuing operations only.
Subsequent to the presentation of GMSL as discontinued operations, the Company no longer reports the Marine Services segment, which previously held the GMSL business. The Company has aligned into seven reportable segments described below.
HC2 is a diversified holding company that seeks opportunities to acquire and grow businesses that can generate long-term sustainable free cash flow and attractive returns in order to maximize value for all stakeholders. As of December 31, 2019, our seven reportable operating segments based on management’s organization of the enterprise included Construction, Energy, Telecommunications, Insurance, Life Sciences, Broadcasting and Other, which includes businesses that do not meet the separately reportable segment thresholds.
Our principal operating subsidiaries include the following assets:
(i)DBM Global Inc. ("DBMG") (Construction), a family of companies providing fully integrated structural and steel construction services;
(ii)American Natural Energy Corp. ("ANG") (Energy), a compressed natural gas fueling company;
(iii)PTGi-International Carrier Services Inc. ("ICS") (Telecommunications), a provider of internet-based protocol and time-division multiplexing access for the transport of long-distance voice minutes;
(iv)Continental Insurance Group Ltd. ("CIG") (Insurance), a platform for our run-off long-term care and life and annuity business, through its insurance company, Continental General Insurance Company ("CGI" or the "Insurance Company");
(v)Pansend Life Sciences, LLC ("Pansend") (Life Sciences), our subsidiary focused on supporting healthcare and biotechnology product development;
(vi)HC2 Broadcasting Holdings Inc. and its subsidiaries ("HC2 Broadcasting"), a strategic acquirer and operator of Over-The-Air ("OTA") broadcasting stations across the United States ("U.S.") and Puerto Rico. In addition, Broadcasting, through its wholly-owned subsidiary, HC2 Network Inc. ("Network"), operates Azteca America, a Spanish-language broadcast network offering high quality Hispanic content to a diverse demographic across the United States; and
(vii)Our Other segment represents all other businesses or investments we believe have significant growth potential or that do not meet the definition of a segment individually or in the aggregate. Included in the Other segment is the former Marine Services segment, which includes its holding company, Global Marine Holdings, LLC ("GMH"), in which the Company maintains approximately 73% controlling interest. GMH results include the current and prior year equity investment in Huawei Marine Networks Co., Limited (“HMN”), its 49% equity method investment with Huawei Technologies Co., Ltd., and the discontinued operations of GMSL.
We expect to continue to focus on acquiring and investing in businesses with attractive assets that we consider to be undervalued or fairly valued, and growing our acquired businesses.
As of December 31, 2019, we had approximately 3,268 employees in our continuing operations and 460 employees at GMSL, part of our discontinued operations. We consider our relations with our employees to be satisfactory.
ITEM 2. PROPERTIES
Our corporate headquarters facility is located in New York, New York. We lease administrative, technical and sales office space in various locations in the countries in which we operate. DBMG is headquartered in Phoenix, Arizona; ANG is headquartered in Saratoga Springs, NY, and leases land for fueling stations across the U.S.; ICS is headquartered in Washington D.C., HC2 Broadcasting is headquartered in New York, New York and CGI is headquartered in Austin, Texas. As of December 31, 2019, total leased space approximates 377,030 square feet, and land leased for fueling stations of 1,600,182 square feet, excluding GMSL. See Note 15. Leases for annual lease costs. The Company has entered into operating and finance lease agreements primarily for land, office space, equipment and vehicles, expiring between 2020 and 2045, excluding GMSL. The operating leases expire at various times, with the longest commitment expiring in 2045. In addition, ANG and DBMG own operational facilities and sales offices throughout the United States totaling approximately 5,541,296 square feet. We believe that our present administrative, technical and sales office facilities are adequate for our anticipated operations and that similar space can be obtained readily as needed.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the information in our consolidated annual audited financial statements and the notes thereto, each of which are contained in Item 8 entitled "Financial Statements and Supplementary Data," and other financial information included herein. Some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section as well as the section entitled "Special Note Regarding Forward-Looking Statements" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis set forth in our 2019 Form 10-K.
Unless the context otherwise requires, "HC2" means HC2 Holdings, Inc. and the "Company," "we" and "our" mean HC2 together with its consolidated subsidiaries. "U.S. GAAP" means accounting principles accepted in the United States of America.
We are a diversified holding company with principal operations conducted through seven operating platforms or reportable segments: Construction ("DBMG"), Energy ("ANG"), Telecommunications ("ICS"), Insurance ("CIG"), Life Sciences ("Pansend"), Broadcasting, and Other, which includes businesses that do not meet the separately reportable segment thresholds.
Certain previous year amounts have been reclassified to conform with current year presentations, including:
•The recast of GMSL's results to discontinued operations. Further, the reclassification of prior period assets and liabilities have been classified as held for sale;
•As a result of the sale of GMSL, and in accordance with ASC 280, the Company no longer considers the results of operations and Balance Sheets of GMH and its subsidiaries as a separate segment. Formerly the Marine Services segment, these entities and the investment in HMN have been reclassified to the Other segment.
•The recast of Earnings per share ("EPS") in the prior period, as a result of the discontinued operations noted above. This includes presenting EPS for Net (loss) income from continuing operations, Net (loss) income from discontinuing operations, and Net (loss) income.
We continually evaluate acquisition opportunities, as well as monitor a variety of key indicators of our underlying platform companies in order to maximize stakeholder value. These indicators include, but are not limited to, revenue, cost of revenue, operating profit, Adjusted EBITDA and free cash flow. Furthermore, we work very closely with our subsidiary platform executive management teams on their operations and assist them in the evaluation and diligence of asset acquisitions, dispositions and any financing or operational needs at the subsidiary level. We believe that this close relationship allows us to capture synergies within the organization across all platforms and strategically position the Company for ongoing growth and value creation.
The potential for additional acquisitions and new business opportunities, while strategic, may result in acquiring assets unrelated to our current or historical operations. As part of any acquisition strategy, we may raise capital in the form of debt and/or equity securities (including preferred stock) or a combination thereof. We have broad discretion and experience in identifying and selecting acquisition and business combination opportunities and the industries in which we seek such opportunities. Many times, we face significant competition for these opportunities, including from numerous companies with a business plan similar to ours. As such, there can be no assurance that any of the past or future discussions we have had or may have with candidates will result in a definitive agreement and, if they do, what the terms or timing of any potential agreement would be. As part of our acquisition strategy, we may utilize a portion of our available cash to acquire interests in possible acquisition targets. Any securities acquired are marked to market and may increase short-term earnings volatility as a result.
We believe our track record, our platform and our strategy will enable us to deliver strong financial results, while positioning our Company for long-term growth. We believe the unique alignment of our executive compensation program, with our objective of increasing long-term stakeholder value, is paramount to executing our vision of long-term growth, while maintaining our disciplined approach. Having designed our business structure to not only address capital allocation challenges over time, but also maintain the flexibility to capitalize on opportunities during periods of market volatility, we believe the combination thereof positions us well to continue to build long-term stakeholder value.
Refer to Note 1. Organization and Business to our Consolidated Financial Statements for additional information.
Seasonality and Cyclical Patterns
Our segments' operations can be highly cyclical and subject to seasonal patterns. Our volume of business in our Construction segment may be adversely affected by declines or delays in projects, which may vary by geographic region. Project schedules, particularly in connection with large, complex, and longer-term projects can also create fluctuations in the services provided, which may adversely affect us in a given period.
For example, in connection with larger, more complicated projects, the timing of obtaining permits and other approvals may be delayed, and we may need to maintain a portion of our workforce and equipment in an underutilized capacity to ensure we are strategically positioned to deliver on such projects when they move forward.
Examples of other items that may cause our results or demand for our services to fluctuate materially from quarter to quarter include: weather or project site conditions, financial condition of our customers and their access to capital; margins of projects performed during any particular period; economic, and political and market conditions on a regional, national or global scale.
Accordingly, our operating results in any particular period may not be indicative of the results that can be expected for any other period.
Other than as described above, our businesses are not materially affected by seasonality.
On March 13, 2020, HC2 entered into a $15.0 million secured revolving credit agreement (the “2020 Revolving Credit Agreement”) with MSD PCOF Partners IX, LLC. The 2020 Revolving Credit Agreement matures in June 2021. Loans under the Revolving Credit Agreement bear interest at a per annum rate equal to, at HC2's option, one, two or three month LIBOR plus a margin of 6.75%.
On April 16, 2020, R2 received $10 million in funding from Huadong Medicine Company Limited as part of Huadong's $30 million Series B equity investment in R2. These funds will be used to commercialize R2's revolutionary CryoAesthetic technology which promises physicians a new way to lighten, brighten and rejuvenate skin. This investment represents the second tranche of Huadong's investment at an approximate post-money valuation of $90 million and reduces Pansend's ownership by 7.8% to 56.1%.
On May 12, 2020 the Company through an indirect subsidiary New Saxon 2019 Ltd. ("New Saxon") completed the sale of 30% of its 49% interest of HMN (the "First HMN Close"). The remaining 19% interest of HMN is retained by New Saxon and subject to a put option agreement by New Saxon, exercisable starting on the second year anniversary of the closing date of the First HMN Close at a price equal to the greater of the share price paid for the 30% interest or fair market value as of the exercisable date.
On June 20, 2020, with the proceeds received from the partial sale of HMN, the Company redeemed $50.6 million of its 11.50% Senior Secured Notes, due 2021.
On August 2, 2020, the Company issued a notice of termination, effectively ending the Services Agreement with HCP, a former related party.
On August 6, 2020 the Energy segment entered into a new credit facility M&T bank. Proceeds from the loan and cash on hand were used to pay down the existing credit facilities with M&T and Pioneer as well as redeem its outstanding $14.0 million preferred stock, which carried a 14% interest rate. The new credit facility is comprised of a $57.0 million term loan facility, a $2.5 million revolving line of credit and an $8.0 million delayed draw term loan ear-marked for new station build, as well as a $10.0 million accordion feature.
On August 10, 2020 the Company and MSD PCOF Partners IX, LLC agreed to extend maturity of the 2020 Revolving Credit Agreement to September 1, 2021.
On August 31, 2020, HC2 Holdings, Inc. (“HC2”) issued a press release announcing that its Broadcasting segment has amended the terms of its privately placed secured notes (the “Broadcasting Notes”) comprised of a $39.3 million Tranche A piece funded by an affiliate of MSD Partners, L.P., along with a $42.5 million Tranche B piece funded by an institutional lender. As part of the amendments, the maturity date of the Broadcasting Notes has been extended to October 2021 and HC2 Broadcasting Holdings, Inc., an indirect subsidiary of HC2, is permitted to sell certain non-core full power stations and use the proceeds therefrom to reduce amounts owed under the Broadcasting Notes. The terms of the Broadcasting Notes are otherwise substantially unchanged.
In August 2020, Broadcasting amended the terms of its 2020 Notes, and extended their maturity by one year to October 2021. The borrowing terms for the 2020 Notes remain largely unchanged. As part of the amended terms, HC2 Broadcasting is able to sell several non-core full power stations, should it choose, which would enable it to reduce the principal on the 2020 Notes.
On September 9, 2020, the Company announced that its Board of Directors (the “Board”) had approved a plan to proceed with steps to launch a $65.0 million rights offering for its common stock. The Company filed a registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”). Subject to final approval of the rights offering by the Board, the Company expects to launch the rights offering as the Registration Statement was declared effective by the SEC on September 23, 2020.
On October 2, 2020, ICS Group Holdings Inc., a subsidiary of the Company, entered into a Stock Purchase Agreement with GoIP Global, Inc., a company that provides cable and pay television services and offers a range of mobile media services, solutions and tools for brands, agencies, content providers, online portals, entertainment and media companies, for the sale of ICS, its wholly-owned subsidiary for a total consideration of $1.0 million, subject to working capital adjustments.
Financial Presentation Background
In the below section within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we compare, pursuant to U.S. GAAP and SEC disclosure rules, the Company’s results of operations for the year ended December 31, 2019 as compared to the year ended December 31, 2018.
Results of Operations
The following table summarizes our results of operations and a comparison of the change between the periods (in millions):
| ||Years Ended December 31,|
| ||2019||2018||Increase / (Decrease)|
|Construction||$||713.3 ||$||716.4 ||$||(3.1)|
|Energy||39.0 ||20.7 ||18.3 |
|Telecommunications||696.1 ||793.6 ||(97.5)|
|Insurance||331.6 ||217.1 ||114.5 |
|Broadcasting||41.8 ||45.4 ||(3.6)|
|Other||— ||3.7 ||(3.7)|
|Total net revenue||1,811.6 ||1,782.4 ||29.2 |
|Income (loss) from operations|
|Construction||$||45.1 ||$||41.9 ||$||3.2 |
|Energy||10.1 ||(0.5)||10.6 |
|Insurance||37.3 ||1.8 ||35.5 |
|Life Sciences||(8.9)||(13.8)||4.9 |
|Non-operating Corporate||(25.0)||(33.6)||8.6 |
|Total income (loss) from operations||33.5 ||(40.4)||73.9 |
|Gain on sale and deconsolidation of subsidiary||— ||105.1 ||(105.1)|
|Income from equity investees||1.6 ||8.4 ||(6.8)|
|Gain on bargain purchase||1.1 ||115.4 ||(114.3)|
|Other income||6.2 ||77.8 ||(71.6)|
|(Loss) income from continuing operations||(37.1)||196.6 ||(233.7)|
|Income tax benefit (expense)||20.3 ||(2.2)||22.5 |
|(Loss) income from continuing operations||(16.8)||194.4 ||(211.2)|
|Loss from discontinued operations||(19.3)||(14.5)||(4.8)|
|Net (loss) income||(36.1)||179.9 ||(216.0)|
|Net loss (income) attributable to noncontrolling interest and redeemable noncontrolling interest||4.6 ||(17.9)||22.5 |
|Net (loss) income attributable to HC2 Holdings, Inc.||(31.5)||162.0 ||(193.5)|
|Less: Preferred dividends, deemed dividends, and repurchase gains||— ||6.4 ||(6.4)|
|Net (loss) income attributable to common stock and participating preferred stockholders||$||(31.5)||$||155.6 ||$||(187.1)|
(1) The Insurance segment revenues are inclusive of realized and unrealized gains and net investment income for the year ended December 31, 2019 and 2018, which are related to transactions between entities under common control which are eliminated or are reclassified in consolidation.
Net revenue: Net revenue for the year ended December 31, 2019 increased $29.2 million to $1,811.6 million from $1,782.4 million for the year ended December 31, 2018. The increase in revenue was driven by improvements in our Insurance and Energy segments. The increase in our Insurance segment, net of eliminations, was driven primarily by the KIC acquisition, which contributed additional net investment income and premiums, and a rotation into higher yielding investments, particularly mortgage loans and preferred stocks, and from higher average invested fixed maturity securities and mortgage loans. The increase in our Energy segment was largely driven by the AFTC related to the 2018 and 2019 CNG sales that was recognized in the fourth quarter of 2019 and included AFTC from the acquisition of the ampCNG stations. These increases were partially offset by a decrease in our Telecommunication segment, which can be attributed to changes in our customer mix, fluctuations in wholesale traffic volumes, and market pressures.
Income (loss) from operations: Income (loss) from operations for the year ended December 31, 2019 increased $73.9 million to income of $33.5 million from a loss of $40.4 million for the year ended December 31, 2018. The increase in income (loss) from operations was primarily driven by our Insurance segment, net of eliminations, due to the recent KIC acquisition, which contributed additional net investment income and premiums, net of additional policy benefits paid to policy holders, changes in reserves, and commissions. Further improvements to our comparable income from operations was the result of lower losses at our Broadcasting segment, mainly driven by cost cutting measures that resulted in a decrease in headcount and a decrease in associated compensation and overhead expenses, our Energy segment driven by the AFTC related to 2018 and 2019 CNG sales that was recognized in the fourth quarter of 2019, and fewer losses at Non-operating Corporate, primarily attributable to reductions in bonus expense, consulting and professional services fees, and employee wage and benefits expenses.
Interest expense: Interest expense for the year ended December 31, 2019 increased $9.8 million to $79.5 million from $69.7 million for the year ended December 31, 2018. The increase was largely attributable to the additional interest and amortization of deferred financing fees driven by an increase in the aggregate principal amount of debt at our Construction and Energy segments.
Gain on sale and deconsolidation of subsidiary: Gain on sale and deconsolidation of subsidiary for the year ended December 31, 2018 was $105.1 million. The 2018 activity was attributable to the Life Sciences segment's sale of BeneVir in which the Company recorded a gain on the sale of $102.1 million in addition to the deconsolidation of 704Games in the third quarter of 2018, which resulted in a gain of $3.0 million. There was no comparable activity in the current year.
Income from equity investees: Income from equity investees for the year ended December 31, 2019 decreased $6.8 million to $1.6 million from $8.4 million for the year ended December 31, 2018. The decrease was largely due to lower equity method income recorded from our equity investment in Huawei Marine Networks ("HMN") due to lower revenues on large turnkey projects underway than in the comparable period, partially offset by decreased equity method losses recorded from our investment in MediBeacon due primarily to lower expenses attributable to the timing of clinical trial activities.
Gain on bargain purchase: Gain on bargain purchase was $1.1 million and $115.4 million for the years ended December 31, 2019 and 2018, respectively. The gain on bargain purchase was driven by the Insurance Segment's acquisition of KIC in 2018 and subsequent purchase price allocation adjustments recorded in 2019. The gain on bargain purchase was driven by the Tax Cuts and Jobs Act, which was not stipulated in the negotiations for the transaction and resulted in a material decline in the Value of Business Acquired balance and a corresponding deferred tax position. More specifically, the gain on bargain purchase was largely driven by the following attributes: (i) the Unified Loss Rules tax attribute reduction to tax value of assets and the seller tax adjustments to tax value of liabilities contribute significantly to the bargain purchase price; (ii) the reduction in the federal income tax rate, from 35% at the time the seller contribution was established to 21% effective January 1, 2018; and (iii) changes in fair value of acquired assets and assumed liabilities between the date the deal was signed and the closing date was driven by the time it took to obtain regulatory approvals.
Other income: Other income for the year ended December 31, 2019 decreased $71.6 million to $6.2 million from $77.8 million for the year ended December 31, 2018. During 2019, the Company recognized gains at our Life Sciences segment, driven by the MediBeacon equity transaction. During 2018, the Company reported the following events that did not occur in 2019 (i) sale of investment in INSG for a total consideration and net gain of $34.4 million, (ii) CGI recaptured two of their reinsurance treaties, in which a gain of $47.0 million was recognized, and (iii) $5.1 million loss on the extinguishment of debt at our Non-operating corporate and Broadcasting segments.
Income tax benefit (expense): Income tax benefit (expense) was a benefit of $20.3 million and an expense of $2.2 million for the year ended December 31, 2019 and 2018, respectively. The amount recorded primarily relates to the release of the Insurance segment’s valuation allowance previously recorded against its deferred tax assets. The Insurance segment is profitable in 2019 and in a three-year overall cumulative income position as of December 31, 2019. The profitability is driven by current year income associated with favorable claims and reserve development relative to expected. Further, unrealized gains from the investment portfolio continued to grow in 2019. The positive trend of profitability in 2018 and 2019 is expected to continue. As a result of the three-year cumulative income position and reliance upon future projections of income, the Insurance segment has released, in full, the $37.4 million valuation allowance as part of continuing operations. Additionally, the tax benefits associated with losses generated by the HC2 Holdings, Inc. U.S. tax consolidated group and certain other businesses have been reduced by a full valuation allowance as we do not believe it is more-likely-than-not that the losses will be utilized.
Income tax expense was $2.2 million for the year ended December 31, 2018. The amount recorded primarily relates to separate state filings that do not have net operating losses available to offset income. In 2018, the Insurance segment acquired Humana’s long-term care business, Kanawha Insurance Company. The combined insurance entity generated a net operating loss for the year due to additional tax deductions related to increases in policy holder reserves. In addition, the bargain purchase gain is not taxable. This net operating loss was carried forward but had a valuation allowance. Additionally, the income tax expense generated from the sale of BeneVir in 2018 is offset by tax attributes for which a valuation allowance had been recorded. Therefore, there is no net income tax expense recorded in the income statement for the sale.
Preferred dividends, deemed dividends, and repurchase gains: Preferred dividends, and deemed dividends, and repurchase gains for the year ended December 31, 2019 decreased $6.4 million to zero compared to a loss of $6.4 million for the year ended December 31, 2018. The decrease was driven by (i) deemed dividends associated with the issuance of the 7.5% Convertible Notes during 2018, in which the Company incurred a consent fee payable to preferred stockholders of $3.8 million (ii) the Insurance segment's purchase of 10,000 shares of the Company's Series A-2 Preferred Stock at a $1.7 million discount during 2019 and (iii) a decrease in the reported preferred stock dividends due to the elimination of the dividends paid on the portion of preferred stock owned by our Insurance segment in consolidation.
Non-GAAP Financial Measures and Other Information
Adjusted EBITDA is not a measurement recognized under U.S. GAAP. In addition, other companies may define Adjusted EBITDA differently than we do, which could limit its usefulness.
Management believes that Adjusted EBITDA provides investors with meaningful information for gaining an understanding of our results as it is frequently used by the financial community to provide insight into an organization’s operating trends and facilitates comparisons between peer companies, since interest, taxes, depreciation, amortization and the other items listed in the definition of Adjusted EBITDA below can differ greatly between organizations as a result of differing capital structures and tax strategies. Adjusted EBITDA can also be a useful measure of a company’s ability to service debt. While management believes that non-U.S. GAAP measurements are useful supplemental information, such adjusted results are not intended to replace our U.S. GAAP financial results. Using Adjusted EBITDA as a performance measure has inherent limitations as an analytical tool as compared to net income (loss) or other U.S. GAAP financial measures, as this non-GAAP measure excludes certain items, including items that are recurring in nature, which may be meaningful to investors. As a result of the exclusions, Adjusted EBITDA should not be considered in isolation and does not purport to be an alternative to net income (loss) or other U.S. GAAP financial measures as a measure of our operating performance. Adjusted EBITDA excludes the results of operations and any consolidating eliminations of our Insurance segment.
The calculation of Adjusted EBITDA, as defined by us, consists of Net income (loss) as adjusted for depreciation and amortization; amortization of equity method fair value adjustments at acquisition; Other operating (income) expense, which is inclusive of (gain) loss on sale or disposal of assets, lease termination costs, and FCC reimbursements; asset impairment expense, interest expense; net gain (loss) on contingent consideration; loss on early extinguishment or restructuring of debt; gain (loss) on sale of subsidiaries; other (income) expense, net; foreign currency transaction (gain) loss included in cost of revenue; income tax (benefit) expense; noncontrolling interest; bonus to be settled in equity; share-based compensation expense; non-recurring items; and acquisition and disposition costs.
|(in millions)||Year ended December 31, 2019|
|Core Operating Subsidiaries||Early Stage & Other||Non-operating Corporate||HC2|
|Construction||Energy||Telecom||Life Sciences||Broadcasting||Other and Elimination|
|Net loss attributable to HC2 Holdings, Inc.||$||(31.5)|
|Less: Net Income attributable to HC2 Holdings Insurance segment||59.4 |
|Less: Consolidating eliminations attributable to HC2 Holdings Insurance segment||(8.9)|
|Net Income (loss) attributable to HC2 Holdings, Inc., excluding Insurance segment||$||24.7 ||$||4.2 ||$||(1.4)||$||(0.2)||$||(18.5)||$||(3.2)||$||(87.6)||$||(82.0)|
|Adjustments to reconcile net income (loss) to Adjusted EBITDA:|
|Depreciation and amortization||15.5 ||6.9 ||0.3 ||0.3 ||6.3 ||— ||0.1 ||29.4 |
|Depreciation and amortization (included in cost of revenue)||9.1 ||— ||— ||— ||— ||— ||— ||9.1 |
|Asset impairment expense||— ||— ||4.5 ||— ||2.6 ||— ||— ||7.1 |
|Other operating (income) expenses||0.5 ||— ||— ||— ||(5.5)||— ||— ||(5.0)|
|Interest expense||9.3 ||3.5 ||— ||— ||9.6 ||— ||57.5 ||79.9 |
|Other (income) expense, net||(1.6)||1.3 ||— ||(8.6)||2.7 ||(0.1)||2.1 ||(4.2)|
|Net loss (gain) on contingent consideration||— ||— ||(0.4)||— ||— ||— ||— ||(0.4)|
|Income tax (benefit) expense||10.9 ||(0.8)||— ||— ||(1.5)||— ||(8.1)||0.5 |
|Noncontrolling interest||2.0 ||1.8 ||— ||(3.4)||(3.8)||(1.2)||— ||(4.6)|
|Share-based payment expense||— ||— ||— ||0.1 ||0.6 ||— ||5.5 ||6.2 |
|Discontinued operations||— ||— ||— ||— ||— ||8.2 ||11.1 ||19.3 |
|Non-recurring items||— ||— ||— ||— ||— ||— ||— ||— |
|Acquisition and disposition costs||5.3 ||0.1 ||0.4 ||— ||1.2 ||— ||1.5 ||8.5 |
|Adjusted EBITDA||$||75.7 ||$||17.0 ||$||3.4 ||$||(11.8)||$||(6.3)||$||3.7 ||$||(17.9)||$||63.8 |
|Total Core Operating Subsidiaries||$||96.1 |
|(in millions)||Year ended December 31, 2018|
|Core Operating Subsidiaries||Early Stage & Other||Non-operating Corporate||HC2|
|Construction||Energy||Telecom||Life Sciences||Broadcasting||Other and Elimination|
|Net Income attributable to HC2 Holdings, Inc.||$||162.0 |
|Less: Net Income attributable to HC2 Holdings Insurance segment||165.2 |
|Less: Consolidating eliminations attributable to HC2 Holdings Insurance segment||19.2 |
|Net Income (loss) attributable to HC2 Holdings, Inc., excluding Insurance Segment||$||27.7 ||$||(0.9)||$||4.6 ||$||65.2 ||$||(34.5)||$||(2.6)||$||(81.9)||$||(22.4)|
|Adjustments to reconcile net income (loss) to Adjusted EBITDA:|
|Depreciation and amortization||7.4 ||5.5 ||0.3 ||0.2 ||3.3 ||0.1 ||0.1 ||16.9 |
|Depreciation and amortization (included in cost of revenue)||7.0 ||— ||— ||— ||— ||— ||— ||7.0 |
|Asset impairment expense||— ||0.7 ||— ||— ||0.3 ||— ||— ||1.0 |
|Other operating (income) expenses||(0.2)||(0.2)||— ||— ||— ||— ||— ||(0.4)|
|Interest expense||2.6 ||1.6 ||— ||— ||9.5 ||— ||56.0 ||69.7 |
|Loss on early extinguishment or restructuring of debt||— ||— ||— ||— ||2.6 ||— ||2.5 ||5.1 |
|Other (income) expense, net||(2.6)||0.3 ||0.1 ||— ||1.5 ||3.9 ||(5.0)||(1.8)|
|Gain on sale and deconsolidation of subsidiary||— ||— ||— ||(102.1)||— ||(1.6)||— ||(103.7)|
|Income tax (benefit) expense||11.9 ||(1.1)||— ||— ||(1.0)||(1.6)||(6.6)||1.6 |
|Noncontrolling interest||2.2 ||(0.4)||— ||19.1 ||(1.9)||(1.1)||— ||17.9 |
|Bonus to be settled in equity||— ||— ||— ||— ||— ||— ||2.0 ||2.0 |
|Share-based payment expense||— ||— ||— ||0.2 ||1.6 ||0.3 ||5.0 ||7.1 |
|Discontinued operations||— ||— ||— ||— ||— ||13.2 ||1.3 ||14.5 |
|Non-recurring items||— ||— ||— ||— ||— ||— ||— ||— |
|Acquisition and disposition costs||4.9 ||— ||0.3 ||2.5 ||1.7 ||— ||0.7 ||10.1 |
|Adjusted EBITDA||$||60.9 ||$||5.5 ||$||5.3 ||$||(14.9)||$||(16.9)||$||10.6 ||$||(25.9)||$||24.6 |
|Total Core Operating Subsidiaries||71.7 |
Construction: Net income from our Construction segment for the year ended December 31, 2019 decreased $3.0 million to $24.7 million from $27.7 million for the year ended December 31, 2018. Adjusted EBITDA from our Construction segment for the year ended December 31, 2019 increased $14.8 million to $75.7 million from $60.9 million for the year ended December 31, 2018. The increase in Adjusted EBITDA was driven by the acquisition of GrayWolf.
Energy: Net income (loss) from our Energy segment for the year ended December 31, 2019 increased by $5.1 million to income of $4.2 million from a loss of $0.9 million for the year ended December 31, 2018. Adjusted EBITDA from our Energy segment for the year ended December 31, 2019 increased $11.5 million to $17.0 million from $5.5 million for the year ended December 31, 2018. The increase in Adjusted EBITDA was primarily driven by the AFTC recognized in the fourth quarter of 2019 attributable to 2018 and 2019 and higher volume-related revenues from the recent acquisition of the ampCNG stations and growth in CNG sales volumes. Partially offsetting these increases were higher selling, general and administrative expenses as a result of the acquisition of the ampCNG stations.
Telecommunications: Net income (loss) from our Telecommunications segment for the year ended December 31, 2019 decreased by $6.0 million to a loss of $1.4 million from income of $4.6 million for the year ended December 31, 2018. Adjusted EBITDA from our Telecommunications segment for the year ended December 31, 2019 decreased $1.9 million to $3.4 million from $5.3 million for the year ended December 31, 2018. The decrease in Adjusted EBITDA was primarily due to both a decline in revenue and the contracting of call termination margin as a result of the continued decline in the international long distance market, partially offset by a decrease in compensation expense due to headcount decreases and reductions in bad debt expense.
Life Sciences: Net income (loss) from our Life Sciences segment for the year ended December 31, 2019 decreased $65.4 million to a loss of $0.2 million from income of $65.2 million for the year ended December 31, 2018. Adjusted EBITDA loss from our Life Sciences segment for the year ended December 31, 2019 decreased $3.1 million to $11.8 million from $14.9 million for the year ended December 31, 2018. The decrease in Adjusted EBITDA loss was primarily driven by comparably fewer expenses at the Pansend holding company, which incurred additional compensation expense in the prior period related to the performance of the segment. The decrease was also due to a reduction in costs associated with BeneVir, which was sold in the second quarter of 2018.
Broadcasting: Net loss from our Broadcasting segment for the year ended December 31, 2019 decreased $16.0 million to $18.5 million from $34.5 million for the year ended December 31, 2018. Adjusted EBITDA loss from our Broadcasting segment for the year ended December 31, 2019 decreased $10.6 million to $6.3 million from $16.9 million for the year ended December 31, 2018. The decrease in Adjusted EBITDA loss was primarily driven by the reduction in costs as the segment exited certain local markets which were unprofitable at Network, partially offset by higher overhead expenses associated with the growth of the Broadcast stations subsequent to the prior year.
Other and Eliminations: Net loss from our Other and Eliminations segment for the year ended December 31, 2019 increased $0.6 million to $3.2 million from $2.6 million for the year ended December 31, 2018. Adjusted EBITDA from our Other segment for the year ended December 31, 2019 decreased $6.9 million to $3.7 million from $10.6 million for the year ended December 31, 2018. The decrease in Adjusted EBITDA loss was primarily driven by lower income from the equity investment in HMN, due to lower revenues on large turnkey projects underway than in the comparable period.
Non-operating Corporate: Net loss from our Non-operating Corporate segment for the year ended December 31, 2019 increased $5.7 million to $87.6 million from $81.9 million for the year ended December 31, 2018. Adjusted EBITDA loss from our Non-operating Corporate segment for the year ended December 31, 2019 decreased $8.0 million to $17.9 million from $25.9 million for the year ended December 31, 2018. The decrease in Adjusted EBITDA loss was primarily attributable to reductions in bonus expense and other general and administrative expenses as previously described.
|(in millions):||Year ended December 31,|
|2019||2018||Increase / (Decrease)|
|Construction||$||75.7 ||$||60.9 ||$||14.8 |
|Energy||17.0 ||5.5 ||11.5 |
|Telecommunications||3.4 ||5.3 ||(1.9)|
|Total Core Operating Subsidiaries||96.1 ||71.7 ||24.4 |
|Life Sciences||(11.8)||(14.9)||3.1 |
|Other and Eliminations||3.7 ||10.6 ||(6.9)|
|Total Early Stage and Other||(14.4)||(21.2)||6.8 |
|Non-Operating Corporate||(17.9)||(25.9)||8.0 |
|Adjusted EBITDA||$||63.8 ||$||24.6 ||$||39.2 |
Liquidity and Capital Resources
Short- and Long-Term Liquidity Considerations and Risks
HC2 is a holding company and its liquidity needs are primarily for interest payments on its Senior Secured Notes, Convertible Notes, and its Revolving Credit Agreement (each as defined below), dividend payments on its Preferred Stock and recurring operational expenses.
As of December 31, 2019, the Company had $228.8 million of cash and cash equivalents compared to $315.9 million as of December 31, 2018. On a stand-alone basis, as of December 31, 2019, HC2 had cash and cash equivalents of $11.6 million compared to $6.5 million at December 31, 2018. At December 31, 2019, cash and cash equivalents in our Insurance segment was $170.5 million compared to $283.3 million at December 31, 2018.
Our subsidiaries' principal liquidity requirements arise from cash used in operating activities, debt service, and capital expenditures, including purchases of steel construction equipment, fueling stations, network equipment (such as switches, related transmission equipment and capacity), and service infrastructure, liabilities associated with insurance products, development of back-office systems, operating costs and expenses, and income taxes.
As of December 31, 2019, the Company had $805.0 million of indebtedness on a consolidated basis compared to $713.7 million as of December 31, 2018. On a stand-alone basis, as of December 31, 2019 and December 31, 2018, HC2 had indebtedness of $540.0 million and $525.0 million, respectively.
HC2's stand-alone debt consists of the $470.0 million aggregate principal amount of 11.5% senior secured notes due 2021 (the "Senior Secured Notes"), the $55.0 million aggregate principal amount of 7.5% convertible senior notes due 2022 (the "Convertible Notes"), and the $15.0 million secured revolving credit agreement ("Revolving Credit Agreement"), fully drawn. HC2 is required to make semi-annual interest payments on its Senior Secured Notes and Convertible Notes, and quarterly interest payments on its Revolving Credit Agreement.
HC2 is required to make dividend payments on its outstanding Preferred Stock on January 15th, April 15th, July 15th, and October 15th of each year.
HC2 received $39.8 million, $16.3 million, and $1.0 million in dividends and tax share from its Construction, Telecommunications and Life Sciences segments during the year ended December 31, 2019.
HC2 received $11.5 million in net management fees during the year ended December 31, 2019, related to fees earned in the fourth quarter of 2018 and 2019.
We have financed our growth and operations to date, and expect to finance our future growth and operations, through public offerings and private placements of debt and equity securities, credit facilities, vendor financing, capital lease financing and other financing arrangements, as well as cash generated from the operations of our subsidiaries. In the future, we may also choose to sell assets or certain investments to generate cash.
At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations (such as debt service and operating leases) and other cash needs for our operations for at least the next twelve months through a combination of distributions from our subsidiaries and from raising of additional debt or equity, refinancing of certain of our indebtedness or preferred stock, other financing arrangements and/or the sale of assets and certain investments. Historically, we have chosen to reinvest cash and receivables into the growth of our various businesses, and therefore have not kept a large amount of cash on hand at the holding company level, a practice which we expect to continue in the future. The ability of HC2’s subsidiaries to make distributions to HC2 is subject to numerous factors, including restrictions contained in each subsidiary’s financing agreements, regulatory requirements, availability of sufficient funds at each subsidiary and the approval of such payment by each subsidiary’s board of directors, which must consider various factors, including general economic and business conditions, tax considerations, strategic plans, financial results and condition, expansion plans, any contractual, legal or regulatory restrictions on the payment of dividends, and such other factors each subsidiary’s board of directors considers relevant. Our ability to sell assets and certain of our investments to meet our existing financing needs may also be limited by our existing financing instruments. Although the Company believes that it will be able to raise additional equity capital, refinance indebtedness or preferred stock, enter into other financing arrangements or engage in asset sales and sales of certain investments sufficient to fund any cash needs that we are not able to satisfy with the funds expected to be provided by our subsidiaries, there can be no assurance that it will be able to do so on terms satisfactory to the Company if at all. Such financing options, if pursued, may also ultimately have the effect of negatively impacting our liquidity profile and prospects over the long-term. In addition, the sale of assets or the Company’s investments may also make the Company less attractive to potential investors or future financing partners.
Capital expenditures for the years ended December 31, 2019 and 2018 are set forth in the table below (in millions):
|Years Ended December 31,|
|Construction||$||9.8 ||$||14.9 |
|Energy||1.1 ||1.5 |
|Telecommunications||— ||0.1 |
|Insurance||0.6 ||0.3 |
|Life Sciences||0.1 ||— |
|Broadcasting||14.2 ||1.1 |
|Non-operating Corporate||— ||0.1 |
|Total||$||25.8 ||$||18.0 |
Summary of Consolidated Cash Flows
The below table summarizes the cash provided or used in our continuing operating, investing and financing activities and the amount of the respective changes between the periods (in millions):
|Years Ended December 31,||Increase / (Decrease)|
|Operating activities||$||94.0 ||$||320.6 ||$||(226.6)|
|Financing activities||65.4 ||118.4 ||(53.0)|
|Effect of exchange rate changes on cash and cash equivalents||1.0 ||(0.2)||1.2 |
|Net decrease in cash,cash equivalents and restricted cash||$||(90.9)||$||233.3 ||$||(324.2)|
Cash provided by operating activities was $94.0 million for the year ended December 31, 2019 as compared to cash provided by operating activities of $320.6 million for the year ended December 31, 2018. The $226.6 million decrease was the result of the recapture of reinsurance treaties by our Insurance segment in 2018 and was offset in part by improved performance of the Insurance segment subsequent to the KIC acquisition, significant reduction of losses at the Broadcasting segment driven by the cost cutting measures, and an increase in the working capital at our Telecommunications segments.
Cash used in investing activities was $251.3 million for the year ended December 31, 2019 as compared to cash used in investing activities of $205.5 million for the year ended December 31, 2018. The $45.8 million increase in cash used was a result of (i) an increase in net cash spent at our Insurance segment driven by purchases of investments from the residual cash received from the KIC acquisition and reinsurance recaptures in 2018, (ii) a decrease in cash proceeds received at our Life Sciences segment, from the 2018 upfront payment and 2019 escrow release related to the sale of BeneVir in the prior period, and (iii) an increase in cash used at our Energy segment to acquire ampCNG stations in 2019. These decreases were largely offset by a reduction in cash used by our Construction segment, driven by the acquisition of GrayWolf in 2018, and a reduction in cash used by our Broadcasting segment as less cash was used on its acquisitions in the current year compared to 2018.
This was largely offset by a reduction in net cash used by the Insurance segment's purchases of investments, as in the prior period the Insurance segment purchased investments from the cash received from the acquisition of KIC.
Cash provided by financing activities was $65.4 million for the year ended December 31, 2019 as compared to $118.4 million for the year ended December 31, 2018. The $53.0 million decrease was a result of a decrease in net borrowings by the Construction and Broadcasting segments, and offset in part by the increase in net borrowings by the Energy segment and Corporate segment, and a decline in cash paid to noncontrolling interest holders driven by the proceeds from our Life Sciences segment's sale of BeneVir in 2018.
Other Invested Assets
Carrying values of other invested assets were as follows (in millions):
|December 31, 2019||December 31, 2018|
|Common stock||$||— ||$||2.4 ||$||— ||$||2.1 |
|Preferred stock||— ||16.1 ||1.6 ||9.6 |
|Other||— ||49.6 ||— ||38.1 |
|Total||$||— ||$||68.1 ||$||1.6 ||$||49.8 |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
HC2 Holdings, Inc.
New York, NY
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of HC2 Holdings, Inc. (the “Company”) and subsidiaries as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 16, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2011.
/s/ BDO USA, LLP
New York, NY
March 16, 2020, (except for Notes 1-8, 10, 11, 13-18, and 21-24, as to which the date is October 7, 2020)
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
HC2 Holdings, Inc.
New York, NY
Opinion on Internal Control over Financial Reporting
We have audited HC2 Holdings, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes and our report dated March 16, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
New York, NY
March 16, 2020
HC2 HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
| ||Years Ended December 31,|