Cannae Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; filed August 9, 2023. Amounts are in millions of dollars except per-share data. Cannae is an investment holding company with controlled operating businesses and significant interests in unconsolidated affiliates. Most affiliate operating revenue is not consolidated; Cannae records its share of affiliates’ results principally through equity-method earnings or losses.
Financial performance and position
- Revenue: Q2 operating revenue was $152.8, down 12.4% year over year; first-half revenue was $307.1, down 10.2%. Restaurant revenue was $145.2 in Q2 and $293.7 for the first half. Other operating revenue was $7.6 and $13.4, respectively.
- Profit and loss: Q2 operating loss was $19.6, versus $27.0 a year earlier. Net loss attributable to Cannae common shareholders was $87.2, or $1.16 per diluted share, versus $263.3, or $3.15 per share. First-half attributable net loss was $91.3, or $1.21 per diluted share, versus $510.9, or $6.03 per share.
- Drivers of reported losses: Q2 included $49.1 of equity-method affiliate losses and $42.2 of recognized net losses. For the first half, those amounts were $81.2 of affiliate losses and $9.9 of recognized net gains. These investment-related items make reported earnings volatile.
- Margins and operating trends: Restaurant cost of revenue was 88.4% of restaurant revenue in Q2, compared with 88.7% a year earlier; first-half ratios were 88.5% and 89.2%. Comparable sales fell at both O’Charley’s and 99 Restaurants: 7.9% and 3.2% in Q2, and 6.1% and 1.7% for the first half, respectively. Management attributed declines primarily to lower guest counts, partly offset by higher average spend.
- Cash flow: First-half operating cash use was $34.6, compared with $133.0 in 2022. Investing cash use was $51.0, versus $201.7 provided in the prior-year period; financing cash use was $49.4 versus $53.9. Cash and cash equivalents declined by $135.0 to $112.7.
- Liquidity and debt: At June 30, cash was $112.7 and short-term investments were $53.6. Total notes payable were $103.3, including $84.7 outstanding on the FNF Revolver at 9.77%; that revolver had no remaining capacity. The 2020 Margin Facility had no outstanding balance and $150.0 of unused capacity, secured by specified Ceridian and D&B shares; its maturity was November 30, 2023. Total liabilities were $413.6 and total equity was $2,582.0.
Material changes and notable items
- Restaurant revenue declined amid store closures and weaker comparable sales. Management also cited inflationary pressure on food and labor costs, with menu pricing used to partially offset costs.
- The smaller year-over-year net loss largely reflects lower prior-year investment losses and expenses, including 2022 Paysafe impairment and Optimal Blue disposition-related carried interest, rather than a return to profitability. Q2 2023 recognized losses included a $31.3 Ceridian fair-value loss and a $9.0 impairment of certain equity interests. First-half recognized gains included a $27.9 Ceridian fair-value gain.
- Cannae repurchased approximately 3.1 million shares in Q2 for $60.4, averaging $19.71 per share. It reported 73.4 million shares outstanding at June 30 and 73.4 million as of July 31, subject to filing-date timing and subsequent transactions.
- Cannae invested $52.1 for an 89% interest in Minden Mill in May; it accounts for the investment as an unconsolidated affiliate. It invested $44.0 in BKFE in the first half and an additional $40.8 after quarter-end, completing its previously disclosed funding commitment.
- A derivative lawsuit settlement was approved in June. The agreement provided $6.0 cash to Cannae, amendments to its Management Services Agreement, and governance changes; the net settlement was recorded in Q2 recognized gains.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management said it expects current operating cash requirements to be met through internal funds, subsidiary dividends, investment-security proceeds, potential asset sales, and existing credit facilities; it continues to assess capital allocation, including debt reduction, repurchases, acquisitions, and cash conservation.
- Management noted that restaurant performance is exposed to inflation, labor and commodity costs, sales fluctuations, seasonality, and competition. The company’s results also depend on market values and performance of its significant affiliates and investments.
- Cannae identified potential future impairment risk for Alight: its quoted fair value was $484.9 versus a $525.1 carrying value. Management considered the decline temporary as of June 30, but further value declines or deterioration in results could lead to an impairment charge.
- Cannae guaranteed certain contingent BKFE investment obligations estimated at approximately $65.2 in aggregate as of the filing date, payable only if BKFE cannot meet obligations triggered by investment options. Restaurant vendor purchase commitments totaled $62.9; total disclosed contractual obligations were $483.9, including leases, debt, and management fees.
- Ordinary-course legal matters were disclosed; the company said recorded legal settlement accruals were not material and it did not expect currently pending matters to have a material adverse effect, while noting outcomes could affect a particular period. The filing added a risk concerning the accuracy and timeliness of financial reporting by material unconsolidated affiliates; System1 had previously restated reports, with no material impact to Cannae’s previously reported figures.
Important facts for investors to verify
- How the restaurant businesses’ comparable-sales declines, guest counts, and inflation-related costs develop.
- The November 2023 maturity and renewal or replacement of the 2020 Margin Facility, its borrowing-base conditions, and the 2025 FNF Revolver maturity and interest burden.
- Market value, carrying value, and impairment indicators for Alight, Ceridian, and other significant investments; also review affiliate reporting periods and equity-method losses.
- The timing and potential cash exposure of BKFE’s contingent obligations, along with Cannae’s remaining purchase, lease, and management-fee commitments.
- Effects of share repurchases and subsequent investments on liquidity and per-share value; the filing reports no quantified forward earnings guidance.