Cannae Holdings, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This was Cannae’s first year as a separate public company following its November 17, 2017 split-off from Fidelity National Financial (FNF); prior-year figures are combined historical results and are not fully comparable. The filing is an annual report, not a standalone fourth-quarter filing.
Business context
Cannae is a holding company reporting a net asset value of approximately $1.2 billion at year-end. Its principal interests included a 55% ownership stake in American Blue Ribbon Holdings (ABRH), a 33% interest in Ceridian, and wholly owned T-System, acquired in October 2017. ABRH operates restaurant and bakery brands; Ceridian provides human capital management software and services and is accounted for under the equity method; T-System provides emergency-care documentation and coding solutions.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Operating revenue | $1,169.5 million | $1,178.4 million |
| Operating loss | $(78.4) million | $(2.2) million |
| Loss from continuing operations | $(55.2) million | $(13.9) million |
| Net earnings (loss) attributable to Cannae | $108.8 million | $(12.4) million |
| Net cash from (used in) operations | $(90.7) million | $60.3 million |
| Cash and cash equivalents at year-end | $245.6 million | $141.7 million |
| Total notes payable | $134.9 million | $104.7 million |
- Revenue declined 0.8%. The operating loss widened substantially; operating margin was approximately negative 6.7%.
- Reported attributable earnings and EPS of $1.54 were driven principally by the OneDigital sale. Continuing-operations loss attributable to common shareholders was $38.7 million, or $0.55 per share.
- OneDigital was sold for $560.0 million in June. Cannae received $331.4 million after debt repayment and other transaction payments, including $326.0 million cash and a $5.4 million holdback receivable. The sale generated a $276.0 million pretax gain; discontinued operations reported $147.7 million net earnings for 2017.
- Operating cash flow turned negative, primarily reflecting $117.7 million of income taxes paid, mainly related to the OneDigital sale. Investing cash flow was positive $91.7 million, including sale proceeds and the $201.6 million net cash acquisition outlay for T-System. Financing cash flow was positive $98.2 million, including FNF’s $100.0 million equity investment.
- Year-end current assets were $350.2 million and current liabilities $249.8 million. However, $122.2 million of notes payable was classified as current, largely because ABRH was out of compliance with certain credit-facility covenants.
- Restaurant Group revenue declined 2.5% to $1,129.0 million; comparable-store sales fell 1.6%, and the segment recorded a $29.5 million operating loss versus $8.0 million operating income in 2016. Restaurant cost of revenue rose to 87.8% of revenue from 85.0%, with management citing lower sales leverage, higher hourly labor costs, and value promotions.
- T-System contributed $12.9 million of revenue and a $0.9 million operating loss from its October acquisition through year-end. Cannae’s equity-method share of Ceridian earnings was $1.9 million in 2017, compared with a $29.1 million loss in 2016.
Material changes, outlook, and risks
- Cannae completed its separation from FNF and began NYSE trading in November 2017. FNF contributed $100.0 million for shares and provided a $100.0 million revolving note facility, which was undrawn at year-end and bears interest at LIBOR plus 4.5%.
- After year-end, Cannae became ABRH’s sole lender. A March 2018 amendment raised the interest rate to 10%, suspended financial covenants through March 31, 2019, and imposed a 2% amendment fee. This action addresses ABRH’s covenant difficulties but increases the cost of its debt.
- Management stated that anticipated cash needs could be met from operating funds, subsidiary distributions, investment proceeds, potential asset sales, and available borrowing facilities. The filing provides no numerical earnings or revenue guidance. Cannae said it would evaluate acquisitions, asset sales, debt reduction, repurchases, and cash preservation; future dividends were not anticipated under its current policy.
- Ceridian announced in March 2018 that it had filed a draft registration statement for a proposed IPO; timing and terms remained subject to SEC review and market conditions. A proposed ABRH transaction involving distribution of most of its family-dining and bakery businesses was described in a non-binding letter of intent. A previously announced J. Alexander’s transaction was terminated in February 2018.
- Key risks include restaurant competition and pressure on guest counts, wages and food costs; seasonality and weather; dependence on subsidiary distributions; ABRH debt and covenant risk; cybersecurity and data privacy; healthcare regulation and T-System execution; Ceridian’s substantial indebtedness and international exposure; and the costs and conflicts associated with the recent FNF separation. Cannae does not hedge restaurant commodity-price exposure.
- Contractual obligations totaled $783.8 million, including $376.8 million of operating lease payments, $271.2 million of purchase obligations, and $135.8 million of scheduled notes payable. The company also disclosed a $23.1 million maximum lease guarantee related to the prior Max & Erma’s sale.
- Unusual items include a $7.5 million noncash tax expense from the 2017 Tax Cuts and Jobs Act, $2.9 million of restaurant tradename impairment, and immaterial corrections to prior-period accounting. The auditor issued an unqualified opinion on the financial statements; management’s internal-control assessment and auditor attestation were omitted under the new-public-company transition relief.
Important facts for investors to verify
- ABRH’s operating performance, liquidity, covenant compliance, and the effects of its 2018 refinancing amendments.
- How much of 2017 earnings and cash availability came from the OneDigital divestiture versus recurring continuing operations.
- Ceridian’s proposed IPO, Cannae’s retained ownership and valuation, and Ceridian’s debt and operating results.
- Progress and final terms, if any, of the proposed ABRH portfolio transaction and the terminated J. Alexander’s deal.
- Cash generation, debt maturities, and the ability of subsidiaries to distribute cash to the holding company.