Cannae Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Financial statements are unaudited; amounts are in millions except per-share data. Cannae actively manages operating businesses and minority investments. Its portfolio included Dun & Bradstreet, Ceridian, Paysafe, Alight, Optimal Blue and AmeriLife, alongside majority-owned restaurant businesses.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $202.4 | $102.6 | $374.3 | $275.6 |
| Operating income (loss) | $(36.2) | $(45.7) | $(72.2) | $(99.0) |
| Recognized gains (losses), net | $274.0 | $578.1 | $(38.5) | $1,493.2 |
| Net earnings (loss) attributable to Cannae common shareholders | $176.4 | $475.3 | $(56.7) | $1,123.0 |
| Diluted earnings (loss) per share | $1.94 | $5.87 | $(0.62) | $14.00 |
| Net cash used in operating activities | Not separately provided for the quarter | $(67.2) | $(81.3) |
At June 30, cash and cash equivalents were $271.2, total assets $4,439.6, and total liabilities $806.1. Notes payable totaled $51.5, including $26.8 current. Cannae reported $200.0 of available capacity under holding-company credit facilities, with the possibility to add $400.0 through an amendment to its margin facility. Cash included $12.9 of restricted restaurant-group cash. The filing does not provide a consolidated free-cash-flow figure or a company-wide operating margin.
Changes versus the prior comparable periods
- Q2 revenue rose 97.3% and first-half revenue rose 35.8%, principally reflecting restaurant recovery from COVID-related restrictions and the reconsolidation of Legendary Baking and VIBSQ in October 2020. Comparisons are affected by unusually depressed 2020 restaurant activity.
- Restaurant Group Q2 revenue increased 91.0%; comparable-store sales rose across its brands versus Q2 2020. Management said same-store sales remained below the corresponding 2019 periods. Cost of restaurant revenue fell to 84.4% of restaurant revenue in Q2 from 101.4% a year earlier, with labor improvements partly offset by higher food and supply costs.
- Despite higher operating revenue and a narrower operating loss, reported earnings were lower than 2020, when investment gains were much larger. First-half 2021 included a net recognized loss, compared with $1,493.2 of recognized gains in first-half 2020.
- Cash fell by $453.5 from year-end to $271.2. First-half investing cash outflow was $282.0, including Paysafe and Alight-related investments; financing cash outflow was $100.2, including $88.0 of treasury-stock repurchases.
Investments, liquidity, outlook and risks
- Cannae received $175.0 from selling 2.0 million Ceridian shares and $186.0 from selling 8.5 million D&B shares. It held approximately 8.0% of Ceridian and 15.8% of D&B at quarter-end. Paysafe became an equity-method investment after its March 2021 merger; Cannae reported a 7.5% direct and indirect interest.
- Alight’s business combination closed July 2, 2021. Cannae reported receiving 40.0 million Alight shares under subscription and forward-purchase arrangements, plus 1.5 million shares through the FTAC sponsor; it also received a $7.1 fee. The QOMPLX combination remained subject to approval and other closing conditions.
- Management said it expected anticipated operating cash requirements to be met through internal funds, subsidiary dividends, investment proceeds, potential asset sales and available borrowing capacity. No numerical earnings or revenue guidance was provided. Cannae expected to report Paysafe results with a three-month lag beginning in Q3 2021.
- The company initiated dispositions of Legendary Baking, VIBSQ and Rock Creek. VIBSQ was sold July 30, 2021; management expected the Rock Creek sale in 2021. Assets held for sale were $104.4 and related liabilities $43.1 at quarter-end; Cannae recorded a $7.0 valuation loss on Legendary Baking and VIBSQ.
- Risks include continuing COVID-19 effects and variants, restaurant traffic and capacity, food, labor and other costs, investment-price volatility and valuation judgments, and execution and funding risks related to acquisitions and SPAC transactions. Cannae had backstop arrangements of up to $690.0 for Austerlitz I/Wynn Interactive and up to $200.0 for Trebia/System1, subject to their terms and conditions.
- Other obligations included $86.5 of unconditional purchase commitments, $278.9 of operating lease payments and $109.0 of projected management fees in the disclosed contractual-obligation schedule. A stockholder derivative suit concerning the management agreement and incentive compensation remained stayed while a special litigation committee investigated; Cannae said it would contest remaining claims.
Unusual items and investor verification points
- The company recorded Q2 out-of-period adjustments that increased recognized gains by $13.2, equity-method earnings by $6.9 and income tax expense by $4.2; attributable net earnings increased $15.9, or $0.17 per share. Management deemed the adjustments immaterial to estimated full-year results and the earnings trend.
- Cannae disclosed a $567.8 difference between its recorded direct Paysafe investment and its ratable share of Paysafe’s underlying net assets and said it was evaluating the accounting treatment.
- Verify the composition and sustainability of reported earnings, particularly investment fair-value marks and realized gains, against operating performance and cash flows.
- Verify post-quarter transaction closings, proceeds and share ownership, including the VIBSQ sale and Alight merger, and the status and funding exposure of pending SPAC transactions and backstops.
- Monitor restaurant sales versus 2019 levels, labor and commodity costs, cash available at the holding company, facility availability, and the disposition of remaining held-for-sale businesses.
- Review subsequent filings for the resolution of the Paysafe accounting evaluation, derivative litigation, and any changes to management fees, repurchases or investment commitments.