Cannae Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Cannae is an active investment holding company with consolidated restaurant operations and significant equity-method investments. Investee revenues are generally not consolidated into Cannae’s operating revenue.
Financial performance and position
- Revenue: Operating revenue was $164.5 million in Q3, down 11.6% year over year, and $506.4 million for the first nine months, down 9.6%. Restaurant revenue was $154.6 million and $483.4 million, respectively.
- Operating results and margins: Operating loss was $21.3 million in Q3 versus $24.8 million a year earlier; the nine-month operating loss widened to $123.9 million from $97.0 million. Restaurant cost of revenue rose to 91.3% of restaurant revenue in Q3 from 88.4%, and to 89.9% for nine months from 86.9%.
- Net income and EPS: Net income attributable to Cannae shareholders was $55.3 million, or $0.69 per diluted share, in Q3, compared with a $121.0 million loss, or $1.36 loss per share, in Q3 2021. For nine months, attributable net loss was $455.6 million, or $5.49 per diluted share, versus a $177.7 million loss, or $1.97 per share, a year earlier.
- Investment-related results: Recognized gains and losses were a $175.0 million gain in Q3 versus a $186.2 million loss in Q3 2021. For nine months, the company recorded $283.8 million of recognized losses, compared with $224.7 million of losses in 2021. Equity-method investments generated losses of $77.9 million in Q3 and $154.0 million for nine months.
- Cash flow: Operating cash use was $186.8 million for nine months, compared with $141.6 million in 2021. Investing activities provided $562.3 million, largely reflecting investment sales, while financing activities used $90.2 million. Cash increased by $285.3 million to $371.1 million.
- Liquidity and debt: Cash was $371.1 million, including $355.0 million at the corporate holding company. Cannae reported $250.0 million of unused capacity under its holding-company margin facility, with potential to increase capacity by a further $250.0 million by amendment. Notes payable totaled $108.7 million; this included $84.7 million drawn on the FNF Revolver. Total assets were $3,181.1 million and total equity was $2,725.5 million at quarter-end.
Material changes versus the prior comparable period
- Q3’s return to positive net income primarily reflects the swing in recognized gains and losses; it does not represent a comparable improvement in operating performance, as revenue fell and the operating loss persisted.
- The nine-month net loss widened, reflecting investment valuation and equity-method losses, including a $236.0 million impairment of the Paysafe investment and a $32.8 million QOMPLX impairment.
- Portfolio transactions included the Optimal Blue disposition, generating a reported $313.0 million gain; the June AmeriLife sale, generating a $102.5 million gain; sales of Ceridian and D&B shares; and the September 30 sale of CorroHealth for $78.7 million in cash and a $5.9 million gain.
- Cannae repurchased 8.43 million shares for approximately $174.7 million during the first nine months. Outstanding shares fell from 86.9 million at December 31, 2021 to 78.5 million at September 30, 2022.
- Restaurant revenue declined partly because of prior-year sales of Village Inn, Baker’s Square, and Legendary Baking businesses. Restaurant cost pressure from labor, food, and supplies contributed to higher cost ratios.
Outlook, commentary, risks, and unusual items
- Outlook: 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 proceeds, potential asset sales, and existing credit facilities, while continuing to assess capital allocation.
- Operating conditions: Management cited inflationary pressure on restaurant labor, commodities, and supplies, noting that menu pricing has been adjusted to an extent. It also highlighted restaurant seasonality and the sensitivity of profitability to sales because of fixed and semi-variable costs. Management said COVID-19 was not materially adversely affecting operations at the time, but a renewed outbreak and related restrictions could affect results.
- Portfolio and valuation risk: Results are exposed to market prices and operating performance of investees. Paysafe’s sharp decline and adverse industry and peer-multiple trends led to an impairment; the company also reported substantial equity-method losses. The filing notes that estimates and actual results may differ.
- Commitments and subsequent events: Cannae terminated its up-to-€523.0 million Eagle credit commitment on October 11, 2022. It committed approximately $84.0 million to the CSI transaction and funded it on November 8, 2022. In October, it also committed $125.8 million to BKFE for a planned acquisition of AFC Bournemouth, with installments expected through Q3 2023. These are related-party-linked transactions: CSI’s manager is affiliated with a Cannae director, and BKFE’s general partner is Cannae’s board chairman.
- Legal matter: An agreement-in-principle was reached in October 2022 to settle a stockholder derivative lawsuit, subject to formal documentation and court approval. Terms include a $6 million payment to Cannae, Management Services Agreement amendments, and governance changes.
- Manager costs: Nine-month management fees were $30.9 million and carried-interest expense was $49.3 million, primarily related to asset dispositions; $31.8 million of carried interest was paid in D&B stock.
Important facts for investors to verify
- Whether investment gains, losses, and impairment charges continue to dominate reported earnings, and how portfolio values compare with carrying amounts.
- Restaurant comparable-store sales, cost ratios, and progress in managing labor and food inflation.
- Cash available at the parent, use and cost of the FNF Revolver, and liquidity after the CSI and BKFE commitments and ongoing repurchases.
- Completion and final terms of the AmeriLife transaction, CSI and BKFE transactions, and the proposed legal settlement.
- Related-party management fees, carried interest, and governance implications of the CSI and BKFE commitments.