Cannae Holdings, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 18, 2019. Although requested as “2018 Q4,” this is an annual filing. Cannae is a holding company whose principal businesses and investments included its restaurant operations, a 23.5% interest in Ceridian, T-System, and other investments.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Operating revenue | $1,205.4 million | $1,169.5 million |
| Operating loss | $(149.8) million | $(78.4) million |
| Net income (loss) attributable to Cannae | $27.6 million | $108.8 million |
| EPS attributable to common shareholders | $0.39 | $1.54 |
| Cash from operating activities | $(22.9) million | $(90.7) million |
| Cash and cash equivalents at year-end | $323.0 million | $245.6 million |
| Notes payable at year-end | $48.1 million | $134.9 million |
| Total assets / total equity | $1,459.5 million / $1,199.7 million | $1,487.2 million / $1,153.1 million |
Revenue increased 3.1%. The consolidated company reported a $10.6 million net loss, while Cannae-attributable earnings were $27.6 million, reflecting losses attributable to noncontrolling interests. The 2017 attributable result included $147.5 million of earnings from discontinued operations, chiefly the OneDigital sale; 2018 had no discontinued-operations earnings. Thus, the year-over-year decline in attributable earnings is not directly comparable to continuing operations alone.
Operating loss widened by $71.4 million. Restaurant Group cost of revenue was 88.7% of restaurant revenue, compared with 87.8% in 2017; management cited higher food and labor costs. The filing does not provide a consolidated operating margin that would be more meaningful than the reported operating loss. Cannae paid no common dividends in either year.
Cash from operations remained negative but improved year over year, primarily due to lower income-tax payments. Investing activities provided $186.7 million, including proceeds from Ceridian share and LifeWorks sales; financing activities used $86.4 million. Year-end current assets were $451.7 million and current liabilities were $160.0 million. Notes payable included $36.1 million under the 99 Restaurants term loan and $11.7 million of Brasada loans, net of debt issuance costs.
Material changes and unusual items
- Ceridian IPO and sales: Cannae retained 23.5% of Ceridian after the April IPO and November secondary sale. It recorded $63.2 million of IPO-related realized gains, $92.6 million on the sale of Ceridian shares, and $24.0 million on the LifeWorks sale. These transactions were major contributors to 2018’s $166.8 million of net realized gains.
- Compensation and impairment: Cannae approved Ceridian-IPO success bonuses of up to $67.1 million, paid in cash and stock; $46.9 million was paid in cash and 991,906 Cannae shares were issued. The Restaurant Group recorded $26.7 million of ABRH goodwill impairment and $5.8 million of impairment related to a tradename and abandoned software project.
- Restaurant restructuring and debt: Cannae reorganized 99 Restaurants and ABRH in November, exchanging $100 million of intercompany debt for a 66.7% direct interest in 99 Holdings. A new 99 Restaurants facility provided $36.2 million, primarily used to repay intercompany debt.
- Dun & Bradstreet, subsequent event: The acquisition closed February 8, 2019, after year-end. Cannae funded a $505.6 million investment for 24.5% of the equity, below its previously disclosed $900 million commitment after syndicating the remainder. The acquisition was financed with equity, preferred equity, and debt at the consortium level. Cannae subsequently drew $150 million under its margin facility and $100 million under the FNF revolver to help fund its investment.
Outlook, risks, and controls
The filing gives no specific earnings or revenue guidance. Management said it expects current operating cash needs to be met through internally generated funds, subsidiary distributions, investment proceeds, potential asset sales, and available borrowing facilities. Capital allocation may include debt reduction, repurchases, acquisitions, or retaining cash. The company’s strategy is to manage and monetize existing investments and pursue additional investments; outcomes and timing are uncertain.
Key disclosed risks include restaurant sales and guest-count declines, wage and food-cost inflation, competition and changing consumer preferences, and potential asset impairments. Cannae also highlights dependence on subsidiary distributions, acquisition and integration risk, portfolio-company debt and operating performance, regulatory and litigation exposure, and cybersecurity and data-privacy risks. Its margin facility is secured by Ceridian shares and includes loan-to-value maintenance requirements, creating potential collateral and repayment pressure if the share price falls.
The financial-statement audit opinion was unqualified. However, the auditor issued an adverse opinion on internal control over financial reporting, identifying material weaknesses in T-System’s adoption and application of ASC 606 revenue accounting. Cannae also concluded disclosure controls were ineffective at year-end and planned remediation during 2019. The company corrected immaterial errors in 2018 interim reporting prospectively. It adopted ASC 606 in 2018; the corrected opening-equity adjustment was $1.9 million. The filing says adoption did not materially change the timing or amount of revenue recognition.
Important facts for investors to verify
- How much of reported earnings depends on realized investment gains, and how Ceridian’s market value compares with its $359.7 million carrying value.
- Restaurant Group operating trends, including comparable-store sales (down 0.6% in 2018), cost inflation, and the outlook for ABRH after its goodwill impairment.
- Funding and leverage after the post-year-end Dun & Bradstreet investment, including Cannae’s margin-facility and FNF revolver borrowings and collateral terms.
- Progress in remediating the T-System revenue-control material weaknesses and whether subsequent filings report further corrections.
- Ability to generate positive operating cash flow and meet contractual commitments, including $379.0 million of future operating lease payments and $341.6 million of purchase obligations disclosed at year-end.