Cannae Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Cannae is an investment holding company with controlled restaurant businesses and significant equity-method and marketable investments. Its consolidated operating revenue primarily reflects its Restaurant Group; results of unconsolidated affiliates are generally recorded as equity earnings or losses.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior period |
|---|---|---|
| Total operating revenue | $167.4 million | $171.9 million |
| Operating loss | $75.6 million | $36.0 million |
| Net loss attributable to Cannae shareholders | $247.6 million; diluted loss per share $2.88 | $233.1 million; diluted loss per share $2.55 |
| Equity in earnings of unconsolidated affiliates | $31.9 million | $53.9 million |
| Cash from operating activities | $(38.5) million | $6.0 million |
| Cash and cash equivalents | $50.7 million | $85.8 million at Dec. 31, 2021 |
| Total assets / total equity | $3,492.7 million / $3,042.7 million | $3,889.6 million / $3,341.1 million at Dec. 31, 2021 |
| Notes payable | $15.3 million | $16.4 million at Dec. 31, 2021 |
Restaurant Group revenue was $162.1 million, down 3.1%. Restaurant cost of revenue was 89.7% of restaurant revenue, compared with 88.3% a year earlier, with management citing higher labor, food and supply costs. Cash used in investing activities was $65.8 million provided; financing activities used $62.4 million. Investing cash flow included $173.3 million of Ceridian share-sale proceeds and $144.5 million from the Optimal Blue disposition, partly offset by a $246.5 million investment in System1.
At March 31, current assets were $76.3 million and current liabilities were $229.7 million. Cannae reported $300 million of capacity under holding-company credit facilities, with potential to add $200 million by amending its margin facility; it had no balance under that facility at quarter-end. The filing reports a $60 million margin-facility borrowing after quarter-end. Cash at the corporate holding company was $21.3 million. Lease liabilities totaled $184.3 million, including current and long-term amounts.
Material changes and notable items
- Operating revenue declined 2.6%, while the operating loss widened by $39.6 million. Net loss attributable to shareholders increased by $14.5 million.
- Recognized net losses were $265.2 million. Major items included a $236.0 million other-than-temporary impairment of Paysafe and a $313.0 million gain on the Optimal Blue sale; equity securities also produced $324.7 million of recognized losses.
- The Optimal Blue disposition generated $144.5 million in cash and 21.8 million D&B shares. Cannae reported approximately 20.3% ownership of D&B at quarter-end after the transaction and transfer of carried interest.
- Cannae completed the System1 business combination in January, investing a total of $248.3 million and reporting approximately 26.5% ownership at March 31. Subsequent to quarter-end, it sold 1.4 million System1 shares for $19.5 million.
- Cannae repurchased 2.0 million shares for approximately $54.0 million during the quarter, including 1.0 million shares bought from FNF for $24.0 million.
- Management fees payable to the external Manager were $10.6 million and carried-interest expense was $45.2 million, compared with $7.6 million and $17.1 million, respectively, in Q1 2021. The 2022 carried interest related principally to the Optimal Blue disposition.
Outlook, risks and contingencies
The filing provides no quantitative earnings or revenue guidance. Management said it expects current operating cash requirements to be met through internally generated funds, subsidiary dividends, investment-security cash flows, potential asset sales and available borrowing capacity. Capital allocation may include acquisitions, debt reduction, share repurchases or preserving cash.
Management cited risks from economic and financial-market conditions, COVID-19 resurgence, restaurant competition and cost inflation, acquisition and integration execution, investment valuation declines, the Investment Company Act, and reliance on the external Manager. Restaurant results are sensitive to guest traffic, food and labor costs, and seasonal factors. Management stated that COVID-19 was no longer materially adversely affecting operations but that renewed disruption could harm results.
Purchase commitments totaled $105.3 million, primarily for Restaurant Group food and beverage purchases; total listed contractual obligations were $516.2 million, including leases, management fees and debt. The company is involved in ordinary-course litigation and regulatory matters; it reported no material accrual for legal settlements. A stockholder derivative suit concerning the management agreement and other matters remained stayed through May 10, 2022, and defendants stated they would contest the remaining claims.
Important facts for investors to verify
- How the Paysafe impairment and subsequent share-price movements affect the carrying value and recoverability of investment holdings.
- The valuation, liquidity and concentration risks of major equity-method investments, including D&B, Alight, Paysafe and System1.
- Whether restaurant sales and margins can withstand elevated labor, food and supply costs; Q1 comparable sales varied materially between O’Charley’s and 99 Restaurants.
- Cash availability at the holding company, use of credit facilities after quarter-end, and collateral or loan-to-value requirements under the margin facility.
- The economics of Manager fees, carried interest and investment-success bonuses, and the outcome of the pending derivative litigation.