Cannae Holdings, Inc. — 2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020, not just the fourth quarter. Cannae is an investment and operating holding company with significant interests in Dun & Bradstreet (D&B), Ceridian, Optimal Blue and AmeriLife, as well as majority-owned restaurant businesses. D&B, Optimal Blue and other equity-method investees’ revenues are not consolidated into Cannae’s operating revenue.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Operating revenue | $585.7 million | $1,070.0 million |
| Operating loss | $188.5 million | $117.6 million |
| Net earnings attributable to Cannae | $1,786.2 million | $77.3 million |
| Diluted EPS | $20.79 | $1.07 |
| Cash used in operating activities | $113.9 million | $84.2 million |
| Cash and cash equivalents at year-end | $724.7 million | $533.7 million |
| Notes payable at year-end | $63.5 million | $127.1 million |
Operating revenue declined 45.3%, largely reflecting the Restaurant Group’s reduced revenue and the Blue Ribbon bankruptcy-related deconsolidation, closures and sales of restaurants, and COVID-19 impacts. Operating margin was approximately negative 32.2%, versus negative 11.0% in 2019. Restaurant costs were 93.7% of restaurant revenue, compared with 87.5% in 2019.
Reported earnings were dominated by investment gains rather than operating performance: recognized net gains and losses were $2.362 billion, including a $684.9 million noncash Ceridian revaluation gain after Cannae lost significant influence, gains on equity securities, and a $117.0 million D&B IPO-related gain. The filing reports $1.581 billion of unrealized gains on equity securities still held at year-end. Net earnings therefore should not be read as a measure of recurring operating profitability.
Fourth-quarter 2020 operating revenue was $170.4 million, versus $278.5 million in fourth-quarter 2019. Net earnings attributable to Cannae were $531.3 million, or $5.81 per diluted share, compared with $24.5 million, or $0.33 per diluted share, in the prior-year quarter.
Year-end total assets were $4.613 billion and total equity was $3.785 billion. Notes payable were $63.5 million; balance-sheet lease liabilities were $221.8 million. Cash used in investing activities was $74.2 million, while financing activities provided $379.1 million, including $455.0 million of net proceeds from a common-stock offering. Cannae repurchased $14.4 million of stock and paid no common dividends. Cash included $12.5 million of restricted collateral. Management reported $666.0 million of cash at the holding company and $200.0 million of available borrowing capacity under holding-company facilities at year-end.
Material changes and significant transactions
- Cannae sold 9.7 million Ceridian shares for $720.9 million and, after losing significant influence in March 2020, began carrying its remaining 9.5% interest at fair value.
- D&B completed its IPO; Cannae invested an additional $200.0 million and held an 18.1% interest at year-end. D&B’s reported net loss was $106.5 million for 2020; Cannae recorded $46.8 million of equity-method losses from D&B.
- Cannae invested $289.0 million for 20% of Optimal Blue and $125.0 million in the AmeriLife joint venture. Equity-method losses from these investments were $9.4 million and $4.0 million, respectively, for the periods included in Cannae’s results.
- Blue Ribbon filed for Chapter 11 in January 2020 and was deconsolidated. Cannae acquired Legendary Baking and VIBSQ upon their emergence in October; the businesses were consolidated only from that date through year-end. Cannae recorded a $7.8 million restaurant goodwill impairment and $11.8 million impairment of the O’Charley’s tradename.
- Cannae and its Senator JV partner exited CoreLogic after an unsuccessful acquisition proposal. Cannae received a further $280.6 million of distributions after year-end through the filing date.
Outlook, commentary and risks
The filing gives no consolidated earnings or revenue guidance. Management said it believed expected cash needs could be met through cash, subsidiary distributions, investment sales, asset sales and available borrowing facilities. It emphasized continued investment evaluation and portfolio monetization. D&B reported a 96% revenue retention rate in both 2019 and 2020 and approximately $242 million of net annualized run-rate cost savings from its transformation initiatives.
Restaurant guest counts and comparable sales remained below historical levels as COVID-19 restrictions, dining-room closures and altered consumer behavior weighed on operations. Comparable sales fell 32.8% at 99 Restaurants and 22.5% at O’Charley’s in 2020. Management noted gradual improvement in the second half but cautioned that pandemic effects could continue; restaurant margins are also exposed to labor, commodity and other largely fixed costs.
As of the filing date, Cannae had aggregate commitments of $975 million related to SPAC investments: $500 million for the Paysafe transaction, $400 million for Alight and $75 million for Trebia. The Paysafe and Alight business combinations remained subject to approvals and other closing conditions. Cannae stated that funding these commitments could require it to forgo other investments, sell assets, raise equity or borrow. The agreements involve sponsors affiliated with company leadership, creating related-party and conflict-of-interest considerations.
Other material risks include volatile fair values of concentrated equity investments; execution and impairment risk at D&B and Optimal Blue; restaurant recovery and competition; cybersecurity and data protection; illiquid investments; potential Investment Company Act regulation; and fees and carried interest under the externally managed structure. A stockholder derivative lawsuit challenged the Management Services Agreement and certain compensation matters; the company said remaining claims would be contested. The auditors issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- How much of 2020 earnings and book-value growth reflects unrealized, nonrecurring investment gains, and how sensitive are key holdings to market-price changes?
- Whether restaurant sales, guest counts and margins recover, and whether further closures or impairment charges occur.
- Funding, valuation and closing outcomes for the $975 million of SPAC-related commitments, including the use of Level 3 assumptions for certain agreements.
- Holding-company liquidity after commitments and obligations, including subsequent CoreLogic distributions, borrowing availability and collateral requirements.
- Current status and potential economic effects of the Manager-related litigation, management fees and carried-interest arrangements.