Cannae Holdings, Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. Cannae is a diversified holding company; its restaurant operations are consolidated, while Ceridian, Dun & Bradstreet (D&B) and other affiliates are generally accounted for using the equity method.
Financial results and position
| Metric | 2019 | 2018 |
|---|---|---|
| Operating revenue | $1,070.0 million | $1,147.5 million |
| Operating loss | $(117.6) million | $(145.8) million |
| Net earnings (loss) attributable to Cannae common shareholders | $77.3 million | $27.6 million |
| EPS attributable to common shareholders | $1.07 | $0.39 |
| Net cash used in operating activities | $(84.2) million | $(22.9) million |
| Capital expenditures | $28.3 million | $15.9 million |
- Revenue declined 6.8%, principally from lower Restaurant Group sales. Restaurant revenue was $1,043.3 million, down from $1,117.8 million.
- The operating loss narrowed, but profitability attributable to shareholders was supported by $357.7 million in net realized gains, primarily the $342.1 million gain on Ceridian share sales. The company also recorded $115.1 million of equity-method losses, including a $132.8 million D&B loss.
- Reported net earnings were $46.8 million, including a $51.8 million loss from discontinued operations; the $77.3 million attributable to Cannae shareholders reflects the allocation of losses to noncontrolling interests.
- Restaurant cost of revenue was 87.5% of restaurant revenue, compared with 88.7% in 2018. The filing does not provide a consolidated operating margin that would meaningfully reflect the investment gains and equity-method results.
- At year-end, cash and cash equivalents were $533.7 million; total assets were $2.09 billion, total liabilities $562.4 million and total equity $1.53 billion. Notes payable totaled $127.1 million, including $7.0 million current and $120.1 million long-term. The company reported $241.2 million of operating lease liabilities after adopting ASC 842.
- Year-end cash increased from $315.7 million in 2018. Financing activities provided $319.1 million, including $236.0 million net proceeds from a share offering; investing activities used $24.2 million. Cannae paid no common dividends and repurchased 178,307 shares for $4.9 million.
Material changes and key transactions
- Cannae invested a net $505.6 million in D&B’s ultimate parent in February 2019, made an additional $23.5 million investment in June, and held a 24.3% interest at year-end. D&B reported $3.82 billion of long-term debt and a $425.8 million net loss for 2019.
- Cannae sold 9.0 million Ceridian shares during 2019, receiving $477.9 million and recording a $342.1 million gain. Its ownership stood at 16.4% at year-end. A further sale in February 2020 generated $283.7 million; Cannae then held 13.7%.
- On December 31, Cannae contributed T-System to Coding Solutions, receiving $60.8 million repayment of intercompany debt, $14.5 million for part of its shares, and a 22.7% Coding Solutions interest valued at $60.2 million. T-System results were classified as discontinued operations.
- Cannae externalized management effective September 1, 2019. The related-party Manager’s fee is 1.5% annualized on defined invested capital; carried interest may also apply to qualifying investment profits above an 8% annualized hurdle.
- Cannae committed $245.0 million to an investment fund and $125.0 million to the proposed AmeriLife joint venture. The fund commitment includes $100.0 million invested after year-end; the AmeriLife transaction was expected to close in the first or second quarter of 2020.
Outlook, risks and unusual items
- No quantified company-wide financial guidance is provided. Management describes an investment strategy focused on managing and monetizing existing holdings and pursuing new investments. D&B’s transformation was reported to have produced approximately $208 million in net annualized run-rate savings by year-end, with further cost opportunities identified.
- Blue Ribbon, which operates Village Inn, Bakers Square and Legendary Baking, filed for Chapter 11 on January 27, 2020. It had closed 33 underperforming stores shortly before filing. The filing does not affect O’Charley’s or 99 Restaurants. Cannae agreed to provide up to $20 million in debtor-in-possession financing and had advanced $7.5 million after year-end; estimated landlord claims were up to about $7 million and professional fees about $5–7 million.
- Restaurant Group revenue fell 6.7%; 48 company-owned restaurants were closed or sold during 2019. Same-store sales declined 2.5% at O’Charley’s and 1.7% at Village Inn; 99 Restaurants declined 0.4%. Management cited guest-count pressure, labor and food costs, competition and other industry risks.
- Impairments included $10.4 million of Restaurant Group goodwill, $17.1 million for Village Inn and Bakers Square trade names, and $21.1 million for restaurant lease assets. Management warned that relatively small adverse forecast or valuation changes could trigger further impairment in certain restaurant assets.
- The 2019 operating cash outflow was driven in part by cash deposited with the Equity Fund. Contractual obligations included $301.4 million in purchase commitments and $303.3 million in undiscounted operating lease payments.
- At December 31, Cannae disclosed $325 million of available borrowing capacity under holding-company facilities. It repaid the remaining $75 million Margin Facility balance and terminated that facility in February 2020; afterward it reported $100 million available under holding-company facilities.
- Other significant risks include conflicts of interest and fees under the related-party management agreement, execution risk in portfolio-company transformations, cybersecurity and data-protection exposure at investees, and potential volatility in equity-method investment values. Cannae reported effective disclosure controls and internal control over financial reporting; the auditors issued unqualified opinions.
Most important facts for investors to verify
- How much of 2019 shareholder earnings reflects recurring operating performance versus realized investment gains, and how the D&B equity-method loss develops.
- Restaurant trends, especially same-store sales, store closures, impairment assumptions and Blue Ribbon’s Chapter 11 outcome and funding needs.
- Post-year-end liquidity and committed capital uses, including the Equity Fund, AmeriLife and any changes to available credit.
- The economics and governance of the external management agreement, including fees, carried interest and related-party oversight.
- Portfolio-company leverage, particularly D&B’s debt and ability to execute its transformation.