Item 2. Management’s Discussion and Analysis
ITEM 2. 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 in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 10, 2021, as well as the section below 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.
Unless the context otherwise requires, in this Quarterly Report on Form 10-Q, "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.
Our Business
We are a diversified holding company with principal operations conducted through four operating platforms or reportable segments: Infrastructure ("DBMG"), Life Sciences ("Pansend"), Spectrum, and Insurance ("CIG"), plus our Other segment, 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 Beyond6, ICS, and CIG's results to discontinued operations. Further, the reclassification of prior period assets and liabilities have been classified as held for sale. See Note 3. Discontinued Operations for further information;
• As a result of the sale of ICS, and in accordance with ASC 280, the Company no longer considers the results of operations and Balance Sheets of ICS as a separate segment. Formerly the Telecommunications segment, this entity has been reclassified to the Other segment. See Note 17. Operating Segment and Related Information for further information; and
• As a result of the sale of Beyond6, and in accordance with ASC 280, the Company no longer considers the results of operations and Balance Sheets of Beyond6 as a separate segment. Formerly the Clean Energy segment, this entity has been reclassified to the Other segment. See Note 17. Operating Segment and Related Information for further information;
• The recast of prior year earnings per share 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. See Note 18. Basic and Diluted Income (Loss) Per Common Share for further details.
Our Operations
Refer to Note 1. Organization and Business to our Condensed Consolidated Financial Statements for additional information.
Cyclical Patterns
Our segments' operations can be highly cyclical. Our volume of business in our Infrastructure 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.
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Recent Developments
COVID-19 Impact on our Business
On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus ("COVID-19") pandemic resulting in action from federal, state and local governments that has significantly affected virtually all facets of the U.S. and global economies. The U.S. federal and various state governments, have implemented enhanced screenings, quarantine requirements, and travel restrictions in connection with the COVID-19 outbreak.
The Company’s top priority is to protect its employees and their families, and those of the Company’s customers. The Company continues to take precautionary measures as directed by health authorities and local governments, including changing operational procedures as necessary, providing additional protective gear and cleaning to protect personnel and customers, which has resulted and may continue to result in disruptions to and increased costs of the Company’s operations. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, vendors, and suppliers. Work-from-home and other measures introduce additional operational risks, including cybersecurity risks, and have affected the way we conduct our operations. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and illness and workforce disruptions could lead to unavailability of key personnel and harm our ability to perform critical functions.
The extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including, but not limited to, the duration and spread of the outbreak, the effectiveness of the vaccine program, the outbreak of any new strains of the coronavirus, and related travel advisories and restrictions, and its impact to the U.S. and global financial markets, all of which are highly uncertain and cannot be predicted. Preventing the effects from and responding to this market disruption if any other public health threat, related or otherwise, may further increase costs of our business and may have a material adverse effect on our business, financial condition, and results of operations.
We continue to monitor the evolving situation and guidance from authorities, including federal, state and local public health departments, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plans. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impact of COVID-19 on our results of operations, financial condition, or cash flows in the future. However, we do expect that it could have a material adverse impact on our future revenue growth as well as our overall profitability and may lead to revised payment terms with certain of our customers.
During the three months ended March 31, 2021, the effects of COVID-19 and the related actions undertaken in the U.S. to attempt to control its spread, specifically impacted certain of our segments as follows:
Infrastructure
DBMG is dependent on its workforce to carry out its services. Developments resulting from governmental responses to COVID-19 such as social distancing and shelter-in-place directives have impacted, and will continue to impact, DBMG’s ability to deploy its workforce in its facilities and project sites efficiently. The nature of DBMG’s business does not permit alternative workforce arrangements in its facilities and project sites such as remote work schemes to be implemented effectively, and as a result of potential workforce disruptions, DBMG may continue to experience delays or suspensions of projects. DBMG has incurred significant costs related to additional procedures to maintain COVID-19 related safety measures. During the three months ended March 31, 2021, $3.9 million of COVID-19 related expenses were incurred. DBMG may also experience disruptions in the supply chain depending on the spread of COVID-19 and related governmental orders. These delays, suspensions, and impacts to supply chain may negatively impact DBMG’s results of operations, cash flows or financial condition. While this could cause the timing of revenue to be delayed and possibly impact earnings, as the vaccination program within the U.S. progresses, DBMG could see continued increases in its backlog position as companies re-engage on previously delayed or postponed projects and could see decreases in COVID-19 related expenses.
Spectrum
As a result of COVID-19, our Spectrum segment has experienced adverse effects on its advertising business because of weakness in the advertising market as advertisers seek to reduce their own costs in response to the pandemic’s impact on their businesses. While we are not able to predict when or whether advertising budgets and the advertising market generally will return or be comparable to historical levels, our Spectrum segment's advertising business appears to have begun to stabilize as the vaccination program within the U.S. progresses and additional businesses begin to reopen.
In addition, COVID-19 could impact our Spectrum segment’s business, financial condition and results of operations in a number of other ways, including, but not limited to:
• negative impact on our broadcast station revenue, as many of our customers also rely on advertising revenues and might be negatively affected by COVID-19;
• slow-down of our ability to build out additional broadcast television stations, as illness, social distancing, and other pandemic-related precautions may result in equipment delivery delays and labor shortages, including the availability of tower crews, an already limited, highly-specialized work force necessary to install broadcast equipment;
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• negative impact on our network distribution revenues, as consumers may seek to reduce discretionary spending by cutting back or foregoing subscriptions to cable television or other multichannel video programming distributors;
• negative impact on our financial condition or our ability to fund operations or future investment opportunities due to an increase in the cost or difficulty in obtaining debt or equity financing, or refinancing our debt in the future, or our ability to comply with our covenants;
• impairments of our programming inventory, goodwill and other indefinite-lived intangible assets, and other long-lived assets; and
• increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online activity.
The magnitude of the impact on our Spectrum segment will depend on numerous evolving factors that we may not be able to accurately predict, including the duration and extent of the pandemic, the impact of federal, state, local and foreign governmental actions, consumer behavior in response to the pandemic and such governmental actions, and the economic and operating conditions that we may face in the aftermath of COVID-19. Even after COVID-19 has subsided, we may experience materially adverse impacts to our business as a result of its global economic impact, including any recession that has occurred or may occur in the future.
For further discussion regarding the potential future impacts of COVID-19 and related economic conditions on the Company's liquidity and capital resources, see "Part II-Item 1A-Risk Factors."
Acquisitions and Dispositions
Infrastructure
Banker Steel Acquisition
On March 15, 2021, the Company announced that DBMG entered into an agreement to acquire 100% of Banker Steel Holdco LLC ("Banker Steel") for $145.0 million, which is expected to close in the second quarter of 2021. Banker Steel provides fabricated structural steel and erection services primarily for East Coast and Southeast commercial and industrial construction industries.
Insurance
Sale of CGI
On March 29, 2021, the Company announced the entry into a definitive agreement to sell its Insurance segment to Continental General Holdings LLC, an entity controlled by Michael Gorzynski, a director of the Company and a beneficial owner of approximately 6.6% of the Company's outstanding common stock who has also served as executive chairman of Continental since October 2020. The transaction value is approximately $90.0 million, inclusive of $65.0 million in cash plus the return of a portion of the affiliated assets held by CGI.
Other
Sale of Beyond6
On December 31, 2020, the Company announced a plan to sell Beyond6 to an affiliate of Mercuria Investments US, Inc., pursuant to an Agreement and Plan of Merger ( the "Merger Agreement") among Beyond6, Greenfill, Inc., a Delaware Corporation ("Parent"), Greenfill Merger Inc., a newly-formed Delaware corporation and wholly-owned subsidiary of Parent, and an affiliate of HC2 as the Stockholder Representative for the Beyond6 stockholders. The sale closed on January 15, 2021. The Company recognized a $39.2 million gain on the sale.
Debt Obligations
Non-Operating Corporate
On February 1, 2021, HC2 repaid its 11.5% senior secured notes due 2021 (the "2021 Senior Secured Notes"), and issued $330.0 million aggregate principal amount of 8.5% senior secured notes due 2026 (the "2026 Senior Secured Notes"). In addition, the Company entered into exchange agreements with certain holders of approximately $51.8 million aggregate principal amount of its existing $55.0 million 7.5% convertible senior notes due 2022 (the "2022 Convertible Notes"), pursuant to which the Company exchanged such holders' 2022 Convertible Notes for newly issued convertible notes due 2026 (the "2026 Convertible Notes"). The 2026 Senior Secured Notes were issued in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.
On February 23, 2021, the Company entered into a third amendment for the line of credit with MSD PCOF Partners IX, LLC ("Revolving Credit Agreement"), increasing the aggregate principal amount to $20.0 million and extending the maturity to February 23, 2024.
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Other
On February 3, 2021 the Company announced that R2 received $10.0 million in funding from Huadong Medicine Company Limited (“Huadong”), a leading publicly traded Chinese pharmaceutical company. Huadong’s investment will be used to fund the launch of R2 Technologies’ first-to-market innovations Glacial Rx and Glacial Spa. As part of its equity investment in R2, Huadong receives exclusive distribution rights for R2’s products in the China and selected Asia-Pacific markets.
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 three months ended March 31, 2021 as compared to the three months ended March 31, 2020.
Results of Operations
The following table summarizes our results of operations and a comparison of the change between the periods (in millions):
Three Months Ended March 31,
2021 2020 Increase / (Decrease)
Revenue
Infrastructure
$ 161.3 $ 176.5 $ (15.2)
Spectrum 10.5 10.1 0.4
Total revenue 171.8 186.6 (14.8)
Income (loss) from operations
Infrastructure
$ 2.2 $ 2.6 $ (0.4)
Life Sciences (4.8) (3.2) (1.6)
Spectrum (1.2) (2.9) 1.7
Other (0.4) (1.0) 0.6
Non-operating Corporate (6.7) (9.1) 2.4
Total loss from operations (10.9) (13.6) 2.7
Interest expense (21.4) (19.2) (2.2)
Loss on early extinguishment or restructuring of debt (10.8) (5.8) (5.0)
Loss from equity investees (2.1) (2.5) 0.4
Other income 3.4 1.5 1.9
Loss from continuing operations (41.8) (39.6) (2.2)
Income tax (expense) benefit (1.1) 9.7 (10.8)
Loss from continuing operations (42.9) (29.9) (13.0)
Income (loss) from discontinued operations (including gain on disposal of $40.4 million and loss on disposal of $39.3 million for the three months ended March 31, 2021 and 2020, respectively) 51.9 (71.1) 123.0
Net income (loss) 9.0 (101.0) 110.0
Net income (loss) attributable to noncontrolling interest and redeemable noncontrolling interest 3.6 17.9 (14.3)
Net income (loss) attributable to HC2 Holdings, Inc. 12.6 (83.1) 95.7
Less: Preferred dividends, deemed dividends, and repurchase gains 0.4 0.4 —
Net income (loss) attributable to common stock and participating preferred stockholders $ 12.2 $ (83.5) $ 95.7
Revenue : Revenue for the three months ended March 31, 2021 decreased $14.8 million to $171.8 million from $186.6 million for the three months ended March 31, 2020. The decrease in revenue was driven by our Infrastructure segment, primarily due to lower revenues from our structural steel fabrication and erection business, driven by timing of project work under execution and changes in backlog mix, as well as a decrease in power and industrial maintenance and repair work performed.
Loss from operations : Loss from operations for the three months ended March 31, 2021 decreased $2.7 million to a loss of $10.9 million from a loss of $13.6 million for the three months ended March 31, 2020. The decrease is attributable to lower overhead costs at Non-operating Corporate, driven by by lower bonus expense and additional cost saving measures implemented, and by our Spectrum segment driven by cost reductions at Network, a decrease in compensation and overhead expenses. This was partially offset by our Life Sciences segment driven by R2, which increased spending in the comparable period to support commercialization efforts and further develop its product platform.
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Interest expense : Interest expense for the three months ended March 31, 2021 increased $2.2 million to $21.4 million from $19.2 million for the three months ended March 31, 2020. The increase was attributable to the acceleration of original issue discount at Non-Operating Corporate related to the refinancing of its debt during the period.
Loss on early extinguishment or restructuring of debt : Loss on early extinguishment or restructuring of debt for the three months ended March 31, 2021 increased $5.0 million to $10.8 million from $5.8 million for the three months ended March 31, 2020. This was driven by the write-off of deferred financing costs and original issuance discount related to the refinancing of the 2021 Senior Secured Notes and the 2022 Convertible Notes in the first quarter of 2021, partially offset by the partial pay down of the 2021 Senior Secured Notes in the prior year.
Loss from equity investees: Loss from equity investees for the three months ended March 31, 2021 decreased $0.4 million to a loss of $2.1 million from a loss of $2.5 million for the three months ended March 31, 2020. The decrease was driven by the equity investment in HMN, as the joint venture produced higher profits than in the comparable period, which is generally attributable to the timing of turnkey project work, and a reduction in HC2's ownership in the second quarter of 2020. This was partially offset by an increase in losses recorded from our investment in MediBeacon due to the timing of clinical trials.
Other income: Other income for the three months ended March 31, 2021 increased $1.9 million to $3.4 million from $1.5 million for the three months ended March 31, 2020. The increase was primarily driven by the income recognized on a litigation settlement in the current period.
Income tax (expense) benefit : Income tax (expense) benefit was an expense of $1.1 million and a benefit of $9.7 million for the three months ended March 31, 2021 and 2020, respectively. The income tax expense recorded for the three months ended March 31, 2021 primarily relates to the projected expense as calculated under ASC 740 for tax paying entities. Additionally, the tax benefits associated with losses generated by the HC2 Holdings, Inc. U.S. consolidated income tax return 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 prior to expiration. The income tax benefit recorded for March 31, 2020 primarily relates to a one-time, discrete benefit from the carryback of net operating losses at the Insurance segment as a result of the enactment of the CARES Act in the first quarter of 2020. 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.
Segment Results of Operations
In the Company's Condensed Consolidated Financial Statements, other operating (income) expense includes (i) (gain) loss on sale or disposal of assets, (ii) lease termination costs, (iii) asset impairment expense, (iv) accretion of asset retirement obligations, and (v) FCC reimbursements. Each table summarizes the results of operations of our operating segments and compares the amount of the change between the periods presented (in millions).
Infrastructure Segment
Three Months Ended March 31,
2021 2020 Increase / (Decrease)
Revenue $ 161.3 $ 176.5 $ (15.2)
Cost of revenue 137.0 151.2 (14.2)
Selling, general and administrative 19.7 19.9 (0.2)
Depreciation and amortization 2.4 2.6 (0.2)
Other operating expense — 0.2 (0.2)
Income from operations $ 2.2 $ 2.6 $ (0.4)
Revenue: Revenue from our Infrastructure segment for the three months ended March 31, 2021 decreased $15.2 million to $161.3 million from $176.5 million for the three months ended March 31, 2020. The decrease was primarily driven by lower revenues from our structural steel fabrication and erection business, driven by timing of project work under execution and changes in backlog mix, as well as a decrease in power and industrial maintenance and repair work performed. These decreases were partially offset by increases from our construction modeling and detailing business.
Cost of revenue: Cost of revenue from our Infrastructure segment for the three months ended March 31, 2021 decreased $14.2 million to $137.0 million from $151.2 million for the three months ended March 31, 2020. The decrease was primarily driven by the timing of project work under execution and change in backlog mix, partially offset by higher costs incurred in response to the COVID-19 pandemic.
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Life Sciences Segment
Three Months Ended March 31,
2021 2020 Increase / (Decrease)
Selling, general and administrative $ 4.8 $ 3.2 $ 1.6
Loss from operations $ (4.8) $ (3.2) $ (1.6)
Selling, general and administrative : Selling, general and administrative expenses from our Life Sciences segment for the three months ended March 31, 2021 increased $1.6 million to $4.8 million from $3.2 million for the three months ended March 31, 2020. The increase was driven by higher expenses at R2, which increased spending from the comparable period to ramp up operations to support commercialization efforts and further develop its product platform.
Spectrum
Three Months Ended March 31,
2021 2020 Increase / (Decrease)
Revenue $ 10.5 $ 10.1 $ 0.4
Cost of revenue 4.3 5.6 (1.3)
Selling, general and administrative 5.5 5.7 (0.2)
Depreciation and amortization 1.5 1.7 (0.2)
Other operating expense 0.4 — 0.4
Loss from operations $ (1.2) $ (2.9) $ 1.7
Revenue: Revenue from our Spectrum segment for the three months ended March 31, 2021 increased $0.4 million to $10.5 million from $10.1 million for the three months ended March 31, 2020. The increase was primarily driven by higher station revenues as our Spectrum segment launched new customers and grew the number of its operating stations, partially offset by a decrease in advertising revenues at the Azteca network driven by unrepeated political campaign expenditures and U.S. census advertising campaigns in the comparable period.
Cost of revenue: Cost of revenue from our Spectrum segment for the three months ended March 31, 2021 decreased $1.3 million to $4.3 million from $5.6 million for the three months ended March 31, 2020. The decrease was primarily driven by cost reductions at Network, partially offset by increased cost of revenues associated with the higher number of operating stations.
Other operating expense : Other operating expense from our Spectrum segment for the three months ended March 31, 2021 decreased $0.4 million to loss of $0.4 million from zero for the three months ended March 31, 2020. The decrease was primarily due to an impairment of a right of use asset as a result of subletting office space, partially offset by an increase in gains from FCC reimbursements.
Non-operating Corporate
Three Months Ended March 31,
2021 2020 Increase / (Decrease)
Selling, general and administrative $ 6.7 $ 9.1 $ (2.4)
Loss from operations $ (6.7) $ (9.1) $ 2.4
Selling, general and administrative : Selling, general and administrative expenses from our Non-operating Corporate segment for the three months ended March 31, 2021 decreased $2.4 million to $6.7 million from $9.1 million for the three months ended March 31, 2020. The decrease was driven by unrepeated costs related to the proxy contest in the comparable period as well as decreases in stock compensation expense, bonus expense, rent expense and various consulting expenses in the current period, partially offset by increased legal expenses.
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Loss from Equity Investees
Three Months Ended March 31,
2021 2020 Increase / (Decrease)
Life Sciences $ (1.5) $ (1.0) $ (0.5)
Other (0.6) (1.5) 0.9
Loss from equity investees $ (2.1) $ (2.5) $ 0.4
Life Sciences: Loss from equity investees within our Life Sciences segment for the three months ended March 31, 2021 increased $0.5 million to $1.5 million from $1.0 million for the three months ended March 31, 2020. The increase in loss was largely due to higher equity method losses recorded from our investment in MediBeacon due to the timing of clinical trials.
Other: Loss from equity investees within our Other segment for the three months ended March 31, 2021 decreased $0.9 million to $0.6 million from $1.5 million for the three months ended March 31, 2020. The decrease in loss was driven by the equity investment in HMN, as the joint venture produced a lower loss than in the comparable period, which is generally attributable to the timing of turnkey project work, and a reduction in ownership from 49% to 19% as a result of the partial sale of HC2's investment in the second quarter of 2020.
Non-GAAP Financial Measures and Other Information
Adjusted EBITDA
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 discontinued operations; depreciation and amortization; Other operating (income) expense, which is inclusive of (gain) loss on sale or disposal of assets, lease termination costs, asset impairment expense and FCC reimbursements; interest expense; other (income) expense, net; net gain (loss) on contingent consideration; loss on early extinguishment or restructuring of debt; foreign currency transaction (gain) loss included in cost of revenue; income tax (benefit) expense; noncontrolling interest; bonus to be settled in equity; share-based payment expense; non-recurring items; costs associated with the COVID-19 pandemic; and acquisition and disposition costs.
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(in millions) Three months ended March 31, 2021
Infrastructure
Life Sciences Spectrum Non-operating Corporate Other and Eliminations HC2
Net Income (loss) attributable to HC2 Holdings, Inc. $ 12.6
Less: Discontinued operations 51.9
Net Income (loss) attributable to HC2 Holdings, Inc., excluding discontinued operations $ — $ (4.2) $ (4.4) $ (30.8) $ 0.1 $ (39.3)
Adjustments to reconcile net income (loss) to Adjusted EBITDA:
Depreciation and amortization 2.4 — 1.5 — — 3.9
Depreciation and amortization (included in cost of revenue) 2.3 — — — — 2.3
Other operating (income) expenses — — 0.4 — — 0.4
Interest expense 1.9 — 2.3 17.2 — 21.4
Other (income) expense, net 0.2 — 0.4 (4.0) — (3.4)
Loss on early extinguishment or restructuring of debt — — 0.9 9.9 — 10.8
Income tax (benefit) expense — — — 1.1 — 1.1
Noncontrolling interest — (2.1) (0.5) — (1.1) (3.7)
Share-based compensation expense — 0.1 0.1 0.4 — 0.6
Nonrecurring Items 0.2 — — 0.5 — 0.7
COVID-19 Costs 3.9 — — — — 3.9
Acquisition and disposition costs 0.4 — 0.1 1.7 0.1 2.3
Adjusted EBITDA $ 11.3 $ (6.2) $ 0.8 $ (4.0) $ (0.9) $ 1.0
(in millions) Three months ended March 31, 2020
Infrastructure
Life Sciences Spectrum Non-operating Corporate Other and Eliminations HC2
Net Income (loss) attributable to HC2 Holdings, Inc. $ (83.1)
Less: Discontinued operations (71.1)
Net Income (loss) attributable to HC2 Holdings, Inc., excluding discontinued operations $ (0.1) $ (3.2) $ (5.5) $ (25.8) $ 22.6 $ (12.0)
Adjustments to reconcile net income (loss) to Adjusted EBITDA:
Depreciation and amortization 2.6 — 1.7 — — 4.3
Depreciation and amortization (included in cost of revenue) 2.3 — — — — 2.3
Other operating (income) expenses 0.2 — — — — 0.2
Interest expense 2.2 — 3.2 13.8 — 19.2
Loss on early extinguishment or restructuring of debt — — — 5.8 — 5.8
Other (income) expense, net 0.2 — 0.6 (2.4) — (1.6)
Income tax (benefit) expense 0.2 — — (0.4) (9.5) (9.7)
Noncontrolling interest — (1.0) (1.1) — (15.7) (17.8)
Share-based compensation expense — — 0.1 1.4 — 1.5
Nonrecurring Items 0.9 — — 1.4 — 2.3
COVID-19 Costs 0.4 — — — — 0.4
Acquisition and disposition costs 0.1 — — 1.2 0.9 2.2
Adjusted EBITDA $ 9.0 $ (4.2) $ (1.0) $ (5.0) $ (1.7) $ (2.9)
Infrastructure: Net income from our Infrastructure segment for the three months ended March 31, 2021 increased $0.1 million to zero from a loss of $0.1 million for the three months ended March 31, 2020. Adjusted EBITDA from our Infrastructure segment for the three months ended March 31, 2021 increased $2.3 million to $11.3 million from $9.0 million for the three months ended March 31, 2020. The increase in Adjusted EBITDA can be attributed to infrastructure work performed by the construction modeling and detailing business, the timing of project work under execution and change in backlog mix in the fabrication and erection business, partially offset by a decline in power and industrial repair and maintenance work performed.
Life Sciences: Net loss from our Life Sciences segment for the three months ended March 31, 2021 decreased $1.0 million to $4.2 million from $3.2 million for the three months ended March 31, 2020. Adjusted EBITDA loss from our Life Sciences segment for the three months ended March 31, 2021 increased $2.0 million to $6.2 million from $4.2 million for the three months ended March 31, 2020. The increase in Adjusted EBITDA loss was primarily driven by higher expenses at R2, which increased spending from the comparable period to support commercialization efforts and further develop its product platform, and higher equity method losses recorded from our investment in MediBeacon due to the timing of clinical trials.
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Spectrum: Net loss from our Spectrum segment for the three months ended March 31, 2021 decreased $1.1 million to $4.4 million from $5.5 million for the three months ended March 31, 2020. Adjusted EBITDA from our Spectrum segment for the three months ended March 31, 2021 increased $1.8 million to income of $0.8 million from an Adjusted EBITDA loss of $1.0 million for the three months ended March 31, 2020. The overall increase in Adjusted EBITDA to income was primarily driven by cost reductions at Network, a decrease in compensation and overhead expenses, as well as higher station revenues as our Spectrum segment grew the number of operating stations and launched new customers across its broadcast platform. This was partially offset by a decrease in advertising revenues at the Azteca network driven by unrepeated political campaign expenditures and U.S. census advertising campaigns in the comparable period and severance costs incurred in the current period.
Non-operating Corporate: Net income (loss) from our Non-operating Corporate segment for the three months ended March 31, 2021 increased $5.0 million to net loss of $30.8 million from $25.8 million for the three months ended March 31, 2020. Adjusted EBITDA loss from our Non-operating Corporate segment for the three months ended March 31, 2021 decreased $1.0 million to $4.0 million from $5.0 million for the three months ended March 31, 2020. The decrease in Adjusted EBITDA loss was driven by a decrease in discretionary bonus and a general reduction in overhead expenses, including professional fees, travel and entertainment expenses, and rent expense, partially offset by an increase in legal fees resulting from an increase in activity.
Other and Elimination: Net loss from our Other segment for the three months ended March 31, 2021 decreased $22.5 million to $0.1 million from $22.6 million for the three months ended March 31, 2020. Adjusted EBITDA losses from our Other segment for the three months ended March 31, 2021 decreased $0.8 million to $0.9 million from $1.7 million for the three months ended March 31, 2020. The decrease in Adjusted EBITDA loss for Other and Eliminations was driven by the equity investment in HMN, as the joint venture produced fewer losses than in the comparable period, which is generally attributable to the timing of turnkey project work, and a reduction in ownership from 49% to 19% as a result of the partial sale of HC2's investment in the second quarter of 2020.
(in millions): Three months ended March 31,
2021 2020 Increase / (Decrease)
Infrastructure
$ 11.3 $ 9.0 $ 2.3
Life Sciences (6.2) (4.2) (2.0)
Spectrum 0.8 (1.0) 1.8
Non-Operating Corporate (4.0) (5.0) 1.0
Other and Eliminations (0.9) (1.7) 0.8
Adjusted EBITDA $ 1.0 $ (2.9) $ 3.9
Backlog
Projects in backlog consist of awarded contracts, letters of intent, notices to proceed, change orders, and purchase orders obtained. Backlog increases as contract commitments are obtained, decreases as revenues are recognized and increases or decreases to reflect modifications in the work to be performed under the contracts. Backlog is converted to sales in future periods as work is performed or projects are completed. Backlog can be significantly affected by the receipt or loss of individual contracts.
Infrastructure Segment
At March 31, 2021, DBMG's backlog was $522.7 million, consisting of $329.1 million under contracts or purchase orders and $193.6 million under letters of intent or notices to proceed. Approximately $217.1 million, representing 41.5% of DBMG’s backlog at March 31, 2021, was attributable to five contracts, letters of intent, notices to proceed or purchase orders. If one or more of these projects terminate or reduce their scope, DBMG’s backlog could decrease substantially.
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Liquidity and Capital Resources
Short- and Long-Term Liquidity Considerations and Risks
Our Non-Operating Corporate segment consists of holding companies, and its liquidity needs are primarily for interest payments on its 2026 Senior Secured Notes, 2022 Convertible Notes and 2026 Convertible Notes, and its Revolving Credit Agreement, dividend payments on its Preferred Stock and recurring operational expenses.
As of March 31, 2021, the Company had $54.2 million of cash and cash equivalents compared to $43.8 million as of December 31, 2020. On a stand-alone basis, as of March 31, 2021, the Non-Operating Corporate segment had cash and cash equivalents of $36.4 million compared to $27.5 million at December 31, 2020.
Our subsidiaries' principal liquidity requirements arise from cash used in operating activities, debt service, and capital expenditures, including purchases of steel construction equipment, OTA broadcast station equipment, liabilities associated with insurance products, development of back-office systems, operating costs and expenses, and income taxes.
As of March 31, 2021, the Company had $549.4 million of indebtedness on a consolidated basis compared to $576.6 million as of December 31, 2020. On a stand-alone basis, as of March 31, 2021 and December 31, 2020, HC2 had indebtedness of $385.0 million and $410.4 million, respectively.
HC2's stand-alone debt consists of the $330.0 million aggregate principal amount of 2026 Senior Secured Notes, the $3.2 million aggregate principal amount of 2022 Convertible Notes, and the $51.8 million aggregate principal amount of 2026 Convertible Notes. HC2 is required to make semi-annual interest payments on its 2026 Senior Secured Notes, 2022 Convertible Notes and 2026 Convertible Notes, and quarterly interest payments, if applicable, on its 2024 Revolving Credit Agreement.
HC2 is required to make dividend payments on its outstanding Preferred Stock on January 15 th , April 15 th , July 15 th , and October 15 th of each year.
HC2 received $1.3 million in net management fees from its Insurance segment during the three months ended March 31, 2021.
The maturity date for the Company's Preferred Stock is May 29, 2021. Our Insurance segment subsidiary, CGIC, is a holder of our Preferred Stock, owning 6,125 Series A and 10,000 Series A-2 shares. In connection with the sale of the Insurance segment to Continental General Holdings LLC, the buyer has agreed to extend the maturity date for the Preferred Stock owned by CGIC by five years from the closing date of the sale and has agreed to such other amendments to the certificates of designation for our Preferred Stock necessary to give effect to such extension of the maturity date. External holders of our Preferred Stock, which include 6,375 Series A and 4,000 Series A-2 shares, have the right to require the Company to redeem each such holder’s shares in whole or in part at a redemption price equal to the accrued value of the shares plus any accrued and unpaid dividends; however, certain of the external holders of our Preferred Stock may, but are under no obligation to, agree to a similar extension of the maturity date of our Preferred Stock held by such holder. We believe our current liquidity sources, including our available cash and cash equivalents, borrowing capacity under our Revolving Credit Agreement and dividends and tax sharing agreement from our DBMG subsidiary are sufficient to meet the redemption obligations on our Preferred Stock.
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 cash on hand, distributions from our subsidiaries, 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. 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 or renegotiate terms of our 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.
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We have seen significant costs increases, primarily at our Infrastructure segment, driven by expenses associated with maintaining a safe work environment, and while executing on its projects. During the three months ended March 31, 2021, $3.9 million of COVID-19 costs were incurred. Although the COVID-19 pandemic did not have a material impact on the HC2’s liquidity for the three months ended March 31, 2021, management believes the continuation of the pandemic and its related effect on the U.S. and global economies could introduce added pressure on the Company’s liquidity position and financial performance. Our sources of liquidity are primarily from the dividends and tax sharing agreement with DBMG, cash proceeds from completed and anticipated monetization’s and other arrangements.
Additionally, in response to the COVID-19 pandemic, our corporate staff is predominantly working remotely and many of our key vendors, and consultants similarly work remotely. As a result of such remote work arrangements, certain operational, reporting, accounting and other processes may slow, which could result in longer time to execute critical business functions.
Capital Expenditures
Capital expenditures for the years ended March 31, 2021 and 2020 are set forth in the table below (in millions):
Three Months Ended March 31,
2021 2020
Infrastructure
$ 1.6 $ 2.3
Life Sciences 0.2 —
Spectrum 1.4 2.7
Total $ 3.2 $ 5.0
Indebtedness
2026 Senior Secured Notes Terms and Conditions
Maturity . The 2026 Senior Secured Notes mature on August 1, 2026.
Interest . The 2026 Senior Secured Notes accrue interest at a rate of 8.50% per year. Interest on the 2026 Senior Secured Notes is paid semi-annually on February 1 and August 1 of each year.
Issue Price . The issue price of the 2026 Senior Secured Notes was 100% of par.
Ranking . The notes and the note guarantees are the Company’s and certain of its direct and indirect domestic subsidiaries’ (the "Subsidiary Guarantors") general senior secured obligations. The notes and the note guarantees will rank: (i) senior in right of payment to all of the Company’s and the Subsidiary Guarantors’ future subordinated debt; (ii) equal in right of payment, subject to the priority of any First-Out Obligations (as defined in the Secured Indenture), with all of the Company’s and the Subsidiary Guarantors’ existing and future senior debt and effectively senior to all of its and the Subsidiary Guarantor’s unsecured debt to the extent of the value of the collateral; and (iii) effectively subordinated to all liabilities of its non-guarantor subsidiaries. The notes and the note guarantees are secured on a first-priority basis by substantially all of the Company’s assets and the assets of the Subsidiary Guarantors, subject to certain exceptions and permitted liens.
Collateral . The 2026 Senior Secured Notes are secured by a first priority lien on substantially all of the Company’s assets (except for certain "Excluded Assets," and subject to certain "Permitted Liens," each as defined in the Secured Indenture), including, without limitation:
• all equity interests owned by the Company or a Subsidiary Guarantor (which, in the case of any equity interest in a foreign subsidiary, will be limited to 100% of the non-voting stock (if any) and 65% of the voting stock of such foreign subsidiary) and the related rights and privileges associated therewith (but excluding Equity Interests of Insurance Subsidiaries (as defined in the Secured Indenture), to the extent the pledge thereof is deemed a "change of control" under applicable insurance regulations);
• all equipment, goods and inventory owned by the Company or a Subsidiary Guarantor;
• all cash and investment securities owned by the Company or a Subsidiary Guarantor;
• all documents, books and records, instruments and chattel paper owned by the Company or a Subsidiary Guarantor;
• all general intangibles owned by the Company or a Subsidiary Guarantor; and
• any proceeds and supporting obligations thereof.
The Secured Indenture permits the Company, under specified circumstances, to incur additional debt in the future that could equally and ratably share in the collateral. The amount of such debt is limited by the covenants contained in the Secured Indenture.
Events of Default . The Secured Indenture contains customary events of default which could, subject to certain conditions, cause the 2026 Senior Secured Notes to become immediately due and payable.
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2022 Convertible Notes Terms and Conditions
Maturity . The 2022 Convertible Notes mature on June 1, 2022 unless earlier converted, redeemed or purchased.
Interest . The 2022 Convertible Notes accrue interest at a rate of 7.5% per year. Interest on the 2022 Convertible Notes is paid semi-annually on December 1 and June 1 of each year.
Issue Price . The issue price of the Convertible Notes was 100% of par.
Ranking . The notes are the Company’s general unsecured and unsubordinated obligations and will rank equally in right of payment with all of the Company’s existing and future unsecured and unsubordinated indebtedness, and senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated to the notes. The notes will be effectively subordinated to all of the Company’s existing and future secured indebtedness, including the Company’s Secured Notes, to the extent of the value of the collateral securing that indebtedness, and structurally subordinated to all indebtedness and other liabilities of the Company’s subsidiaries, including trade credit.
Optional Redemption . The Company could not redeem the notes prior to June 1, 2020. From or after June 1, 2020, the Company may redeem for cash all of the notes if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (which need not be consecutive trading days) during any 30 consecutive trading-day period ending within five trading days prior to the date on which the Company provides notice of redemption. The redemption price will equal 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date.
Conversion Rights . The 2022 Convertible Notes are convertible into shares of the Company’s common stock based on a conversion rate of 234.2971 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $4.27 per share of the Company’s common stock), at any time prior to the close of business on the business day immediately preceding the maturity date, in principal amounts of $1,000 or an integral multiple of $1,000 in excess thereof. In addition, following a Make-Whole Fundamental Change (as defined in the indenture governing the 2022 Convertible Notes) or the Company’s delivery of a notice of redemption for the 2022 Convertible Notes, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2022 Convertible Notes in connection with (i) such Make-Whole Fundamental Change or (ii) such notice of redemption. However, to comply with certain listing standards of The New York Stock Exchange, the Company will settle in cash its obligation to increase the conversion rate in connection with a Make-Whole Fundamental Change or redemption until it has obtained the requisite stockholder approval.
Events of Default . The indenture governing the 2022 Convertible Notes contains customary events of default which could, subject to certain conditions, cause the 2022 Convertible Notes to become immediately due and payable.
2026 Convertible Notes Terms and Conditions
Maturity . The 2026 Convertible Notes mature on August 1, 2026 unless earlier converted, redeemed or purchased.
Interest . The 2026 Convertible Notes accrue interest at a rate of 7.5% per year. Interest on the 2026 Convertible Notes is paid semi-annually on February 1 and August 1 of each year.
Issue Price . The issue price of the 2026 Convertible Notes was 100% of par.
Ranking . The notes are the Company’s general unsecured and unsubordinated obligations and will rank equally in right of payment with all of the Company’s existing and future unsecured and unsubordinated indebtedness, and senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated to the notes. The notes will be effectively subordinated to all of the Company’s existing and future secured indebtedness, including the Company’s 2026 Senior Secured Notes, to the extent of the value of the collateral securing that indebtedness, and structurally subordinated to all indebtedness and other liabilities of the Company’s subsidiaries, including trade credit.
Optional Redemption . The Company may not redeem the notes prior to August 1, 2023. On or after August 1, 2023, the Company may redeem for cash all of the notes if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (which need not be consecutive trading days) during any 30 consecutive trading-day period ending within five trading days prior to the date on which the Company provides notice of redemption. The redemption price will equal 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date.
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Conversion Rights . The 2026 Convertible Notes are convertible into shares of the Company’s common stock based on an initial conversion rate of 234.2971 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $4.27 per share of the Company’s common stock), at any time prior to the close of business on the business day immediately preceding the maturity date, in principal amounts of $1,000 or an integral multiple of $1,000 in excess thereof. In addition, following a Make-Whole Fundamental Change (as defined in the Convertible Indenture) or the Company’s delivery of a notice of redemption for the 2026 Convertible Notes, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2026 Convertible Notes in connection with (i) such Make-Whole Fundamental Change or (ii) such notice of redemption. However, to comply with certain listing standards of The New York Stock Exchange, the Company will settle in cash its obligation to increase the conversion rate in connection with a Make-Whole Fundamental Change or redemption until it has obtained the requisite stockholder approval.
Events of Default . The Convertible Indenture contains customary events of default which could, subject to certain conditions, cause the Convertible Notes to become immediately due and payable.
Revolving Credit Agreement
Lender. MSD PCOF Partners IX, LLC (“MSD”)
Ranking. Obligations under the Revolving Credit Agreement constitute a First-Out Debt, as defined in the Senior Secured Indenture, and are secured on a pari passu basis with the 2026 Senior Secured Notes with a maturity date of February 23, 2024.
Collateral: As provided under a Collateral Trust Joinder, the lender was added as a secured party to the Collateral Trust Agreement, and accordingly the pari passu obligations and commitments under the Revolving Credit Agreement are secured equally and ratably by the collateral of the Secured Notes.
Infrastructure
The Wells Fargo Facility and the TCW Loan associated with our Infrastructure segment contain customary restrictive and financial covenants related to debt levels and performance. As of March 31, 2021, DBMG was in compliance with all of the financial covenants to its debt agreements.
See Note 9. Debt Obligations to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional details regarding the Company's indebtedness.
Restrictive Covenants
The indenture governing the 2026 Senior Secured Notes dated February 1, 2021, by and among HC2, the guarantors party thereto and U.S. Bank National Association, a national banking association ("U.S. Bank"), as trustee (the "Senior Secured Indenture"), contains certain affirmative and negative covenants limiting, among other things, the ability of the Company, and, in certain cases, the Company’s subsidiaries, to incur additional indebtedness; create liens; engage in sale-leaseback transactions; pay dividends or make distributions in respect of capital stock; make certain restricted payments; sell assets; engage in transactions with affiliates; or consolidate or merge with, or sell substantially all of its assets to, another person. These covenants are subject to a number of important exceptions and qualifications.
The Company is also required to comply with certain financial maintenance covenants, which are similarly subject to a number of important exceptions and qualifications. These covenants include maintenance of (1) liquidity and (2) collateral coverage.
The maintenance of liquidity covenant provides that the Company will not permit the aggregate amount of (i) all unrestricted cash and Cash Equivalents of the Company and the Subsidiary Guarantors, (ii) amounts available for drawing under revolving credit facilities and undrawn letters of credit of the Company and the Subsidiary Guarantors and (iii) dividends, distributions or payments that are immediately available to be paid to the Company by any of its Restricted Subsidiaries to be less than the Company’s obligation to pay interest on the 2026 Senior Secured Notes and all other Debt, including Convertible Preferred Stock mandatory cash dividends or any other mandatory cash pay Preferred Stock but excluding any obligation to pay interest on Convertible Preferred Stock or any other mandatory cash pay Preferred Stock which, in each case, may be paid by accretion or in-kind in accordance with its terms of the Company and its Subsidiary Guarantors for the next six months. As of March 31, 2021, the Company was in compliance with this covenant.
The maintenance of collateral coverage provides that the certain subsidiaries' Collateral Coverage Ratio (as defined in the Secured Indenture as the ratio of (i) the Loan Collateral to (ii) Consolidated Secured Debt (each as defined therein)) calculated on a pro forma basis as of the last day of each fiscal quarter may not be less than 1.50 to 1.00. As of March 31, 2021, the Company was in compliance with this covenant.
The instruments governing the Company’s Preferred Stock also limit the Company’s and its subsidiaries ability to take certain actions, including, among other things, to incur additional indebtedness; issue additional Preferred Stock; engage in transactions with affiliates; and make certain restricted payments. These limitations are subject to a number of important exceptions and qualifications.
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The Company conducted its operations in a manner that resulted in compliance with the prior Secured Indenture; however, compliance with certain financial covenants for future periods may depend on the Company or one or more of the Company’s subsidiaries undertaking one or more non-operational transactions, such as the management of operating cash outflows, a monetization of assets, a debt incurrence or refinancing, the raising of equity capital, or similar transactions. If the Company is unable to remain in compliance and does not make alternate arrangements, an event of default would occur under the Company’s Secured Indenture which, among other remedies, could result in the outstanding obligations under the indenture becoming immediately due and payable and permitting the exercise of remedies with respect to the collateral. There is no assurance the Company will be able to complete any non-operational transaction it may undertake to maintain compliance with covenants under the Secured Indenture or, even if the Company completes any such transaction, that it will be able to maintain compliance for any subsequent period.
Summary of Consolidated Cash Flows
The below table summarizes the cash provided or used in our activities and the amount of the respective changes between the periods (in millions):
Three Months Ended March 31, Increase / (Decrease)
2021 2020
Operating activities from Continuing Operations $ (23.2) $ (4.3) $ (18.9)
Investing activities from Continuing Operations 66.4 140.8 (74.4)
Financing activities from Continuing Operations (31.6) (142.1) 110.5
Effect of exchange rate changes on cash and cash equivalents (0.3) 0.4 (0.7)
Cash flows from discontinued operations 17.9 (47.2) 65.1
Net increase (decrease) in cash, cash equivalents and restricted cash $ 29.2 $ (52.4) $ 81.6
Less: Net increase (decrease) in cash and cash equivalents classified within current assets held for sale 18.3 (44.0) 62.3
Net change in cash, cash equivalents and restricted cash $ 10.9 $ (8.4) $ 19.3
Operating Activities
Cash used in operating activities was $23.2 million for the three months ended March 31, 2021 as compared to cash used in operating activities of $4.3 million for the three months ended March 31, 2020. The $18.9 million change was primarily related to an increase in working capital due to the timing of interest payments as a result of the refinancing, ramp of product launch at R2, scheduling of payments at Spectrum, and project timing at Infrastructure.
Investing Activities
Cash provided by investing activities was $66.4 million for the three months ended March 31, 2021 as compared to cash provided by investing activities of $140.8 million for the three months ended March 31, 2020. The $74.4 million change was from the reduction in proceeds from the sale of subsidiaries. Beyond6 was sold in 2021 for net proceeds of $70.0 million while compared to GMSL sold in the prior year for net proceeds of $144.0 million.
Financing Activities
Cash used in financing activities was $31.6 million for the three months ended March 31, 2021 as compared to cash used in financing activities of $142.1 million for the three months ended March 31, 2020. The $110.5 million change was primarily a result of the larger principal payments on debt obligations at our Non-Operating Corporate segment in the comparable period and payments to minority stockholders at our Other segment for the portion of the proceeds received from the sale of GMSL in the comparable period.
Discontinued Operations
Cash provided by discontinued operations was $17.9 million for the three months ended March 31, 2021 as compared to cash used by discontinued operations of $47.2 million for the three months ended March 31, 2020. The $65.1 million increase was largely due to a decline in net investment spend at our Insurance segment compared to the prior year.
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Infrastructure
Cash Flows
Cash flows from operating activities are the principal source of cash used to fund DBMG’s operating expenses, interest payments on debt, and capital expenditures. DBMG's short-term cash needs are primarily for working capital to support operations including receivables, inventories, and other costs incurred in performing its contracts. DBMG attempts to structure the payment arrangements under its contracts to match costs incurred under the project. To the extent it is able to bill in advance of costs incurred, DBMG generates working capital through billings in excess of costs and recognized earnings on uncompleted contracts. DBMG relies on its credit facilities to meet its working capital needs. DBMG believes that its existing borrowing availability together with cash from operations will be adequate to meet all funding requirements for its operating expenses, interest payments on debt and capital expenditures for the foreseeable future.
DBMG is required to make monthly or quarterly interest payments on all of its debt. Based upon the March 31, 2021 debt balance, DBMG anticipates that its interest payments will be approximately $1.7 million each quarter of 2021.
DBMG believes that its available funds, cash generated by operating activities and funds available under its bank credit facilities will be sufficient to fund its capital expenditures and its working capital needs. However, DBMG may expand its operations through future acquisitions and may require additional equity or debt financing.
Discontinued Operations
We have reclassified several entities as discontinued operations for the three months ended March 31, 2021 and 2020. Accordingly, revenue, costs, and expenses of the discontinued operations have been excluded from continuing operations. The entities reported in discontinued operations are as follows:
• The sale of GMSL closed on February 28, 2020. At the time of the sale, the Company recorded a $39.3 million loss on the sale, inclusive of recognizing a $31.3 million loss from the realization of AOCI. During the fourth quarter of 2020, the Company recognized a gain of $2.4 million as a result of bonding releases related to projects which existed prior to sale. During the first quarter of 2021, the Company recognized a gain of $1.2 million as a result of indemnity release.
• The sale of ICS and its subsidiary, Go2 Tel, Inc., closed on October 31, 2020. The Company recorded a $0.9 million gain on the sale and recognized $8.2 million of Accumulated other comprehensive loss related to the foreign currency translation of PTGi International Carrier Services Ltd., which was essentially liquidated in conjunction with the sale. The proceeds were used for general corporate purposes.
• On December 31, 2020, the Company signed the Merger Agreement to sell Beyond6. The sale closed on January 15, 2021. The Company recognized a $39.2 million gain on the sale.
• On March 29, 2021, the Company announced the definitive agreement to sell its Insurance segment to Continental General Holdings LLC, an entity controlled by Michael Gorzynski, a director of the Company and a beneficial owner of approximately 6.6% of the Company's outstanding common stock who has also served as executive chairman of Continental since October 2020.
Cash flows from discontinued operations are reported in the Statement of Cash Flows as a separate line item within the Operations, Investing and Financing activities sections for each year presented.
In the absence of cash flows from the discontinued operations, the Company does not expect there to be an impact on liquidity at the Company.
Off-Balance Sheet Arrangements
In September 2018, the Company entered into a 75-month lease for office space. As part of the agreement, HC2 was able to pay a lower security deposit and lease payments, and received favorable lease terms as consideration for landlord required cross default language in the event of default of the shared space leased by Harbinger Capital Partners, formerly a related party, as disclosed in Note 16. Related Parties to our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. With the adoption of ASC 842, as of January 1, 2019, this lease was recognized as a right of use asset and lease liability on the Consolidated Balance Sheets.
DBMG’s off-balance sheet arrangements at March 31, 2021 included letters of credit of $9.8 million under Credit and Security Agreements and performance bonds of $107.0 million. DBMG’s contract arrangements with customers sometimes require DBMG to provide performance bonds to partially secure its obligations under its contracts. Bonding requirements typically arise in connection with public works projects and sometimes with respect to certain private contracts. DBMG’s performance bonds are obtained through surety companies and typically cover the entire project price.
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New Accounting Pronouncements
For a discussion of our New Accounting Pronouncements, refer to Note 2. Summary of Significant Accounting Policies to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Critical Accounting Policies
There have been no material changes in the Company’s critical accounting policies during the quarter ended March 31, 2021. For information about critical accounting policies, refer to “Critical Accounting Policies” under Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Related Party Transactions
For a discussion of our Related Party Transactions, refer to Note 16. Related Parties to our Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Corporate Information
HC2, a Delaware corporation, was incorporated in 1994. The Company’s executive offices are located at 295 Madison Avenue, 12th Floor, New York, NY, 10017. The Company’s telephone number is (212) 235-2690. Our Internet address is www.hc2.com . We make available free of charge through our Internet website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information on or accessible through our website is not a part of this Quarterly Report on Form 10-Q.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains or incorporates a number of "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based on current expectations, and are not strictly historical statements. In some cases, you can identify forward-looking statements by terminology such as "if," "may," "should," "believe," "anticipate," "future," "forward," "potential," "estimate," "opportunity," "goal," "objective," "growth," "outcome," "could," "expect," "intend," "plan," "strategy," "provide," "commitment," "result," "seek," "pursue," "ongoing," "include" or in the negative of such terms or comparable terminology. These forward-looking statements inherently involve certain risks and uncertainties and are not guarantees of performance, results, or the creation of stockholder value, although they are based on our current plans or assessments which we believe to be reasonable as of the date hereof.
Factors that could cause actual results, events and developments to differ include, without limitation: the ability of our subsidiaries (including, target businesses following their acquisition) to generate sufficient net income and cash flows to make upstream cash distributions, capital market conditions, our and our subsidiaries’ ability to identify any suitable future acquisition opportunities, efficiencies/cost avoidance, cost savings, income and margins, growth, economies of scale, combined operations, future economic performance, conditions to, and the timetable for, completing the integration of financial reporting of acquired or target businesses with HC2 or the applicable subsidiary of HC2, completing future acquisitions and dispositions, litigation, potential and contingent liabilities, management’s plans, changes in regulations and taxes.
We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.
Forward-looking statements are not guarantees of performance. You should understand that the following important factors, in addition to those discussed under the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020 and in the documents incorporated by reference, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. You should also understand that many factors described under one heading below may apply to more than one section in which we have grouped them for the purpose of this presentation. As a result, you should consider all of the following factors, together with all of the other information presented herein, in evaluating our business and that of our subsidiaries.
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HC2 Holdings, Inc. and Subsidiaries
Our actual results or other outcomes may differ from those expressed or implied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:
• the effect of the novel coronavirus (“COVID-19”) pandemic and related governmental responses on our business, financial condition and results of operations;
• limitations on our ability to successfully identify any strategic acquisitions or business opportunities and to compete for these opportunities with others who have greater resources;
• our possible inability to generate sufficient liquidity, margins, earnings per share, cash flow and working capital from our operating segments;
• the impact of catastrophic events including natural disasters, pandemic illness and the outbreak of war or acts of terrorism;
• our dependence on distributions from our subsidiaries to fund our operations and payments on our obligations;
• the impact on our business and financial condition of our substantial indebtedness and the significant additional indebtedness and other financing obligations we may incur;
• the impact of covenants in the Indenture governing HC2’s new notes, the Certificates of Designation governing HC2’s Preferred Stock and all other subsidiary debt obligations as summarized in Note 9. Debt Obligations and future financing agreements on our ability to operate our business and finance our pursuit of acquisition opportunities;
• our dependence on certain key personnel;
• uncertain global economic conditions in the markets in which our operating segments conduct their businesses;
• the ability of our operating segments to attract and retain customers;
• increased competition in the markets in which our operating segments conduct their businesses;
• our expectations regarding the timing, extent and effectiveness of our cost reduction initiatives and management’s ability to moderate or control discretionary spending;
• management’s plans, goals, forecasts, expectations, guidance, objectives, strategies and timing for future operations, acquisitions, synergies, asset dispositions, fixed asset and goodwill impairment charges, tax and withholding expense, selling, general and administrative expenses, product plans, performance and results;
• management’s assessment of market factors and competitive developments, including pricing actions and regulatory rulings;
• the impact of additional material charges associated with our oversight of acquired or target businesses and the integration of our financial reporting;
• the impact of expending significant resources in considering acquisition targets or business opportunities that are not consummated;
• our expectations and timing with respect to our ordinary course acquisition activity and whether such acquisitions are accretive or dilutive to stockholders;
• our expectations and timing with respect to any strategic dispositions and sales of our operating subsidiaries, or businesses that we may make in the future and the effect of any such dispositions or sales on our results of operations;
• the possibility of indemnification claims arising out of divestitures of businesses;
• tax consequences associated with our acquisition, holding and disposition of target companies and assets;
• the effect any interests our officers, directors, stockholders and their respective affiliates may have in certain transactions in which we are involved;
• our ability to effectively increase the size of our organization, if needed, and manage our growth;
• the potential for, and our ability to, remediate future material weaknesses in our internal controls over financial reporting;
• our possible inability to raise additional capital when needed or refinance our existing debt, on attractive terms, or at all; and
• our possible inability to hire and retain qualified executive management, sales, technical and other personnel.
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Infrastructure / DBM Global Inc.
Our actual results or other outcomes of DBM Global, Inc. and its wholly-owned subsidiaries ("DBMG"), and, thus, our Infrastructure segment, may differ from those expressed or implied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:
• our ability to maintain efficient staffing and productivity as well as delays and cancellations as a result of the COVID-19 pandemic;
• its ability to realize cost savings from expected performance of contracts, whether as a result of improper estimates, performance, or otherwise;
• its ability to successfully consummate the acquisition of Banker Steel Holdco LLC;
• potential impediments and limitations on our ability to complete ordinary course acquisitions in anticipated time frames or at all;
• uncertain timing and funding of new contract awards, as well as project cancellations;
• cost overruns on fixed-price or similar contracts or failure to receive timely or proper payments on cost-reimbursable contracts, whether as a result of improper estimates, performance, disputes, or otherwise;
• risks associated with labor productivity, including performance of subcontractors that DBMG hires to complete projects;
• its ability to settle or negotiate unapproved change orders and claims;
• changes in the costs or availability of, or delivery schedule for, equipment, components, materials, labor or subcontractors;
• adverse impacts from weather affecting DBMG’s performance and timeliness of completion of projects, which could lead to increased costs and affect the quality, costs or availability of, or delivery schedule for, equipment, components, materials, labor or subcontractors;
• fluctuating revenue resulting from a number of factors, including the cyclical nature of the individual markets in which our customers operate;
• adverse outcomes of pending claims or litigation or the possibility of new claims or litigation, and the potential effect of such claims or litigation on DBMG’s business, financial condition, results of operations or cash flow; and
• lack of necessary liquidity to provide bid, performance, advance payment and retention bonds, guarantees, or letters of credit securing DBMG’s obligations under bids and contracts or to finance expenditures prior to the receipt of payment for the performance of contracts.
Life Sciences / Pansend Life Sciences, LLC
Our actual results or other outcomes of Pansend Life Sciences, LLC, and, thus, our Life Sciences segment, may differ from those expressed or implied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:
• our Life Sciences segment’s ability to invest in development stage companies;
• our Life Sciences segment’s ability to develop products and treatments related to its portfolio companies;
• medical advances in healthcare and biotechnology; and
• governmental regulation in the healthcare industry.
Spectrum / HC2 Broadcasting Holdings Inc.
Our actual results or other outcomes of HC2 Broadcasting Holdings Inc., and, thus, our Spectrum segment, may differ from those expressed or implied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:
• our ability to attract advertisers during the COVID-19 pandemic;
• our Spectrum segment’s ability to operate in highly competitive markets and maintain market share;
• our Spectrum segment’s ability to effectively implement its business strategy or be successful in the operation of its business;
• new and growing sources of competition in the broadcasting industry; and
• FCC regulation of the television broadcasting industry.
Other
Our actual results or other outcomes of our Other segment may differ from those expressed or implied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:
• risks associated with our equity method investment that operates in China (i.e., Huawei Marine Systems Co. Limited, a Hong Kong holding company with a Chinese operating subsidiary)
We caution the reader that undue reliance should not be placed on any forward-looking statements, which speak only as of the date of this document. Neither we nor any of our subsidiaries undertake any duty or responsibility to update any of these forward-looking statements to reflect events or circumstances after the date of this document or to reflect actual outcomes, except as required by applicable law.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.