Quarterly Report (10-q)

Date : 05/07/2019 @ 9:49PM
Source : Edgar (US Regulatory)
Stock : HC2 Holdings Inc (HCHC)
Quote : 2.17  -0.01 (-0.46%) @ 12:59AM
HC2 share price Chart

Quarterly Report (10-q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549  
FORM 10-Q  
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File No. 001-35210
 
HC2LOGO20178KA23.JPG
HC2 HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
54-1708481
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
450 Park Avenue, 30th Floor, New York, NY
 
10022
(Address of principal executive offices)
 
(Zip Code)
(212) 235-2690
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
Accelerated filer
x
Non-accelerated filer
 
Smaller reporting company
 
Emerging growth company
 ☐
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes        No   ý
_____________________________________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.001 per share
HCHC
New York Stock Exchange
As of April 30, 2019 , 45,629,254 shares of common stock, par value $0.001, were outstanding.



HC2 HOLDINGS, INC.
INDEX TO FORM 10-Q


PART I. FINANCIAL INFORMATION

PART II. OTHER INFORMATION


1

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except per share amounts)

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Revenue
 
$
404.9

 
$
415.5

Life, accident and health earned premiums, net
 
29.9

 
20.0

Net investment income
 
51.1

 
17.7

Net realized and unrealized gains on investments
 
5.5

 
0.5

Net revenue
 
491.4

 
453.7

Operating expenses
 
 
 
 
Cost of revenue
 
357.7

 
375.6

Policy benefits, changes in reserves, and commissions
 
52.7

 
32.3

Selling, general and administrative
 
52.9

 
52.1

Depreciation and amortization
 
6.9

 
9.7

Other operating income, net
 
(0.4
)
 
(2.2
)
Total operating expenses
 
469.8

 
467.5

Income (loss) from operations
 
21.6

 
(13.8
)
Interest expense
 
(22.3
)
 
(19.3
)
Loss from equity investees
 
(4.9
)
 
(5.2
)
Other income, net
 
3.3

 
1.1

Loss from continuing operations before income taxes
 
(2.3
)
 
(37.2
)
Income tax expense
 
(4.0
)
 
(1.7
)
Net loss
 
(6.3
)
 
(38.9
)
Less: Net loss attributable to noncontrolling interest and redeemable noncontrolling interest
 
3.5

 
3.9

Net loss attributable to HC2 Holdings, Inc.
 
(2.8
)
 
(35.0
)
Less: Preferred dividends, deemed dividends, and repurchase gains
 
(1.2
)
 
0.7

Net loss attributable to common stock and participating preferred stockholders
 
$
(1.6
)
 
$
(35.7
)
 
 
 
 
 
Loss per common share
 
 
 
 
Basic and diluted
 
$
(0.04
)
 
$
(0.81
)
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
Basic and diluted
 
44.8

 
44.3




















See notes to Condensed Consolidated Financial Statements

2

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in millions)

 
 
Three Months Ended March 31,
 
 
2019
 
2018
Net loss
 
$
(6.3
)
 
$
(38.9
)
Other comprehensive income (loss)
 
 
 
 
Foreign currency translation adjustment
 
0.9

 
4.5

Unrealized gain (loss) on available-for-sale securities
 
148.2

 
(28.7
)
Other comprehensive income (loss)
 
149.1

 
(24.2
)
Comprehensive income (loss)
 
142.8

 
(63.1
)
Comprehensive loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
3.2

 
3.9

Comprehensive income (loss) attributable to HC2 Holdings, Inc.
 
$
146.0

 
$
(59.2
)
























See notes to Condensed Consolidated Financial Statements

3

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except share amounts)



March 31, 2019
 
December 31, 2018
Assets




Investments:




Fixed maturity securities, available-for-sale at fair value

$
3,625.9


$
3,391.6

Equity securities

172.7


200.5

Mortgage loans

137.2


137.6

Policy loans

19.7


19.8

Other invested assets

67.9


72.5

Total investments

4,023.4


3,822.0

Cash and cash equivalents

302.2


325.0

Accounts receivable, net

328.4


379.2

Recoverable from reinsurers

975.8


1,000.2

Deferred tax asset

1.8


2.1

Property, plant and equipment, net

376.6


376.3

Goodwill

171.7


171.7

Intangibles, net

221.7


219.2

Other assets

280.8


208.1

Total assets

$
6,682.4


$
6,503.8






Liabilities, temporary equity and stockholders’ equity




Life, accident and health reserves

$
4,549.0


$
4,562.1

Annuity reserves

241.5


245.2

Value of business acquired

238.0


244.6

Accounts payable and other current liabilities

320.3


344.9

Deferred tax liability

34.6


30.3

Debt obligations

762.0


743.9

Other liabilities

187.2


110.8

Total liabilities

6,332.6


6,281.8

Commitments and contingencies




Temporary equity




Preferred stock

10.3


20.3

Redeemable noncontrolling interest

7.3


8.0

Total temporary equity

17.6


28.3

Stockholders’ equity




Common stock, $.001 par value




Shares authorized: 80,000,000 at March 31, 2019 and December 31, 2018;






Shares issued: 46,266,918 and 45,391,397 at March 31, 2019 and December 31, 2018;






Shares outstanding: 45,563,003 and 44,907,818 at March 31, 2019 and December 31, 2018, respectively






Additional paid-in capital

264.4


260.5

Treasury stock, at cost: 703,915 and 483,579 shares at March 31, 2019 and December 31, 2018, respectively

(3.2
)

(2.6
)
Accumulated deficit

(64.3
)

(57.2
)
Accumulated other comprehensive income (loss)

36.2


(112.6
)
Total HC2 Holdings, Inc. stockholders’ equity

233.1


88.1

Noncontrolling interest

99.1


105.6

Total stockholders’ equity

332.2


193.7

Total liabilities, temporary equity and stockholders’ equity

$
6,682.4


$
6,503.8
















See notes to Condensed Consolidated Financial Statements

4

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in millions)

 
 
Common Stock
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total HC2 Stockholders' Equity
 
Non-
controlling
Interest
Total Stockholders’ Equity
Temporary Equity
 
 
 
 
Shares
 
Amount
 
Balance as of December 31, 2018
 
44.9

 
$

 
$
260.5

 
$
(2.6
)
 
$
(57.2
)
 
$
(112.6
)
 
$
88.1

 
$
105.6

 
$
193.7

 
$
28.3

Cumulative effect of accounting for leases  (1)
 

 

 

 

 
(4.3
)
 

 
(4.3
)
 
(0.7
)
 
(5.0
)
 
(0.1
)
Share-based compensation
 

 

 
2.5

 

 

 

 
2.5

 

 
2.5

 

Fair value adjustment of redeemable noncontrolling interest
 

 

 
0.2

 

 

 

 
0.2

 

 
0.2

 
(0.2
)
Taxes paid in lieu of shares issued for share-based compensation
 
(0.2
)
 

 

 
(0.6
)
 

 

 
(0.6
)
 

 
(0.6
)
 

Preferred stock dividend
 

 

 
(0.3
)
 

 

 

 
(0.3
)
 

 
(0.3
)
 

Issuance of common stock
 
0.9

 

 

 

 

 

 

 

 

 

Purchase of preferred stock by subsidiary
 

 

 
1.7

 

 

 

 
1.7

 

 
1.7

 
(10.0
)
Transactions with noncontrolling interests
 

 

 
(0.5
)
 

 

 

 
(0.5
)
 
(3.0
)
 
(3.5
)
 

Other
 

 

 
0.3

 

 

 

 
0.3

 

 
0.3

 

Net loss
 

 

 

 

 
(2.8
)
 

 
(2.8
)
 
(3.1
)
 
(5.9
)
 
(0.4
)
Other comprehensive income
 










148.8


148.8


0.3


149.1



Balance as of March 31, 2019
 
45.6


$


$
264.4


$
(3.2
)
 
$
(64.3
)

$
36.2


$
233.1


$
99.1


$
332.2


$
17.6


 
 
Common Stock
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total HC2 Stockholders' Equity
 
Non-
controlling
Interest
Total Stockholders’ Equity
Temporary Equity
 
 
 
 
Shares
 
Amount
 
Balance as of December 31, 2017
 
44.2

 
$

 
$
254.7

 
$
(2.1
)
 
$
(221.2
)
 
$
41.7

 
$
73.1

 
$
115.0

 
$
188.1

 
$
27.9

Cumulative effect of accounting for revenue recognition  (1)
 

 

 

 

 
0.7

 

 
0.7

 

 
0.7

 

Cumulative effect of accounting for the recognition and measurement of financial assets and financial liabilities  (1)
 

 

 

 

 
3.3

 
(1.7
)
 
1.6

 

 
1.6

 

Share-based compensation
 

 

 
1.6

 

 

 

 
1.6

 

 
1.6

 

Fair value adjustment of redeemable noncontrolling interest
 

 

 
(2.5
)
 

 

 

 
(2.5
)
 

 
(2.5
)
 
2.5

Taxes paid in lieu of shares issued for share-based compensation
 
(0.1
)
 

 

 
(0.3
)
 

 

 
(0.3
)
 

 
(0.3
)
 

Preferred stock dividend
 

 

 
(0.5
)
 

 

 

 
(0.5
)
 

 
(0.5
)
 

Issuance of common stock
 
0.4

 

 

 

 

 

 

 

 

 

Transactions with noncontrolling interests
 

 

 
(0.2
)
 

 

 

 
(0.2
)
 

 
(0.2
)
 

Net loss
 

 

 

 

 
(35.0
)
 

 
(35.0
)
 
(3.0
)
 
(38.0
)
 
(0.9
)
Other comprehensive loss
 

 

 

 

 


(24.2
)
 
(24.2
)
 


(24.2
)


Balance as of March 31, 2018
 
44.5

 
$


$
253.1


$
(2.4
)
 
$
(252.2
)

$
15.8


$
14.3


$
112.0


$
126.3


$
29.5

(1) See Note 2. Summary of Significant Accounting Policies for further information about adjustments resulting from the Company’s adoption of new accounting standards in 2019 and 2018, respectively.







See notes to Condensed Consolidated Financial Statements

5

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)


 
 
Three Months Ended March 31,
 
 
2019
 
2018
Cash flows from operating activities
 
 
 
 
Net loss
 
$
(6.3
)
 
$
(38.9
)
Adjustments to reconcile net loss to cash provided by operating activities
 
 
 
 
Provision for doubtful accounts receivable
 
0.4

 
(0.3
)
Share-based compensation expense
 
1.7

 
1.1

Depreciation and amortization
 
9.0

 
11.3

Amortization of deferred financing costs and debt discount
 
2.9

 
4.0

Amortization of (discount) premium on investments
 
1.6

 
1.1

Gain on sale or disposal of assets
 
(0.1
)
 
(2.3
)
Loss from equity investees
 
4.9

 
5.2

Net realized and unrealized gains on investments
 
(5.8
)
 
(0.5
)
Receipt of dividends from equity investees
 
1.6

 
1.6

Deferred income taxes
 
(0.6
)
 
1.0

Annuity benefits
 
2.0

 
2.1

Other operating activities
 
(3.1
)
 
0.7

Changes in assets and liabilities, net of acquisitions
 
 
 
 
Accounts receivable
 
50.6

 
(1.9
)
Recoverable from reinsurers
 
1.9

 
(3.1
)
Other assets
 
(2.6
)
 
(6.1
)
Life, accident and health reserves
 
7.5

 
14.6

Accounts payable and other current liabilities
 
(21.3
)
 
4.7

Other liabilities
 
(6.2
)
 
6.5

Cash provided by operating activities
 
38.1

 
0.8

Cash flows from investing activities
 
 
 
 
Purchase of property, plant and equipment
 
(6.4
)
 
(9.2
)
Disposal of property, plant and equipment
 
2.2

 
3.5

Purchase of investments
 
(257.9
)
 
(106.8
)
Sale of investments
 
199.0

 
73.4

Maturities and redemptions of investments
 
13.9

 
21.6

Cash paid on acquisitions
 
(6.0
)
 
(37.5
)
Other investing activities
 
(3.2
)
 
(1.7
)
Cash used in investing activities
 
(58.4
)
 
(56.7
)
Cash flows from financing activities
 
 
 
 
Proceeds from debt obligations
 
16.4

 
61.5

Principal payments on debt obligations
 
(5.2
)
 
(5.4
)
Cash paid by subsidiary to purchase preferred stock
 
(8.3
)
 

Annuity receipts
 
0.5

 
0.7

Annuity surrenders
 
(4.4
)
 
(5.7
)
Transactions with noncontrolling interests
 
(3.5
)
 
(0.2
)
Payment of dividends
 
(0.4
)
 
(0.5
)
Other financing activities
 
(1.5
)
 
(1.2
)
Cash (used in) provided by financing activities
 
(6.4
)
 
49.2

Effects of exchange rate changes on cash, cash equivalents and restricted cash
 
0.1


0.7

Net change in cash, cash equivalents and restricted cash
 
(26.6
)
 
(6.0
)
Cash, cash equivalents and restricted cash, beginning of period
 
330.4

 
98.9

Cash, cash equivalents and restricted cash, end of period
 
$
303.8

 
$
92.9

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Cash paid for interest
 
$
4.0

 
$
4.4

Cash paid for taxes, net of refunds
 
$
0.2

 
$
0.1

Non-cash investing and financing activities:
 
 
 
 
Property, plant and equipment included in accounts payable
 
$
5.9

 
$
1.4

Investments included in accounts payable
 
$
6.9

 
$
24.4

Investments included in accounts receivable
 
$
7.8

 
$
0.2

Declared but unpaid dividends from equity method investments included in other assets
 
$
6.0

 
$

 
See notes to Condensed Consolidated Financial Statements

6


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. Organization and Business

HC2 Holdings, Inc. ("HC2" and, together with its consolidated subsidiaries, the "Company", "we" and "our") is a diversified holding company which seeks to acquire and grow attractive businesses that we believe can generate long-term sustainable free cash flow and attractive returns. While the Company generally intends to acquire controlling equity interests in its operating subsidiaries, the Company may invest to a limited extent in a variety of debt instruments or noncontrolling equity interest positions. The Company’s shares of common stock trade on the NYSE under the symbol "HCHC".

The Company currently has eight reportable segments based on management’s organization of the enterprise - Construction, Marine Services, Energy, Telecommunications, Insurance, Life Sciences, Broadcasting, and Other, which includes businesses that do not meet the separately reportable segment thresholds.

1. Our Construction segment is comprised of DBM Global Inc. ("DBMG") and its wholly-owned subsidiaries. DBMG is a fully integrated Building Information Modelling modeler, detailer, fabricator and erector of structural steel and heavy steel plate. DBMG models, details, fabricates and erects structural steel for commercial and industrial construction projects such as high- and low-rise buildings and office complexes, hotels and casinos, convention centers, sports arenas, shopping malls, hospitals, dams, bridges, mines and power plants. DBMG also fabricates trusses and girders and specializes in the fabrication and erection of large-diameter water pipe and water storage tanks. Through GrayWolf DBMG provides services including maintenance, repair, and installation to a diverse range of end markets in order to provide high-quality outage, turnaround, and new installation services to customers. Through Aitken Manufacturing, DBMG manufactures pollution control scrubbers, tunnel liners, pressure vessels, strainers, filters, separators and a variety of customized products. The Company maintains an approximately 92% controlling interest in DBMG.

2. Our Marine Services segment is comprised of Global Marine Group ("GMSL"). GMSL is a leading provider of engineering and underwater services on submarine cables. GMSL aims to maintain its leading market position in the telecommunications maintenance segment and seeks opportunities to grow its installation activities in the three market sectors (telecommunications, offshore power, and oil and gas) while capitalizing on high market growth in the offshore power sector through expansion of its installation and maintenance services in that sector. The Company maintains an approximately 73% controlling interest in GMSL.

3. Our Energy segment is comprised of American Natural Gas, LLC ("ANG"). ANG is a premier distributor of natural gas motor fuel. ANG designs, builds, owns, acquires, operates and maintains compressed natural gas fueling stations for transportation vehicles. The Company maintains an approximately 68% controlling interest in ANG.

4. Our Telecommunications segment is comprised of PTGi International Carrier Services ("ICS"). ICS operates a telecommunications business including a network of direct routes and provides premium voice communication services for national telecommunications operators, mobile operators, wholesale carriers, prepaid operators, voice over internet protocol service operators and internet service providers. ICS provides a quality service via direct routes and by forming strong relationships with carefully selected partners. The Company maintains a 100% interest in ICS.

5. Our Insurance segment is comprised of Continental General Insurance Company ("CGI" or the "Insurance Company"). CGI provides long-term care, life, annuity, and other accident and health coverage that help protect policy and certificate holders from the financial hardships associated with illness, injury, loss of life, or income continuation. The Company maintains a 100% interest in CGI.

6. Our Life Sciences segment is comprised of Pansend Life Sciences, LLC ("Pansend"). Pansend maintains controlling interests of approximately 80% in Genovel Orthopedics, Inc. ("Genovel"), which seeks to develop products to treat early osteoarthritis of the knee and approximately 74% in R2 Dermatology Inc. ("R2"), which develops skin lightening technology. Pansend also invests in other early stage or developmental stage healthcare companies including an approximately 50% interest in Medibeacon Inc., and an investment in Triple Ring Technologies, Inc.

7. Our Broadcasting segment is comprised of HC2 Broadcasting Holdings Inc. ("HC2 Broadcasting") and its subsidiaries. HC2 Broadcasting strategically acquires and operates over-the-air broadcasting stations across the United States. In addition, HC2 Broadcasting, through its wholly-owned subsidiary, HC2 Network Inc. ("Network"), operates Azteca America, a Spanish-language broadcast network offering high quality Hispanic content to a diverse demographic across the United States. The Company maintains an approximately 98% controlling interests in HC2 Broadcasting and an approximately 50% controlling interest in DTV America Corporation ("DTV") as well as approximately 10% proxy and voting rights from minority holders.

8. Our Other segment represents all other businesses or investments we believe have significant growth potential, that do not meet the definition of a segment individually or in the aggregate.


7


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

2. Summary of Significant Accounting Policies

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries and all other subsidiaries over which the Company exerts control. All intercompany profits, transactions and balances have been eliminated in consolidation. As of March 31, 2019, the results of DBMG, GMSL, ANG, ICS, CGI, Genovel, R2, and HC2 Broadcasting have been consolidated into the Company’s results based on guidance from the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC" 810, Consolidation) . The remaining interests not owned by the Company are presented as a noncontrolling interest component of total equity.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of the Company included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information. All such adjustments are of a normal recurring nature. Certain information and note disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), have been condensed or omitted pursuant to such rules and regulations. Certain prior amounts have been reclassified or combined to conform to the current year presentation. These reclassifications and combinations had no effect on previously reported net loss attributable to controlling interest or accumulated deficit. These interim financial statements should be read in conjunction with the Company’s annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 12, 2019. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending December 31, 2019.

Use of Estimates and Assumptions

The preparation of the Company’s Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions used.

Statement of Cash Flows

The following table provides a reconciliation of cash and cash equivalents and restricted cash to amounts reported within the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows (in millions):
 
 
March 31, 2019
 
March 31, 2018
Cash and cash equivalents, beginning of period
 
$
325.0

 
$
97.9

Restricted cash included in other assets
 
5.4

 
1.0

Total cash and cash equivalents and restricted cash
 
$
330.4

 
$
98.9

 
 
 
 
 
Cash and cash equivalents, end of period
 
$
302.2

 
$
92.1

Restricted cash included in other assets
 
1.6

 
0.8

Total cash and cash equivalents and restricted cash
 
$
303.8

 
$
92.9


Accounting Pronouncements Adopted in the Current Year

The Company’s 2018 Form 10-K includes discussion of significant recent accounting pronouncements that either have impacted or may impact our financial statements in the future. The following discussion provides information about recently adopted and recently issued or changed accounting guidance (applicable to the Company ) that have occurred since the Company filed its 2018 Form 10-K. The Company has implemented all new accounting pronouncements that are in effect and that may impact its Condensed Consolidated Financial Statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial condition, results of operations or liquidity.


8


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Effective January 1, 2019 the Company adopted the accounting pronouncements described below.

Accounting for Leases

ASU 2016-02, Leases, was issued by FASB in February 2016. This standard requires the Company, as the lessee, to recognize most leases on the balance sheet thereby resulting in the recognition of right of use assets and lease obligations for those leases currently classified as operating leases. The standard became effective for the Company on January 1, 2019 and the Company elected the optional transition method as well as the package of practical expedients upon adoption. The Company recognized right of use ("ROU") assets and lease liabilities in the amount of $67.1 million and $74.1 million , respectively, within Other assets and Other liabilities lines of the Condensed Consolidated Financial Statements, respectively. Utilizing the modified retrospective approach, upon adoption, we evaluated ROU assets for impairment and determined that approximately $5.1 million of newly recognized ROU assets that existed immediately prior to the effective date were impaired. The impairment of ROU assets as of January 1, 2019, was recorded as a reduction to retained earnings and noncontrolling interests.

Accounting Pronouncements to be Adopted Subsequent to December 31, 2019

Credit Loss Standard

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments , was issued by FASB in June 2016. This standard is effective January 1, 2020 (with early adoption permitted), and will impact, at least to some extent, the Company's accounting and disclosure requirements for it's recoverable from reinsurers, accounts receivable, and mortgage loans. Available for sale fixed maturity securities are not in scope of the new credit loss model, but will undergo targeted improvements to the current reporting model including the establishment of a valuation allowance for credit losses versus the current direct write down approach. The Company will continue to identify any other financial assets not excluded from scope. The Company does not currently expect to early adopt this standard and is currently evaluating the impact of this new accounting guidance on its consolidated financial statements.

Outlined below are key areas of change, although there are other changes not noted below:

Financial assets (or a group of financial assets) measured at amortized cost will be required to be presented at the net amount expected to be collected, with an allowance for credit losses deducted from the amortized cost basis, resulting in a net carrying value that reflects the amount the entity expects to collect on the financial asset at purchase.

Credit losses relating to available for sale fixed maturity securities will be recorded through an allowance for credit losses, rather than reductions in the amortized cost of the securities and is anticipated to increase volatility in the Company's Consolidated Statements of Operations. The allowance methodology recognizes that value may be realized either through collection of contractual cash flows or through the sale of the security. Therefore, the amount of the allowance for credit losses will be limited to the amount by which fair value is below amortized cost because the classification as available for sale is premised on an investment strategy that recognizes that the investment could be sold at fair value, if cash collection would result in the realization of an amount less than fair value.

The Company's Consolidated Statements of Operations will reflect the measurement of expected credit losses for newly recognized financial assets as well as the expected increases or decreases (including the reversal of previously recognized losses) of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

Disclosures will be required to include information around how the credit loss allowance was developed, further details on information currently disclosed about credit quality of financing receivables and net investments in leases, and a rollforward of the allowance for credit losses for available for sale fixed maturity securities as well as an aging analysis for securities that are past due.

The Company anticipates a significant impact on the systems, processes and controls. While the requirements of the new guidance represent a material change from existing GAAP, the underlying economics of items in scope and related cash flows are unchanged. Currently, the Company plans to focus on developing models and procedures in the first half of 2019 with testing and refinement of models occurring in the later part of the year 2019.  Focus areas will include, but not be limited to: (i) updating procedures to reflect new guidance requiring establishment of allowance for credit losses on available for sale debt securities; (ii) establishing procedures to review reinsurance risk to include but not limited to review of reinsurer ratings, trust agreements where applicable and historical and current performance; (iii) establishing procedures to identify and review all remaining financial assets within scope; and (iv) developing, testing, and implementing controls for newly developed procedures, as well as for additional annual reporting requirements.

Long-Duration Contracts

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts , was issued by the FASB in August 2018 and is expected to have a significant impact on the Company’s Consolidated Financial Statements and Notes to Consolidated Financial Statements. The standard is effective January 1, 2021 (with early adoption permitted), and will impact, at least to some extent, Company's accounting and disclosure requirements for it's long-duration insurance contracts. The Company does not currently expect to early adopt this standard and is currently evaluating the impact of this new accounting guidance on its consolidated financial statements.

9


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Outlined below are key areas of change, although there are other changes not noted below:

Cash flow assumptions must be reviewed at least annually and updated if necessary. The impact of these updates will be reported through net income. Current accounting policy requires the liability assumptions for long-duration contracts and limited payment contracts be locked in at contract inception, unless the contracts project a loss position which would allow the liability assumptions to be unlocked so that the loss could be recognized.

The rate used to discount the liability projections is to be based on an A-rated asset with observable market inputs and duration consistent with the duration of the liabilities. The discount rate is to be updated quarterly with the impact of the change in the discount rate recognized through other comprehensive income. Current accounting policy allows the use of an expected investment yield (which is not required to be observable in the market) to discount the liability projections.

Deferred acquisition costs for long-duration contracts are to be amortized in proportion to premiums, gross profits, or gross margins and those balances must be amortized on a constant-level basis over the expected life of the contract. Current accounting policy would amortize deferred acquisition costs based on revenue and profits. The Company does not have any deferred acquisition costs but VOBA amortization will follow this new guidance.

Market risk benefits are to be measured at fair value and presented separately in the statement of financial position. Under current accounting policy benefit features that will meet the definition of market risk benefits are accounted for as embedded derivatives or insurance liabilities via the benefit ratio model. The Company does not have any benefit features that will be categorized as market risk benefits.

Disaggregated rollforwards of beginning to ending balances of the liability for future policy benefits, policyholder account balances, VOBA, as well as information about significant inputs, judgments, assumptions, and methods used in measurement are required to be disclosed.

The Company anticipates that the requirement to update assumptions for liability for future policy benefits will increase volatility in the Company's Consolidated Statements of Operations while the requirement to update the discount rate will increase volatility in the Company's Consolidated Statements of Stockholders' Equity. The Company anticipates a significant impact on the systems, processes and controls. While the requirements of the new guidance represent a material change from existing GAAP, the underlying economics of the Company's Insurance segment and related cash flows are unchanged.

Currently, the Company plans to focus on developing models and procedures in 2019 with testing and refinement of models occurring in 2020. Focus areas will include, but not be limited to: (i) determining an appropriate upper-medium grade fixed income instrument yield source from the market; (ii) establishing appropriate aggregation of liabilities; (iii) establishing liability models for each contract grouping identified that may be quickly updated to reflect current inforce listing and new discount rates on a quarterly basis; (iv) establishing appropriate best estimate assumptions with no provision for adverse deviation; (v) establishing procedures for annual review of assumptions including tracking of actual experience for enhanced reporting requirements; (vi) establishing new VOBA amortization that will align with new guidance for DAC amortization; and (vii) developing, testing, and implementing controls for newly developed procedures, as well as for additional annual reporting requirements.    

Subsequent Events

ASC 855, Subsequent Events requires the Company to evaluate events that occur after the balance sheet date as of which the financial statements are issued, and to determine whether adjustments to or additional disclosures in the financial statements are necessary. See Note 22. Subsequent Events for the summary of the subsequent events.

3. Revenue

Revenue from contracts with customers consist of the following (in millions):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Revenue  (1)
 
 
 
 
Construction
 
$
192.1

 
$
158.9

Marine Services
 
42.4

 
36.7

Energy
 
5.1

 
4.5

Telecommunications
 
155.5

 
202.3

Broadcasting
 
9.8

 
10.7

Other
 

 
2.4

Total revenue
 
$
404.9

 
$
415.5

(1) The Insurance segment does not have revenues in scope of ASC 606


10


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Accounts receivables, net from contracts with customers consist of the following (in millions):
 
 
March 31, 2019
 
December 31, 2018
Accounts receivables with customers
 
 
 
 
Construction
 
$
206.1

 
$
196.6

Marine Services
 
48.6

 
48.3

Energy
 
3.4

 
3.3

Telecommunications
 
58.1

 
117.6

Broadcasting
 
8.4

 
9.2

Total accounts receivables with customers
 
$
324.6

 
$
375.0


Construction Segment

DBMG performs its services primarily under fixed-price contracts and recognizes revenue over time using the input method to measure progress for its projects. The customer receives value over the term of the project based on the amount of work that has been completed towards the delivery of the completed project. The most reliable measure of progress is the cost incurred towards delivery of the completed project. Therefore, the input method provides the most reliable method to measure progress. Revenue recognition begins when work has commenced. Costs include all direct material and labor costs related to contract performance, subcontractor costs, indirect labor, and fabrication plant overhead costs, which are charged to contract costs as incurred. Revenues relating to changes in the scope of a contract are recognized when DBMG and customer or general contractor have agreed on both the scope and price of changes, the work has commenced, it is probable that the costs of the changes will be recovered and that realization of revenue exceeding the costs is assured beyond a reasonable doubt. Revisions in estimates during the course of contract work are reflected in the accounting period in which the facts requiring the revision become known. Provisions for estimated losses on uncompleted contracts are made in the period a loss on a contract becomes determinable.

Construction contracts with customers generally provide that billings are to be made monthly in amounts which are commensurate with the extent of performance under the contracts. Contract receivables arise principally from the balance of amounts due on progress billings on jobs under construction. Retentions on contract receivables are amounts due on progress billings, which are withheld until the completed project has been accepted by the customer.

Disaggregation of Revenues

DBMG's revenues are principally derived from contracts to provide fabrication and erection services to its customers. Contracts represent majority of the revenue of the Construction segment and are generally recognized over time. A majority of contracts are domestic, fixed priced, and are in excess of one year. Disaggregation of the Construction segment, by market or type of customer, is used to evaluate its financial performance.

The following table disaggregates DBMG's revenue by market (in millions):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Commercial
 
$
59.4

 
$
69.7

Convention
 
28.7

 
31.7

Healthcare
 
8.8

 
27.8

Industrial
 
53.8

 
9.3

Transportation
 
18.1

 
5.2

Other
 
23.3

 
15.2

Total revenue from contracts with customers
 
192.1


158.9

Other revenue
 

 

Total Construction segment revenue
 
$
192.1


$
158.9


Contract Assets and Contract Liabilities

The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from our long-term construction projects when revenue recognized under the cost-to-cost measure of progress exceed the amounts invoiced to our customers, as the amounts cannot be billed under the terms of our contracts. Such amounts are recoverable from our customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. In addition, many of our time and materials arrangements, as well as our contracts to perform turnaround services within the United States industrial services segment, are billed in arrears pursuant to contract terms that are standard within the industry, resulting in contract assets and/or unbilled receivables being recorded, as revenue is recognized in advance of billings. Also included in contract assets are amounts we seek or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders or modifications in dispute or unapproved as to both scope and/or price or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders). Our contract assets do not include capitalized costs to obtain and fulfill a contract. Contract assets are included in Other assets in the Condensed

11


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Consolidated Balance Sheets.

Contract liabilities from our long-term construction contracts occur when amounts invoiced to our customers exceed revenues recognized. Contract liabilities additionally include advanced payments from our customers on certain contracts. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation. Contract liabilities are included in Other liabilities in the Condensed Consolidated Balance Sheets.

Contract assets and contract liabilities consisted of the following (in millions):
 
 
March 31, 2019
 
December 31, 2018
Contract assets
 
$
73.4

 
$
69.0

Contract liabilities
 
$
(61.2
)
 
$
(62.0
)

The change in contract assets is a result of the recording of $36.9 million of costs in excess of billings driven by new commercial projects, offset by $32.5 million of costs in excess of billings transferred to receivables from contract assets recognized at the beginning of the period. The change in contract liabilities is a result of periodic billing in excess of costs of $37.7 million driven largely by new commercial projects, offset by revenue recognized that was included in the contract liability balance at the beginning of the period in the amount of $38.5 million .

Transaction Price Allocated to Remaining Unsatisfied Performance Obligations     

The transaction price allocated to remaining unsatisfied performance obligations consisted of the following (in millions):
 
 
Within one year
 
Within five years
 
Total
Commercial
 
$
102.1

 
$
20.5

 
$
122.6

Convention
 
53.5

 

 
53.5

Healthcare
 
41.0

 
5.5

 
46.5

Industrial
 
124.8

 
59.4

 
184.2

Transportation
 
69.9

 
10.8

 
80.7

Other
 
71.1

 

 
71.1

Remaining unsatisfied performance obligations
$
462.4

 
$
96.2

 
$
558.6


DBMG's remaining unsatisfied performance obligations, otherwise referred to as backlog, increase with awards of new contracts and decrease as it performs work and recognizes revenue on existing contracts. DBMG includes a project within its remaining unsatisfied performance obligations at such time the project is awarded and agreement on contract terms has been reached. DBMG's remaining unsatisfied performance obligations include amounts related to contracts for which a fixed price contract value is not assigned when a reasonable estimate of total transaction price can be made. DBMG expects to recognize this revenue over the next twenty-four months.

Remaining unsatisfied performance obligations include unrecognized revenues to be realized from uncompleted construction contracts. Although many of DBMG's contracts are subject to cancellation at the election of its customers, in accordance with industry practice, DBMG does not limit the amount of unrecognized revenue included within its remaining unsatisfied performance obligations due to the inherent substantial economic penalty that would be incurred by its customers upon cancellation.

Marine Services Segment

GMSL generally generates revenue by providing maintenance services for subsea telecommunications cabling, installing subsea cables, providing installation, maintenance and repair of fiber optic communication and power infrastructure to offshore oil and gas platforms, and installing inter-array power cables for use in offshore wind farms.

Telecommunication - Maintenance & Installation

GMSL performs its services within telecommunication market primarily under fixed-price contracts and recognizes revenue over time using the input method to measure progress for its projects. The customer receives value over the term of the project based on the amount of work that has been completed towards the delivery of the completed project. Depending on the project, the most reliable measure of progress is either the cost incurred or time elapsed towards delivery of the completed project. Therefore, the input method provides the most reliable method to measure progress. Revenue recognition begins when work has commenced. Costs include all direct material and labor costs related to contract performance, indirect labor, and overhead costs, which are charged to contract costs as incurred. Revisions in estimates during the course of contract work are reflected in the accounting period in which the facts requiring the revision become known. Provisions for estimated losses on uncompleted contracts are made in the period a loss on a contract becomes determinable.


12


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Maintenance revenues within this market are attributable to standby vessels and the provision of cable storage depots for repair of fiber optic telecommunications cables in defined geographic zones, and its maintenance business is provided through contracts with consortia of approximately 60 global telecommunications providers. These contracts are generally five to seven years long.
    
Installation revenues within this market are generated through installation of cable systems including route planning, mapping, route engineering, cable laying, and trenching and burial. GMSL’s installation business is project-based with contracts typically lasting one to five months.

Power - Operations, Maintenance & Construction Support

Majority of revenues within this market are generated through the provision of crew transfer vessels and turbine technicians on the maintenance of offshore windfarms. Services are provided at agreed day rates and are recognized as revenues at the point in time at which the performance obligations are met. Additional revenues are generated through the provision of approved safety training courses to personnel operating on offshore wind turbines. Courses are supplied at agreed rates and recognized at the point in time at which the courses are provided.

Power - Cable Installation & Repair

Installation and repair revenues within this market are attributable to the provision of engineering solutions, which includes the charter of cable laying vessels and related subsea assets. These contracts are either charged at agreed day rates and are recognized as revenues at the point in time at which the performance obligations are met, or are under fixed-price contracts, in which case revenue is recognized over time using the input method to measure progress for its projects.

Disaggregation of Revenues

GMSL's revenues are principally derived from contracts to provide maintenance and installation services to its customers. Contracts represent a majority of revenues at the Marine Services segment of which a majority are recognized over time.

The following table disaggregates GMSL's revenue by market (in millions):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Telecommunication - Maintenance
 
$
21.0

 
$
21.8

Telecommunication - Installation
 
5.4

 
7.3

Power - Operations, Maintenance & Construction Support
 
4.2

 
4.7

Power - Cable Installation & Repair
 
11.8

 
2.9

Total revenue from contracts with customers
 
42.4


36.7

Other revenue
 

 

Total Marine Services segment revenue
 
$
42.4


$
36.7


Contract Assets and Contract Liabilities

The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from our long-term projects when revenue recognized exceeds the amounts invoiced to our customers, as the amounts cannot be billed under the terms of our contracts. Such amounts are recoverable from our customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. In addition, many of our time and materials arrangements, as well as our contracts to perform services are billed in arrears pursuant to contract terms that are standard within the industry, resulting in contract assets and/or unbilled receivables being recorded, as revenue is recognized in advance of billings. Contract assets are included in Other assets in the Condensed Consolidated Balance Sheets.

Contract liabilities from our long-term construction contracts occur when amounts invoiced to our customers exceed revenues recognized. Contract liabilities additionally include advanced payments from our customers on certain contracts. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation. Contract liabilities are included in Other liabilities in the Condensed Consolidated Balance Sheets.

Contract assets and contract liabilities consisted of the following (in millions):
 
 
March 31, 2019
 
December 31, 2018
Contract assets
 
$
7.1

 
$
5.2

Contract liabilities
 
$
(15.4
)
 
$
(1.0
)


13


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Transaction Price Allocated to Remaining Unsatisfied Performance Obligations     

The transaction price allocated to remaining unsatisfied performance obligations consisted of the following (in millions):
 
 
Within one year
 
Within five years
 
Thereafter
 
Total
Telecommunication - Maintenance
 
$
57.5

 
$
217.8

 
$
60.0

 
$
335.3

Telecommunication - Installation
 
15.0

 

 

 
15.0

Power - Operations, Maintenance & Construction Support
 
8.9

 
9.4

 

 
18.3

Power - Cable Installation & Repair
 
20.5

 
66.0

 

 
86.5

Remaining unsatisfied performance obligations
$
101.9


$
293.2


$
60.0

 
$
455.1


GMSL's remaining unsatisfied performance obligations, otherwise referred to as backlog, increase with awards of new contracts and decrease as it performs work and recognizes revenue on existing contracts. GMSL includes a project within its remaining unsatisfied performance obligations at such time the project is awarded and agreement on contract terms has been reached. GMSL's remaining unsatisfied performance obligations include amounts related to contracts for which a fixed price contract value is not assigned when a reasonable estimate of total transaction price can be made.

Remaining unsatisfied performance obligations consist predominantly from projects within telecommunication maintenance market. These revenues are generated through long-term contracts for the provision of vessels and cable depots in maintaining and repairing subsea telecoms cables around the globe. Revenues are recognized over time to reflect both the duration that the vessels and depots are provided on standby duties and the amount of work that has been completed.

Energy Segment

ANG's revenues are principally derived from sales of compressed natural gas. ANG recognizes revenue from the sale of natural gas fuel primarily at the time the fuel is dispensed.

Disaggregation of Revenues

The following table disaggregates ANG's revenue by type (in millions):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Volume-related
 
$
4.8

 
$
4.1

Total revenue from contracts with customers
 
4.8


4.1

RNG Incentives
 
0.3

 
0.4

Total Energy segment revenue
 
$
5.1


$
4.5


Telecommunications Segment

ICS operates an extensive network of direct routes and offers premium voice communication services for carrying a mix of business, residential and carrier long-distance traffic, data and transit traffic. Customers may have a bilateral relationship with ICS, meaning they have both a customer and vendor relationship with ICS. In these cases, ICS sells the customer access to ICS supplier routes but also purchases access to the customer’s supplier routes.

Net revenue is derived from the long-distance data and transit traffic. Net revenue is earned based on the number of minutes during a call multiplied by the price per minute, and is recorded upon completion of a call. Completed calls are billable activity while incomplete calls are non-billable. Incomplete calls may occur as a result of technical issues or because the customer’s credit limit was exceeded and thus the customer routing of traffic was prevented.

Revenue for a period is calculated from information received through ICS’s billing software, such as minutes and market rates. Customized billing software has been implemented to track the information from the switch and analyze the call detail records against stored detailed information about revenue rates. This software provides ICS with the ability to perform a timely and accurate analysis of revenue earned in a period.

ICS evaluates gross versus net revenue recognition for each of its contractual arrangements by assessing indicators of control and significant influence to determine whether the ICS acts as a principal (i.e. gross recognition) or an agent (i.e. net recognition). ICS has determined that it acts as a principal for all of its performance obligations in connection with all revenue earned. Net revenue represents gross revenue, net of allowance for doubtful accounts receivable, service credits and service adjustments. Cost of revenue includes network costs that consist of access, transport and termination costs. The majority of ICS’s cost of revenue is variable, primarily based upon minutes of use, with transmission and termination costs being the most significant expense.

14


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED


Disaggregation of Revenues

ICS's revenues are predominantly derived from wholesale of international long distance minutes (in millions):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Termination of long distance minutes
 
$
155.5

 
$
202.3

Total revenue from contracts with customers
 
155.5

 
202.3

Other revenue
 

 

Total Telecommunications segment revenue
 
$
155.5

 
$
202.3


Broadcasting Segment

Network advertising revenue is generated primarily from the sale of television airtime for programs or advertisements. Network advertising revenue is recognized when the program or advertisement is broadcast. Revenues are reported net of agency commissions, which are calculated as a stated percentage applied to gross billings. The Network advertising contracts are generally short-term in nature.

Network distribution revenue consists of payments received from cable, satellite and other multiple video program distribution systems for their retransmission of our network content. Network distribution revenue is recognized as earned over the life of the retransmission consent contract and varies from month to month. Variable fees are usage/sales based, calculated on the average number of subscribers, and recognized as revenue when the usage occurs. Transaction prices are based on the contract terms, with no material judgements or estimates.

Broadcast station revenue is generated primarily from the sale of television airtime in return for a fixed fee or a portion of the related ad sales recognized by the third party. In a typical broadcast station revenue agreement, the licensee of a station makes available, for a fee, airtime on its station to a party which supplies content to be broadcast during that airtime and collects revenue from advertising aired during such content. Broadcast station revenue is recognized over the life of the contract, when the program is broadcast. The fees that we charge can be fixed or variable and the contracts that the Company enters into are generally short-term in nature. Variable fees are usage/sales-based and recognized as revenue when the subsequent usage occurs. Transaction prices are based on the contract terms, with no material judgements or estimates.

The following table disaggregates the Broadcasting segment's revenue by type (in millions):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Network advertising
 
$
5.4

 
$
6.8

Broadcast station
 
2.7

 
2.7

Network distribution
 
1.5

 
1.0

Other
 
0.2

 
0.2

Total revenue from contracts with customers
 
9.8

 
10.7

Other revenue
 

 

Total Broadcasting segment revenue
 
$
9.8

 
$
10.7


Contract Liabilities

Audience deficiency units ("ADU") liability is recognized as an available return to customers as fulfillment for under-delivered guaranteed viewership per the related agreement. ADU balance was $1.1 million and $1.0 million as of March 31, 2019 and December 31, 2018, respectively. HC2 Broadcasting measures the potential obligation based on audience measurement ratings and cost per view, and is subsequently made whole in the following period.

Transaction Price Allocated to Remaining Unsatisfied Performance Obligations    

The transaction price allocated to remaining unsatisfied performance obligations consisted of $6.0 million and $0.6 million of network advertising and broadcasting station revenues, respectively of which $3.5 million is expected to be recognized within one year and $3.1 million is expected to be recognized within five years.


15


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

4. Acquisitions, Dispositions, and Deconsolidations

Construction Segment

On November 30, 2018, DBMG consummated acquisition of GrayWolf Industrial ("GrayWolf"), a premier specialty maintenance, repair and installation services provider, pursuant to that certain Agreement and Plan of Merger, dated October 10, 2018, as amended by Amendment No. 1 to the Agreement and Plan of Merger, dated November 29, 2018. The aggregate fair value of the cash consideration paid in connection with the acquisition of GrayWolf was $139.8 million . The transaction was accounted for as business acquisition.

The preliminary allocation of the fair value of consideration transferred among the identified assets acquired, liabilities assumed, intangibles and residual goodwill are summarized as follows (in millions):
Other invested assets
 
$
0.9

Cash and cash equivalents
 
8.6

Accounts receivable
 
32.0

Property, plant and equipment
 
15.4

Goodwill
 
43.7

Intangibles
 
44.1

Other assets
 
22.2

Total assets acquired
 
166.9

Accounts payable and other current liabilities
 
(23.0
)
Other liabilities
 
(4.1
)
Total liabilities assumed
 
(27.1
)
Total net assets acquired
 
$
139.8


The size and breadth of the GrayWolf acquisition necessitates use of the one year measurement period to adequately analyze all the factors used in establishing the asset and liability fair values as of the acquisition date, including, but not limited to deferred tax assets.  

Goodwill was determined based on the residual differences between fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. Among the factors that contributed to goodwill was approximately $10.9 million assigned to the assembled and trained workforce. Goodwill is not amortized and is not deductible for tax purposes.

Acquisition costs incurred by DMBG in connection with the acquisition of GrayWolf were approximately $4.2 million , which were included in selling, general and administrative expenses. The acquisition costs were primarily related to legal, accounting and valuation services.

Results of GrayWolf were included in our Consolidated Statements of Operations since the acquisition date. Pro forma results of operations have not been presented because they are not material to our consolidated results of operations.

16


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Insurance Segment

On August 9, 2018, CGI completed the acquisition all of the outstanding shares of KMG America Corporation (“KMG”), the parent company of Kanawha Insurance Company (“KIC”), Humana Inc.’s long-term care insurance subsidiary for a cash consideration of ten thousand dollars.

The decision to acquire was made as part of CGI’s core strategy to acquire additional accretive LTC run-off businesses.

The preliminary allocation of the fair value of consideration transferred among the identified assets acquired, liabilities assumed and bargain purchase gain are summarized as follows (in millions):
Fixed maturity securities, available-for-sale at fair value
 
$
1,575.4

Equity securities
 
0.3

Mortgage loans
 
0.9

Policy loans
 
2.9

Cash and cash equivalents
 
806.7

Recoverable from reinsurers
 
901.8

Other assets
 
28.2

Total assets acquired
 
3,316.2

Life, accident and health reserves
 
(2,931.3
)
Annuity reserves
 
(11.3
)
Value of business acquired
 
(214.4
)
Accounts payable and other current liabilities
 
(6.7
)
Deferred tax liability
 
(25.3
)
Other liabilities
 
(11.8
)
Total liabilities assumed
 
(3,200.8
)
Total net assets acquired
 
115.4

Total fair value of consideration
 

Gain on bargain purchase
 
$
115.4


Gain on bargain purchase

Gain on bargain purchase was driven by the Tax Cuts and Jobs Act, which was not stipulated in the negotiations for the transaction and resulted in a material decline in the Value of Business Acquired balance, corresponding deferred tax position and, ultimately, recognition of the bargain purchase gain, largely driven by the following attributes:

The Unified Loss Rules tax attribute reduction to tax value of assets and the seller tax adjustments to tax value of liabilities contribute significantly to the bargain purchase price. 

The reduction in the federal income tax rate, from 35% at the time the seller contribution was established to 21% effective January 1, 2018, effectively generates the remaining balance for the bargain purchase price.
 
Changes in fair value of acquired assets and assumed liabilities between the date the deal was signed and the closing date was driven by the time it took to obtain regulatory approvals, amongst other closing conditions.

Reinsurance Recoverable

The reinsurance recoverable balance represents amounts recoverable from third parties. U.S. GAAP requires insurance reserves and reinsurance recoverable balances to be presented on a gross basis, as opposed to U.S. statutory accounting principles, where reserves are presented net of reinsurance. Accordingly, the Company grossed up the fair value of the net insurance contract liability for the amount of reinsurance of approximately $901.8 million , to arrive at a gross insurance liability, and recognized an offsetting reinsurance recoverable amount of approximately $901.8 million . As part of this process, management considered reinsurance counterparty credit risk and considers it to have an immaterial impact on the reinsurance fair value gross-up. To mitigate this risk substantially all reinsurance is ceded to companies with investment grade S&P ratings.
    
Amounts recoverable from reinsurers were estimated in a manner consistent with the liability associated with the reinsured policies and were an estimate of the reinsurance recoverable on paid and unpaid losses, including an estimate for losses incurred but not reported. Reinsurance recoverable represent expected cash inflows from reinsurers for liabilities ceded and therefore incorporate uncertainties as to the timing and amount of claim payments. Reinsurance recoverable includes the balances due from reinsurers under the terms of the reinsurance agreements for these ceded balances as well as settlement amounts currently due.


17


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

The Value of Business Acquired

VOBA reflects the estimated fair value of in-force contracts in a life insurance company acquisition less the amount recorded as insurance contract liabilities. It represents the portion of the purchase price that is allocated to the value of the rights to receive future cash flows from the business in force at the acquisition date. A VOBA liability (negative asset) occurs when the estimated fair value of in-force contracts in a life insurance company acquisition is less than the amount recorded as insurance contract liabilities. HC2 calculated VOBA by adjusting the purchase price, which was derived on a statutory accounting basis, for differences between statutory and US GAAP accounting requirements. Amortization is based on assumptions consistent with those used in the development of the underlying contract adjusted for emerging experience and expected trends.

Life, accident and health reserves

HC2 estimated the fair value of reserves on a fair value basis, using actuarial assumptions consistent with those used for the buyer’s valuation of the acquired business, and discount rates reflecting capital market conditions. The reserve accounts for the present value of all future cash flows, net of reinsurance, of the acquired block of insurance, including premium, benefit payments, and expenses. HC2 estimated the fair value of recoverable from reinsurers using the same assumptions as those for reserves of the net retained business, but applied to business ceded through various, existing reinsurance agreements.  

Life Sciences Segment

On June 8, 2018, Pansend closed on the sale of its approximately 75.9% ownership in BeneVir to Janssen Biotech, Inc. (“Janssen”). In conjunction with the closing of the transaction, Janssen made an upfront cash payment of $140.0 million . Pansend received a cash payment of $93.4 million and expects to receive an additional cash payment of $13.3 million , currently held in an escrow, for a total consideration of $106.7 million . The escrow will be released within fifteen months subsequent to the closing date, assuming there are no pending or unresolved indemnified claims. Pansend recorded a gain on the sale of $102.1 million , of which $21.7 million was allocated to noncontrolling interests. HC2 received a cash payment of $72.8 million and expects to receive an additional cash payment of $9.2 million upon the release of the escrow.

Under the terms of the merger agreement, Pansend is eligible to receive payments of up to $189.7 million upon the achievement of specified development milestones and up to $493.1 million upon the achievement of specified levels of annual net sales of licensed products. From these potential milestone payments, HC2 is eligible to receive up to $512.2 million .
Broadcasting Segment

During the three months ended March 31, 2019 , HC2 Broadcasting completed a series of transactions for total cash consideration of $6.0 million . During the year ended December 31, 2018, HC2 Broadcasting completed a series of transactions for a total consideration of $71.4 million . All transactions were accounted for as asset acquisitions.

The allocation of the fair value of consideration transferred among the identified assets acquired, liabilities assumed and intangibles are summarized as follows (in millions):
 
 
March 31, 2019
 
December 31, 2018
Property, plant and equipment
 
$
0.3

 
$
1.2

Intangibles
 
5.7

 
70.2

Other assets
 
0.4

 

Total assets acquired
 
6.4


71.4

Other liabilities
 
(0.4
)
 

Total liabilities assumed
 
(0.4
)


Total net assets acquired
 
$
6.0


$
71.4


Other Segment

On August 14, 2018, 704Games issued a 53.5% equity interest to international media and technology company Motorsport Network. As a result, HC2’s ownership percentage in 704Games was diluted to 26.2% resulting in the loss of control and the deconsolidation of the entity.


18


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Pro Forma Adjusted Summary

The following schedule presents unaudited consolidated pro forma results of operations data as if the acquisition of KMG had occurred on January 1, 2018. This information does not purport to be indicative of the actual results that would have occurred if the acquisitions had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the combined company (in millions):
 
 
Three Months Ended March 31, 2018
Net revenue
 
$
500.6

Net income (loss) from continuing operations
 
$
(9.9
)
Net income (loss) attributable to HC2 Holdings, Inc.
 
$
(13.9
)

5. Investments

Fixed Maturity Securities

The following tables provide information relating to investments in fixed maturity securities (in millions):
March 31, 2019
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair
Value
U.S. Government and government agencies
 
$
24.2

 
$
1.0

 
$

 
$
25.2

States, municipalities and political subdivisions
 
412.9

 
20.2

 
(0.2
)
 
432.9

Residential mortgage-backed securities
 
80.4

 
3.8

 
(0.7
)
 
83.5

Commercial mortgage-backed securities
 
100.6

 
1.3

 
(0.1
)
 
101.8

Asset-backed securities
 
522.6

 
0.9

 
(17.0
)
 
506.5

Corporate and other
 
2,417.5

 
84.8

 
(26.3
)
 
2,476.0

Total fixed maturity securities
 
$
3,558.2

 
$
112.0

 
$
(44.3
)
 
$
3,625.9

December 31, 2018
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair
Value
U.S. Government and government agencies
 
$
24.7

 
$
0.7

 
$

 
$
25.4

States, municipalities and political subdivisions
 
413.7

 
9.6

 
(1.4
)
 
421.9

Residential mortgage-backed securities
 
92.6

 
3.1

 
(1.3
)
 
94.4

Commercial mortgage-backed securities
 
94.7

 
0.3

 
(1.1
)
 
93.9

Asset-backed securities
 
540.8

 
0.8

 
(30.1
)
 
511.5

Corporate and other
 
2,311.0

 
17.0

 
(83.5
)
 
2,244.5

Total fixed maturity securities
 
$
3,477.5

 
$
31.5

 
$
(117.4
)
 
$
3,391.6


The amortized cost and fair value of fixed maturity securities available-for-sale as of March 31, 2019 are shown by contractual maturity in the table below (in millions). Actual maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset and mortgage-backed securities are shown separately in the table below, as they are not due at a single maturity date:
 
 
Amortized Cost
 
Fair
 Value
Corporate, Municipal, U.S. Government and Other securities
 
 
 
 
Due in one year or less
 
$
24.6

 
$
25.1

Due after one year through five years
 
222.1

 
224.5

Due after five years through ten years
 
344.6

 
354.2

Due after ten years
 
2,263.3

 
2,330.3

Subtotal
 
2,854.6

 
2,934.1

Mortgage-backed securities
 
181.0

 
185.3

Asset-backed securities
 
522.6

 
506.5

Total
 
$
3,558.2

 
$
3,625.9



19


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

The tables below show the major industry types of the Company’s corporate and other fixed maturity securities (in millions):
 
 
March 31, 2019
 
December 31, 2018
 
 
Amortized Cost
 
Fair
Value
 
% of
Total
 
Amortized Cost
 
Fair
Value
 
% of
Total
Finance, insurance, and real estate
 
$
517.4

 
$
523.2

 
21.1
%
 
$
469.0

 
$
452.9

 
20.2
%
Transportation, communication and other services
 
786.7

 
809.2

 
32.7
%
 
758.6

 
734.0

 
32.7
%
Manufacturing
 
733.0

 
751.9

 
30.4
%
 
712.7

 
693.5

 
30.9
%
Other
 
380.4

 
391.7

 
15.8
%
 
370.7

 
364.1

 
16.2
%
Total
 
$
2,417.5

 
$
2,476.0

 
100.0
%
 
$
2,311.0

 
$
2,244.5

 
100.0
%

A portion of certain other-than-temporary impairment ("OTTI") losses on fixed maturity securities is recognized in Accumulated Other Comprehensive Income ("AOCI"). For these securities the net amount represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in AOCI. The Company did not recognize any impairments on corporate and other fixed maturity securities for the three months ended March 31, 2019 or 2018.

The following table presents the total unrealized losses for the 283 and 749 fixed maturity securities held by the Company as of March 31, 2019 and December 31, 2018 , respectively, where the estimated fair value had declined and remained below amortized cost by the indicated amount (in millions):
 
 
March 31, 2019
 
December 31, 2018
 
 
Unrealized Losses
 
% of
Total
 
Unrealized Losses
 
% of
Total
Less than 20%
 
$
(43.9
)
 
99.1
%
 
$
(116.0
)
 
98.8
%
20% or more for less than six months
 

 
%
 
(0.8
)
 
0.7
%
20% or more for six months or greater
 
(0.4
)
 
0.9
%
 
(0.6
)
 
0.5
%
Total
 
$
(44.3
)
 
100.0
%
 
$
(117.4
)
 
100.0
%

The determination of whether unrealized losses are "other-than-temporary" requires judgment based on subjective as well as objective factors. Factors considered and resources used by management include (i) whether the unrealized loss is credit-driven or a result of changes in market interest rates, (ii) the extent to which fair value is less than cost basis, (iii) cash flow projections received from independent sources, (iv) historical operating, balance sheet and cash flow data contained in issuer SEC filings and news releases, (v) near-term prospects for improvement in the issuer and/or its industry, (vi) third party research and communications with industry specialists, (vii) financial models and forecasts, (viii) the continuity of dividend payments, maintenance of investment grade ratings and hybrid nature of certain investments, (ix) discussions with issuer management, and (x) ability and intent to hold the investment for a period of time sufficient to allow for anticipated recovery in fair value.

The Company analyzes its MBS for OTTI each quarter based upon expected future cash flows. Management estimates expected future cash flows based upon its knowledge of the MBS market, cash flow projections (which reflect loan-to-collateral values, subordination, vintage and geographic concentration) received from independent sources, implied cash flows inherent in security ratings and analysis of historical payment data.

The Company believes it will recover its cost basis in the non-impaired securities with unrealized losses and that the Company has the ability to hold the securities until they recover in value. The Company neither intends to sell nor does it expect to be required to sell the securities with unrealized losses as of March 31, 2019 . However, unforeseen facts and circumstances may cause the Company to sell fixed maturity and equity securities in the ordinary course of managing its portfolio to meet certain diversification, credit quality and liquidity guidelines.

The following tables present the estimated fair values and gross unrealized losses for the 283 and 749 fixed maturity securities held by the Company that have estimated fair values below amortized cost as of each of March 31, 2019 and December 31, 2018 , respectively. The Company does not have any OTTI losses reported in AOCI. These investments are presented by investment category and the length of time the related fair value has remained below amortized cost (in millions):
March 31, 2019
 
Less than 12 months
 
12 months or greater
 
Total
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
U.S. Government and government agencies
 
$
0.1

 
$

 
$
1.6

 
$

 
$
1.7

 
$

States, municipalities and political subdivisions
 
14.8

 
(0.2
)
 

 

 
14.8

 
(0.2
)
Residential mortgage-backed securities
 
14.0

 
(0.6
)
 
2.7

 
(0.1
)
 
16.7

 
(0.7
)
Commercial mortgage-backed securities
 
27.0

 
(0.1
)
 

 

 
27.0

 
(0.1
)
Asset-backed securities
 
382.1

 
(12.4
)
 
48.5

 
(4.6
)
 
430.6

 
(17.0
)
Corporate and other
 
393.0

 
(18.3
)
 
169.5

 
(8.0
)
 
562.5

 
(26.3
)
Total fixed maturity securities
 
$
831.0

 
$
(31.6
)
 
$
222.3

 
$
(12.7
)
 
$
1,053.3

 
$
(44.3
)

20


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED