Cannae Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated results. Cannae is a holding company whose principal investments included Dun & Bradstreet (24.3%), Ceridian (13.7% at quarter-end), AmeriLife, and controlled restaurant businesses.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total operating revenue | $173.0 million | $262.3 million |
| Operating loss | $(53.3) million | $(11.1) million |
| Net earnings (loss) | $638.1 million | $(19.9) million |
| Net earnings (loss) attributable to Cannae common shareholders | $647.7 million | $(16.8) million |
| Basic / diluted EPS | $8.19 / $8.17 | $(0.24) / $(0.24) |
| Cash from (used in) operating activities | $(34.3) million | $6.0 million |
Revenue declined 34.0%. Restaurant revenue was $169.9 million, down from $257.8 million. The reported profit and EPS primarily reflect large investment-related gains, not improved operating performance: the filing reports $915.1 million of realized and other gains and losses, net, versus $1.6 million in Q1 2019. The quarter also included $52.7 million of equity-method losses, compared with $21.4 million.
Restaurant cost of revenue was 90.1% of restaurant revenue, versus 88.1% a year earlier, reflecting the effect of fixed costs on lower sales. Cannae’s consolidated operating margin was negative, with an operating loss of $53.3 million on $173.0 million of revenue.
Balance sheet, debt and liquidity
- At March 31, 2020, cash and cash equivalents were $444.3 million, down from $533.7 million at year-end 2019. Cash included $11.4 million of restricted cash.
- Total assets were $2.705 billion; total liabilities were $500.1 million; total equity was $2.205 billion.
- Notes payable totaled $48.9 million, down from $127.1 million at year-end. Cannae repaid the remaining $75.0 million Margin Facility balance and terminated that agreement during the quarter.
- The company reported $100.0 million of remaining borrowing capacity under its FNF Revolver. The 99 Restaurants Revolver and development lines had $12.5 million of aggregate borrowing capacity.
- Operating lease liabilities totaled $165.1 million, including $26.7 million current. Undiscounted operating lease payments were $227.3 million.
- Investing activities provided $31.3 million; financing activities used $86.4 million. Cash declined by $89.4 million during the quarter.
Material changes and unusual items
- Ceridian: Cannae sold 3.9 million shares in February for $283.7 million and recorded a $223.1 million gain. After its ownership and governance influence fell, Cannae stopped using equity-method accounting and remeasured its remaining stake to fair value, recording a $684.9 million gain. The March 31 fair value was $993.4 million. A further 1.8 million shares were sold after quarter-end for expected proceeds of $115.9 million.
- Blue Ribbon bankruptcy: Blue Ribbon filed for Chapter 11 on January 27; Cannae deconsolidated it but retained a 65.4% equity interest. The filing records a $26.5 million deconsolidation gain and an $18.6 million impairment of the retained investment. Cannae had advanced $11.0 million of a DIP loan commitment of up to $20.0 million. The filing states the bankruptcy does not affect O’Charley’s or 99 Restaurants.
- COVID-19 and restaurants: Guest counts fell significantly in the last two weeks of March, and dining rooms were closed in substantially all restaurants, with most operating only takeout and delivery as permitted. Comparable sales fell 12.9% at 99 Restaurants and 16.9% at O’Charley’s. Cannae recorded $7.7 million of goodwill impairment and $4.5 million of tradename impairment, citing reduced forecasts and uncertainty related to COVID-19.
- Equity Fund: Cannae’s equity-method loss included $58.8 million from the fund. The fund reported a $120.5 million change in unrealized losses on derivative contracts for the quarter. Cannae had invested $192.1 million in the fund by March 31 and invested a further $50.0 million after quarter-end.
- AmeriLife: Cannae completed a $125.0 million investment in an AmeriLife joint venture on March 18. Equity-method results are reported on a three-month lag, so none were included in Q1 results.
- Cannae repurchased 386,517 shares for $10.8 million during the quarter, at an average $27.94 per share.
Outlook, risks and contingencies
The filing provides no numerical earnings or revenue guidance. Management said it believed Cannae’s operating model, low financial leverage and access to capital positioned it to withstand economic disruption, and expected current operating cash needs to be met through internal funds, subsidiary dividends, investment proceeds, potential asset sales and credit facilities. Management also cautioned that the duration and effects of COVID-19 were uncertain and could materially harm Restaurant Group results. Risks include prolonged restaurant restrictions, reduced consumer demand, possible supply interruptions, economic and market disruption affecting portfolio companies, and valuation volatility in investments.
Contractual obligations included $241.1 million of unconditional purchase commitments, $227.3 million of undiscounted operating lease payments, and $75.6 million of scheduled management fees over the disclosed period. Cannae reported $0.1 million accrued for legal proceedings and said it did not expect currently pending matters to have a material adverse effect, while noting outcomes could differ from recorded amounts.
Investor verification priorities
- Separate recurring operating performance from the $915.1 million of reported gains, particularly the Ceridian sale and fair-value remeasurement gains.
- Track the duration and financial effects of COVID-19 on restaurant sales, costs, impairment estimates and liquidity.
- Verify subsequent Ceridian share sales, proceeds and the resulting remaining ownership and exposure.
- Monitor Blue Ribbon’s Chapter 11 outcome, DIP loan advances and potential recovery on Cannae’s retained investment.
- Assess the Equity Fund’s derivative exposure and losses, alongside Cannae’s cash use and remaining credit capacity.