Cannae Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Cannae is an investment and operating company with interests in public and private businesses, including Dun & Bradstreet, Ceridian, Alight, Paysafe, Sightline, and restaurant operators O’Charley’s and 99 Restaurants. Most affiliate results are accounted for under the equity method and are not consolidated as Cannae revenue.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Operating revenue | $154.3 million | $167.4 million |
| Operating loss | $22.7 million | $75.6 million |
| Recognized gains (losses), net | $52.1 million | ($265.2 million) |
| Equity in earnings (losses) of unconsolidated affiliates | ($32.1 million) | $31.9 million |
| Net loss attributable to Cannae common shareholders | $4.1 million | $247.6 million |
| Basic and diluted loss per share | $0.05 | $2.88 |
| Cash used in operating activities | $19.7 million | $38.5 million |
Restaurant cost of revenue was 88.6% of restaurant revenue, compared with 89.7% a year earlier. No consolidated gross or operating margin guidance was provided. Revenue declined 7.8%; the filing attributes most of the Restaurant Group’s revenue decline to $8.3 million of prior-year revenue from stores closed before 2023. Comparable sales fell 4.9% at O’Charley’s and 0.2% at 99 Restaurants, primarily reflecting lower guest counts.
Balance sheet and liquidity
- At March 31, 2023, cash and cash equivalents were $184.8 million, short-term investments $105.0 million, and total current assets $313.2 million. Cash plus short-term investments totaled $289.8 million.
- Total assets were $3.13 billion; total liabilities were $414.2 million; total equity was $2.72 billion.
- Notes payable totaled $101.9 million, including $84.7 million outstanding on the FNF Revolver. The FNF borrowing carried 9.23% interest and had no remaining availability. The 2020 Margin Facility had no outstanding balance and $250 million of unused capacity; it is secured by specified Ceridian and D&B shares and has loan-to-value requirements.
- Cash decreased by $62.9 million during the quarter. Investing activities used $44.4 million, including $40.3 million of additional investments in unconsolidated affiliates and $70.1 million of net purchases of short-term investments. Financing activities provided $1.2 million.
- Operating lease payments and restaurant purchase commitments were $236.6 million and $80.9 million, respectively, over the disclosed contractual schedule. The filing also reports $34.4 million of Restaurant Group financing obligations.
Material changes and unusual items
- Net loss improved substantially from Q1 2022, but results in both periods were heavily affected by investment valuation and transaction items. Q1 2023 recognized gains included $59.2 million of Ceridian fair-value gains; Q1 2022 included $324.5 million of Ceridian losses, a $236.0 million Paysafe impairment, and a $313.0 million Optimal Blue sale gain.
- Equity-method results shifted from $31.9 million of earnings to $32.1 million of losses. Cannae reported losses from D&B, Alight, Paysafe, Sightline, and other affiliates in Q1 2023.
- Cannae sold 1.0 million Ceridian shares in February for $78.0 million and held 5.0 million shares at quarter-end. It received $4.0 million in D&B dividends, recorded as a reduction to its investment basis.
- Management fee expense payable to the external Manager was $9.4 million versus $10.6 million a year earlier. The prior-year period included $45.2 million of carried-interest expense; none was incurred in Q1 2023.
Outlook, risks, and contingencies
The filing provides no numerical earnings or revenue guidance. Management expects operating cash needs to be met through internal funds, subsidiary dividends, investment-security proceeds, potential asset sales, and available borrowing capacity. Capital allocation remains subject to review, including debt reduction, share repurchases, acquisitions, and conserving cash. Management cited inflationary pressure on restaurant commodity and labor costs and said menu pricing has been adjusted at least partly to address cost increases.
- Investment values and affiliate performance are significant risks. Cannae said its March 31 System1 investment fair value of $116.6 million was below its $122.4 million carrying value; by May 8, its fair value was $85.7 million. Further deterioration could lead to impairment. Alight’s quoted fair value was also below carrying value ($483.3 million versus $526.4 million); management considered the decline temporary but noted further deterioration could result in impairment.
- Cannae reports System1 results on a three-month lag and used preliminary results because System1 had not filed its annual report for 2022. System1 had also warned investors not to rely on certain 2022 quarterly financial statements. Cannae said it did not expect the restatements to materially affect its previously reported financial information, while identifying affiliate reporting and control weaknesses as an added risk.
- Cannae guaranteed certain BKFE earnouts and investment commitments, estimated at approximately $100.8 million in aggregate, contingent on specified conditions and payable only to the extent BKFE cannot meet them.
- A derivative lawsuit settlement formalized in March includes a $6 million cash payment to Cannae, amendments to the Manager agreement, and governance changes. Court approval was pending, with a settlement hearing scheduled for June 8, 2023. The company said its accrued legal settlement liability was not material.
- Other risks include restaurant competition and operating costs, market volatility, acquisition and integration risks, reliance on the external Manager, and ordinary-course litigation and regulatory matters. Management said current pending legal matters were not expected to have a material adverse effect, although outcomes remain uncertain.
Important facts for investors to verify
- Subsequent Ceridian and System1 market values, and whether declines in affiliate values trigger impairment charges.
- Unconsolidated affiliates’ latest financial statements, reporting controls, and any effect of System1 restatements on Cannae’s reported results.
- Use of available cash and margin-facility capacity, FNF Revolver interest costs, and compliance with margin-facility collateral requirements.
- Final court approval and terms of the derivative lawsuit settlement, including receipt of the $6 million payment.
- Restaurant comparable sales, inflation-related food and labor costs, and the ability to sustain margins as sales change.