Cannae Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated financial statements; amounts below are in millions except per-share data. Cannae is an investment holding company with controlled operating businesses and significant interests in unconsolidated affiliates.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenue | $143.6 | $164.5 | $450.7 | $506.4 |
| Operating loss | $(51.9) | $(21.3) | $(94.2) | $(123.9) |
| Net loss attributable to Cannae common shareholders | $(157.3) | $55.3 | $(248.6) | $(455.6) |
| Loss per share, basic and diluted | $(2.18) | $0.69 | $(3.34) | $(5.49) |
| Net cash used in operating activities | — | $(54.5) | $(186.8) |
Restaurant revenue was $131.2 in Q3 and $424.9 for nine months. Cost of restaurant revenue was 88.3% of restaurant revenue in Q3, versus 91.3% a year earlier; the nine-month ratio was 88.4%, versus 89.9%. Cannae’s reported operating revenue does not include the full revenue of its equity-method affiliates.
Balance sheet, cash flow and capital
- At September 30, cash and cash equivalents were $58.1, short-term investments $18.5, and current assets $126.3 against current liabilities of $118.4. Cash and short-term investments together were $76.6.
- Total assets were $2,768.4 and total liabilities $402.8. Notes payable totaled $102.6, including $84.7 outstanding under the FNF Revolver. The $150.0 margin facility had no balance outstanding; unused capacity was $150.0, potentially expandable to $500.0 by amendment.
- Nine-month investing cash flow was a use of $33.6, including $162.0 of additional investments in unconsolidated affiliates and $124.6 of Ceridian share-sale proceeds. Financing cash flow used $101.5, including $106.1 of treasury-stock repurchases.
- During the first nine months, Cannae repurchased 5.7 million shares for approximately $111.5. A new authorization for up to 10 million shares was approved October 29, 2023, in addition to the 2022 program.
Material changes and unusual items
- Q3 revenue declined 12.7% year over year, while operating loss widened to $51.9 from $21.3. The nine-month operating loss narrowed to $94.2 from $123.9, but Cannae remained loss-making.
- Q3 recognized losses, net, were $130.8, compared with gains of $175.0 in Q3 2022. Nine-month recognized losses were $120.9, versus $283.8 of losses in the prior-year period. Current-year charges included $70.2 impairment of Sightline and $63.9 impairment of System1; Ceridian fair-value adjustments provided a partial offset.
- Equity in losses of unconsolidated affiliates was $107.2 for nine months, compared with $154.0. System1, Alight and BKFE contributed to current-period losses; prior-year Paysafe losses were a substantial contributor to the comparative-period total.
- Restaurant Group comparable sales fell in Q3 at O’Charley’s (3.1%) and 99 Restaurants (2.1%); nine-month declines were 4.6% and 1.8%, respectively. Management cited lower guest counts, partially offset by higher average spend. Q3 restaurant results also included substantial impairment and closure-related costs.
Outlook, risks and contingencies
- The filing provides no numerical earnings or revenue guidance. Management says it expects current operating cash requirements to be met through internal funds, subsidiary dividends, investment-security proceeds, potential asset sales and borrowing capacity; it continues to assess monetizations, debt reduction, repurchases and acquisitions.
- Management is closing or expects to close certain O’Charley’s locations with unfavorable cash-flow profiles, anticipating lower future revenue but improved operating profitability. It cautions that the precise effect is uncertain. $29.6 of liabilities were recognized for stores expected to close in Q4 2023; related lease and property assets had been fully impaired.
- Inflation in food, labor and other costs remains a Restaurant Group risk. The margin facility is secured by shares of Ceridian, D&B and Alight and includes loan-to-value requirements that could require additional collateral, repayment or asset sales.
- Cannae has guaranteed certain BKFE investment-commitment obligations, estimated at approximately $63.6 in aggregate, payable over about five years if specified options are exercised and BKFE cannot pay.
- The filing adds a risk concerning timely and effective financial reporting by material unconsolidated affiliates, which could affect Cannae’s reporting or require restatements. Management also identifies macroeconomic, investment, acquisition, competition and external-manager risks.
- A stockholder derivative lawsuit concerning the management agreement was settled with court approval in June 2023; the Company received $6.0 in cash and amended its management agreement. The amended agreement reduces the fee rate on invested capital above $2.5 billion from 1.5% to 1.25%, lowers the standard termination fee to $20.0, and introduces related-party transaction review by a Board committee.
Key facts investors should verify
- Whether System1 and Sightline operating performance, liquidity and valuation assumptions support the recorded impairment amounts; Sightline’s valuation used a 29% discount rate.
- Whether Alight’s market value remaining below Cannae’s carrying value leads to an impairment; Cannae reported no impairment at September 30.
- Cash needs and sources of liquidity, including the use of repurchases, affiliate investments and available margin-facility capacity.
- The financial and operational effects of O’Charley’s closures, including lease termination costs and whether expected profitability improves.
- The status and potential funding exposure of BKFE’s guaranteed commitments, and the reporting timeliness and controls of material unconsolidated affiliates.