Cannae Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results. Cannae is an investment holding company with restaurant operations and minority investments, including Dun & Bradstreet (D&B), Ceridian, CoreLogic, Optimal Blue and AmeriLife.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $139.7m | $257.0m | $415.3m | $791.5m |
| Operating loss | $(28.4)m | $(21.5)m | $(127.4)m | $(54.0)m |
| Recognized gains and losses, net | $189.6m | $92.9m | $1,682.8m | $169.6m |
| Net earnings attributable to Cannae common shareholders | $131.9m | $46.2m | $1,254.9m | $52.8m |
| Basic earnings per share | $1.44 | $0.65 | $14.97 | $0.74 |
Restaurant revenue was $129.4m in Q3 and $398.7m for the first nine months. Restaurant cost of revenue was 94.0% and 94.2% of restaurant revenue, respectively, versus 88.9% and 87.9% in the comparable 2019 periods. The filing does not provide a consolidated operating margin that isolates recurring operating performance.
Nine-month results included substantial investment-related gains, notably the change in accounting for Ceridian, sales of Ceridian shares, the D&B IPO and gains on equity securities. The $1,254.9m of nine-month common-shareholder earnings therefore should not be read as recurring operating profit. Income tax expense was $335.6m for the nine months; the balance sheet showed a $231.1m deferred tax liability, versus a $54.5m deferred tax asset at year-end 2019.
Financial position, cash flow and capital
- Cash and cash equivalents: $405.9m at September 30, 2020, down from $533.7m at December 31, 2019. This includes $10.9m of restricted cash.
- Liquidity: Current assets were $493.1m and current liabilities $159.0m. Cannae reported $100.0m of available capacity under its holding-company credit facility.
- Debt: Notes payable totaled $70.3m, down from $127.1m at year-end 2019. The company repaid its $75.0m Ceridian-backed margin facility in February. Lease liabilities totaled $150.0m; undiscounted future operating lease payments were $205.8m.
- Cash flows, nine months: Operating cash flow was $(190.9)m, investing cash flow $(323.9)m and financing cash flow $387.0m. Financing included $455.0m net proceeds from a June equity offering; cash declined by $127.8m overall.
- Equity and repurchases: The offering issued 12.65m shares. Cannae repurchased 510,109 shares for $14.4m during the nine months. Shares outstanding were 91.7m at October 31, 2020.
Material changes and developments
- Operating revenue fell 45.6% in Q3 and 47.5% for the nine months year over year. Restaurant revenue declines reflected COVID-19 restrictions, closed or sold restaurants, and Blue Ribbon’s deconsolidation from January 27; comparable-store sales also fell sharply.
- Comparable-store sales decreased 29.5% at 99 Restaurants and 19.4% at O’Charley’s in Q3. Management reported a gradual recovery in guest traffic and revenue versus Q2, but continued uncertainty.
- Cannae’s Ceridian investment moved from equity-method accounting to fair value accounting in March after reduced ownership and influence. The remeasurement produced a $684.9m gain; Cannae also sold shares during the period.
- D&B completed its IPO in July. Cannae held approximately 18.1% at quarter-end and continued equity-method accounting. Cannae invested $289.0m for a 20% interest in Optimal Blue when Black Knight acquired it in September.
- Blue Ribbon filed for Chapter 11 in January and emerged on October 2, after quarter-end. Cannae received all equity in the reorganized companies in exchange for $15.5m of DIP-loan balance and provided an exit facility, including additional term and revolving credit availability.
- Cannae and Senator’s proposed CoreLogic acquisition was rejected by CoreLogic’s board. They raised their offer to $66 per share and pursued a shareholder vote to elect nominated directors; the special meeting was scheduled for November 17, 2020.
Outlook, risks and contingencies
The filing gives no specific revenue, earnings or other quantitative guidance. Management said its low holding-company leverage and access to capital position it to withstand economic disruption, while noting that COVID-19’s effects on restaurant traffic, sales and costs could continue and could be material. Restaurant operations remain exposed to restrictions, consumer demand, fixed costs and potential supply interruptions. Cannae also cited investment, market and acquisition risks, including CoreLogic transaction uncertainty and risks related to Optimal Blue’s cybersecurity, technology, regulation, third-party providers and mortgage-market exposure.
- 99 Restaurants was not in compliance with certain financial covenants at September 30; related debt was classified as current. Management was negotiating a facility modification and expected to address it before November 20, 2020.
- Legal proceedings include a September 2020 stockholder derivative suit alleging fiduciary-duty breaches concerning the management agreement and incentive matters. Cannae said it would contest the action; the outcome was not determinable.
- Restaurant purchase commitments totaled $135.9m. Cannae also had three contingent forward purchase agreements totaling $375m, payable only upon completion of the associated business combinations; their reported fair value was $26.0m.
- After quarter-end, Cannae sold 2.1m Ceridian shares on November 9 and expected gross proceeds of $198.9m.
Important facts for investors to verify
- How much of reported earnings and equity value depends on investment remeasurements, market prices and other non-recurring gains, versus cash-generating operations.
- Restaurant recovery, comparable-store sales, cost ratios and any further effects of COVID-19 or Blue Ribbon’s post-bankruptcy operations.
- Resolution of the 99 Restaurants covenant breach, including any amendment, repayment or liquidity implications.
- Valuation and performance of major holdings—especially D&B, Ceridian, CoreLogic, Optimal Blue and AmeriLife—and the status of the CoreLogic proposal and proxy effort.
- Cash conversion and liquidity needs, including taxes, investment commitments, leases, purchase obligations and contingent forward purchases.