Cannae Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statement figures are in millions unless noted. Cannae is a holding company with restaurant and technology subsidiaries and minority investments, including Ceridian and Dun & Bradstreet (D&B).
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $270.4 | $293.5 | $830.0 | $888.2 |
| Operating loss | $(23.6) | $(25.3) | $(62.7) | $(101.4) |
| Net earnings (loss) attributable to Cannae common shareholders | $46.2 | $1.5 | $52.8 | $(19.4) |
| Diluted earnings (loss) per share | $0.64 | $0.02 | $0.73 | $(0.27) |
| Operating cash flow | — | $(39.1) | $(48.8) |
- Revenue declined 7.9% in Q3 and 6.6% for the nine-month period. Restaurant revenue fell 8.0% and 5.8%, respectively; the filing attributes the decrease mainly to 55 restaurant closures or sales since the prior-year periods and, to a lesser extent, lower comparable sales.
- Operating losses narrowed, but consolidated operating results remained negative. Cost of restaurant revenue was 88.9% of restaurant revenue in Q3 versus 90.8% a year earlier, and 87.9% versus 88.5% for the nine-month periods.
- Reported net income benefited substantially from realized gains: $93.0 in Q3 and $169.1 for the nine months, primarily reflecting Ceridian share sales. Cannae sold 4.0 million Ceridian shares in two 2019 offerings for $212.5 in proceeds and recorded gains of $153.3. Equity-method losses were $8.3 in Q3 and $50.8 for the nine months, including D&B losses of $21.4 and $68.6, respectively.
- Cash and cash equivalents were $153.2 at September 30, down from $323.0 at year-end; $11.3 was restricted cash. Cash used in investing activities was $289.9, including $526.2 of D&B investment spending, offset in part by $212.5 of Ceridian sale proceeds. Cash provided by financing activities was $159.2.
- Total assets were $1,893.7 and total liabilities $619.0, compared with $1,459.5 and $259.8 at year-end. Current assets were $240.8 and current liabilities $184.9.
- Notes payable totaled $201.2, versus $48.1 at year-end; $150.0 was outstanding under the margin facility. Cannae reported $250.0 of capacity under holding-company credit facilities. Operating lease liabilities were $253.7, including $43.2 current. D&B’s debt is at the investee and is not included in Cannae’s notes payable.
Material changes and notable items
- Cannae completed its D&B investment in February 2019, retaining a 24.3% interest as of quarter-end. Its investment in unconsolidated affiliates rose to $851.9 from $397.2 at year-end, including $446.2 in D&B and $370.3 in Ceridian.
- On September 1, Cannae became externally managed under an agreement with Trasimene Capital Management, which is owned by certain Cannae directors and officers. The annualized management fee is 1.5% of defined cost of invested capital; the agreement also provides for carried interest on qualifying investment profits above an 8% annualized hurdle. Fees were to begin November 1, 2019.
- Cannae adopted the new lease accounting standard in January 2019, recording a $246.0 right-of-use asset and $279.4 lease liability at adoption. It also eliminated the reporting lag in D&B equity results, applying the change retrospectively to 2019 interim periods.
- A new three-year repurchase program authorizes up to 5 million shares through September 30, 2022. Cannae repurchased 145,000 shares for approximately $4.0 in the quarter; subsequent purchases through November 8 brought the total to 178,307 shares for approximately $4.9.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management says expected operating cash needs should be met through internal funds, subsidiary dividends, investment proceeds, potential asset sales and available borrowing capacity, while continuing to assess debt reduction, repurchases, acquisitions and cash conservation. Restaurant risks include weak comparable sales, competition, wage and food-cost inflation, and sensitivity to consumer spending; T-System faces healthcare technology and reimbursement pressures. Forward-looking results may also be affected by market conditions, investment performance, acquisition execution and the externalized management structure.
- Management reported that disclosure controls were not effective at September 30, 2019 because previously identified material weaknesses in T-System revenue controls had not been remediated. Remediation was underway, with completion expected during 2019.
- The external-manager arrangement creates related-party, time-allocation and investment-conflict risks. The manager cannot be removed solely for poor performance; fees are payable regardless of company performance, and management and carried-interest costs could reduce cash available to shareholders.
- Restaurant purchase commitments totaled $244.0; undiscounted operating lease payments were $346.8. Cannae reported $0.4 accrued for legal proceedings and stated it did not expect pending matters, individually or collectively, to materially adversely affect its financial condition, results or cash flows.
- The company corrected previously reported 2018 financial information and changed its D&B reporting-lag policy. Management assessed the prior-period errors as immaterial; the D&B accounting change materially affected 2019 interim equity-method results.
Important facts for investors to verify
- How much of reported earnings is repeatable operating performance versus realized investment gains, and how D&B losses and future investment marks may affect results.
- Restaurant comparable-sales trends, continuing closures, cost pressures and the path to operating profitability.
- Liquidity after investment commitments, debt maturities, lease payments and the start of management fees; confirm current borrowing availability and balances.
- Progress in remediating T-System revenue-control weaknesses and any subsequent financial-reporting or restatement developments.
- The external manager’s fee and carried-interest calculations, related-party safeguards, and effects on shareholder returns and distributions.