Cannae Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited consolidated and combined financial statements. Cannae is a holding company with restaurant, healthcare software and investment interests, including a 27% equity-method stake in Ceridian HCM.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $303.9m | $295.5m | $597.8m | $570.8m |
| Operating loss | $(66.9)m | $(35.3)m | $(74.0)m | $(41.7)m |
| Net loss from continuing operations | $(21.4)m | $(19.6)m | $(27.3)m | $(23.5)m |
| Net (loss) earnings attributable to Cannae common shareholders | $(18.8)m | $126.4m | $(20.5)m | $126.9m |
| Cash used in operating activities | Six-month period: $47.5m | Prior-year six-month period: $89.3m |
- Q2 revenue increased 2.8%; first-half revenue increased 4.7%. Restaurant revenue declined 4.0% in Q2 and 1.8% for the six months. Restaurant comparable sales fell 1.5% and 0.7%, respectively.
- Operating loss widened substantially, while continuing-operations losses attributable to Cannae shareholders were broadly similar year over year. Personnel costs included a Ceridian IPO success bonus of up to $67.1m, paid partly in cash and partly in Cannae shares.
- Reported 2017 net earnings included OneDigital discontinued-operations earnings of $145.3m in Q2 and $147.7m for the first half. Accordingly, reported net income comparisons are not like-for-like.
- Realized gains were $66.5m in Q2 and for the first half of 2018, mainly reflecting a $63.2m gain associated with the Ceridian IPO and change in ownership. Cannae also received a $5.6m Ceridian management-agreement termination fee.
- Ceridian generated equity-method losses of $19.6m in Q2 and $20.7m for the first half, versus $6.8m and $10.2m in the comparable 2017 periods. Cannae reported its 27% Ceridian HCM stake at $409.0m; its shares had an aggregate quoted market value of approximately $1.2bn at June 30.
- Restaurant cost of revenue was 86.9% of restaurant revenue in Q2 and 87.4% for the first half, versus 86.4% and 86.5%. The filing cites weaker sales against fixed costs, wage increases, weather-related costs and an accounting presentation change.
- Cash and equivalents were $77.7m at June 30, down from $245.6m at year-end; short-term investments were $17.3m. Total assets were $1.36bn and total equity $1.17bn. Notes payable fell to $12.4m from $134.9m, primarily after Cannae paid off ABRH’s external debt. The company had a $100m FNF revolver available and undrawn.
- Six-month investing cash flow was a $0.7m use, compared with $316.6m provided in 2017, which included OneDigital sale proceeds. Financing cash flow was a $119.7m use, principally reflecting debt service payments of $123.9m. Cash declined $167.9m over the first half.
- Contractual obligations included $359.2m of future operating lease payments and $199.9m of purchase commitments, in addition to $12.5m of scheduled notes payable.
Material developments, outlook and risks
- Dun & Bradstreet transaction: After quarter-end, Cannae committed to invest up to $900m in the consortium’s acquisition of Dun & Bradstreet, subject to the agreement’s terms, and agreed to guarantee 46.31% of certain termination fees and expenses. Cannae was to use reasonable best efforts to syndicate at least $600m, but remained the primary obligor until closing or termination. The transaction was subject to shareholder, regulatory and other customary conditions; management expected a decision within six months.
- The related letter restricts dividends and stock repurchases while Cannae’s obligations remain outstanding. The filing describes liquidity sources as internally generated funds, investment-security proceeds, potential non-strategic asset sales and existing credit facilities; no specific earnings or revenue guidance is provided.
- After quarter-end, LifeWorks was sold for $325m; Cannae expected to receive $56.2m for its interest, with proceeds expected in August 2018.
- Management cited restaurant-industry competition, consumer and discretionary-spending trends, food and labor inflation, minimum-wage increases, weather and seasonality. Ceridian faces interest-rate and operating risks; T-System faces healthcare IT, regulatory and interoperability challenges.
- Ordinary-course litigation and regulatory matters remain; $0.4m was accrued for legal proceedings at June 30. Management did not believe their resolution would materially adversely affect the company, but outcomes were generally not determinable. The filing also describes the Otis tipped-employee wage lawsuit.
- The company adopted revenue-recognition Topic 606, recording a $4.3m increase to opening retained earnings; management said adoption did not significantly affect revenue recognition. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- The funding, syndication, guarantee exposure and closing conditions for the Dun & Bradstreet commitment, and the resulting constraints on dividends and repurchases.
- The sustainability and cash impact of Ceridian-related gains, the success bonus, the quoted value of the Ceridian stake and continuing equity-method losses.
- Restaurant comparable-sales trends, cost ratios and whether labor, weather and other cost pressures persist.
- Liquidity after the cash decline and debt repayment, including the timing and use of expected LifeWorks proceeds.
- Potential changes in legal contingencies, purchase commitments and other obligations.