Cannae Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results; dollar amounts are in millions unless stated otherwise. Cannae is a holding company with restaurant operations and minority investments, including Dun & Bradstreet (D&B), Ceridian and AmeriLife.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $102.6 | $272.2 | $275.6 | $534.5 |
| Operating loss | $(45.7) | $(21.4) | $(99.0) | $(32.5) |
| Net earnings (loss) | $466.1 | $18.9 | $1,104.2 | $(1.0) |
| Net earnings attributable to Cannae shareholders | $475.3 | $23.4 | $1,123.0 | $6.6 |
| Diluted earnings per share | $5.87 | $0.33 | $14.00 | $0.09 |
| Net cash used in operating activities | — | $(81.3) | $(24.5) |
- Revenue fell 62.3% in Q2 and 48.4% for the first half. Restaurant revenue was $99.4 in Q2, down from $266.5; the filing attributes declines to COVID-19 restrictions, Blue Ribbon’s deconsolidation and previously closed or sold restaurants.
- Reported earnings were dominated by investment gains, not operating profitability: realized and other gains were $578.1 in Q2 and $1,493.2 for the half. For the six months, these included a $684.9 gain on the Ceridian accounting change and a $223.1 gain on Ceridian share sales. Equity securities still held generated $525.9 of Q2 unrealized gains and $1,083.0 for the half. These gains may fluctuate with market prices.
- Restaurant cost of revenue was 101.4% of restaurant revenue in Q2 (86.9% in Q2 2019) and 94.3% for the half (87.5% in 2019), reflecting the impact of lower sales against fixed costs. The filing reports no consolidated operating profit margin.
- Cash and cash equivalents were $922.7 at June 30, up from $533.7 at year-end; short-term investments were $100.0. Current assets totaled $1,083.4 versus current liabilities of $188.8.
- Notes payable totaled $70.4, down from $127.1 at year-end, including repayment of the $75.0 Ceridian-backed margin facility in February. Lease liabilities were $159.1 ($27.1 current; $132.0 long term). The company also reported $100.0 of available capacity under its holding-company credit facilities.
- Operating cash use was partly offset by $522.0 in Ceridian share-sale proceeds and $455.0 net proceeds from a June equity offering. Investing cash flow was $83.3 provided; financing cash flow was $387.0 provided. Shares outstanding increased from 79.5 million at year-end to 91.7 million at June 30, following the offering and other share activity.
Material changes and significant events
- COVID-19 and restaurants: Dining rooms at substantially all restaurants closed in late March, with most remaining closed through early May. Many locations relied on takeout and delivery; comparable sales fell 62.0% at 99 Restaurants and 35.1% at O’Charley’s in Q2.
- Blue Ribbon: The Village Inn, Baker’s Square and Legendary Baking parent filed for Chapter 11 on January 27, and Cannae deconsolidated it. Cannae’s recorded equity investment had fallen to zero by June 30. It had funded $15.5 under a debtor-in-possession loan; the recorded loan balance was $4.0 after losses were applied. The commitment was increased from $20.0 to $27.5 on July 16. A reorganization plan filed July 10 remained subject to court confirmation.
- Ceridian: After selling 7.6 million shares, Cannae held 16.1 million shares, or 11.1%, and began accounting for the investment at fair value from March 31 after losing significant influence. The remaining holding was valued at $1,279.4 at June 30.
- D&B: The IPO closed July 6. After investing $200.0 in a concurrent private placement, Cannae reported ownership of 76.6 million shares, approximately 18.1%. At June 30, before these post-quarter transactions, its equity-method interest was 24.3%, recorded at $344.0.
- Other investments: Cannae invested $125.0 in the AmeriLife joint venture in March. It and Senator Investment Group proposed a $65-per-share cash acquisition of CoreLogic in June; CoreLogic rejected the proposal July 7, and Cannae and Senator later initiated a process to call a shareholder meeting to elect directors.
- Cannae entered forward purchase agreements for potential investments totaling $225.0 in FTAC and Trebia business combinations, contingent on those transactions closing. On July 26, it also agreed to invest $290.0 for 20% of a new Black Knight subsidiary associated with the proposed Optimal Blue acquisition. A further $150.0 FTAC II forward purchase agreement was entered into July 31.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance is provided. Management said it believed low holding-company leverage and access to capital positioned Cannae to weather disruption, and expected anticipated operating cash requirements to be met through internal funds, investment proceeds, asset sales, borrowing or capital raises.
- Management cautioned that COVID-19’s duration, renewed restrictions, guest traffic, restaurant sales and costs remained uncertain. The filing warns that pandemic effects could materially harm Restaurant Group results; it also identifies possible supplier disruption and risks to D&B demand, data sourcing and operations.
- The company recorded $7.7 of goodwill impairment and $4.5 of tradename impairment in the first half, citing lower forecasts and pandemic uncertainty. Legal proceedings were described as ordinary course; $0.1 was accrued, and management did not expect currently pending matters to have a material adverse effect, while noting outcomes could differ.
- Contractual obligations totaled $558.6, including $218.7 of undiscounted operating lease payments, $151.4 of purchase commitments, $71.3 of notes payable and $78.2 of management fees over the stated periods. The filing also describes a maximum DIP-loan commitment of $27.5 after the July amendment.
- The CFO resigned July 22 and Bryan D. Coy was appointed CFO. Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings and book value depends on unrealized equity-security gains, and how those valuations move in subsequent periods.
- The pace and profitability of restaurant reopening, comparable-sales recovery, fixed-cost absorption and any further impairment or liquidity needs.
- Blue Ribbon’s court-approved restructuring outcome, recoverability of the DIP loan and any additional funding required.
- D&B’s post-IPO performance and Cannae’s ownership, valuation and equity-method results; also verify the impact of D&B’s reported losses.
- Closing conditions, funding dates and total capital commitments for the CoreLogic, Black Knight and SPAC-related transactions, including related-party considerations.
- Cash deployment after the $455.0 offering, share dilution and repurchases, and the company’s capacity to meet debt, lease, purchase and management-fee obligations.