Cannae Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited results; dollar amounts are in millions unless noted. Cannae is an investment and operating company whose portfolio includes controlled restaurant businesses and minority investments, many accounted for under the equity method.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Operating revenue | $171.9 | $173.0 |
| Operating loss | $(36.0) | $(53.3) |
| Recognized investment losses (gains), net | $(312.5) | $915.1 |
| Equity in earnings (losses) of affiliates | $53.9 | $(52.7) |
| Net loss attributable to Cannae common shareholders | $(233.1) | Net earnings of $647.7 |
| Basic and diluted EPS | $(2.55) | $8.19 basic; $8.17 diluted |
| Operating cash flow | $6.0 | $(34.3) |
| Cash and cash equivalents at quarter-end | $439.7 | $724.7 at Dec. 31, 2020 |
| Notes payable | $59.7 | $63.5 at Dec. 31, 2020 |
Operating margin was approximately negative 20.9% of revenue, compared with negative 30.8% a year earlier. In the Restaurant Group, cost of restaurant revenue was 88.3% of restaurant revenue, versus 90.1% a year earlier. Cannae reported no consolidated operating profit; the filing does not provide a meaningful consolidated net profit margin given the substantial investment-related gains and losses.
Total assets were $4,305.4 and total liabilities were $755.1 at March 31, 2021. Cannae reported $200.0 of capacity under existing holding-company credit facilities, with the ability to add up to $400.0 more by amending its margin facility. No amount was outstanding under the 2020 Margin Facility. Cash included $12.5 of restricted cash.
Material changes and portfolio developments
- Revenue declined $1.1, or 0.6%, year over year. Restaurant revenue fell $2.6, or 1.5%; recovery from COVID-19 restrictions and restaurant closures weighed on results, partly offset by the reconsolidation of Legendary Baking and VIBSQ.
- The consolidated net result swung from earnings of $638.1 to a loss of $233.8. The main driver was investment valuation: Cannae recorded a $312.5 net recognized loss in Q1 2021, including a $312.1 loss on Ceridian equity securities. Q1 2020 included substantial gains, including a $684.9 gain related to a change in accounting for Ceridian and gains from Ceridian share sales.
- Equity-method affiliate earnings were $53.9, including $71.4 from “Other,” which included Cannae’s share of a gain recorded by the FTAC II sponsor related to Paysafe. D&B, Optimal Blue, and AmeriLife generated equity-method losses. Paysafe closed on March 30, so no Paysafe earnings or losses were included in Q1.
- Investments in unconsolidated affiliates increased to $2,011.1 from $1,453.0 at year-end, including a $746.9 carrying value for Paysafe. Cannae invested approximately $500.0 in Paysafe and received shares and warrants; it reported a 7.5% ownership interest. Its direct and indirect Paysafe shares had a quoted aggregate value of $729.6 at quarter-end.
- Cannae received $280.6 in distributions from the Senator JV and reported no further material ownership interest in it. It also closed a $32.0 investment in Sightline Payments.
- Cannae classified Legendary Baking and VIBSQ as held for sale after receiving preliminary, non-binding letters of intent. The filing records a $7.0 valuation allowance/loss; completion remained subject to due diligence, regulatory approvals, and other conditions.
Cash flow, outlook, and risks
Cash declined by $280.9 during the quarter. Operating activities provided $6.0; investing activities used $282.8, principally reflecting investments including Paysafe and other affiliates, partly offset by $281.2 of distributions from affiliates. Financing activities used $4.1. Management said it expects anticipated operating cash requirements to be met through internal funds, subsidiary dividends, investment proceeds, asset sales, and available borrowing capacity. It continues to assess capital allocation among investments, debt reduction, share repurchases, and conserving cash. The filing gives no quantified earnings or revenue guidance.
Management described continued uncertainty from COVID-19, including dining-room capacity restrictions, guest traffic, vaccination rates, and the pace of economic recovery. Restaurant results are also exposed to competition, discretionary spending, labor and food costs, regulation, seasonality, and fixed operating costs. Other key risks include investment valuation volatility, the ability to complete announced transactions, and broader economic and market conditions.
- The Board authorized a new three-year repurchase program for up to 10 million shares; it does not require purchases. No shares were repurchased in Q1 2021.
- Forward purchase and subscription commitments for Alight, QOMPLX, and Austerlitz transactions were contingent on business-combination closings and other conditions. Alight and QOMPLX transactions were expected to close after quarter-end; these were expectations, not completed transactions as of March 31.
- Outstanding legal matters include a stockholder derivative suit concerning the Management Services Agreement and incentive compensation. A special litigation committee was formed, and the case was stayed for six months for its investigation. Cannae said legal accruals were not material and did not expect currently pending matters to materially affect its financial condition, though outcomes remain uncertain.
- Restaurant Group unconditional purchase commitments totaled $110.9; total listed contractual obligations were $606.1, including leases, debt, management fees, and restaurant financing obligations.
Investor verification priorities
- Review the composition and valuation sensitivity of the $312.5 recognized investment loss, particularly the Ceridian markdown and Level 3 estimates for transaction-related agreements and warrants.
- Verify the subsequent completion and accounting for the Alight and QOMPLX transactions, Austerlitz commitments, and proposed Legendary Baking and VIBSQ sales.
- Assess the quality and sustainability of the $53.9 equity-method earnings, including the $71.4 “Other” contribution and the timing lag for AmeriLife reporting.
- Reconcile liquidity and cash needs against investment commitments, $110.9 of purchase obligations, facility availability, and the $606.1 schedule of contractual obligations.
- Track restaurant recovery and comparable-store trends: O’Charley’s increased 8.6%, while 99 Restaurants, Village Inn, and Baker’s Square declined 7.7%, 12.5%, and 31.5%, respectively, year over year.