Cannae Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Cannae is an investment holding company with controlled restaurant operations and significant equity-method and equity-security investments. Unless noted, amounts are in millions of dollars.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $174.5 | $202.4 | $341.9 | $374.3 |
| Operating loss | $(27.0) | $(36.2) | $(102.6) | $(72.2) |
| Net earnings (loss) attributable to Cannae common shareholders | $(263.3) | $176.4 | $(510.9) | $(56.7) |
| Basic and diluted EPS | $(3.15) | $1.94 | $(6.03) | $(0.62) |
| Cash from (used in) operating activities | Not presented by quarter | $(133.0) | $(67.2) |
- Revenue declined 13.8% in Q2 and 8.7% in the first half. Restaurant revenue was $166.7 in Q2 and $328.8 in the first half.
- Restaurant cost of revenue rose to 88.7% of restaurant revenue in Q2 and 89.2% for the first half, from 84.4% and 86.2%, respectively, in 2021. The filing attributes the increase to labor, food and supply costs. Restaurant Group reported an operating loss of $3.4 in Q2 versus income of $5.8 a year earlier.
- Investment and equity-method results drove much of the net loss: recognized net losses were $193.6 in Q2 and $458.8 for the first half; equity-method losses were $108.0 and $76.1, respectively. The filing does not provide a consolidated operating margin measure.
- At June 30, cash and cash equivalents were $100.6, including $75.7 at the holding company. Current assets were $128.6 versus current liabilities of $186.6. Total assets were $3,188.1 and total equity was $2,706.1.
- Notes payable totaled $106.7, compared with $16.4 at year-end 2021; $10.8 was current and $95.9 long-term. The company reported $250.0 of unused capacity under its margin facility, with potential capacity to increase it by another $250.0 subject to amendment. The margin facility had no balance outstanding at quarter-end.
- First-half investing cash flow was $201.7 provided, including proceeds from asset and investment sales and a $246.5 investment in System1. Financing cash flow used $53.9; cash increased $14.8 to $100.6. Operating cash use increased by $65.8 year over year, primarily due to working-capital timing.
Material changes and unusual items
- The year-over-year earnings swing reflects market-related investment losses and impairments, compared with substantial investment gains in Q2 2021. First-half 2022 included a $236.0 impairment of Paysafe, a $32.8 impairment of QOMPLX, and a $313.0 gain on the Optimal Blue disposition. Q2 2022 also included substantial equity-security losses.
- Cannae sold its Optimal Blue interests in February for $144.5 cash and 21.8 million D&B shares, recording the $313.0 gain. It sold Ceridian shares during the first half for $285.7 in proceeds. The remaining Ceridian equity-security carrying value fell to $282.5 from $1,045.1 at year-end.
- Restaurant revenue comparisons were affected by the prior-year-period presence of Village Inn, Baker’s Square and Legendary Baking, which had subsequently been sold. Comparable sales in Q2 fell 5.1% at O’Charley’s but rose 10.2% at 99 Restaurants.
- The company repurchased 6.8 million shares in the first half for approximately $138.6, including repurchases from FNF. A new authorization for up to 10 million shares was approved August 3, 2022.
- Management began reporting its Alight equity-method investment on a current basis rather than a three-month lag in Q2; the change did not materially affect current or prior-period results. Paysafe and several other affiliate results continue to be reported on a lag.
Outlook, risks and contingencies
- No earnings or revenue guidance was provided. Management said it expects current operating cash needs to be met through internal funds, subsidiary distributions, investment-sale proceeds, potential asset sales and existing credit facilities, while continuing to assess cash conservation, debt reduction, repurchases and acquisitions.
- Management cited elevated inflation affecting restaurant commodity and labor costs; menu pricing has been adjusted to some extent while balancing customer value and long-term profitability. It said COVID-19 was no longer materially affecting operations, but a renewed outbreak and related responses could adversely affect results.
- Cannae signed a non-binding letter of intent concerning an investment in Eagle Football Holdings. Separately, it provided a commitment for a credit facility of up to €523.0 to support a contemplated acquisition involving Olympique Lyonnais; the facility would be secured by specified football-club interests and personally guaranteed by John Textor. Cannae expects to syndicate a substantial majority if funded. Final terms and funding are not established in the filing.
- A $125.0 AAII forward-purchase commitment is contingent on completion of AAII’s business combination. Restaurant vendor purchase commitments totaled $82.4; total disclosed contractual obligations were $578.2.
- The filing describes ongoing ordinary-course litigation and a stockholder derivative action concerning the management agreement and incentive arrangements. The company said its legal accruals were not material and that it did not expect pending matters, individually or collectively, to materially adversely affect its financial condition, results or cash flows; outcomes remain uncertain.
- Other risks identified include investment valuation and market volatility, macroeconomic conditions, competition, the external-manager relationship, and the ability to find and integrate acquisitions. Debt maturities include $85.4 in 2025.
Important facts for investors to verify
- How much of the reported loss reflects investment-market movements and impairments versus recurring operating performance, and whether portfolio valuations recover or deteriorate.
- The status, final terms, funding exposure and syndication of the Eagle credit commitment, and whether the contingent AAII commitment becomes payable.
- Restaurant sales trends, inflation-driven cost pressure, and the effect of divested brands on future revenue comparisons.
- Liquidity after operating cash use, share repurchases and any new investments; confirm borrowing capacity, covenants and the 2025 debt maturity profile.
- Subsequent D&B share sale proceeds of $127.2 reported after quarter-end, and the resulting ownership and investment carrying values.