OREANDA-NEWS. August 10, 2016. HC2 Holdings, Inc. (“HC2”) (NYSE MKT:HCHC), a diversified holding company that focuses on acquiring, operating and growing businesses that it considers to be under or fairly valued, today announced its consolidated results for the second quarter ended on June 30, 2016.

“I am pleased with today’s announcement, as we continued to execute well during the second quarter evidenced by the strength and stability of our core operating subsidiaries driving sequential growth,” said Philip Falcone, HC2’s Chairman, President and Chief Executive Officer. “This quarter’s results further demonstrate the power of our model, which combines a diverse portfolio of cash generating businesses, a strong capital base and significant upside potential in our early stage investments. In the second half of 2016, we will focus on continuing our positive momentum via capital structure and liquidity optimization, active management and expansion of our portfolio.”

Second Quarter Financial Highlights: 

  • Net Revenue: Consolidated total net revenues were \\$359.3 million for the second quarter of 2016, an increase of \\$27.5 million or 8.3% compared to the first quarter of 2016, and an increase of \\$78.3 million, or 27.9% compared to the year-ago quarter, primarily driven by growth in the telecom segment, as well as the contribution from the Company’s Continental Insurance business, which was completed in December 2015.
  • Net Income / (Loss): HC2 reported Net Income attributable to common and participating preferred stockholders of \\$0.9 million or \\$0.02 per fully diluted share for the second quarter of 2016, compared to a loss of \\$(31.5) million or \\$(0.89) per fully diluted share for the first quarter of 2016, and a loss of \\$(12.0) million or \\$(0.47) per fully diluted share compared to the year ago quarter.  Second quarter 2016 Net Income included a beneficial adjustment to the Company's depreciation and amortization expense of \\$1.3 million related to the Company’s acquisition of Schuff. Excluding this adjustment, second quarter Net Income (loss) attributable to common and participating preferred stockholders would have been a loss of \\$(0.4) million or \\$(0.01) per fully diluted share.
  • Adjusted EBITDA: Adjusted EBITDA for “Core Operating Subsidiaries”, which includes HC2's Manufacturing, Marine Services, Utilities and Telecommunications segments, was a combined \\$27.1 million for the second quarter of 2016 compared to \\$12.7 million in the first quarter of 2016 and \\$30.8 million in the year-ago quarter.  Core Operating Subsidiary results for the second quarter were driven primarily by the Marine Services segments stable maintenance business, as well as strong performance from the Company’s joint ventures; the Manufacturing segment’s continued strong margins; and the ongoing growth in scale and customer relationships in the Telecommunications segment.

    Total Adjusted EBITDA (excluding the Insurance segment) for the second quarter, which includes results from Core Operating Subsidiaries, Early-Stage, Other and Non-Operating Corporate segments, was \\$15.2 million, compared to \\$0.3 million in the first quarter of 2016 and \\$19.6 million for the year-ago quarter. 

  • Balance Sheet: As of June 30, 2016, HC2 had consolidated cash, cash equivalents and investments of \\$1.6 billion, which includes cash and investments associated with HC2's Insurance segment. At the corporate level, HC2 had \\$40.3 million in cash and cash equivalents as of June 30, 2016. 
  • Increased Liquidity: In light of improvements in the overall value of the Company’s portfolio, the Collateral Coverage Ratio as calculated under its 11% Senior Secured Notes Due 2019 (the “11% Notes”) for the quarter ending June 30, 2016 was greater than 2.0x. As a result, the applicable period in the Company’s Maintenance of Liquidity covenant under its 11% Notes was reduced from 12 months to six months, resulting in approximately \\$19 million of incremental available cash and cash equivalents from the \\$40.3 million balance as of June 30, 2016. Taking into consideration this increased liquidity, available cash and cash equivalents at the end of the second quarter was \\$21.4 million. The Company noted that if the Collateral Coverage Ratio decreases below 2.0x in the future, the Company’s Maintenance Liquidity Requirement under its 11% Notes would increase back to 12 months. 

Additional Second Quarter Highlights and Recent Developments 

  • Manufacturing -  HC2’s Manufacturing segment (Schuff Steel) reported Net Income of \\$9.4 million for the second quarter of 2016, compared to \\$4.4 million for the first quarter and \\$5.9 million for the year-ago quarter. Excluding the \\$1.3 million prior period beneficial adjustment for depreciation and amortization expense related to the Company’s acquisition of Schuff, Manufacturing Net Income for the second quarter would have been \\$8.1 million.

    Manufacturing Adjusted EBITDA was \\$13.2 million for the second quarter of 2016, compared to \\$11.5 million for the first quarter and \\$14.0 million for the year-ago quarter. Backlog at the end of the second quarter was \\$344.3 million. Taking into consideration awarded, but unsigned contracts, backlog would be over \\$500 million. The Company said it continues to see a number of large opportunities in the commercial sector totaling over \\$400 million in potential new projects that could be awarded over the next three to four months, which are not in the greater than \\$500 million backlog noted above. These projects include a number of new sporting arenas and stadiums, as well as new healthcare facilities and commercial office buildings.

  • Marine Services - Global Marine reported Net Income of \\$6.0 million for the second quarter of 2016, compared to a Net Loss of \\$(5.9) million for the first quarter and Net Income of \\$9.4 million for the year-ago quarter. Adjusted EBITDA was \\$11.8 million for the second quarter of 2016, compared to \\$0.5 million for the first quarter and \\$16.4 million for the year-ago quarter. The second quarter 2016 results include a full quarter contribution from the acquisition of offshore renewables specialist CWind. In addition, Global Marine continued to realize stable maintenance revenues during the second quarter, as well as strong performance from its global joint ventures. 
  • Utilities - American Natural Gas (ANG) reported Net Income of \\$0.07 million for the second quarter of 2016, compared to a Net Loss of \\$(0.03) million for the first quarter and Net Loss of \\$(0.13) million for the year-ago quarter. Adjusted EBITDA was \\$0.54 million for the second quarter of 2016, compared to \\$0.40 million for the first quarter and \\$0.14 million for the year-ago quarter. ANG currently owns and/or operates 17 natural gas fueling stations compared to 11 stations at the end of the first quarter of 2016.  ANG continues to expect to own/operate approximately 20 fueling stations by the end of 2016, many of which are in various stages of planning, design and construction.
  • Telecommunications - Net Income for PTGI-ICS was \\$1.0 million for the second quarter of 2016, compared to \\$1.2 million for the first quarter and \\$0.6 million for the year-ago quarter. Adjusted EBITDA was \\$1.5 million for the second quarter of 2016, compared to \\$0.3 million for the first quarter and \\$0.2 million in year-ago quarter. The second quarter of 2016 marked the fifth consecutive quarter of profitability for PTGI-ICS, driven primarily by growth in wholesale traffic volumes due to continued expansion in the scale and number of customer relationships.
  • Insurance - As of June 30, 2016, the Insurance companies had approximately \\$77.0 million of statutory surplus and \\$2.1 billion in total GAAP assets.
  • Pansend Life Sciences - During the second quarter, MediBeacon™ Inc., a portfolio company within HC2’s Pansend Life Sciences platform and maker of proprietary, non-invasive, real-time monitoring systems for kidney function, gastrointestinal permeability and other light-activated diagnostics, completed the acquisition of Mannheim Pharma & Diagnostics, a life science company based in Mannheim, Germany. Use of the Manheim technology enhances preclinical assessment of kidney therapeutics, evaluation of nephrotoxicity and fundamental understanding of kidney function in animals. The acquired technology adds to MediBeacon's robust intellectual property assets, which includes a portfolio of fluorescent tracer agents. MediBeacon's system designed for human use is currently in clinical trials.
  • HC2 Corporate - Subsequent to quarter end, the Company entered into agreements with affiliates of Luxor Capital Partners, LP (“Luxor”) and Corrib Master Fund, Ltd. (“Corrib”) to respectively convert their shares the Company’s Series A-1 Convertible Participating Preferred Stock and Series A Preferred stock into shares of the Company’s common stock. The Company also issued shares of common stock to the investors in place of accrued and unpaid dividends and agreed to issue additional shares in the future in place of any dividends the investors would have been entitled to had they remained holders of the preferred stock. After giving effect to these conversions, the cumulative outstanding accreted value of the Company’s Series A, A-1 and A-2 Convertible Participating Preferred Stock was reduced to \\$42.7 million.

 

Non-GAAP Financial Measures

In this release, HC2 refers to certain financial measures that are not presented in accordance with U.S. generally accepted accounting principles (“GAAP”), including Core Operating Subsidiary Adjusted EBITDA, Total Adjusted EBITDA (excluding the Insurance segment) and Adjusted EBITDA for its operating segments.  Management believes that Adjusted EBITDA measures provide investors with meaningful information for gaining an understanding of the Company’s 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, because interest, taxes, depreciation, amortization and the other items for which adjustments are made as noted in the definition of Adjusted EBITDA below can differ greatly between organizations as a result of differing capital structures and tax strategies. In addition, management uses Adjusted EBITDA measures in evaluating certain of the Company’s segments performance because they eliminate the effects of considerable amounts of non-cash depreciation and amortization and items not within the control of the Company’s operations managers. While management believes that these non-US GAAP measurements are useful as supplemental information, such adjusted results are not intended to replace our US GAAP financial results and should be read together with HC2’s results reported under GAAP.

Management defines Adjusted EBITDA as Net income (loss) adjusted to exclude the impact of asset impairment expense; gain (loss) on sale or disposal of assets; lease termination costs; interest expense; loss on early extinguishment or restructuring of debt; other income (expense), net; foreign currency transaction gain (loss); income tax (benefit) expense; gain (loss) from discontinued operations; non-controlling interest; share-based compensation expense; acquisition related and other non-recurring items and depreciation and amortization. A reconciliation of Adjusted EBITDA to net income is included in the financial tables at the end of this release.

Conference Call

HC2 Holdings, Inc. will host a live conference call to discuss its second quarter 2016 financial results and operations today, Tuesday, August 9, 2016 at 5:30 p.m. ET. Dial-in instructions for the conference call and the replay are as follows:

Live Call

Dial-In (Toll Free): 1-866-395-3893

International Dial-In: 1-678-509-7540

Participant Entry Number: 49610865

Alternatively, a live webcast of the conference call can be accessed by interested parties through the Investor Relations section of the HC2 Website, www.HC2.com.

Conference Replay*

Domestic Dial-In (Toll Free): 1-855-859-2056

International Dial-In: 1-404-537-3406

Conference Number: 49610865

*Available approximately two hours after the end of the conference call through September, 30, 2016.

Cautionary Statement Regarding Forward-Looking Statements

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: This release contains, and certain oral statements made by our representatives from time to time may contain, forward-looking statements. Generally, forward-looking statements include information describing actions, events, results, strategies and expectations and are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans,” “seeks,” “estimates,” “projects,” “may,” “will,” “could,” “might,” or “continues” or similar expressions. The forward-looking statements in this press release include without limitation statements regarding our expectation regarding building shareholder value.  Such statements are based on the beliefs and assumptions of HC2's management and the management of HC2's subsidiaries. The Company believes these judgments are reasonable, but you should understand that these statements are not guarantees of performance or results, and the Company’s actual results could differ materially from those expressed or implied in the forward-looking statements due to a variety of important factors, both positive and negative, that may be revised or supplemented in subsequent reports on Forms 10-K, 10-Q and 8-K. Such important factors include, without limitation, issues related to the restatement of our financial statements; the fact that we have historically identified material weaknesses in our internal control over financial reporting, and any inability to remediate future material weaknesses; capital market conditions; the ability of HC2's subsidiaries to generate sufficient net income and cash flows to make upstream cash distributions; volatility in the trading price of HC2 common stock; the ability of HC2 and its subsidiaries to identify any suitable future acquisition opportunities; our ability to realize efficiencies, cost savings, income and margin improvements, growth, economies of scale and other anticipated benefits of strategic transactions; difficulties related to the integration of financial reporting of acquired or target businesses; difficulties completing pending and future acquisitions and dispositions; effects of litigation, indemnification claims, and other contingent liabilities; changes in regulations and tax laws; and risks that may affect the performance of the operating subsidiaries of HC2. These risks and other important factors discussed under the caption “Risk Factors” in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), and our other reports filed with the SEC could cause actual results to differ materially from those indicated by the forward-looking statements made in this press release.

You should not place undue reliance on forward-looking statements. All forward-looking statements attributable to HC2 or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements. All such statements speak only as of the date made, and HC2 undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

For information on HC2 Holdings, Inc., please contact Andrew G. Backman - Managing Director - Investor Relations & Public Relations - abackman@hc2.com - 212-339-5836

 
HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
 
  Three Months Ended June 30, Six Months Ended June 30,
  2016 2015 2016 2015
Services revenue \\$197,372  \\$147,841  \\$379,481  \\$221,559 
Sales revenue 125,759  133,141  246,256  261,231 
Life, accident and health earned premiums, net 20,037  —  39,971  — 
Net investment income 13,707  —  27,786  — 
Net realized gains (losses) on investments 2,418  —  (2,457) — 
Net revenue 359,293  280,982  691,037  482,790 
Operating expenses        
Cost of revenue - services 183,193  134,589  358,066  196,509 
Cost of revenue - sales 101,290  110,909  200,967  221,445 
Policy benefits, changes in reserves, and commissions 29,189  —  63,328  — 
Selling, general and administrative 35,614  26,476  71,916  49,988 
Depreciation and amortization 5,887  5,478  11,484  10,733 
(Gain) loss on sale or disposal of assets (1,837) 498  (950) 971 
Lease termination costs 338  —  338  — 
Total operating expenses 353,674  277,950  705,149  479,646 
Income (loss) from operations 5,619  3,032  (14,112) 3,144 
Interest expense (10,569) (10,125) (20,895) (18,825)
Other income (expense), net 430  (2,344) 540  (2,571)
Income (loss) from equity investees 6,035  1,429  2,101  (1,259)
Gain (loss) from continuing operations before income taxes 1,515  (8,008) (32,366) (19,511)
Income tax benefit (expense) (224) (2,678) 2,315  3,336 
Gain (loss) from continuing operations 1,291  (10,686) (30,051) (16,175)
Loss from discontinued operations —  (11) —  (20)
Net income (loss) 1,291  (10,697) (30,051) (16,195)
Less: Net (income) loss attributable to noncontrolling interest and redeemable noncontrolling interest 644  (204) 1,524  57 
Net income (loss) attributable to HC2 Holdings, Inc. 1,935  (10,901) (28,527) (16,138)
Less: Preferred stock dividends and accretion 1,044  1,089  2,113  2,177 
Net income (loss) attributable to common stock and participating preferred stockholders \\$891  \\$(11,990) \\$(30,640) \\$(18,315)
Basic income (loss) per common share:        
Income (loss) from continuing operations \\$0.02  \\$(0.47) \\$(0.87) \\$(0.74)
Loss from discontinued operations —  —  —  — 
Net income (loss) attributable to common stock and participating preferred stockholders \\$0.02  \\$(0.47) \\$(0.87) \\$(0.74)
Diluted income (loss) per common share:        
Income (loss) from continuing operations \\$0.02  \\$(0.47) \\$(0.87) \\$(0.74)
Loss from discontinued operations —  —  —  — 
Net income (loss) attributable to common stock and participating preferred stockholders \\$0.02  \\$(0.47) \\$(0.87) \\$(0.74)
Weighted average common shares outstanding:        
Basic 35,518  25,514  35,391  24,838 
Diluted 35,643  25,514  35,391  24,838 
 
HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
 
  June 30, 2016 December 31, 2015
Assets    
Investments:    
Fixed maturity securities, available-for-sale at fair value \\$1,323,821  \\$1,231,841 
Equity securities, available-for-sale at fair value 52,703  49,682 
Mortgage loans 4,165  1,252 
Policy loans 18,311  18,476 
Other invested assets 62,304  53,119 
Total investments 1,461,304  1,354,370 
Cash and cash equivalents 134,510  158,624 
Restricted cash 590  538 
Accounts receivable (net of allowance for doubtful accounts of \\$1,516 and \\$794 at June 30, 2016 and December 31, 2015, respectively) 221,295  210,853 
Costs and recognized earnings in excess of billings on uncompleted contracts 29,957  39,310 
Inventory 11,116  12,120 
Recoverable from reinsurers 526,158  522,562 
Accrued investment income 15,079  15,300 
Deferred tax asset 41,062  52,511 
Property, plant and equipment, net 243,497  214,466 
Goodwill 83,931  61,178 
Intangibles, net 36,909  29,409 
Other assets 38,801  65,206 
Assets held for sale 1,116  6,065 
Total assets \\$2,845,325  \\$2,742,512 
Liabilities, temporary equity and stockholders’ equity    
Life, accident and health reserves \\$1,625,560  \\$1,591,937 
Annuity reserves 256,014  260,853 
Value of business acquired 49,699  50,761 
Accounts payable and other current liabilities 212,438  225,389 
Billings in excess of costs and recognized earnings on uncompleted contracts 43,098  21,201 
Deferred tax liability 11,514  4,281 
Long-term obligations 394,489  371,876 
Pension liability 21,419  25,156 
Other liabilities 9,896  17,793 
Total liabilities 2,624,127  2,569,247 
Commitments and contingencies    
Temporary equity:    
Preferred stock, \\$.001 par value - 20,000,000 shares authorized; Series A - 28,308 and 29,172 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively; Series A-1 - 10,000 shares issued and outstanding at June 30, 2016 and December 31, 2015; Series A-2 - 14,000 shares issued and outstanding at June 30, 2016 and December 31, 2015 51,854  52,619 
Redeemable noncontrolling interest 2,811  3,122 
Total temporary equity 54,665  55,741 
Stockholders’ equity:    
Common stock, \\$.001 par value - 80,000,000 shares authorized; 35,605,957 and 35,281,375 shares issued and 35,574,331 and 35,249,749 shares outstanding at June 30, 2016 and December 31, 2015, respectively 36  35 
Additional paid-in capital 218,478  209,477 
Accumulated deficit (108,256) (79,729)
Treasury stock, at cost (378) (378)
Accumulated other comprehensive gain (loss) 27,577  (35,375)
Total HC2 Holdings, Inc. stockholders’ equity before noncontrolling interest 137,457  94,030 
Noncontrolling interest 29,076  23,494 
Total stockholders’ equity 166,533  117,524 
Total liabilities, temporary equity and stockholders’ equity \\$2,845,325  \\$2,742,512 
 
HC2 HOLDINGS, INC.
RECONCILIATION OF NET INCOME (LOSS) TO ADJUSTED EBITDA
(in thousands)
(Unaudited)
 
  Three Months Ended June 30, 2016
  Core OperatingEarly Stage & OtherNon-
 operating
Corporate		HC2**
  Manufacturing Marine
Services		 Telecom Utilities Total Core
Operating		 Life
Sciences		 Other and
Eliminations
Net income (loss) \\$9,364  \\$6,002  \\$1,009  \\$68  \\$16,443 \\$(2,004) \\$(2,608)\\$(7,603)\\$4,228 
Adjustments to reconcile net income (loss) to Adjusted EBITDA:               
Depreciation and amortization 303  5,725  140  468  6,636 36  336 — 7,008 
Depreciation and amortization (included in cost of revenue)* (206) —  —  —  (206)—  — — (206)
(Gain) loss on sale or disposal of assets (1,845) 7  —  —  (1,838)—  1 — (1,837)
Lease termination costs —  —  338  —  338 —  — — 338 
Interest expense 303  1,285  —  14  1,602 —  1 8,966 10,569 
Other (income) expense, net (32) 211  29  (344) (136)—  (10)465 319 
Foreign currency (gain) loss (included in cost of revenue) —  (1,540) —  —  (1,540)—  — — (1,540)
Income tax (benefit) expense 4,524  (212) —  —  4,312 —  1 (9,404)(5,091)
Noncontrolling interest 768  200  —  244  1,212 (812) (1,044)— (644)
Share-based payment expense —  152  —  90  242 34  40 1,359 1,675 
Acquisition and nonrecurring items —  —  18  —  18 —   313 331 
Adjusted EBITDA \\$13,179  \\$11,830  \\$1,534  \\$540  \\$27,083 \\$(2,746) \\$(3,283)\\$(5,904)\\$15,150 
   
  Three Months Ended June 30, 2015
  Core OperatingEarly Stage & OtherNon-
operating
Corporate		HC2**
  Manufacturing Marine
Services		 Telecom Utilities Total Core
Operating		Life
Sciences		 Other and
Eliminations
Net income (loss) \\$5,878  \\$9,398  \\$587  \\$(134) \\$15,729 \\$(1,383) \\$(2,232)\\$(22,885)\\$(10,771)
Adjustments to reconcile net income (loss) to Adjusted EBITDA:               
Depreciation and amortization 499  4,324  98  397  5,318 1  159 — 5,478 
Depreciation and amortization (included in cost of revenue) 1,932  —  —  —  1,932 —  — — 1,932 
Loss on sale or disposal of assets 498  —  —  —  498 —  — — 498 
Interest expense 366  963  —  11  1,340 —  1 8,784 10,125 
Other (income) expense, net (6) (1,388) (469) (7) (1,870)—  (1,128)5,342 2,344 
Foreign currency (gain) loss (included in cost of revenue) —  2,758  —  —  2,758 —  — — 2,758 
Income tax (benefit) expense 4,335  38  —  —  4,373 (9) (1,571)(115)2,678 
Loss from discontinued operations 11  —  —  —  11 —  — — 11 
Noncontrolling interest 499  310  —  (129) 680 (475) (1)— 204 
Share-based payment expense —  —  —  2  2 —  (2)2,364 2,364 
Acquisition and nonrecurring items —  —  —  —  — —  — 1,969 1,969 
Adjusted EBITDA \\$14,012  \\$16,403  \\$216  \\$140  \\$30,771 \\$(1,866) \\$(4,774)\\$(4,541)\\$19,590 
 

(*) Includes depreciation adjustments from purchase accounting as fully described previously within the Second Quarter Financial Highlights.
(**) Excludes net loss from Insurance segment in the amount of \\$2.3 million and \\$0.1 million for the three months ended June 30, 2016 and 2015, respectively.

   
  Three Months Ended March 31, 2016
  Core OperatingEarly Stage & OtherNon-
operating
Corporate		HC2**
  Manufacturing Marine
Services		 Telecom Utilities Total Core
Operating		Life
Sciences		 Other and
Eliminations
Net income (loss) \\$4,384  \\$(5,918) \\$1,202  \\$(27) \\$(359)\\$1,298  \\$(10,494)\\$(13,409)\\$(22,966)
Adjustments to reconcile net income (loss) to Adjusted EBITDA:               
Depreciation and amortization 529  4,797  106  429  5,861 19  336 — 6,216 
Depreciation and amortization (included in cost of revenue) 1,933  —  —  —  1,933 —  — — 1,933 
(Gain) loss on sale or disposal of assets 904  (17) —  —  887 —  — — 887 
Interest expense 310  1,070  —  9  1,389 —  — 8,937 10,326 
Other (income) expense, net (44) 612  (1,025) (31) (488)(3,221) 6,006 (1,611)687 
Foreign currency (gain) loss (included in cost of revenue) —  (147) —  —  (147)—  — — (147)
Income tax (benefit) expense 3,445  (640) —  —  2,805 —  — (4,226)(1,422)
Noncontrolling interest 61  (155) —  (22) (116)(720) (44)— (880)
Share-based payment expense —  609  —  14  623 22  159 2,386 3,191 
Acquisition and nonrecurring items —  266  —  27  293 —   2,201 2,494 
Adjusted EBITDA \\$11,522  \\$477  \\$283  \\$399  \\$12,681 \\$(2,602) \\$(4,037)\\$(5,722)\\$319 
 

(**) Excludes net loss from Insurance segment in the amount of \\$7.5 million for the three months ended March 31, 2016.