Cannae Holdings, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated and combined results; comparative periods are 2017. Cannae is a holding company with restaurant operations, T-System, and a 26.9% equity-method investment in Ceridian HCM.
Key financial results
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Operating revenue | $293.5 million | $281.3 million | $891.3 million | $852.1 million |
| Operating loss | $(25.9) million | $(20.8) million | $(99.9) million | $(62.5) million |
| Net income (loss) attributable to Cannae common shareholders | $1.1 million | $(16.6) million | $(19.4) million | $110.3 million |
| Operating cash flow | Not provided for the quarter | $(48.8) million | $(111.4) million |
- Revenue increased 4.3% in Q3 and 4.6% for the nine months. Restaurant revenue declined 0.3% and 1.3%, respectively; T-System, consolidated after its 2017 acquisition, and other operating revenue contributed to the increase.
- Operating margin was approximately negative 8.8% in Q3 and negative 11.2% for the nine months, versus negative 7.4% and negative 7.3% in the prior-year periods.
- Restaurant Group comparable-store sales fell 0.7% in both periods. Restaurant costs were 90.8% of restaurant revenue in Q3 (90.0% in 2017) and 88.5% year to date (87.6% in 2017).
- Q3 attributable net income was positive despite a consolidated net loss, reflecting $9.6 million of net loss attributable to noncontrolling interests. For the nine months, the prior-year comparison includes $147.7 million of earnings from discontinued OneDigital operations, including a $276.0 million sale gain.
- 2018 nine-month results included $63.2 million of realized gain from the Ceridian IPO-related ownership change and a $23.7 million gain on the LifeWorks sale; these were partly offset by a $9.5 million investment-securities impairment. Personnel costs included Ceridian-related success bonuses of up to $67.1 million, paid partly in cash and partly in shares.
Financial position and liquidity
- At September 30, 2018, cash and cash equivalents were $57.8 million, short-term investments $32.2 million, and total current assets $252.4 million. Cash was $245.6 million at December 31, 2017. Current liabilities were $119.3 million, compared with $249.8 million.
- Total assets were $1.365 billion, total liabilities $192.2 million, and total equity $1.173 billion. Notes payable totaled $12.1 million, down from $134.9 million at year-end, following payoff of ABRH’s external debt. The $100 million FNF revolver was undrawn; $4.4 million was available under the Brasada Cascades line of credit.
- Nine-month cash flows: $48.8 million used in operations, $19.1 million used in investing, and $119.9 million used in financing. Financing outflow primarily reflected $124.1 million in debt service payments. Cash declined $187.8 million to $57.8 million.
- Contractual obligations included $352.2 million of future minimum operating lease payments and $149.5 million of restaurant purchase commitments. These are obligations over multiple years, not amounts due immediately.
Developments, outlook, and risks
- Dun & Bradstreet transaction: Cannae committed up to $900 million of equity toward the consortium acquisition and guaranteed 46.31% of specified $380.1 million termination fees in certain circumstances. As of the filing date, it had non-binding commitments to syndicate $400 million and expected to retain $500 million, funded with cash, investments, and debt. Cannae remained the primary obligor on the equity commitment until specified termination events or closing. The transaction was subject to regulatory and other closing conditions; D&B shareholders approved the merger on November 7, 2018. The commitment restricted dividends and stock repurchases and limited use or sale of Cannae’s Ceridian shares. A post-quarter margin facility of up to $300 million, secured by Ceridian shares, was available but had no borrowings outstanding as of the filing date; Cannae provided a time-limited guarantee.
- Restaurant Group: Management cited pressure from lower guest counts and comparable sales, higher labor costs, consumer shifts toward ready-to-eat alternatives, and food, energy, and other operating costs. ABRH goodwill of $103.1 million was not impaired in the Q3 test, but estimated fair value exceeded carrying value by only 13%; further deterioration could require a material future impairment. Restaurant intangible and property impairments were also recorded.
- After quarter-end, on November 6, Cannae restructured its relationship with the 99 Restaurants business: $100 million of ABRH intercompany debt was exchanged for equity, with Cannae reporting 88.5% beneficial ownership of 99 Holdings after the restructuring.
- Management said expected operating cash requirements could be met from internal funds, investment proceeds, asset sales, and existing credit facilities. No quantified earnings or revenue guidance was provided. Management also noted seasonality, with restaurant sales and operating earnings typically stronger in the first and fourth quarters.
- Other risks include Ceridian investment performance, healthcare IT market pressures affecting T-System, acquisition execution and funding, litigation and regulatory matters, and potential future impairments. The filing reported $0.6 million accrued for legal proceedings and stated that pending matters were not expected to have a material adverse effect, while acknowledging actual outcomes may differ.
- ASC 606 adoption increased opening retained earnings by $4.3 million and was not reported to have a significant impact on revenue recognition. The company also corrected a prior interim comprehensive-income presentation error of $16.7 million; it said earnings and EPS were unaffected and the error was not material. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the Dun & Bradstreet transaction closed, how much of Cannae’s equity commitment was ultimately syndicated, and the resulting funding, debt, and guarantee exposure.
- Whether ABRH’s restaurant performance and cash flows stabilize, and whether the limited 13% goodwill valuation cushion changes.
- How quickly Cannae’s cash and investments are replenished after debt repayment and transaction funding, and whether operating cash flow improves.
- The continuing effect of Ceridian-related gains and compensation costs, and the performance and market value of Cannae’s 26.9% Ceridian stake.
- The financial and operating consequences of the post-quarter 99 Restaurants restructuring, including the value and recoverability of the remaining intercompany credit exposure.