Cannae Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2018. Unaudited consolidated and combined results cover a holding company with restaurant operations, T-System, and equity-method investments including Ceridian. Comparisons with 2017 are affected by the October 2017 T-System acquisition, OneDigital’s 2017 discontinued operations, and the company’s post-split-off structure.
Financial performance and position
- Revenue: Total operating revenue was $293.9 million, up $18.6 million (6.8%) from $275.3 million. Restaurant revenue was $273.8 million, up 0.4%; other operating revenue rose to $20.1 million from $2.6 million, largely reflecting T-System, which contributed $16.9 million.
- Profit and margins: Operating loss widened to $7.1 million from $6.2 million. Net loss was $5.9 million versus $1.5 million; loss attributable to Cannae common shareholders was $1.7 million versus earnings of $0.5 million. Diluted loss per share was $0.02 versus earnings per share of $0.01. The 2017 period included $2.3 million of discontinued-operation earnings and $5.1 million of realized investment gains. Restaurant Group comparable-store sales increased 0.1%; its operating loss was $5.6 million versus $2.6 million, with restaurant cost of revenue rising to 87.9% of restaurant revenue from 86.6%.
- Segment detail: T-System recorded $16.9 million revenue and $0.1 million operating income. Ceridian, accounted for under the equity method, had a $1.8 million net loss in its own reported results for the quarter; Cannae recorded $1.1 million in equity-method losses across unconsolidated affiliates.
- Cash flow: Operating cash used was $11.3 million, versus $13.4 million provided in 2017. Investing cash used was $6.4 million versus $3.6 million provided. Financing cash used was $123.7 million, primarily reflecting repayment of ABRH external debt. Cash fell $141.4 million to $104.2 million.
- Liquidity and debt: Current assets were $217.5 million, including $104.2 million cash and $21.1 million short-term investments; current liabilities were $118.0 million. Notes payable totaled $12.5 million, down from $134.9 million at December 31, 2017. Total assets were $1.34 billion, total liabilities $192.0 million, and total equity $1.15 billion. Cannae described its net asset value as approximately $1.1 billion.
- Other obligations and investments: Future minimum operating lease payments were $371.0 million and unconditional purchase commitments were $224.8 million. Investments in unconsolidated affiliates totaled $415.4 million; available-for-sale fixed-maturity securities had $11.1 million of unrealized losses.
Material changes and unusual items
- In March 2018, the ABRH credit facility was assigned to Cannae and its outstanding balance was paid off. The amended arrangement increased the interest rate to 10%, suspended financial covenants through March 31, 2019, and provided for a fee equal to 2% of the outstanding loan balance. Cannae reported no borrowings under its $100 million FNF revolver at quarter-end.
- Cannae adopted ASC Topic 606 on January 1, 2018 using the modified retrospective method. It recorded a $4.3 million increase to opening retained earnings and decrease to deferred revenue; the company said adoption did not significantly affect revenue recognition.
- After quarter-end, Ceridian HCM priced its IPO at $22 per share. Cannae reported a 27.2% ownership interest following the IPO and a concurrent $33.4 million investment. A $5.6 million termination fee was paid to Cannae on May 1. On May 7, the board’s Compensation Committee approved a success bonus of up to $67.1 million, expected to be paid in cash and stock.
- Cannae and Newport Global signed a non-binding letter of intent concerning a proposed distribution of most of ABRH’s family dining and Legendary Baking businesses; discussions were ongoing and no closing date had been determined.
- The company revised 2017 comparative financial statement items for prior Ceridian accounting errors it assessed as immaterial; the corrections reduced equity-method losses by $0.6 million and reduced the income tax benefit by $0.8 million for the 2017 quarter.
Outlook, commentary, and risks
The filing provides no quantified company-wide earnings or revenue guidance. Management said anticipated cash needs for current operations were expected to be met through internally generated funds, investment-security proceeds, potential non-strategic asset sales, and existing credit facilities. Capital allocation priorities may include debt reduction, share repurchases, strategic initiatives, or conserving cash.
Management cited restaurant exposure to labor and food-cost inflation, weather, consumer spending, competition, and changing shopping patterns. Ceridian faces sensitivity to interest rates, customer employment levels, and operating conditions; T-System faces healthcare IT platform, interoperability, regulatory, and reimbursement pressures. Other risks include acquisition and integration challenges, the proposed ABRH restructuring, and restrictions related to the FNF split-off. The filing reported ordinary-course litigation, including a stayed O’Charley’s wage-and-hour class action; accrued legal liabilities were $0.4 million. Management did not believe pending matters would have a material adverse effect, while noting actual losses could differ from accruals. No material change in risk factors was reported.
Key facts investors should verify
- Whether restaurant operating performance and elevated labor, bakery, and operating costs improve in subsequent quarters.
- The final Ceridian IPO-related ownership, proceeds and fee accounting, and the amount, form, and timing of the approved bonus of up to $67.1 million.
- The outcome and financial effects of the proposed ABRH/Newport Global transaction and the amended ABRH financing terms.
- Cash generation, liquidity, and the treatment of material lease and purchase commitments alongside the reported debt reduction.
- How the different reporting scope and accounting basis affect comparisons with 2017, particularly T-System’s inclusion and OneDigital’s discontinued results.