Cerence Inc. Form 8-K Summary
Business context and reporting period
Filed September 30, 2019, in connection with Cerence’s planned spin-off from Nuance Communications. The filing reports the pricing and expected terms of Cerence’s senior secured credit facilities. It does not present quarterly or annual operating results for the period ended September 30, 2019.
Financing and key financial metrics
- Term loan: Five-year senior secured term loan facility with an aggregate principal amount of $270.0 million. The amount was reduced from the previously contemplated $425.0 million.
- Revolving facility: $75.0 million senior secured first-lien revolving credit facility with a 54-month maturity. Up to $15.0 million may be used for letters of credit, reducing borrowing availability.
- Expected borrowings and cash: Cerence expects to draw the full $270.0 million term loan and have approximately $110.0 million of cash at the spin-off closing.
- Use of proceeds: Approximately $160.0 million of net term-loan proceeds is expected to be transferred to Nuance, subject to adjustments for final transaction expenses and Cerence cash balances.
- Interest: Borrowings will bear interest at either ABR plus an expected 5.00% margin or adjusted LIBOR plus an expected 6.00% margin. Rates will fluctuate with the applicable benchmark.
- Amortization: Quarterly principal payments equal to an annualized 3.5% of original term-loan principal during the first two years and 10% thereafter, with the remaining balance due at maturity.
- Leverage covenant: The credit agreement is expected to require a net first-lien leverage ratio of no greater than 6.00 to 1.00.
- Mandatory prepayments: Beginning with fiscal year 2020, annual excess-cash-flow prepayments are expected to be 75%, subject to step-downs to 50%, 25% and 0% based on specified leverage ratios.
Material changes and unusual items
- The planned term-loan size was reduced by $155.0 million, from $425.0 million to $270.0 million.
- The financing is being established as part of the separation of Cerence from Nuance and is expected to result in a substantial initial debt burden relative to the company’s post-spin-off capitalization; the filing does not provide post-spin-off revenue, EBITDA or leverage amounts.
- The facilities will be secured by substantially all tangible and intangible personal property and material real property of Cerence and specified subsidiaries. Certain domestic subsidiaries will provide guarantees.
Outlook, covenants and risks
The definitive credit documentation had not yet been executed as of the filing date, and the final terms may differ from those described. Funding remains subject to customary closing conditions and completion of the spin-off.
The expected credit agreement will restrict additional debt and liens, asset dispositions, investments, acquisitions, dividends, distributions, affiliate transactions and other corporate actions. It will also include customary events of default, including payment defaults, cross-defaults, bankruptcy events and change-of-control provisions.
Management identifies risks including significant indebtedness, cash-management needs, automotive-industry and macroeconomic conditions, customer pricing pressure and concentration, contract renewals, technology and product risks, cybersecurity and data privacy, intellectual-property matters, international operations, personnel retention and dependence on third-party hardware, software, services and data.
Important facts for investors to verify
- Whether the spin-off and financing closed on the expected timetable and whether the full $270.0 million term loan was drawn.
- The final executed credit agreement, including interest margins, fees, amortization, covenants, collateral and mandatory-prepayment provisions.
- The actual amount transferred to Nuance and Cerence’s cash balance after transaction expenses and closing adjustments.
- Cerence’s post-spin-off revenue, profitability, operating cash flow, net debt and compliance with the 6.00-to-1.00 net first-lien leverage covenant.
- Revolving-facility availability after letters of credit and other permitted uses.
- Any subsequent filings describing amendments, refinancing, covenant compliance, defaults or changes in the financing terms.