Cannae Holdings, Inc. Form 10-Q Summary
Period: Quarter ended September 30, 2017; filed November 28, 2017.
Business context and reporting period
Cannae was formed in April 2017, but had not commenced operations through September 30, 2017. Accordingly, this filing omits Cannae standalone financial statements and presents unaudited combined results for Fidelity National Financial Ventures Operations (FNFV Operations), the businesses intended for the split-off. The results are historical carve-out information and may not represent the results or costs of an independently operated Cannae.
The FNFV Operations portfolio included a 55% interest in American Blue Ribbon Holdings (restaurant operations), a 33% equity-method investment in Ceridian, and other controlled and minority investments. FNF completed the split-off on November 17, 2017, when Cannae became a separate public company.
Key financial results
| Metric | Three months ended September 30, 2017 | Nine months ended September 30, 2017 |
|---|---|---|
| Total operating revenue | $281.3 million, versus $281.9 million | $852.1 million, versus $875.4 million |
| Operating income (loss) | $(20.8) million, versus $(3.7) million | $(62.5) million, versus $1.2 million |
| Continuing-operations loss | $(23.2) million, versus $(27.7) million | $(45.0) million, versus $(8.8) million |
| Net earnings (loss), including discontinued operations | $(23.2) million, versus $(27.7) million | $102.7 million, versus $(6.8) million |
| Net earnings (loss) attributable to Parent | $(15.1) million, versus $(26.4) million | $113.5 million, versus $(7.8) million |
Nine-month 2017 results included $147.7 million of earnings from discontinued operations, principally related to the OneDigital sale. The continuing-operations loss therefore better reflects ongoing reported operations than total net earnings for that period.
Restaurant revenue was $270.0 million in Q3 and $830.4 million for the first nine months, down 1% and 3%, respectively, from comparable 2016 periods. Restaurant cost of revenue rose to approximately 90% of restaurant revenue in Q3 and 88% year to date, compared with approximately 87% and 85%, respectively.
Balance sheet, cash flow and debt
- At September 30, 2017, cash and cash equivalents were $335.5 million; total assets were $1.361 billion and total liabilities were $287.3 million.
- Total notes payable were $128.5 million, including $86.1 million under the ABRH term loan and $29.6 million under its revolving facility. Gross scheduled debt maturities included $105.5 million in 2019.
- For the nine months, operating cash flow was negative $111.4 million, compared with positive $15.2 million in 2016. Management attributed the decline primarily to increased income tax payments.
- Investing activities provided $301.7 million, including $326.0 million of cash proceeds from OneDigital. Financing activities used $1.2 million. Capital expenditures were $29.5 million.
- Reported future operating lease payments totaled $387.1 million and unconditional purchase obligations totaled $233.9 million.
Material changes and unusual items
- OneDigital was sold on June 6, 2017, in a $560.0 million all-cash transaction. FNFV Operations received $331.4 million after debt repayment and other payments, including $326.0 million cash and a $5.4 million holdback receivable. The sale generated a $276.0 million pretax gain; discontinued operations reported $147.7 million of earnings for the nine-month period.
- Restaurant operating results deteriorated: Q3 operating loss increased to $16.9 million from $3.0 million, and nine-month results shifted to a $19.8 million operating loss from $7.7 million of operating income. The filing cites lower same-store sales, reduced operating leverage, higher hourly labor costs and increased value promotions.
- Corporate and Other nine-month personnel costs increased, primarily due to Investment Success Incentive Program bonuses associated with the OneDigital sale; separation-related costs also contributed to higher expenses.
- On October 16, 2017, FNFV LLC acquired T-System for $204.4 million in cash. The filing says purchase-price allocation estimates were not yet available.
- On November 17, FNF contributed $100.0 million to Cannae in exchange for shares and issued a revolving note of up to $100.0 million, bearing interest at LIBOR plus 450 basis points.
- A proposed exchange of 99 Restaurants for J. Alexander’s equity and assumption of net debt was subject to closing conditions and expected in late 2017 or early 2018; it was not completed as of the filing’s reporting date.
Management commentary, outlook and risks
No quantified financial guidance is provided. Management said it expected anticipated cash requirements for current operations to be met through internally generated funds, investment-security proceeds, potential non-strategic asset sales and borrowing capacity. It described ongoing evaluation of assets and investments for liquidity and capital allocation, including debt reduction, share repurchases, strategic initiatives or cash conservation.
Management highlighted restaurant-industry exposure to consumer spending, competition, food and labor costs, regulation, weather and seasonality. Ceridian’s results may be affected by interest rates, customer employment and transaction volumes, foreign exchange, and its business transition to cloud services. The filing also identifies acquisition integration and financing risks, split-off restrictions, and newly disclosed T-System risks involving healthcare regulation, customer spending, data security and international operations.
O’Charley’s faced potential card-network liabilities following a 2016 payment-card incident; Visa had reported 438,248 affected accounts, and an assessment was expected in November 2017. The filing reported no legal-proceeding accruals because no ongoing matter was both probable and reasonably estimable. It cautioned that outcomes could nevertheless affect results or cash flows. Disclosure controls were reported effective, with no material changes to internal control over financial reporting.
Most important facts for investors to verify
- How the post-split-off Cannae standalone financial statements compare with the historical FNFV Operations carve-out results and allocated costs.
- The sustainability of restaurant performance, particularly same-store sales, labor and food costs, and restaurant-level margins.
- The final T-System purchase-price allocation, integration costs and operating performance, and the status and terms of the proposed 99 Restaurants transaction.
- The cash impact of the OneDigital sale, related taxes and incentive compensation, and the drivers of negative operating cash flow.
- Subsequent developments and ultimate exposure from the O’Charley’s card incident and other legal, regulatory and contractual commitments.