Cannae Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited consolidated results. Cannae is a holding company with majority-owned operating businesses and minority investments, including Ceridian and Dun & Bradstreet (D&B).
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total operating revenue | $274.5 million | $292.4 million |
| Operating loss | $14.6 million | $8.0 million |
| Net earnings (loss) | $2.0 million | $(5.3) million |
| Net earnings (loss) attributable to Cannae common shareholders | $5.1 million | $(1.1) million |
| Diluted EPS | $0.07 | $(0.02) |
| Cash from operating activities | $6.0 million | $(11.3) million |
- Revenue fell $17.9 million, or about 6%, year over year. The filing reports no consolidated gross-margin figure; restaurant cost of revenue was 88.1% of restaurant revenue, versus 87.9% in Q1 2018.
- Cash and cash equivalents were $121.2 million at March 31, down from $323.0 million at December 31, 2018; short-term investments were $12.1 million. Cannae reported $167.4 million of available capacity under its credit facilities.
- Notes payable totaled $212.2 million, and a separate $100.0 million was outstanding under the FNF revolver. Operating lease liabilities were $273.6 million. Current liabilities were $188.1 million and current assets were $222.8 million.
- Investments in unconsolidated affiliates were $930.8 million, up from $397.2 million at year-end, largely reflecting the D&B investment. Total assets were $1,981.1 million and total equity was $1,226.0 million.
Changes and drivers versus the prior period
- Restaurant Group revenue declined 5.8% to $257.8 million. Comparable-store sales fell 2.8%; closures or sales of 37 company-owned restaurants reduced revenue by $8.5 million. Average guest checks partly offset the decline.
- Restaurant Group reported an operating loss of $7.8 million, compared with $5.6 million. Cost of restaurant revenue declined in dollars but increased slightly as a share of revenue.
- T-System revenue fell 20.8% to $12.2 million, primarily due to lower bookings in clinical documentation. Its operating loss widened to $3.5 million from $0.8 million; Q1 2019 also included $1.4 million of interest expense on an intercompany note.
- Corporate and Other pretax earnings rose to $7.3 million from $0.4 million, primarily due to $9.1 million of D&B syndication fees, partly offset by higher interest expense.
- Other income included $11.0 million of interest, investment and other income and $1.6 million of realized gains. Equity-method earnings were $2.9 million, versus a $1.1 million loss. Cannae’s reported net earnings include results attributable to noncontrolling interests; the common-shareholder result was $5.1 million.
- Cash used in investing activities was $481.8 million, primarily reflecting the D&B investment. Financing activities provided $274.0 million, including borrowings used to fund that investment.
Outlook, risks and unusual items
- Cannae retained and funded a $505.6 million D&B investment, representing 24.5% ownership at quarter-end, after syndicating part of its original commitment. The company said it would begin reporting its share of D&B earnings or losses on a one-quarter lag in Q2 2019.
- Management said anticipated operating cash needs were expected to be met through internal funds, subsidiary dividends, investment income, potential asset sales and borrowing capacity. Capital allocation could include debt reduction, share repurchases, acquisitions or conserving cash; no specific earnings guidance was provided.
- Restaurant risks cited include competition, weaker discretionary spending, labor and food-cost inflation, weather and seasonality. T-System faces healthcare IT platform and interoperability trends. Cannae also identified acquisition, integration, economic and financial-market risks.
- The company adopted the new lease standard on January 1, 2019, recording $246.0 million of lease assets and $279.4 million of lease liabilities at adoption. The quarter-end balance sheet showed $240.6 million of lease assets and $273.6 million of lease liabilities.
- Cannae disclosed corrections to previously reported Q1 2018 figures, which it assessed as immaterial to prior filings. The corrections included a $1.5 million decrease in other operating revenue and a $0.6 million decrease in reported net loss.
- Disclosure controls were reported as ineffective at March 31, 2019 because previously identified material weaknesses in T-System revenue accounting controls had not been remediated. Management said remediation was underway and expected during 2019.
- Legal proceedings carried a $0.5 million accrual. Management did not expect currently pending matters, individually or in aggregate, to have a material adverse effect, while noting actual losses could differ. Restaurant Group unconditional purchase obligations totaled $361.4 million.
Important facts for investors to verify
- Whether restaurant comparable-store sales and T-System bookings stabilize, and how those trends affect operating losses.
- The performance, valuation and financing exposure of the D&B investment, including the effect of lagged equity-method reporting.
- Debt maturities and borrowing costs following the D&B-related draws, including the $150 million margin-facility borrowing and $100 million FNF revolver balance.
- Progress in remediating T-System revenue-control weaknesses and whether future filings report effective controls.
- The effect of lease obligations, purchase commitments and any potential asset sales on liquidity and capital allocation.