0001006837-18-000095.txt : 20180808 0001006837-18-000095.hdr.sgml : 20180808 20180808164334 ACCESSION NUMBER: 0001006837-18-000095 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 143 CONFORMED PERIOD OF REPORT: 20180630 FILED AS OF DATE: 20180808 DATE AS OF CHANGE: 20180808 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HC2 HOLDINGS, INC. CENTRAL INDEX KEY: 0001006837 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED STRUCTURAL METAL PRODUCTS [3440] IRS NUMBER: 541708481 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-35210 FILM NUMBER: 181001995 BUSINESS ADDRESS: STREET 1: 450 PARK AVENUE STREET 2: 30TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 212-235-2690 MAIL ADDRESS: STREET 1: 450 PARK AVENUE STREET 2: 30TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: HC2 Holdings, Inc. DATE OF NAME CHANGE: 20140415 FORMER COMPANY: FORMER CONFORMED NAME: PTGi HOLDING, INC. DATE OF NAME CHANGE: 20131108 FORMER COMPANY: FORMER CONFORMED NAME: PRIMUS TELECOMMUNICATIONS GROUP INC DATE OF NAME CHANGE: 19960814 10-Q 1 hc2holdings-2018q210q.htm 10-Q Document


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 June 30, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File No. 001-35210
 
hc2logo20178ka09.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)
_____________________________________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.001 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
N/A
_____________________________________________________________________________________________________________________
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
Accelerated filer
x
Non-accelerated filer
 
Smaller reporting company
 
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.
Emerging Growth Company
 
 
 
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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 7(a)(2)(B) of the Securities Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes       No  ý
As of July 31, 2018, 44,707,771 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 thousands, except per share amounts)

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenue
 
$
455,038

 
$
340,383

 
$
870,515

 
$
694,925

Life, accident and health earned premiums, net
 
19,905

 
20,235

 
39,945

 
40,176

Net investment income
 
19,342

 
16,939

 
37,066

 
32,243

Net realized and unrealized gains on investments
 
2,494

 
1,095

 
2,943

 
1,876

Net revenue
 
496,779

 
378,652

 
950,469

 
769,220

Operating expenses
 
 
 
 
 
 
 
 
Cost of revenue
 
400,609

 
308,664

 
776,283

 
623,078

Policy benefits, changes in reserves, and commissions
 
35,391

 
30,443

 
67,674

 
61,930

Selling, general and administrative
 
57,055

 
41,707

 
109,143

 
81,563

Depreciation and amortization
 
9,057

 
7,295

 
18,713

 
14,692

Other operating (income) expense, net
 
185

 
1,738

 
(2,067
)
 
(1,820
)
Total operating expenses
 
502,297

 
389,847

 
969,746

 
779,443

Loss from operations
 
(5,518
)
 
(11,195
)
 
(19,277
)
 
(10,223
)
Interest expense
 
(17,181
)
 
(12,073
)
 
(36,506
)
 
(26,188
)
Gain on sale of subsidiary
 
102,141

 

 
102,141

 

Income from equity investees
 
10,752

 
4,003

 
5,521

 
11,696

Other income (expenses), net
 
(968
)
 
(3,193
)
 
124

 
(8,334
)
Income (loss) from continuing operations before income taxes
 
89,226

 
(22,458
)
 
52,003

 
(33,049
)
Income tax (expense) benefit
 
(9,462
)
 
1,985

 
(11,093
)
 
(3,306
)
Net income (loss)
 
79,764

 
(20,473
)
 
40,910

 
(36,355
)
Less: Net (income) loss attributable to noncontrolling interest and redeemable noncontrolling interest
 
(24,398
)
 
2,562

 
(20,540
)
 
3,948

Net income (loss) attributable to HC2 Holdings, Inc.
 
55,366

 
(17,911
)
 
20,370

 
(32,407
)
Less: Preferred stock and deemed dividends from conversions
 
703

 
793

 
1,406

 
1,376

Net income (loss) attributable to common stock and participating preferred stockholders
 
$
54,663

 
$
(18,704
)
 
$
18,964

 
$
(33,783
)
 
 
 
 
 
 
 
 
 
Income (loss) per Common Share
 
 
 
 
 

 

Basic
 
$
1.11

 
$
(0.44
)
 
$
0.39

 
$
(0.80
)
Diluted
 
$
1.08

 
$
(0.44
)
 
$
0.38

 
$
(0.80
)
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
44,180

 
42,691

 
44,114

 
42,322

Diluted
 
45,503

 
42,691

 
45,284

 
42,322















See notes to Condensed Consolidated Financial Statements

2

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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income (loss)
 
$
79,764

 
$
(20,473
)
 
$
40,910

 
$
(36,355
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(6,205
)
 
2,224

 
(1,700
)
 
3,349

Unrealized gain (loss) on available-for-sale securities
 
(22,931
)
 
19,000

 
(51,593
)
 
30,976

Other comprehensive income (loss)
 
(29,136
)
 
21,224

 
(53,293
)
 
34,325

Comprehensive income (loss)
 
50,628

 
751

 
(12,383
)
 
(2,030
)
Comprehensive (income) loss attributable to noncontrolling interests and redeemable noncontrolling interests
 
(24,090
)
 
2,562

 
(20,232
)
 
3,948

Comprehensive income (loss) attributable to HC2 Holdings, Inc.
 
$
26,538

 
$
3,313

 
$
(32,615
)
 
$
1,918

























See notes to Condensed Consolidated Financial Statements

3

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

 
 
June 30, 2018
 
December 31, 2017
Assets
 

 

Investments:
 

 

Fixed maturity securities, available-for-sale at fair value
 
$
1,249,253

 
$
1,340,626

Equity securities
 
79,557

 
47,500

Mortgage loans
 
69,890

 
52,109

Policy loans
 
17,768

 
17,944

Other invested assets
 
86,109

 
85,419

Total investments
 
1,502,577

 
1,543,598

Cash and cash equivalents
 
112,304

 
97,885

Accounts receivable, net
 
346,702

 
322,446

Recoverable from reinsurers
 
531,269

 
526,337

Deferred tax asset
 
991

 
1,661

Property, plant and equipment, net
 
368,914

 
374,660

Goodwill
 
128,846

 
131,741

Intangibles, net
 
120,280

 
117,105

Other assets
 
142,453

 
102,258

Total assets
 
$
3,254,336

 
$
3,217,691

 
 
 
 
 
Liabilities, temporary equity and stockholders’ equity
 

 

Life, accident and health reserves
 
$
1,728,167

 
$
1,693,961

Annuity reserves
 
237,373

 
243,156

Value of business acquired
 
40,500

 
42,969

Accounts payable and other current liabilities
 
296,339

 
347,492

Deferred tax liability
 
8,634

 
10,740

Debt obligations
 
668,505

 
593,172

Other liabilities
 
79,529

 
70,174

Total liabilities
 
3,059,047

 
3,001,664

Commitments and contingencies
 

 

Temporary equity
 

 

Preferred stock
 
26,325

 
26,296

Redeemable noncontrolling interest
 
8,396

 
1,609

Total temporary equity
 
34,721

 
27,905

Stockholders’ equity
 

 

Common stock, $.001 par value
 
45

 
44

Shares authorized: 80,000,000 at June 30, 2018 and December 31, 2017;
 
 
 
 
Shares issued: 45,121,231 and 44,570,004 at June 30, 2018 and December 31, 2017;
 
 
 
 
Shares outstanding: 44,676,335 and 44,190,826 at June 30, 2018 and December 31, 2017, respectively
 
 
 
 
Additional paid-in capital
 
259,999

 
254,685

Treasury stock, at cost: 444,896 and 379,178 shares at June 30, 2018 and December 31, 2017, respectively
 
(2,434
)
 
(2,057
)
Accumulated deficit
 
(197,148
)
 
(221,189
)
Accumulated other comprehensive income (loss)
 
(9,175
)
 
41,688

Total HC2 Holdings, Inc. stockholders’ equity
 
51,287

 
73,171

Noncontrolling interest
 
109,281

 
114,951

Total stockholders’ equity
 
160,568

 
188,122

Total liabilities, temporary equity and stockholders’ equity
 
$
3,254,336

 
$
3,217,691
















See notes to Condensed Consolidated Financial Statements

4

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

 
 
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
 
44,190

 
$
44

 
$
254,685

 
$
(2,057
)
 
$
(221,189
)
 
$
41,688

 
$
73,171

 
$
114,951

 
$
188,122

 
$
27,905

Cumulative effect of accounting for revenue recognition (1)
 

 

 

 

 
376



 
376

 
291

 
667

 

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

 

 

 

 
3,295


(1,660
)
 
1,635

 

 
1,635

 

Share-based compensation
 

 

 
6,605

 

 

 

 
6,605

 

 
6,605

 

Fair value adjustment of redeemable noncontrolling interest
 

 

 
(3,311
)
 

 

 

 
(3,311
)
 

 
(3,311
)
 
3,311

Exercise of stock options
 
82

 

 
372

 

 

 

 
372

 

 
372

 

Taxes paid in lieu of shares issued for share-based compensation
 
(65
)
 

 


 
(377
)
 

 

 
(377
)
 

 
(377
)
 

Preferred stock dividend
 

 

 
(1,000
)
 

 

 

 
(1,000
)
 

 
(1,000
)
 

Amortization of issuance costs
 

 

 
(30
)
 

 

 

 
(30
)
 

 
(30
)
 
30

Issuance of common stock
 
470

 
1

 


 

 

 

 
1

 

 
1

 

Transactions with noncontrolling interests
 

 

 
2,678

 

 

 
3,781

 
6,459

 
(27,686
)
 
(21,227
)
 
4,968

Net income (loss)
 

 

 

 

 
20,370

 

 
20,370

 
21,281

 
41,651

 
(741
)
Other comprehensive (loss) income
 










(52,984
)

(52,984
)

444


(52,540
)

(752
)
Balance as of June 30, 2018
 
44,677


$
45


$
259,999


$
(2,434
)
 
$
(197,148
)

$
(9,175
)

$
51,287


$
109,281


$
160,568


$
34,721

(1) See Note 2 for further information about adjustments resulting from the Company’s adoption of new accounting standards in 2018.

 
 
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, 2016
 
41,811

 
$
42

 
$
241,485

 
$
(1,387
)
 
$
(174,278
)
 
$
(21,647
)
 
$
44,215

 
$
23,224

 
$
67,439

 
$
31,985

Share-based compensation
 

 

 
3,809

 

 

 

 
3,809

 

 
3,809

 

Dividend paid to noncontrolling interests
 

 

 

 

 

 

 

 
(378
)
 
(378
)
 

Fair value adjustment of redeemable noncontrolling interest
 

 

 
(533
)
 

 

 

 
(533
)
 

 
(533
)
 
533

Exercise of stock options
 
129

 

 
462

 

 

 

 
462

 

 
462

 

Taxes paid in lieu of shares issued for share-based compensation
 
(105
)
 

 

 
(582
)
 

 

 
(582
)
 

 
(582
)
 

Preferred stock dividend
 

 

 
(1,063
)
 

 

 

 
(1,063
)
 

 
(1,063
)
 

Amortization of issuance costs and beneficial conversion feature
 

 

 
(35
)
 

 

 

 
(35
)
 

 
(35
)
 
35

Issuance of common stock
 
363

 

 
16

 

 

 

 
16

 

 
16

 

Conversion of preferred stock to common stock
 
803

 
1

 
3,026

 

 

 

 
3,027

 

 
3,027

 
(3,228
)
Transactions with noncontrolling interests
 

 

 

 

 

 

 

 

 

 
332

Net loss
 

 

 

 

 
(32,407
)
 

 
(32,407
)
 
(2,930
)
 
(35,337
)
 
(1,018
)
Other comprehensive income
 

 

 

 

 


34,325

 
34,325

 


34,325



Balance as of June 30, 2017
 
43,001

 
$
43


$
247,167


$
(1,969
)
 
$
(206,685
)

$
12,678


$
51,234


$
19,916


$
71,150


$
28,639


See notes to Condensed Consolidated Financial Statements

5

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


 
 
Six Months Ended June 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
40,910

 
$
(36,355
)
Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities:
 
 
 
 
Provision for doubtful accounts receivable
 
818

 
(506
)
Share-based compensation expense
 
4,793

 
2,624

Depreciation and amortization
 
21,993

 
17,234

Amortization of deferred financing costs and debt discount
 
4,658

 
3,460

Amortization of (discount) premium on investments
 
2,418

 
4,255

Gain on sale of subsidiary
 
(2,448
)
 
(3,879
)
(Gain) loss on sale or disposal of a subsidiary
 
(102,141
)
 

Lease termination costs
 

 
249

Asset impairment expense
 
381

 
1,810

Income from equity investees
 
(5,521
)
 
(11,696
)
Impairment of investments
 

 
6,089

Net realized and unrealized gains on investments
 
(2,988
)
 
(1,896
)
Loss on contingent consideration
 

 
319

Receipt of dividends from equity investees
 
3,081

 
917

Deferred income taxes
 
423

 
(8,784
)
Annuity benefits
 
4,191

 
4,346

Loss on early extinguishment of debt
 
2,537

 

Other operating activities
 
(1,241
)
 
2,718

Changes in assets and liabilities, net of acquisitions:
 
 
 
 
Accounts receivable
 
(23,082
)
 
19,848

Recoverable from reinsurers
 
(4,931
)
 
(3,595
)
Other assets
 
(21,434
)
 
(12,729
)
Life, accident and health reserves
 
34,133

 
34,700

Accounts payable and other current liabilities
 
(9,712
)
 
(8,056
)
Other liabilities
 
12,008

 
5,843

Cash (used in) provided by operating activities:
 
(41,154
)
 
16,916

Cash flows from investing activities:
 
 
 
 
Purchase of property, plant and equipment
 
(20,234
)
 
(17,019
)
Disposal of property, plant and equipment
 
3,500

 
382

Purchase of investments
 
(207,548
)
 
(157,599
)
Sale of investments
 
155,545

 
70,750

Maturities and redemptions of investments
 
40,000

 
74,957

Purchase of equity method investments
 
(127
)
 
(10,390
)
Cash received for business disposition, net of cash disposed
 
93,272

 

Cash paid for business acquisitions, net of cash acquired
 
(45,965
)
 

Other investing activities
 
(2,023
)
 
373

Cash provided by (used in) investing activities:
 
16,420

 
(38,546
)
Cash flows from financing activities:
 
 
 
 
Proceeds from debt obligations
 
180,326

 
104,410

Principal payments on debt obligations
 
(110,736
)
 
(44,127
)
Annuity receipts
 
1,308

 
1,563

Annuity surrenders
 
(11,208
)
 
(10,600
)
Transactions with noncontrolling interest
 
(14,889
)
 
332

Payment of dividends
 
(1,000
)
 
(2,262
)
Taxes paid in lieu of shares issued for share-based compensation
 
(377
)
 
(583
)
Proceeds from the exercise of warrants and stock options
 
488

 
450

Other financing activities
 
(805
)
 
(116
)
Cash provided by financing activities:
 
43,107

 
49,067

Effects of exchange rate changes on cash and cash equivalents
 
(371
)

319

Net change in cash and cash equivalents and restricted cash
 
18,002

 
27,756

Cash and cash equivalents and restricted cash, beginning of period
 
98,853

 
115,869

Cash and cash equivalents and restricted cash, end of period
 
$
116,855

 
$
143,625

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Cash paid for interest
 
$
33,944


$
23,224

Cash paid for taxes
 
$
11,512


$
8,647

Non-cash investing and financing activities:
 
 
 
 
Property, plant and equipment included in accounts payable
 
$
1,202

 
$
1,630

Investments included in accounts payable
 
$
750

 
$
21,433

Conversion of preferred stock to common stock
 
$

 
$
4,433

Dividends payable to shareholders
 
$
500

 
$
500




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 Aitken, 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 Systems Limited ("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 72% 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 and annuity 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. (“Broadcasting”) and its subsidiaries. Broadcasting strategically acquires and operates Over-The-Air ("OTA") broadcasting stations across the United States. In addition, Broadcasting, through its wholly-owned subsidiary, HC2 Network Inc. (“Network”), operates Azteca America, a Spanish-language broadcast network offering high quality Hispanic content to a diverse demographic across the United States. Broadcasting maintains an approximately 50% controlling interest in DTV America Corporation ("DTV").

8.In our Other segment, we invest in and grow developmental stage companies that we believe have significant growth potential. Among the businesses included in this segment is the Company's approximately 56% controlling interest in 704Games Company ("704Games"), which owns licenses to create and distribute NASCAR® video games.


7


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

2. Summary of Significant Accounting Policies

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, 2017, filed with the SEC on March 14, 2018, as amended by amendment no.1, filed on April 2, 2018 (collectively, "Form 10-K"). The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending December 31, 2018.

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.

Accounting Pronouncements Adopted in the Current Year

The Company’s 2017 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 2017 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.

Effective January 1, 2018 the Company adopted the accounting pronouncements described below.

Statement of Cash Flows

In November 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") 2016-18, Restricted Cash - a consensus of the FASB Emerging Issues Task Force. This guidance requires entities to show the changes in the total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. This standard was applied retrospectively, which resulted in the recast of the prior reporting period in the condensed consolidated statements of cash flows. A reconciliation of cash and cash equivalents and restricted cash from our condensed consolidated statements of cash flows to the amounts reported within our condensed consolidated balance sheet is included in our condensed consolidated statements 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 thousands):
 
 
June 30, 2018
 
June 30, 2017
Cash and cash equivalents, beginning of period
 
$
97,885

 
$
115,371

Restricted cash included in other assets
 
968

 
498

Total cash and cash equivalents and restricted cash
 
$
98,853

 
$
115,869

 
 
 
 
 
Cash and cash equivalents, end of period
 
$
112,304

 
$
143,130

Restricted cash included in other assets
 
4,551

 
495

Total cash and cash equivalents and restricted cash
 
$
116,855

 
$
143,625



8


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

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The update provides that equity investments with readily determinable values be measured at fair value and changes in the fair value flow through net income. These changes historically have run through other comprehensive income. Equity investments without readily determinable fair values have the option to be measured at fair value or at cost, adjusted for changes in observable prices minus impairment. Changes in either method are also recognized in net income. The standard requires a qualitative assessment of impairment indicators at each reporting period. For financial liabilities, entities that elect the fair value option must recognize the change in fair value attributable to instrument-specific credit risk in other comprehensive income rather than net income. Lastly, regarding deferred tax assets, the need for a valuation allowance on a deferred tax asset will need to be assessed related to available-for-sale debt securities. This standard was adopted prospectively as of January 1, 2018 and resulted in a $3.3 million cumulative effect adjustment credit to retained earnings related to the following investments:
Equity securities which were previously classified as available-for-sale
 
$
1,660

Equity securities which were previously accounted for under the cost method
 
1,635

Total
 
$
3,295


See Note 5. Investments and Note 6. Fair Value of Financial Instruments for further details.

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606"). This ASU supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal Versus Agent Considerations, which clarifies the guidance in ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, an update on identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which includes amendments for enhanced clarification of the guidance. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Revenue from Contracts with Customers (Topic 606), which includes amendments of a similar nature to the items typically addressed in the technical corrections and improvements project. Lastly, in February 2017, the FASB issued ASU 2017-05, clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets to clarify the scope of ASC 610-20, Other Income - Gains and Losses from Derecognition of Nonfinancial Assets, and provide guidance on partial sales of nonfinancial assets. This ASU clarifies that the unit of account under ASU 610-20 is each distinct nonfinancial or in substance nonfinancial asset and that a financial asset that meets the definition of an "in substance nonfinancial asset" is within the scope of ASC 610-20. This ASU eliminates rules specifically addressing sales of real estate and removes exceptions to the financial asset derecognition model. The ASUs described above are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. See Note 3. Revenue for further details.

New Accounting Pronouncements

Reporting Comprehensive Income

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from AOCI. The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate or law in U.S. Tax Reform is recognized. Early adoption is permitted. Current GAAP guidance requires that the effect of a change in tax laws or rates on deferred tax liabilities or assets to be included in income from continuing operations in the reporting period that includes the enactment date, even if the related income tax effects were originally charged or credited directly to AOCI. The new guidance allows a reclassification of AOCI to retained earnings for stranded tax effects resulting from U.S. Tax Reform. Also, the new guidance requires certain disclosures about stranded tax effects. The Company is currently in the process of evaluating the impact of this guidance on our consolidated financial statements and expects minimal impact.

Accounting for Leases

In February 2016, the FASB issued ASU 2016-02, Leases. The new standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available. The Company has started evaluating its lease arrangements to determine the impact of this amendment on the financial statements. The evaluation includes an extensive review of the leases, which are primarily related to our vessels and office space. Additionally, the Company has begun tracking separate accounting records for leases entered into starting January 1, 2017 under the new guidance to facilitate future implementation. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842) - Land Easement Practical Expedient for Transition to Topic 842, which provides an optional transition practical expedient to not

9


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

evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 840. The effective date and transition requirements for ASU 2018-01 are the same as ASU 2016-02. Early adoption is permitted. The Company is continuing to evaluate the impact this standard will have on its financial statements. While not yet quantified, the Company expects a material impact to its Condensed Consolidated Balance Sheets from recognizing additional assets and liabilities of operating leases upon adoption. The actual increase in assets and liabilities will depend on the volume and terms of leases in place at the time of adoption. The Company plans to elect the optional practical expedient to retain the current classification of leases, and therefore, does not anticipate a material impact to the Condensed Consolidated Statements of Income or Cash Flows. The Company also expects that adoption of the new standard will require changes to internal controls over financial reporting.

Subsequent Events

ASC 855, Subsequent Events ("ASC 855"), establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC 855 requires HC2 to evaluate events that occur after the balance date as of which HC2's financial statements are issued, and to determine whether adjustments to or additional disclosures in the financial statements are necessary. HC2 has evaluated subsequent events through the date these financial statements were issued. See Note 22. Subsequent Events for the summary of the subsequent events.

3. Revenue

The Company adopted ASC 606 on January 1, 2018. The adoption of ASC 606 represents a change in accounting principle that aligns revenue recognition with the timing of when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To achieve this core principle, the Company applies the following five steps in accordance with ASC 606:

Identify the contract with a customer

A contract with a customer exists when: (a) the parties have approved the contract and are committed to perform their respective obligations, (b) the rights of the parties can be identified, (c) payment terms can be identified, (d) the arrangement has commercial substance, and (e) collectibility of consideration is probable. Judgment is required when determining if the contractual criteria are met, specifically in the earlier stages of a project when a formally executed contract may not yet exist. In these situations, the Company evaluates all relevant facts and circumstances, including the existence of other forms of documentation or historical experience with our customers that may indicate a contractual agreement is in place and revenue should be recognized. In determining if the collectibility of consideration is probable, the Company considers the customer’s ability and intention to pay such consideration through an evaluation of several factors, including an assessment of the creditworthiness of the customer and our prior collection history with such customer.

Identify the performance obligations in the contract

At contract inception, the Company assesses the goods or services promised in a contract and identifies, as a separate performance obligation, each distinct promise to transfer goods or services to the customer. The identified performance obligations represent the “unit of account” for purposes of determining revenue recognition. In order to properly identify separate performance obligations, the Company applies judgment in determining whether each good or service provided is: (a) capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and (b) distinct within the context of the contract, whereby the transfer of the good or service to the customer is separately identifiable from other promises in the contract.

In addition, when assessing performance obligations within a contract, the Company considers the warranty provisions included within such contract. To the extent the warranty terms provide the customer with an additional service, other than assurance that the promised good or service complies with agreed upon specifications, such warranty is accounted for as a separate performance obligation. In determining whether a warranty provides an additional service, the Company considers each warranty provision in comparison to warranty terms which are standard in the industry.

Determine the transaction price

The transaction price represents the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to our customers. The consideration promised within a contract may include fixed amounts, variable amounts, or both. To the extent the performance obligation includes variable consideration, including contract bonuses and penalties that can either increase or decrease the transaction price, the Company estimates the amount of variable consideration to be included in the transaction price utilizing one of two prescribed methods, depending on which method better predicts the amount of consideration to which the entity will be entitled. Such methods include: (a) the expected value method, whereby the amount of variable consideration to be recognized represents the sum of probability weighted amounts in a range of possible consideration amounts, and (b) the most likely amount method, whereby the amount of variable consideration to be recognized represents the single most likely amount in a range of possible consideration amounts. When applying these methods, the Company considers all information that is reasonably available, including historical, current and estimates of future performance.


10


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

Variable consideration is included in the transaction price only to the extent it is probable, in the Company’s judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur when the uncertainty associated with the variable consideration is subsequently resolved. This threshold is referred to as the variable consideration constraint. In assessing whether to apply the variable consideration constraint, the Company considers if factors exist that could increase the likelihood or the magnitude of a potential reversal of revenue, including, but not limited to, whether: (a) the amount of consideration is highly susceptible to factors outside of the Company’s influence, such as the actions of third parties, (b) the uncertainty surrounding the amount of consideration is not expected to be resolved for a long period of time, (c) the Company’s experience with similar types of contracts is limited or that experience has limited predictive value, (d) the Company has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances, and (e) the contract has a large number and broad range of possible consideration amounts.

Pending change orders represent one of the most common forms of variable consideration included within contract value and typically represent contract modifications for which a change in scope has been authorized or acknowledged by our customer, but the final adjustment to contract price is yet to be negotiated. In estimating the transaction price for pending change orders, the Company considers all relevant facts, including documented correspondence with the customer regarding acknowledgment and/or agreement with the modification, as well as historical experience with the customer or similar contractual circumstances. Based upon this assessment, the Company estimates the transaction price, including whether the variable consideration constraint should be applied.

Changes in the estimates of transaction prices are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. Such changes in estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in prior periods. Such changes in estimates may also result in the reversal of previously recognized revenue if the ultimate outcome differs from the Company’s previous estimate.

Allocate the transaction price to performance obligations in the contract

For contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation based on a relative standalone selling price. The Company determines the standalone selling price based on the price at which the performance obligation would have been sold separately in similar circumstances to similar customers. If the standalone selling price is not observable, the Company estimates the standalone selling price taking into account all available information such as market conditions and internal pricing guidelines. In certain circumstances, the standalone selling price is determined using an expected profit margin on anticipated costs related to the performance obligation.

Recognize revenue as performance obligations are satisfied

The Company recognizes revenue at the time the related performance obligation is satisfied by transferring a promised good or service to its customers. A good or service is considered to be transferred when the customer obtains control. The Company can transfer control of a good or service and satisfy its performance obligations either over time or at a point in time. The Company transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time if one of the following three criteria are met: (a) the customer simultaneously receives and consumes the benefits provided by the Company’s performance as we perform, (b) the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (c) the Company’s performance does not create an asset with an alternative use to us, and we have an enforceable right to payment for performance completed to date.

For our performance obligations satisfied over time, we recognize revenue by measuring the progress toward complete satisfaction of that performance obligation. The selection of the method to measure progress towards completion can be either an input method or an output method and requires judgment based on the nature of the goods or services to be provided.

Revenue from contracts with customers consist of the following (in thousands):
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Revenue (1)
 
 
 
 
Construction
 
$
176,910

 
$
335,851

Marine Services
 
68,376

 
105,098

Energy
 
7,078

 
11,580

Telecommunications
 
190,529

 
392,832

Broadcasting
 
11,089

 
21,745

Other
 
1,056

 
3,409

Total revenue
 
$
455,038

 
$
870,515

(1) The Insurance segment does not have revenues in scope of ASU 2014-09.

11


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

Accounts receivables, net from contracts with customers consist of the following (in thousands):
 
 
June 30, 2018
Accounts receivables with customers
 
 
Construction
 
$
194,381

Marine Services
 
51,716

Energy
 
3,278

Telecommunications
 
80,223

Broadcasting
 
9,462

Other
 
3,988

Total accounts receivables with customers
 
$
343,048


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 nature of the projects does not provide measurable value to the customer over time and control does not transfer to the customer at discrete points in time. 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 thousands):
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Commercial
 
$
67,790

 
$
137,441

Convention
 
22,177

 
53,828

Healthcare
 
29,245

 
57,086

Other
 
57,692

 
87,472

Total revenue from contracts with customers
 
176,904


335,827

Other revenue
 
6

 
24

Total Construction segment revenue
 
$
176,910


$
335,851



12


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

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 Consolidated Balance Sheets.

Contract assets and contract liabilities consisted of the following (in thousands):
 
 
June 30, 2018
 
December 31, 2017
Contract assets
 
$
32,871

 
$
25,676

Contract liabilities
 
$
(46,991
)
 
$
(29,862
)

The change in contract assets is a result of the recording of $30.3 million of costs in excess of billings driven by new commercial projects, offset by $23.1 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 results of periodic billing in excess of costs of $46.0 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 $28.9 million.

Transaction Price Allocated to Remaining Unsatisfied Performance Obligations     

The transaction price allocated to remaining unsatisfied performance obligations consisted of the following (in thousands):
 
 
Within one year
 
Within five years
 
Total
Commercial
 
$
161,867

 
$

 
$
161,867

Convention
 
138,511

 
15,000

 
153,511

Healthcare
 
66,253

 

 
66,253

Other
 
221,770

 
53,000

 
274,770

Remaining unsatisfied performance obligations
$
588,401

 
$
68,000

 
$
656,401


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 nature of the projects does not provide measurable value to the customer over time and control does not transfer to the customer at discrete points in time. 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

13


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

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.

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 approximately 73% and 72% we recognized over time during the three and six months ended June 30, 2018, respectively.

The following table disaggregates GMSL's revenue by market (in thousands):
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Telecommunication - Maintenance
 
$
22,090

 
$
43,872

Telecommunication - Installation
 
16,498

 
23,796

Power - Operations, Maintenance & Construction Support
 
11,923

 
16,585

Power - Cable Installation & Repair
 
17,865

 
20,845

Total revenue from contracts with customers
 
68,376


105,098

Other revenue
 

 

Total Marine Services segment revenue
 
$
68,376


$
105,098


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 thousands):
 
 
June 30, 2018
 
December 31, 2017
Contract assets
 
$
16,687

 
$
6,610

Contract liabilities
 
$
(214
)
 
$
(3,106
)


14


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 thousands):
 
 
Within one year
 
Within five years
 
Thereafter
 
Total
Telecommunication - Maintenance
 
$
36,567

 
$
262,025

 
$
40,836

 
$
339,428

Telecommunication - Installation
 
3,804

 

 

 
3,804

Power - Operations, Maintenance & Construction Support
 
12,285

 
10,913

 
3,734

 
26,932

Power - Cable Installation & Repair
 
1,993

 

 

 
1,993

Remaining unsatisfied performance obligations
$
54,649


$
272,938


$
44,570

 
$
372,157


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.

As a result of the Bipartisan Budget Act of 2018, signed into law on February 9, 2018, all Alternative Fuel Tax Credit ("AFETC") revenue for vehicle fuel ANG sold in 2017 was collected in the second quarter of 2018. Net revenue after customer rebates for such credits for 2017 were $2.6 million, which was recognized during the second quarter of 2018, the period in which the credit became available.

Disaggregation of Revenues

The following table disaggregates ANG's revenue by type (in thousands):
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Volume-related
 
$
4,059

 
$
8,123

Maintenance services
 
19

 
48

Total revenue from contracts with customers
 
4,078


8,171

RNG Incentives
 
367

 
742

Alternative Fuel Tax Credit
 
2,576

 
2,576

Other revenue
 
57

 
91

Total Energy segment revenue
 
$
7,078


$
11,580


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 Internet 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 the ICS network but also purchases access to the customer’s network.

Net revenue is derived from carrying business, residential and carrier long-distance traffic, and data traffic. For certain voice services, net revenue is earned based on the number of minutes during a call, 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 network switches, such as minutes and market rates. Customized software has been designed 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.


15


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

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.

Disaggregation of Revenues

ICS's revenues is predominantly derived from wholesale of international long distance minutes (in thousands):
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Termination of long distance minutes
 
$
190,529

 
$
392,832

Total revenue from contracts with customers
 
190,529

 
392,832

Other revenue
 

 

Total Telecommunications segment revenue
 
$
190,529

 
$
392,832


Broadcasting Segment

Broadcasting advertising revenue is generated primarily from the sale of television airtime for programs or advertisements. Broadcasting 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 broadcasting advertising contracts are generally short-term in nature.

Retransmission consent revenue consists of payments received from cable, satellite and other multiple video program distribution systems for their retransmission of our broadcast signals and generally based on per subscriber basis. Retransmission consent revenue is recognized as earned over the life of the retransmission consent contract and varies from month to month generally based on the average number of subscribers.

Local Marketing Agreements (“LMAs”) revenue is generated primarily from the sale of television airtime in return for a fixed fee or additional commission on the related sales incurred by the third party. In a typical LMA, 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. LMA revenue is recognized over the life of the contract, when the program is broadcast. The LMA fees that we charge can be fixed or commission-based and the LMA contracts that we enter into are generally short-term in nature.

Retransmission and LMA commission based revenues 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 thousands):
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Advertising
 
$
7,016

 
$
13,764

LMA
 
2,796

 
5,489

Retransmission
 
907

 
1,850

Other
 
370

 
642

Total revenue from contracts with customers
 
11,089

 
21,745

Other revenue
 

 

Total Broadcasting segment revenue
 
$
11,089

 
$
21,745


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 $1.3 million and $1.6 million as of June 30, 2018 and December 31, 2017, respectively. Broadcasting measures the potential obligation based on Nielsen 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 $8.8 million of advertising revenues of which $3.5 million is expected to be recognized within one year and $5.3 million is expected to be recognized within five years.

Other Segment

Our Other segment's revenues are driven by 704Games. 704Games derives revenue principally from sales of software games and related content and services on (1) consoles and (2) mobile devices. Console revenue includes revenue associated with the sale of 704Games' software games, whether delivered via a physical disc (e.g., packaged goods) or via the Internet (full-game downloads). Console revenue also includes in game

16


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

purchases within the Xbox and PlayStation online stores (PlayStation, Xbox, or Apple/Google play). Mobile revenue includes revenue from 704Games' free to download (“freemium”) mobile game that requires 704Games' hosting support for micro-transactions (e.g. purchases for in game use). Sales are recognized as revenues at the point in time at which control had passed to the customer, either when physical discs are received by distributors or when digital goods are purchased.

704Games reduces revenue for estimated price reductions which may occur with its distributors and retailers. Price reductions represent 704Games' practice to provide a credit allowance to lower the wholesale price on a particular product to incentivize end consumer purchases. The amount of the price reduction is generally the difference between the original wholesale price and the reduced wholesale price.

The price protection reserve for estimated price reductions are recorded as a reduction of sales in the same period that the revenue is recognized. This reserve is a subjective critical estimate that has a direct impact on reported net revenues, and is calculated based on historical price concessions, estimated future price concessions and information provided by retailers regarding their inventory levels. 704Games' price protection reserves are classified as liabilities and included within Accounts Payable and Other Current Liabilities. 704Games continually monitors current pricing trends and wholesaler inventory levels to ensure the sales allowance is fairly stated.

Disaggregation of Revenues

The following table disaggregates the Other segment's revenue by type (in thousands):
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Digital
 
$
650

 
$
1,905

Disc
 
139

 
840

Mobile
 
267

 
664

Total revenue from contracts with customers
 
1,056

 
3,409

Other revenue
 

 

Total Other segment revenue
 
$
1,056

 
$
3,409


4. Acquisitions and Dispositions

Construction Segment

2017 Acquisitions

On November 1, 2017, DBMG consummated the acquisition of 100% of the shares of  North American operations of Candraft VSI ("Candraft"). Candraft is a premier bridge infrastructure detailing and modeling company. On December 1, 2017, DBMG consummated the acquisition of the assets from Mountain States Steel, Inc. ("MSS") including inventory, machinery & equipment, real estate, employees and certain intangible assets. MSS is a premier custom structural steel fabricator for construction projects including bridges, stadiums and power plants. The aggregate fair value of the consideration paid in connection with the acquisitions of Candraft and MSS was $17.8 million, including $16.1 million in cash. Both transactions were accounted for as business acquisitions.

The fair value of consideration transferred and its allocation among the identified assets acquired, liabilities assumed, intangibles and residual goodwill are summarized as follows (in thousands):
Purchase price allocation
 
 
Accounts receivable
 
$
473

Property, plant and equipment
 
12,730

Goodwill
 
2,290

Intangibles
 
1,608

Other assets
 
909

Total assets acquired
 
18,010

Accounts payable and other current liabilities
 
(23
)
Other liabilities
 
(167
)
Total liabilities assumed
 
(190
)
Total net assets acquired
 
$
17,820


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 $1.5 million assigned to the assembled and trained workforce for 2017. Goodwill is not amortized and is not deductible for tax purposes.

Acquisition costs incurred by DMBG in 2017, in connection with the 2017 acquisitions were approximately $3.3 million, which were included in selling, general and administrative expenses. The acquisition costs were primarily related to legal, accounting and valuation services.

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

Results of acquired businesses were included in our Consolidated Statements of Operations since their respective acquisition dates. Pro forma results of operations have not been presented because they are not material to our consolidated results of operations.

Marine Services Segment

2017 Acquisitions

On November 30, 2017, GMSL acquired 5 assets and 19 employees and contractors based in Aberdeen, Scotland from Fugro N.V. The fair value of the purchase consideration was $87.2 million and comprised of 23.6% share in GMH LLC and a short-term loan of $7.5 million to Fugro N.V. The decision to acquire was made to support the overall group strategy of growing the Power and Oil & Gas businesses. The transaction was accounted for as a business acquisition.

The limited liability company agreement of GMH was amended and restated upon consummation of the Acquisition to reflect such issuance and to provide the Fugro Member with certain rights, including the right to designate two out of the up to seven members of its board of directors, the right to approve certain actions outside the ordinary course of business, certain "tag-along" rights to participate in sales of membership units by other members and, after five years and subject to the Fugro Member first offering its membership units to the other members at a price based upon independent valuations, the right to cause GMHL to be put up for sale in a process led by an investment banking firm.

Fair value of consideration transferred and its allocation among the identified assets acquired, liabilities assumed, intangibles, and residual goodwill are summarized as follows (in thousands):
Purchase price allocation
 
 
Cash and cash equivalents
 
$
2,212

Property, plant and equipment
 
73,320

Goodwill
 
11,783

Other assets
 
596

Total assets acquired
 
87,911

Accounts payable and other current liabilities
 
(676
)
Total liabilities assumed
 
(676
)
Total net assets acquired
 
$
87,235


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. Goodwill is not amortized and is not deductible for tax purposes.

Acquisition costs incurred by GMSL in 2017, in connection with the 2017 acquisition were approximately $1.8 million, which were included in selling, general and administrative expenses. The acquisition costs were primarily related to legal, accounting and valuation services.

Results of acquired businesses were included in our Consolidated Statements of Operations since their respective acquisition dates. Pro forma results of operations are also presented because the Fugro acquisition was material to our consolidated results of operations.

Broadcasting Segment

2018 Acquisitions

During the six months ended June 30, 2018, Broadcasting completed a series of transactions for a total cash consideration of $13.2 million. All transactions were accounted for as asset acquisitions.

The following table summarizes the allocation of the purchase price to the fair value of identifiable assets acquired, liabilities assumed, and intangibles (in thousands):
Purchase price allocation
 
 
Property, plant and equipment
 
$
721

Intangibles
 
12,446

Total assets acquired
 
13,167

Total liabilities assumed
 

Total net assets acquired
 
$
13,167



18


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

2017 Acquisitions

During the year ended December 31, 2017, Broadcasting and its subsidiaries completed the following transactions (in thousands):
 
 
DTV
 
Mako
 
Azteca
 
Other
 
Total
Cash
 
$
13,467

 
$
18,192

 
$

 
$
12,104

 
$
43,763

Accounts payable
 

 

 
33,000

 

 
33,000

Equity
 

 
4,994

 

 

 
4,994

Debt obligations
 
2,405

 
5,250

 

 

 
7,655

Fair value of previously held interest
 
1,780

 

 

 

 
1,780

Fair value of consideration
 
$
17,652


$
28,436


$
33,000


$
12,104


$
91,192


In November 2017, Broadcasting closed a series of transactions that resulted in the ownership of over 50% of the shares of common stock of DTV for a total consideration of $17.7 million. DTV is an aggregator and operator of Low Power Television ("LPTV") licenses and stations across the United States. DTV currently owns and operates 52 LPTV stations in more than 40 cities. DTV’s distribution platform currently provides carriage for more than 30 television broadcast networks. DTV maintains a focus on technological innovation. DTV exclusively adopted Internet Protocol (IP) as a transport to provide Broadcast-as-a-Service, making it the only adopter of all IP-transport to the home. The transaction was accounted for as business acquisition.

In November 2017, HC2 LPTV Holdings Inc. ("HC2 LPTV"), a wholly-owned subsidiary of Broadcasting, closed on a transaction with Mako Communications, LLC and certain of its affiliates ("Mako") to purchase all the assets in connection with Mako’s ownership and operation of LPTV stations that resulted in HC2 acquiring 38 operating stations in 28 cities, for a total consideration of $28.4 million. Mako is a family owned and operated business headquartered in Corpus Christi, Texas, that has been acquiring, building, and maintaining Class A and LPTV stations all across the United States since 2000. The transaction was accounted for as business acquisition.

In November 2017, Network acquired Azteca America, a Spanish-language broadcast network, from affiliates of TV Azteca, S.A.B. de C.V. ("Azteca") (AZTECACPO.MX) (Latibex:XTZA).  As part of the bifurcated transaction structure, a wholly-owned subsidiary of Broadcasting signed a definitive acquisition agreement with Northstar Media, LLC ("Northstar"), a licensee of numerous broadcast television licenses in the United States. Under the agreement with Northstar, a wholly-owned subsidiary of Broadcasting acquired Northstar’s broadcast television stations, which carry Azteca America programming. In February 2018, Broadcasting closed on the acquisition and funded the $33.0 million consideration balance. The transaction was accounted for as business acquisition.

In November and December of 2017, Broadcasting closed three additional acquisitions for a total consideration of $12.1 million. All three transactions were accounted for as asset acquisitions.

The following table summarizes the allocation of the purchase price to the fair value of identifiable assets acquired, liabilities assumed, intangibles and residual goodwill (in thousands):
Purchase price allocation
 
 
Cash and cash equivalents
 
$
61

Accounts receivable
 
9,134

Property, plant and equipment
 
12,097

Goodwill
 
21,402

Intangibles
 
80,378

Other assets
 
1,290

Total assets acquired
 
124,362

Accounts payable and other current liabilities
 
(8,036
)
Deferred tax liability
 
(6,072
)
Debt obligations (1)
 
(4,480
)
Other liabilities
 
(86
)
Total liabilities assumed
 
(18,674
)
Enterprise value
 
105,688

Less fair value of noncontrolling interest
 
14,496

Total net assets acquired
 
$
91,192

(1) Debt obligations includes a $2.0 million note with CGI, which is eliminated on the Condensed Consolidated Balance Sheet.


19


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

The following table summarizes acquired intangible assets (in thousands):
FCC licenses
 
 
 
$
75,852

Trade name
 
 
 
208

Other
 
 
 
4,318

Total intangibles
 
 
 
$
80,378


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. Goodwill is not amortized and is not deductible for tax purposes.

Results of operations from acquisitions completed by Broadcasting segment since their respective acquisition dates have been included in our Consolidated Statements of Operations.

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. 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.
Pro Forma Adjusted Summary

Disclosure of proforma information under ASC 805 related to the Azteca acquisition has not been provided as it would be impracticable to do so. After making every reasonable effort to do so, the Company is unable to obtain reliable historical GAAP financial statements for Azteca. Amounts would require estimates so significant as to render the disclosure irrelevant.

The following schedule presents unaudited consolidated pro forma results of operations data as if the acquisition of Fugro had occurred on January 1, 2017. 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 thousands):
 
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
Net revenue
 
$
389,715

 
$
791,346

Net income (loss) from continuing operations
 
$
(22,825
)
 
$
(33,784
)
Net income (loss) attributable to HC2 Holdings, Inc.
 
$
(18,278
)
 
$
(33,141
)

5. Investments

Fixed Maturity Securities

The following tables provide information relating to investments in fixed maturity securities (in thousands):
June 30, 2018
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair
Value
Fixed maturity securities
 
 
 
 
 
 
 
 
U.S. Government and government agencies
 
$
14,708

 
$
308

 
$
(205
)
 
$
14,811

States, municipalities and political subdivisions
 
362,775

 
9,644

 
(1,446
)
 
370,973

Residential mortgage-backed securities
 
86,850

 
4,909

 
(637
)
 
91,122

Commercial mortgage-backed securities
 
39,331

 
133

 
(506
)
 
38,958

Asset-backed securities
 
147,542

 
875

 
(2,022
)
 
146,395

Corporate and other
 
575,516

 
19,738

 
(8,260
)
 
586,994

Total fixed maturity securities
 
$
1,226,722

 
$
35,607

 
$
(13,076
)
 
$
1,249,253




20


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

December 31, 2017
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair
Value
Fixed maturity securities
 
 
 
 
 
 
 
 
U.S. Government and government agencies
 
$
15,283

 
$
470

 
$
(31
)
 
$
15,722

States, municipalities and political subdivisions
 
377,549

 
18,953

 
(1,052
)
 
395,450

Foreign government
 
6,331

 

 
(333
)
 
5,998

Residential mortgage-backed securities
 
101,974

 
4,185

 
(1,264
)
 
104,895

Commercial mortgage-backed securities
 
30,152

 
269

 
(16
)
 
30,405

Asset-backed securities
 
145,479

 
2,610

 
(163
)
 
147,926

Corporate and other
 
589,803

 
51,891

 
(1,464
)
 
640,230

Total fixed maturity securities
 
$
1,266,571

 
$
78,378

 
$
(4,323
)
 
$
1,340,626


The Company has investments in mortgage-backed securities ("MBS") that contain embedded derivatives (primarily interest-only MBS) that do not qualify for hedge accounting. The Company recorded the change in the fair value of these securities within Net realized and unrealized gains on investments. These investments had a fair value of $11.6 million and $12.3 million as of June 30, 2018 and December 31, 2017, respectively. The change in fair value related to these securities resulted in a gain of $0.2 million and a loss of $0.7 million for the three months ended June 30, 2018 and 2017, respectively and gains of $0.7 million and a loss of $0.7 million for the six months ended June 30, 2018 and 2017, respectively.

Maturities of Fixed Maturity Securities Available-for-sale

The amortized cost and fair value of fixed maturity securities available-for-sale as of June 30, 2018 are shown by contractual maturity in the table below (in thousands). 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
 
$
13,753

 
$
13,600

Due after one year through five years
 
129,070

 
128,942

Due after five years through ten years
 
165,275

 
165,518

Due after ten years
 
644,901

 
664,718

Subtotal
 
952,999

 
972,778

Mortgage-backed securities
 
126,181

 
130,080

Asset-backed securities
 
147,542

 
146,395

Total
 
$
1,226,722

 
$
1,249,253


The tables below show the major industry types of the Company’s corporate and other fixed maturity securities (in thousands):
 
 
June 30, 2018
 
December 31, 2017
 
 
Amortized Cost
 
Fair
Value
 
% of
Total
 
Amortized Cost
 
Fair
Value
 
% of
Total
Finance, insurance, and real estate
 
$
215,159

 
$
215,813

 
36.8
%
 
$
191,234

 
$
203,735

 
31.8
%
Transportation, communication and other services
 
158,600

 
160,973

 
27.4
%
 
186,114

 
201,802

 
31.5
%
Manufacturing
 
97,192

 
101,014