Cannae Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited consolidated results. Cannae is an investment holding company with controlled operating businesses and minority stakes, including Ceridian and Dun & Bradstreet (D&B).
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $285.1 million | $302.3 million | $559.6 million | $594.7 million |
| Operating loss | $(24.5) million | $(68.1) million | $(39.1) million | $(76.1) million |
| Net earnings (loss) attributable to Cannae common shareholders | $19.5 million | $(19.8) million | $24.6 million | $(20.9) million |
| Diluted EPS | $0.27 | $(0.28) | $0.34 | $(0.30) |
- Revenue declined 5.7% in Q2 and 5.9% in the first half year over year. Restaurant revenue fell 3.5% and 4.7%, respectively; T-System revenue fell 12.8% and 16.9%.
- Q2 and first-half operating losses narrowed. Restaurant cost of revenue was 86.9% of restaurant revenue in Q2, unchanged year over year; the six-month ratio was 87.5% versus 87.4%.
- Reported earnings benefited substantially from investment gains: realized gains were $74.5 million in Q2 and $76.1 million in the first half, including a $71.1 million gain on the Ceridian share sale. Equity-method losses were $22.4 million in Q2 and $19.5 million in the first half, including D&B losses.
- Operating cash flow was negative $24.5 million for the first half, compared with negative $47.5 million in 2018. Investing cash flow was negative $387.8 million, primarily reflecting the D&B investment; financing cash flow was positive $163.0 million. Cash declined to $73.7 million from $323.0 million at year-end.
- At June 30, cash and short-term investments totaled $75.5 million. Current assets were $165.3 million versus current liabilities of $176.5 million. Notes payable totaled $201.1 million, including a $150 million margin-facility draw; operating lease liabilities were $261.0 million.
- Total assets were $1.872 billion, investments in unconsolidated affiliates $913.3 million, and total equity $1.252 billion. Cannae held 21.7% of Ceridian and 24.3% of D&B.
Material changes and business developments
- Cannae completed its D&B investment in February 2019, retaining a 24.5% stake initially and reporting 24.3% ownership at June 30. The investment was funded partly with cash and borrowings; Cannae also made a further $23.5 million investment in June.
- In May, Cannae sold 2.0 million Ceridian shares for $100.5 million in proceeds, reducing its ownership to 21.7%.
- Restaurant revenue pressure reflected the closure or sale of 47 company-owned restaurants and weaker comparable sales in parts of ABRH. Q2 comparable sales decreased 1.4% at ABRH and increased 1.5% at 99 Restaurants. T-System revenue weakness was attributed mainly to lower clinical-documentation bookings.
- Adoption of lease accounting in January added lease assets and liabilities. The balance sheet reported $228.4 million of lease assets at June 30; disclosed operating lease liabilities were $261.0 million.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said it expects current operating cash needs to be met through internally generated funds, subsidiary dividends, investment proceeds, potential asset sales, and credit facilities; it continues to assess debt reduction, repurchases, strategic investments, and cash conservation.
- Management highlighted restaurant exposure to competition, consumer spending, labor and food-cost inflation, weather, and regulation. Restaurant sales are seasonal, with typically stronger first and fourth quarters. T-System faces healthcare IT, interoperability, reimbursement, and regulatory pressures.
- At June 30, Cannae had $250 million of holding-company facility capacity; after a July 5 $100 million FNF Revolver borrowing, stated corporate borrowing capacity was $150 million. The July borrowing was for investment and general corporate purposes.
- Restaurant purchase commitments totaled $212.6 million. Total disclosed notes, lease, ABRH financing, and purchase obligations were $790.5 million. Management reported $0.4 million accrued for legal proceedings and did not expect current matters, individually or collectively, to materially adversely affect financial condition, results, or cash flows, while noting outcomes remain uncertain.
- Disclosure controls were deemed ineffective as of June 30 due to unremediated material weaknesses in T-System revenue accounting and ASC 606 controls. Management said remediation efforts were underway and expected remediation during 2019.
- The filing corrected previously identified errors in 2018 statements, including T-System revenue-related items and a $16.7 million comprehensive-income presentation error. Management concluded the errors were not material to prior filings.
Important facts for investors to verify
- How much of reported earnings depends on realized investment gains, especially the Ceridian share sale, versus recurring operating performance.
- Whether restaurant and T-System revenue trends stabilize, and whether restaurant labor, food, and occupancy costs pressure margins.
- D&B’s operating performance and the impact of its losses on Cannae’s equity-method earnings, leverage, and liquidity.
- Debt maturities and refinancing needs, particularly the $156.1 million of notes payable scheduled for 2021, alongside lease and purchase commitments.
- Progress and effectiveness of remediation for T-System revenue controls and the disclosed accounting weaknesses.