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CDAY Ceridian HCM Holding

Filed: 7 Nov 19, 4:18pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly reporting period ended September 30, 2019

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                     to                    

Commission file number 001-38467

 

Ceridian HCM Holding Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

46-3231686

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer

Identification Number)

3311 East Old Shakopee Road

Minneapolis, Minnesota 55425

(952) 853-8100

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, $0.01 par value

 

CDAY

 

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ☐    No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as the latest practicable date: 143,881,411 shares of Common Stock, $0.01 par value per share, as of November 5, 2019.

 

 

 


Ceridian HCM Holding Inc.

Table of Contents

 

 

2


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains, or incorporates by reference, not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and that are subject to the safe harbor created by those sections. Forward-looking statements, including, without limitation, statements concerning the conditions of the human capital management solutions industry and our operations, performance, and financial condition, including, in particular, statements relating to our business, growth strategies, product development efforts, and future expenses. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,��� “seeks,” “believes,” “estimates,” “expects,” “assumes,” “projects,” “could,” “may,” “will,” “should,” and similar references to future periods, or by the inclusion of forecasts or projections.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national, or global political, economic, business, competitive, market, and regulatory conditions and the following:

 

 

our inability to attain or to maintain profitability;

 

significant competition for our solutions;

 

our inability to continue to develop or to sell our existing Cloud solutions;

 

our inability to manage our growth effectively;

 

the risk that we may not be able to successfully migrate our Bureau customers to our Cloud solutions or to offset the decline in Bureau revenue with Cloud revenue;

 

the decline or slower than expected development of the market for enterprise cloud computing;

 

failure of our efforts to increase use of our Cloud solutions and our other applications may not succeed;

 

our failure to provide enhancements and new features and modifications to our solutions;

 

failure to comply the Federal Trade Commission’s (“FTC”) ongoing consent order regarding data protection;

 

system interruptions or failures, including cyber-security breaches, identity theft, or other disruptions that could compromise our information;

 

our failure to comply with applicable privacy, security and data laws, regulations and standards;

 

changes in regulations governing privacy concerns and laws or other domestic or foreign data protection regulations;

 

our inability to successfully expand our current offerings into new markets or further penetrate existing markets;

 

the impact of the material weakness related to the duplicative payroll incident and our failure to maintain effective internal controls in the future;

 

our inability to meet the more complex configuration and integration demands of our large customers;

 

the risk of our customers declining to renew their agreements with us or renewing at lower performance fee levels;

 

our failure to manage our technical operations infrastructure;

 

our inability to maintain necessary third party relationships, and third party software licenses or there are errors in the software we license;

 

our inability to protect our intellectual property rights, proprietary technology, information, processes, and know-how;

 

our failure to keep pace with rapid technological changes and evolving industry standards; or

 

changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself.

Please refer to Part II, Item IA, “Risk Factors” of this Form 10-Q and Part I, Item IA, “Risk Factors” of our most recently filed Annual Report on Form 10-K, for the year ended December 31, 2018 (“2018 Form 10-K”), for a further description of these and other factors. Although we have attempted to identify important risk factors, there may be other risk factors not presently known to us or that we presently believe are not material that could cause actual results and developments to differ materially from those made in or suggested by the forward-looking statements contained in this Form 10-Q. If any of these risks materialize, or if any of the above assumptions underlying forward-looking statements prove incorrect, actual results and developments may differ materially from those made in or suggested by the forward-looking statements contained in this Form 10-Q. For the reasons described above, we caution you against relying on any forward-looking statements. Any forward-looking statement made by us in this Form 10-Q speaks only as of the date on which we make it. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or to revise any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as may be required by law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should be viewed as historical data.

3


PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Ceridian HCM Holding Inc.

Condensed Consolidated Balance Sheets

(Dollars in millions, except share data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

(unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

270.9

 

 

$

217.8

 

Trade and other receivables, net

 

 

69.5

 

 

 

63.9

 

Prepaids expenses and other current assets

 

 

59.9

 

 

 

48.9

 

Total current assets before customer trust funds

 

 

400.3

 

 

 

330.6

 

Customer trust funds

 

 

2,604.0

 

 

 

2,603.5

 

Total current assets

 

 

3,004.3

 

 

 

2,934.1

 

Right of use lease asset

 

 

36.8

 

 

 

 

Property, plant, and equipment, net

 

 

108.8

 

 

 

104.4

 

Goodwill

 

 

1,961.2

 

 

 

1,927.4

 

Other intangible assets, net

 

 

181.7

 

 

 

187.5

 

Other assets

 

 

143.4

 

 

 

94.4

 

Total assets

 

$

5,436.2

 

 

$

5,247.8

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

6.8

 

 

$

6.8

 

Short-term lease liabilities

 

 

13.3

 

 

 

 

Accounts payable

 

 

34.1

 

 

 

41.5

 

Deferred revenue

 

 

27.2

 

 

 

23.2

 

Employee compensation and benefits

 

 

57.4

 

 

 

54.5

 

Other accrued expenses

 

 

14.0

 

 

 

23.9

 

Total current liabilities before customer trust funds obligations

 

 

152.8

 

 

 

149.9

 

Customer trust funds obligations

 

 

2,590.4

 

 

 

2,619.7

 

Total current liabilities

 

 

2,743.2

 

 

 

2,769.6

 

Long-term debt, less current portion

 

 

659.3

 

 

 

663.5

 

Employee benefit plans

 

 

129.1

 

 

 

153.3

 

Long-term lease liabilities

 

 

31.8

 

 

 

 

Other liabilities

 

 

19.7

 

 

 

45.9

 

Total liabilities

 

 

3,583.1

 

 

 

3,632.3

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par, 500,000,000 shares authorized, 143,835,394 and

    139,453,710 shares issued and outstanding as of September 30, 2019, and

    December 31, 2018, respectively

 

 

1.4

 

 

 

1.4

 

Additional paid in capital

 

 

2,428.3

 

 

 

2,325.6

 

Accumulated deficit

 

 

(228.3

)

 

 

(335.6

)

Accumulated other comprehensive loss

 

 

(348.3

)

 

 

(375.9

)

Total stockholders’ equity

 

 

1,853.1

 

 

 

1,615.5

 

Total liabilities and equity

 

$

5,436.2

 

 

$

5,247.8

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

Ceridian HCM Holding Inc.

Condensed Consolidated Statements of Operations

(Unaudited, dollars in millions, except share and per share data)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

 

*As Adjusted

 

 

 

 

 

 

*As Adjusted

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

$

167.4

 

 

$

149.5

 

 

$

503.7

 

 

$

460.5

 

Professional services and other

 

 

34.9

 

 

 

28.6

 

 

 

98.6

 

 

 

85.4

 

Total revenue

 

 

202.3

 

 

 

178.1

 

 

 

602.3

 

 

 

545.9

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

49.4

 

 

 

49.1

 

 

 

149.0

 

 

 

149.3

 

Professional services and other

 

 

37.6

 

 

 

32.5

 

 

 

107.1

 

 

 

98.7

 

Product development and management

 

 

17.5

 

 

 

14.5

 

 

 

49.1

 

 

 

43.3

 

Depreciation and amortization

 

 

9.0

 

 

 

8.5

 

 

 

26.7

 

 

 

25.7

 

Total cost of revenue

 

 

113.5

 

 

 

104.6

 

 

 

331.9

 

 

 

317.0

 

Gross profit

 

 

88.8

 

 

 

73.5

 

 

 

270.4

 

 

 

228.9

 

Selling, general, and administrative expense

 

 

82.3

 

 

 

57.3

 

 

 

217.8

 

 

 

193.1

 

Operating profit

 

 

6.5

 

 

 

16.2

 

 

 

52.6

 

 

 

35.8

 

Interest expense, net

 

 

7.8

 

 

 

8.8

 

 

 

25.2

 

 

 

74.4

 

Other expense (income), net

 

 

1.6

 

 

 

0.9

 

 

 

4.7

 

 

 

(0.7

)

(Loss) income from continuing operations before income taxes

 

 

(2.9

)

 

 

6.5

 

 

 

22.7

 

 

 

(37.9

)

Income tax (benefit) expense

 

 

(65.6

)

 

 

(0.7

)

 

 

(57.5

)

 

 

6.3

 

Income (loss) from continuing operations

 

 

62.7

 

 

 

7.2

 

 

 

80.2

 

 

 

(44.2

)

Loss from discontinued operations

 

 

 

 

 

(3.0

)

 

 

 

 

 

(14.8

)

Net income (loss)

 

 

62.7

 

 

 

4.2

 

 

 

80.2

 

 

 

(59.0

)

Net loss attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

(0.5

)

Net income (loss) attributable to Ceridian

 

$

62.7

 

 

$

4.2

 

 

$

80.2

 

 

$

(58.5

)

Net income (loss) per share attributable to Ceridian:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.44

 

 

$

0.03

 

 

$

0.57

 

 

$

(0.63

)

Diluted

 

$

0.42

 

 

$

0.03

 

 

$

0.54

 

 

$

(0.63

)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

142,780,819

 

 

 

137,768,764

 

 

 

141,369,339

 

 

 

105,730,178

 

Diluted

 

 

149,153,227

 

 

 

145,064,698

 

 

 

148,279,943

 

 

 

105,730,178

 

 

 

*Please refer to Note 2 for a summary of adjustments.

See accompanying notes to condensed consolidated financial statements.

5


Ceridian HCM Holding Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited, dollars in millions)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

 

*As Adjusted

 

 

 

 

 

 

*As Adjusted

 

Net income (loss)

 

$

62.7

 

 

$

4.2

 

 

$

80.2

 

 

$

(59.0

)

Items of other comprehensive income (loss) before income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

(6.5

)

 

 

10.2

 

 

 

17.3

 

 

 

(16.6

)

Change in unrealized gain (loss) from invested customer trust funds

 

 

3.1

 

 

 

(6.0

)

 

 

42.3

 

 

 

(24.5

)

Change in pension liability adjustment (1)

 

 

2.5

 

 

 

2.9

 

 

 

7.5

 

 

 

8.7

 

Other comprehensive (loss) income before income taxes

 

 

(0.9

)

 

 

7.1

 

 

 

67.1

 

 

 

(32.4

)

Income tax expense (benefit), net

 

 

8.8

 

 

 

(0.9

)

 

 

12.4

 

 

 

(2.3

)

Other comprehensive (loss) income after income taxes

 

 

(9.7

)

 

 

8.0

 

 

 

54.7

 

 

 

(30.1

)

Comprehensive income (loss)

 

 

53.0

 

 

 

12.2

 

 

 

134.9

 

 

 

(89.1

)

Comprehensive loss attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

(0.5

)

Comprehensive income (loss) attributable to Ceridian

 

$

53.0

 

 

$

12.2

 

 

$

134.9

 

 

$

(88.6

)

 

(1)

The amount of the pension liability adjustment recognized in the condensed consolidated statements of operations within other expense (income), net was $2.6 million and $3.0 million during the three months ended September 30, 2019, and 2018, respectively, and $7.8 million and $9.0 million during the nine months ended September 30, 2019, and 2018, respectively.

 

*Please refer to Note 2 for a summary of adjustments.

See accompanying notes to condensed consolidated financial statements.

6


Ceridian HCM Holding Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited, dollars in millions, except share data)

 

 

 

Common Stock

 

 

Additional

Paid In

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders

 

 

 

Shares

 

 

$

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balance as of December 31, 2018

 

 

139,453,710

 

 

$

1.4

 

 

$

2,325.6

 

 

$

(335.6

)

 

$

(375.9

)

 

$

1,615.5

 

Cumulative-effect adjustment to accumulated deficit related to

   the adoption of ASU 2018-02 (Please refer to Note 2)

 

 

 

 

 

 

 

 

 

 

 

27.1

 

 

 

(27.1

)

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

11.2

 

 

 

 

 

 

11.2

 

Issuance of common stock under share-based compensation plans

 

 

1,221,622

 

 

 

 

 

 

20.1

 

 

 

 

 

 

 

 

 

20.1

 

Share-based compensation

 

 

 

 

 

 

 

 

6.0

 

 

 

 

 

 

 

 

 

6.0

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12.3

 

 

 

12.3

 

Change in unrealized gain, net of tax of $2.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19.2

 

 

 

19.2

 

Change in pension liability adjustment, net of tax of $0.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.5

 

 

 

2.5

 

Balance as of March 31, 2019

 

 

140,675,332

 

 

$

1.4

 

 

$

2,351.7

 

 

$

(297.3

)

 

$

(369.0

)

 

$

1,686.8

 

Net income

 

 

 

 

 

 

 

 

 

 

 

6.3

 

 

 

 

 

 

6.3

 

Issuance of common stock under share-based compensation plans

 

 

1,266,734

 

 

 

 

 

 

24.0

 

 

 

 

 

 

 

 

 

24.0

 

Share-based compensation

 

 

 

 

 

 

 

 

9.6

 

 

 

 

 

 

 

 

 

9.6

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11.5

 

 

 

11.5

 

Change in unrealized gain, net of tax of $0.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16.4

 

 

 

16.4

 

Change in pension liability adjustment, net of tax of $0.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.5

 

 

 

2.5

 

Balance as of June 30, 2019

 

 

141,942,066

 

 

$

1.4

 

 

$

2,385.3

 

 

$

(291.0

)

 

$

(338.6

)

 

$

1,757.1

 

Net income

 

 

 

 

 

 

 

 

 

 

 

62.7

 

 

 

 

 

 

62.7

 

Issuance of common stock under share-based compensation plans

 

 

1,893,328

 

 

 

 

 

 

32.6

 

 

 

 

 

 

 

 

 

32.6

 

Share-based compensation

 

 

 

 

 

 

 

 

10.4

 

 

 

 

 

 

 

 

 

10.4

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6.5

)

 

 

(6.5

)

Change in unrealized loss, net of tax of $7.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3.9

)

 

 

(3.9

)

Change in pension liability adjustment, net of tax of $1.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.7

 

 

 

0.7

 

Balance as of September 30, 2019

 

 

143,835,394

 

 

$

1.4

 

 

$

2,428.3

 

 

$

(228.3

)

 

$

(348.3

)

 

$

1,853.1

 

 

See accompanying notes to condensed consolidated financial statements.

 

7


Ceridian HCM Holding Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited, dollars in millions, except share data)

 

 

 

 

Senior Preferred

Stock

 

 

Junior Preferred

Stock

 

 

Common Stock

 

 

Additional Paid In

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders

 

 

Non-controlling

 

 

Total

 

 

 

Shares

 

 

$

 

 

Shares

 

 

$

 

 

Shares

 

 

$

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

 

Interest

 

 

Equity

 

Balance as of

   December 31, 2017

 

 

16,802,144

 

 

$

184.8

 

 

 

58,244,308

 

 

$

0.6

 

 

 

65,285,962

 

 

$

0.7

 

 

$

1,565.4

 

 

$

(267.3

)

 

$

(311.0

)

 

$

1,173.2

 

 

$

37.8

 

 

$

1,211.0

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.6

 

 

 

 

 

 

0.6

 

 

 

(0.5

)

 

 

0.1

 

Issuance of common

   stock under share-based

   compensation plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

88,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior preferred dividends

   declared

 

 

 

 

 

5.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5.3

)

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.9

 

 

 

 

 

 

 

 

 

2.9

 

 

 

 

 

 

2.9

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16.4

)

 

 

(16.4

)

 

 

(0.2

)

 

 

(16.6

)

Change in unrealized

   loss, net of tax of ($0.8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12.6

)

 

 

(12.6

)

 

 

 

 

 

(12.6

)

Change in pension liability

   adjustment, net of tax of

   $0.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.9

 

 

 

2.9

 

 

 

 

 

 

2.9

 

Balance as of

   March 31, 2018

 

 

16,802,144

 

 

$

190.1

 

 

 

58,244,308

 

 

$

0.6

 

 

 

65,374,309

 

 

$

0.7

 

 

$

1,568.3

 

 

$

(272.0

)

 

$

(337.1

)

 

$

1,150.6

 

 

$

37.1

 

 

$

1,187.7

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(63.3

)

 

 

 

 

 

(63.3

)

 

 

 

 

 

(63.3

)

Issuance of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,695,455

 

 

 

0.3

 

 

 

594.7

 

 

 

 

 

 

 

 

 

595.0

 

 

 

 

 

 

595.0

 

Issuance of common

   stock under share-based

   compensation plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,148,801

 

 

 

 

 

 

14.1

 

 

 

 

 

 

 

 

 

14.1

 

 

 

 

 

 

14.1

 

Senior preferred dividends

   declared

 

 

 

 

 

2.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2.4

)

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of senior and

   junior preferred shares

 

 

(16,802,144

)

 

 

(192.5

)

 

 

(58,244,308

)

 

 

(0.6

)

 

 

42,246,650

 

 

 

0.4

 

 

 

192.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LifeWorks Disposition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(95.7

)

 

 

 

 

 

0.7

 

 

 

(95.0

)

 

 

(37.3

)

 

 

(132.3

)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.5

 

 

 

 

 

 

 

 

 

10.5

 

 

 

 

 

 

10.5

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10.4

)

 

 

(10.4

)

 

 

0.2

 

 

 

(10.2

)

Change in unrealized

   loss, net of tax of ($0.6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4.5

)

 

 

(4.5

)

 

 

 

 

 

(4.5

)

Change in pension liability

   adjustment, net of tax of

   $0.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.9

 

 

 

2.9

 

 

 

 

 

 

2.9

 

Balance as of

   June 30,2018

 

 

 

 

$

 

 

 

 

 

$

 

 

 

137,465,215

 

 

$

1.4

 

 

$

2,284.6

 

 

$

(337.7

)

 

$

(348.4

)

 

$

1,599.9

 

 

$

 

 

$

1,599.9

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.2

 

 

 

 

 

 

4.2

 

 

 

 

 

 

4.2

 

Issuance of common

   stock under share-based

   compensation plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

584,503

 

 

 

 

 

 

7.8

 

 

 

 

 

 

 

 

 

7.8

 

 

 

 

 

 

7.8

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.9

 

 

 

 

 

 

 

 

 

4.9

 

 

 

 

 

 

4.9

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.2

 

 

 

10.2

 

 

 

 

 

 

10.2

 

Change in unrealized

   loss, net of tax of ($0.9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5.1

)

 

 

(5.1

)

 

 

 

 

 

(5.1

)

Change in pension liability

   adjustment, net of tax of

   $0.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.9

 

 

 

2.9

 

 

 

 

 

 

2.9

 

Balance as of

   September 30, 2018

 

 

 

 

$

 

 

 

 

 

$

 

 

 

138,049,718

 

 

$

1.4

 

 

$

2,297.3

 

 

$

(333.5

)

 

$

(340.4

)

 

$

1,624.8

 

 

$

 

 

$

1,624.8

 

 

See accompanying notes to condensed consolidated financial statements.

8


Ceridian HCM Holding Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, dollars in millions)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

*As Adjusted

 

Net income (loss)

 

$

80.2

 

 

$

(59.0

)

Loss from discontinued operations

 

 

 

 

 

14.8

 

Adjustments to reconcile net income (loss) to net cash provided by (used in)

   operating activities:

 

 

 

 

 

 

 

 

Deferred income tax benefit

 

 

(75.9

)

 

 

(9.4

)

Depreciation and amortization

 

 

43.9

 

 

 

42.4

 

Amortization of debt issuance costs and debt discount

 

 

0.8

 

 

 

1.9

 

Loss on debt extinguishment

 

 

 

 

 

25.7

 

Net periodic pension and postretirement cost

 

 

3.9

 

 

 

1.8

 

Non-cash share-based compensation

 

 

26.0

 

 

 

18.0

 

Other

 

 

1.8

 

 

 

0.1

 

Changes in operating assets and liabilities excluding effects of acquisitions and divestitures:

 

 

 

 

 

 

 

 

Trade and other receivables

 

 

(10.6

)

 

 

4.2

 

Prepaid expenses and other current assets

 

 

(10.1

)

 

 

(6.4

)

Accounts payable and other accrued expenses

 

 

(2.5

)

 

 

(8.4

)

Deferred revenue

 

 

2.6

 

 

 

4.8

 

Employee compensation and benefits

 

 

(18.5

)

 

 

(27.7

)

Accrued interest

 

 

 

 

 

(15.5

)

Accrued taxes

 

 

(10.4

)

 

 

5.2

 

Other assets and liabilities

 

 

(6.6

)

 

 

(7.3

)

Net cash provided by (used in) operating activities - continuing operations

 

 

24.6

 

 

 

(14.8

)

Net cash used in operating activities - discontinued operations

 

 

 

 

 

(3.3

)

Net cash provided by (used in) operating activities

 

 

24.6

 

 

 

(18.1

)

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Purchase of customer trust funds marketable securities

 

 

(335.1

)

 

 

(694.8

)

Proceeds from sale and maturity of customer trust funds marketable securities

 

 

278.1

 

 

 

707.9

 

Expenditures for property, plant, and equipment

 

 

(10.8

)

 

 

(6.8

)

Expenditures for software and technology

 

 

(27.6

)

 

 

(21.9

)

Acquisition costs, net of cash acquired

 

 

(29.4

)

 

 

 

Net cash used in investing activities

 

 

(124.8

)

 

 

(15.6

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Increase in customer trust funds obligations, net

 

 

(54.5

)

 

 

(625.5

)

Net proceeds from issuance of common stock

 

 

 

 

 

595.0

 

Proceeds from issuance of common stock under share-based compensation plans

 

 

76.7

 

 

 

22.2

 

Proceeds from debt issuance

 

 

 

 

 

680.0

 

Repayment of long-term debt obligations

 

 

(5.1

)

 

 

(1,132.3

)

Payment of debt refinancing costs

 

 

 

 

 

(23.3

)

Net cash provided by (used in) financing activities

 

 

17.1

 

 

 

(483.9

)

Effect of exchange rate changes on cash, restricted cash, and equivalents

 

 

7.2

 

 

 

(2.2

)

Net decrease in cash, restricted cash, and equivalents

 

 

(75.9

)

 

 

(519.8

)

Elimination of cash from discontinued operations

 

 

 

 

 

0.5

 

Cash, restricted cash, and equivalents at beginning of period

 

 

1,106.3

 

 

 

2,411.8

 

Cash, restricted cash, and equivalents at end of period

 

$

1,030.4

 

 

$

1,892.5

 

Reconciliation of cash, restricted cash, and equivalents to the condensed consolidated

   balance sheets

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

270.9

 

 

$

188.0

 

Restricted cash and equivalents included in customer trust funds

 

 

759.5

 

 

 

1,704.5

 

Total cash, restricted cash, and equivalents

 

$

1,030.4

 

 

$

1,892.5

 

 

*Please refer to Note 2 for a summary of adjustments.

See accompanying notes to condensed consolidated financial statements.

9


Ceridian HCM Holding Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization

Ceridian HCM Holding Inc. and its subsidiaries (also referred to in this report as “Ceridian,” “we,” “our,” and “us”) offer a broad range of services and software designed to help employers more effectively manage employment processes, such as payroll, payroll-related tax filing, human resource information systems, employee self-service, time and labor management, employee assistance programs, and recruitment and applicant screening. Our technology-based services are typically provided through long-term customer relationships that result in a high level of recurring revenue. Our operations are primarily located in the United States and Canada.   

On April 30, 2018, we completed our initial public offering ("IPO"), in which we issued and sold 21,000,000 shares of common stock at a public offering price of $22.00 per share. We granted the underwriters a 30-day option to purchase an additional 3,150,000 shares of common stock at the offering price, which was exercised in full. A total of 24,150,000 shares of common stock were issued and sold in our IPO. Concurrently with our IPO, we issued and sold an additional 4,545,455 shares of our common stock in a private placement at $22.00 per share. We received gross proceeds of $631.3 million from shares issued and sold in the IPO and concurrent private placement before deducting underwriting discounts, commissions, and other offering related expenses.

Since our IPO, we have completed multiple secondary offerings, in which certain of our stockholders (the “Selling Stockholders”) have sold common stock in underwritten public offerings. All proceeds from the sale of this common stock went to the Selling Stockholders. Our secondary offerings are as follows:

 

12,650,000 shares of common stock sold at a public offering price of $36.00 per share on November 16, 2018

 

14,222,142 shares of common stock sold at a public offering price of $50.50 per share on March 22, 2019 (including 1,222,142 shares purchased pursuant to the underwriters’ option to purchase additional shares on April 3, 2019)

 

8,000,000 shares of common stock sold at a public offering price of $50.50 per share on May 23, 2019

 

10,000,000 shares of common stock sold at a public offering price of $49.75 per share on August 8, 2019

 

9,000,000 shares of common stock sold at a public offering price of $56.30 per share on September 6, 2019

During the three months ended September 30, 2019, we incurred $0.8 million of expenses related to our August 6, and September 4, 2019, secondary offerings. During the nine months ended September 30, 2019, we incurred $2.4 million of expenses related to our secondary offerings. Expenses associated with our secondary offerings are recorded within selling, general, and administrative expense in our condensed consolidated statements of operations.

2. Summary of Significant Accounting Policies

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which replaced all existing revenue guidance created by Accounting Standards Codification (“ASC”) Topic 605, including prescriptive industry-specific guidance, and created ASC Topic 606 for revenue and ASC Subtopic 340-40 for incremental costs of obtaining a contract with customers. This standard’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We have adopted ASU No. 2014-09 as of January 1, 2019, using the full retrospective method for adoption. Please refer to the tables below for the retrospective impacts of the adoption of this guidance. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition, as detailed below.

The adoption of the new standard resulted in changes to the classification and timing of our revenue recognition. Specifically, revenue classified as professional services and other revenue was increased, and revenue classified as recurring services revenue was reduced under the new standard, compared to ASC Topic 605. Adoption of the new standard also resulted in changes to the timing of our revenue recognition compared to ASC Topic 605 because professional services and other revenue is generally recognized earlier in the contract period than recurring services revenue. In compliance with the new standard, a contract asset is reflected on the consolidated balance sheets when revenue recognized for professional service performance obligations exceed the billings and is amortized over the contract period, which is generally three years. We also have changed the timing of certain selling, general, and administrative expenses, as the new standard required capitalizing and amortizing certain selling expenses, such as commissions and bonuses paid to the sales force. These sales expenses are now amortized over the period of benefit, which we have determined to be five years.

10


In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. This standard requires balance sheet recognition for both finance leases and operating leases. In July 2018, the FASB issued ASU No. 2018-11 “Leases (Topic 842): Targeted Improvement,” which allowed an additional (and optional) transition method to adopt the new lease requirements. We have adopted ASU No. 2016-02 and ASU No. 2018-11 as of January 1, 2019, by recording a cumulative-effect adjustment to the opening balance of accumulated deficit on this date. Please refer to Note 15, “Leases,” for additional discussion of the impacts of adoption of this guidance.  

In November 2016, the FASB issued ASU No. 2016-18, “Restricted Cash,” which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. We have adopted this guidance as of January 1, 2019, on a retrospective basis for all periods presented. Accordingly, the condensed consolidated statement of cash flows has been revised to include restricted cash and restricted cash equivalents held to satisfy customer trust funds obligations, as a component of cash, cash equivalents, restricted cash, and restricted cash equivalents. Please refer to the tables below for the retrospective impacts of the adoption of this guidance.

In March 2017, the FASB issued ASU No. 2017-07, “Compensation—Retirement Benefits,” which aims to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments in this update require that an employer (a) report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, and (b) report the other components of net benefit cost in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. We have adopted this guidance as of January 1, 2019, on a retrospective basis for all periods presented. Please refer to the tables below for the retrospective impacts of the adoption of this guidance.  

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income,” in response to a narrow-scope financial reporting issue that arose as a consequence of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The amendment in this update allows entities to reclassify from accumulated other comprehensive income to retained earnings, the impact of the reduced federal statutory tax rate for corporations included in the Tax Act. We have adopted this guidance as of January 1, 2019, resulting in an increase in accumulated other comprehensive loss of $27.1 million, and a decrease in accumulated deficit for the same amount on our consolidated balance sheets. As of January 1, 2019, we have changed our policy for releasing income tax effects from accumulated other comprehensive loss to comply with this guidance, which is considered a change in accounting principle.    

We have adjusted our condensed consolidated financial statements from amounts previously reported due to the adoption of ASC Topic 606, ASU No. 2017-07, and ASU No. 2016-18. Please refer to our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on May 21, 2019, for information on our adjusted consolidated balance sheet as of December 31, 2018. Selected condensed consolidated financial statement line items, which reflect the adoption of the new ASUs, are as follows:

 

 

 

Three Months Ended September 30, 2018

 

 

 

As previously

reported

 

 

ASC Topic 606

Adjustments

 

 

ASU 2017-07

Adjustments

 

 

As

adjusted

 

Condensed Consolidated Statement of Operations

 

(Dollars in millions, except per share data)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

$

157.2

 

 

$

(7.7

)

 

$

 

 

$

149.5

 

Professional services and other

 

 

22.4

 

 

 

6.2

 

 

 

 

 

 

28.6

 

Total revenue

 

$

179.6

 

 

$

(1.5

)

 

$

 

 

$

178.1

 

Selling, general, and administrative expense

 

 

59.4

 

 

 

(1.5

)

 

 

(0.6

)

 

 

57.3

 

Operating profit

 

 

15.6

 

 

 

 

 

 

0.6

 

 

 

16.2

 

Other expense, net

 

 

0.3

 

 

 

 

 

 

0.6

 

 

 

0.9

 

Income tax benefit

 

 

(0.9

)

 

 

0.2

 

 

 

 

 

 

(0.7

)

Net income

 

$

4.4

 

 

$

(0.2

)

 

$

 

 

$

4.2

 

Net income per share, basic and diluted

 

$

0.03

 

 

$

 

 

$

 

 

$

0.03

 

11


 

 

 

Nine Months Ended September 30, 2018

 

 

 

As previously

reported

 

 

ASC Topic 606

Adjustments

 

 

ASU 2017-07

Adjustments

 

 

As

adjusted

 

Condensed Consolidated Statement of Operations

 

(Dollars in millions, except per share data)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

$

480.8

 

 

$

(20.3

)

 

$

 

 

$

460.5

 

Professional services and other

 

 

65.3

 

 

 

20.1

 

 

 

 

 

 

85.4

 

Total revenue

 

$

546.1

 

 

$

(0.2

)

 

$

 

 

$

545.9

 

Selling, general, and administrative expense

 

 

200.3

 

 

 

(5.4

)

 

 

(1.8

)

 

 

193.1

 

Operating profit

 

 

28.8

 

 

 

5.2

 

 

 

1.8

 

 

 

35.8

 

Other income, net

 

 

(2.5

)

 

 

 

 

 

1.8

 

 

 

(0.7

)

Income tax expense

 

 

5.8

 

 

 

0.5

 

 

 

 

 

 

6.3

 

Net loss attributable to Ceridian

 

$

(63.2

)

 

$

4.7

 

 

$

 

 

$

(58.5

)

Net loss per share attributable to Ceridian, basic and diluted

 

$

(0.67

)

 

$

0.04

 

 

$

 

 

$

(0.63

)

 

 

 

Nine Months Ended September 30, 2018

 

 

 

As previously

reported

 

 

ASC Topic 606

Adjustments

 

 

ASU 2016-18

Adjustments

 

 

As

adjusted

 

Condensed Consolidated Statement of Cash Flows

 

(Dollars in millions)

 

Net loss

 

$

(63.7

)

 

$

4.7

 

 

$

 

 

$

(59.0

)

Adjustments to reconcile net loss to net cash used in

   operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income tax benefit

 

 

(9.8

)

 

 

0.4

 

 

 

 

 

 

(9.4

)

Changes in operating assets and liabilities excluding effects of

   acquisitions and divestitures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade and other receivables

 

 

2.9

 

 

 

1.3

 

 

 

 

 

 

4.2

 

Prepaid expenses and other current assets

 

 

(3.0

)

 

 

(3.4

)

 

 

 

 

 

(6.4

)

Deferred revenue

 

 

2.8

 

 

 

2.0

 

 

 

 

 

 

4.8

 

Other assets and liabilities

 

 

(2.3

)

 

 

(5.0

)

 

 

 

 

 

 

(7.3

)

Net cash used in operating activities- continuing operations

 

 

(14.8

)

 

 

 

 

 

 

 

 

(14.8

)

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in restricted cash and other restricted assets held

   to satisfy customer trust funds obligations

 

 

610.1

 

 

 

 

 

 

(610.1

)

 

 

 

Net cash provided by (used in) investing activities

 

 

594.5

 

 

 

 

 

 

(610.1

)

 

 

(15.6

)

Effect of Exchange Rate Changes on Cash, Restricted Cash, and

   Equivalents

 

 

(1.5

)

 

 

 

 

 

(0.7

)

 

 

(2.2

)

Net increase (decrease) in cash, restricted cash, and equivalents

 

 

93.3

 

 

 

 

 

 

(613.1

)

 

 

(519.8

)

Elimination of cash from discontinued operations

 

 

0.5

 

 

 

 

 

 

 

 

 

0.5

 

Cash, restricted cash, and equivalents at beginning of period

 

 

94.2

 

 

 

 

 

 

2,317.6

 

 

 

2,411.8

 

Cash, restricted cash, and equivalents at end of period

 

$

188.0

 

 

$

 

 

$

1,704.5

 

 

$

1,892.5

 

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. The accounting policies we follow are set forth in Note 2, “Summary of Significant Accounting Policies,” to our audited consolidated financial statements in our 2018 Form 10-K. The following notes should be read in conjunction with these policies and other disclosures in our 2018 Form 10-K.

In the opinion of management, the unaudited condensed consolidated financial statements contained herein reflect all adjustments (consisting only of normal recurring adjustments, except as set forth in these notes to condensed consolidated financial statements) necessary to present fairly in all material aspects the financial position, results of operations, comprehensive loss, and cash flows from all periods presented. Interim results are not necessarily indicative of results for a full year.

 

12


Internally Developed Software Costs

In accordance with ASC Topic 350, we capitalize costs associated with software developed or obtained for internal use when both the preliminary project stage is completed and our management has authorized further funding for the project, which it deems probable of completion. Capitalized software costs include only: (1) external direct costs of materials and services consumed in developing or obtaining the software; (2) payroll and payroll-related costs for employees who are directly associated with and who devote time to the project; and (3) interest costs incurred while developing the software. Capitalization of these costs ceases no later than the point at which the project is substantially complete and ready for its intended purpose. We do not include general and administrative costs and overhead costs in capitalizable costs. We charge research and development costs and other software maintenance costs related to software development to earnings as incurred.

Revenue Recognition

The core principle of ASC Topic 606 is that revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. In accordance with ASC Topic 606, we perform the following steps to determine revenue to be recognized:

 

1)

Identify the contract(s) with a customer;

 

2)

Identify the performance obligations in the contract;

 

3)

Determine the transaction price;

 

4)

Allocate the transaction price to the performance obligations in the contract; and

 

5)

Recognize revenue when (or as) we satisfy a performance obligation.

The significant majority of our two major revenue sources (recurring and professional services and other) are derived from contracts with customers. Recurring revenues are primarily related to our cloud subscription performance obligations. Professional services and other revenues are primarily related to professional services for our cloud customers (including implementation services to activate new accounts, as well as post-go live professional services typically billed on a time and materials basis) and, to a much lesser extent, fees for other non-recurring services, including sales of time clocks and certain client reimbursable out-of-pocket expenses. Fees charged to cloud subscription performance obligations are generally priced either on a per-employee-per-month (“PEPM”) basis for a given month or on a per-employee-per-process basis for a given process, both based on usage; and fees charged for professional services are typically priced on a fixed fee basis for activating new accounts and on a time and materials basis for post go-live professional services.  

Our recurring cloud subscription performance obligations are generally priced based on the number of active customer employees, as of the signing of the contract, at the contract PEPM rate over the initial contract term. Our professional services are generally based on a fixed fee charged to our customers for activating new accounts and on a time and materials basis for post go-live professional services. There is typically no variable consideration related to our recurring cloud subscriptions or our activation services, nor do they include a significant financing component, non-cash consideration, or consideration payable to a customer. Our recurring cloud subscriptions are typically billed one month in advance while our professional services are billed over the implementation period for activation of new accounts and as work is performed for post go-live professional services.

Our cloud services arrangements include multiple performance obligations, and transaction price allocations are based on the stand-alone selling price ("SSP") for each performance obligation. Our contract renewal rates serve as an observable input to establish SSP for our recurring cloud subscription performance obligations. The SSP for professional services performance obligations is estimated based on market conditions and observable inputs, including rates charged by third parties to perform implementation services.

For our performance obligations, the consideration allocated to cloud subscription revenues is recognized as recurring revenues, typically commencing with the date the customer processes their first live payroll using the solution (referred to as the "go-live" date). The consideration allocated to professional services to activate a new account is recognized as professional services revenues based on the proportion of total work performed, using reasonably dependable estimates (in relation to progression through the implementation phase), by solution.

Deferred Costs

Deferred costs primarily consist of deferred sales commissions. Sales commissions paid based on the annual contract value of a signed customer contract are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions paid based on the annual contract value are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be five years.

13


Deferred costs included within Other assets on our condensed consolidated balance sheets were $91.0 million and $83.5 million as of September 30, 2019, and December 31, 2018, respectively. Amortization expense for the deferred costs was $8.1 million and $6.7 million for the three months ended September 30, 2019, and 2018, respectively, and $23.5 million and $19.2 million for the nine months ended September 30, 2019, and 2018, respectively.

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-14, “Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans,” which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.  This update removes disclosures that are no longer considered cost beneficial, adds disclosures identified as relevant, and clarifies certain specific requirements of disclosures to improve the effectiveness of disclosures in the notes to financial statements. The amendments in this update are effective for public business entities for fiscal years ending after December 15, 2020.  Early adoption is permitted.  The amendments in this update should be applied on a retrospective basis to all periods presented. We are currently evaluating the impact of the adoption of this standard.

3. Discontinued Operations

Distribution of LifeWorks Business

In the second quarter of 2018, contemporaneously with our IPO and concurrent private placement, we distributed our controlling financial interest in LifeWorks Corporation Ltd (“LifeWorks”) to our stockholders of record prior to the IPO on a pro rata basis in accordance with their pro rata interests in us (the “LifeWorks Disposition”). At this time, the LifeWorks Disposition represented a strategic shift in our overall business and had a significant impact on the financial statement results. Therefore, the LifeWorks business has been presented as discontinued operations in the condensed consolidated financial statements and accompanying notes for all periods presented. Our net book value related to LifeWorks of $95.7 million was recorded as a distribution through additional paid in capital within our condensed consolidated balance sheet during the second quarter of 2018.

The amounts in the table below reflect the operating results of LifeWorks reported as discontinued operations, as well as supplemental disclosures of the discontinued operations:

 

 

 

Three Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2018

 

 

 

(Dollars in millions)

 

Net revenues

 

$

 

 

$

28.3

 

Loss from operations before income taxes

 

 

 

 

 

(0.9

)

Income tax expense

 

 

(3.0

)

 

 

(13.9

)

Loss from discontinued operations, net of income taxes

 

$

(3.0

)

 

$

(14.8

)

Depreciation and amortization

 

$

 

 

$

1.4

 

 

4. Business Combinations

 

On September 6, 2019, we entered into a purchase agreement with the shareholders of Lusworth Holding Pty Ltd. (“RITEQ”), an Australian-based corporation, to acquire 100% of the issued and outstanding shares of RITEQ for approximately $19.4 million, subject to certain purchase price adjustments. RITEQ is a provider of workforce management solutions and operates within Australia, New Zealand, and the United Kingdom. The share purchase transaction was completed on September 13, 2019.

 

The financial results of RITEQ have been included within our condensed consolidated financial statements as of the acquisition date. The acquisition of RITEQ was recorded using the acquisition method of accounting and recognized the assets and liabilities assumed at their fair value. As of September 30, 2019, we have conducted a preliminary assessment of certain assets and liabilities related to the acquisition of RITEQ. We are continuing our review of these items during the measurement period, and if new information is obtained about facts and circumstances that existed at the effective date of the acquisition, the acquisition accounting will be revised to reflect the resulting adjustments to current estimate of these items.

 

 

14


5. Fair Value Measurements

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of September 30, 2019, our financial assets and liabilities measured at fair value on a recurring basis were categorized as follows:

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

 

Level 3

 

 

 

(Dollars in millions)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale customer trust funds assets

 

$

1,838.3

 

 

$

 

 

$

1,838.3

 

(a)

 

$

 

Total assets measured at fair value

 

$

1,838.3

 

 

$

 

 

$

1,838.3

 

 

 

$

 

As of December 31, 2018, our financial assets and liabilities measured at fair value on a recurring basis were categorized as follows:

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

 

Level 3

 

 

 

(Dollars in millions)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale customer trust funds assets

 

$

1,715.0

 

 

$

 

 

$

1,715.0

 

(a)

 

$

 

Total assets measured at fair value

 

$

1,715.0

 

 

$

 

 

$

1,715.0

 

 

 

$

 

 

(a)

Fair value is based on inputs that are observable for the asset or liability, other than quoted prices.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During the nine months ended September 30, 2019, and the year ended December 31, 2018, we did not re-measure any financial assets or liabilities at fair value on a nonrecurring basis.

6. Customer Trust Funds

Investment income from invested customer trust funds is a component of our compensation for providing services under agreements with our customers. Investment income from invested customer trust funds included in revenue was $18.3 million and $15.8 million for the three months ended September 30, 2019, and 2018, respectively, and $62.9 million and $49.6 million for the nine months ended September 30, 2019, and 2018, respectively. Investment income includes interest income, realized gains and losses from sales of customer trust funds’ investments, and unrealized credit losses determined to be other-than-temporary.

15


The amortized cost of customer trust funds as of September 30, 2019, and December 31, 2018, is the original cost of assets acquired. The amortized cost and fair values of investments of customer trust funds available for sale as of September 30, 2019, and December 31, 2018, are as follows:

Investments of Customer Trust Funds at September 30, 2019

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gain

 

 

Loss

 

 

Value

 

 

 

(Dollars in millions)

 

Money market securities, investments carried at cost and

   other cash equivalents

 

$

751.9

 

 

 

 

 

 

 

 

 

 

$

751.9

 

Available for sale investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

578.6

 

 

 

9.1

 

 

 

(0.4

)

 

 

587.3

 

Canadian and provincial government securities

 

 

399.8

 

 

 

6.8

 

 

 

(0.2

)

 

 

406.4

 

Corporate debt securities

 

 

552.9

 

 

 

9.4

 

 

 

(0.4

)

 

 

561.9

 

Asset-backed securities

 

 

246.8

 

 

 

2.0

 

 

 

(0.4

)

 

 

248.4

 

Mortgage-backed securities

 

 

21.8

 

 

 

0.2

 

 

 

 

 

 

22.0

 

Other securities

 

 

12.2

 

 

 

0.1

 

 

 

 

 

 

12.3

 

Total available for sale investments

 

 

1,812.1

 

 

$

27.6

 

 

$

(1.4

)

 

 

1,838.3

 

Invested customer trust funds

 

 

2,564.0

 

 

$

27.6

 

 

$

(1.4

)

 

 

2,590.2

 

Trust receivables (a)

 

 

26.4

 

 

 

 

 

 

 

 

 

 

 

13.8

 

Total customer trust funds

 

$

2,590.4

 

 

 

 

 

 

 

 

 

 

$

2,604.0

 

 

(a)

The fair value of trust receivables as of September 30, 2019, includes a loss of $12.6 million related to unrecovered duplicate payments resulting from the September 26, 2019, isolated service incident.  Ceridian is liable for these unrecovered duplicate payments and will reimburse the customer trust for the resulting losses.  Please refer to Note 16, “Commitments and Contingencies,” for further discussion of the September 26, 2019, isolated service incident.  

Investments of Customer Trust Funds at December 31, 2018

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gain

 

 

Loss

 

 

Value

 

 

 

(Dollars in millions)

 

Money market securities, investments carried at cost and

   other cash equivalents

 

$

876.9

 

 

$

 

 

$

 

 

$

876.9

 

Available for sale investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

573.4

 

 

 

0.2

 

 

 

(11.4

)

 

 

562.2

 

Canadian and provincial government securities

 

 

392.5

 

 

 

3.4

 

 

 

(1.4

)

 

 

394.5

 

Corporate debt securities

 

 

495.0

 

 

 

0.5

 

 

 

(4.7

)

 

 

490.8

 

Asset-backed securities

 

 

247.1

 

 

 

0.2

 

 

 

(2.7

)

 

 

244.6

 

Mortgage-backed securities

 

 

8.5

 

 

 

 

 

 

(0.2

)

 

 

8.3

 

Other securities

 

 

14.7

 

 

 

 

 

 

(0.1

)

 

 

14.6

 

Total available for sale investments

 

 

1,731.2

 

 

 

4.3

 

 

 

(20.5

)

 

 

1,715.0

 

Invested customer trust funds

 

 

2,608.1

 

 

$

4.3

 

 

$

(20.5

)

 

 

2,591.9

 

Trust receivables

 

 

11.6

 

 

 

 

 

 

 

 

 

 

 

11.6

 

Total customer trust funds

 

$

2,619.7

 

 

 

 

 

 

 

 

 

 

$

2,603.5

 

 

16


The following represents the gross unrealized losses and the related fair value of the investments of customer trust funds available for sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2019.

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

 

(Dollars in millions)

 

U.S. government and agency securities

 

$

(0.1

)

 

$

42.9

 

 

$

(0.4

)

 

$

104.4

 

 

$

(0.5

)

 

$

147.3

 

Canadian and provincial government securities

 

 

(0.2

)

 

 

106.8

 

 

 

 

 

 

 

 

 

(0.2

)

 

 

106.8

 

Corporate debt securities

 

 

(0.2

)

 

 

65.5

 

 

 

(0.1

)

 

 

38.7

 

 

 

(0.3

)

 

 

104.2

 

Asset-backed securities

 

 

(0.3

)

 

 

59.9

 

 

(a)

 

 

 

34.0

 

 

 

(0.3

)

 

 

93.9

 

Mortgage-backed securities

 

(a)

 

 

 

0.1

 

 

 

(0.1

)

 

 

5.1

 

 

 

(0.1

)

 

 

5.2

 

Other securities

 

 

 

 

 

 

 

(a)

 

 

 

8.1

 

 

 

 

 

 

8.1

 

Total available for sale investments

 

$

(0.8

)

 

$

275.2

 

 

$

(0.6

)

 

$

190.3

 

 

$

(1.4

)

 

$

465.5

 

 

(a)

These investments have been in an unrealized loss position; however, the amount of unrealized loss is less than $0.05 million.

Management does not believe that any individual unrealized loss as of September 30, 2019, represents an other-than-temporary impairment. The unrealized losses are primarily attributable to changes in interest rates and not to credit deterioration. We currently do not intend to sell or expect to be required to sell the securities before the time required to recover the amortized cost.

The amortized cost and fair value of investment securities available for sale at September 30, 2019, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or to prepay obligations with or without call or prepayment penalties.

 

 

 

September 30, 2019

 

 

 

Cost

 

 

Fair Value

 

 

 

(Dollars in millions)

 

Due in one year or less

 

$

1,074.2

 

 

$

1,074.5

 

Due in one to three years

 

 

706.8

 

 

 

711.8

 

Due in three to five years

 

 

622.9

 

 

 

637.3

 

Due after five years

 

 

160.1

 

 

 

166.6

 

Invested customer trust funds

 

$

2,564.0

 

 

$

2,590.2

 

 

7. Goodwill and Intangible Assets

Goodwill

Goodwill and changes therein were as follows for the nine months ended September 30, 2019, and the year ended December 31, 2018 (Dollars in millions):

 

Balance at December 31, 2017

 

$

1,961.0

 

Translation

 

 

(33.6

)

Balance at December 31, 2018

 

 

1,927.4

 

Acquisitions

 

 

21.9

 

Translation

 

 

11.9

 

Balance at September 30, 2019

 

$

1,961.2

 

 

Please refer to Note 4, “Business Combinations,” for further discussion of our RITEQ acquisition.

17


Intangible Assets

Other intangible assets consisted of the following as of September 30, 2019:

 

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

Estimated Life

Range (Years)

 

 

(Dollars in millions)

 

 

 

Customer lists and relationships

 

$

212.9

 

 

$

(204.8

)

 

$

8.1

 

 

5-15

Trade name

 

 

173.9

 

 

 

(2.0

)

 

 

171.9

 

 

3 and Indefinite

Technology

 

 

155.1

 

 

 

(153.4

)

 

 

1.7

 

 

3-4

Total other intangible assets

 

$

541.9

 

 

$

(360.2

)

 

$

181.7

 

 

 

 

We perform an impairment assessment of our trade name intangible assets as of October 1 of each year. We continue to evaluate the use of our trade names and branding in our sales and marketing efforts. If there is a fundamental shift in the method of our branding in the future, we will assess the impact on the carrying amount of our trade name intangible assets and determine whether an impairment exists. If it is determined that an impairment has occurred, it would be recognized during the period in which the decision was made to make the fundamental shift.  

 

Other intangible assets consisted of the following as of December 31, 2018:

 

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

Estimated Life

Range (Years)

 

 

 

(Dollars in millions)

 

 

 

 

 

Customer lists and relationships

 

$

205.4

 

 

$

(190.2

)

 

$

15.2

 

 

5-15

 

Trade name

 

 

173.5

 

 

 

(1.9

)

 

 

171.6

 

 

 

 

Technology

 

 

152.2

 

 

 

(151.5

)

 

 

0.7

 

 

3-4

 

Total other intangible assets

 

$

531.1

 

 

$

(343.6

)

 

$

187.5

 

 

 

 

 

 

Amortization expense related to definite-lived intangible assets was $4.7 million and $4.7 million for the three months ended September 30, 2019, and 2018, respectively, and $13.9 million and $14.0 million for the nine months ended September 30, 2019, and 2018, respectively.

8. Debt

Overview

Our debt obligations consisted of the following as of the periods presented:

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Dollars in millions)

 

Term Debt, interest rate of 5.0% and 5.8% as of September 30, 2019, and December

   31, 2018, respectively

 

$

673.2

 

 

$

678.3

 

Revolving Credit Facility ($300.0 million available capacity less amounts reserved for

   letters of credit, which were $2.4 million and $2.7 million as of September 30, 2019, and

   December 31, 2018, respectively)

 

 

 

 

 

 

Canada Line of Credit (CDN $7.0 million letter of credit capacity as of September 30, 2019,

   and December 31, 2018, which was fully utilized; USD $5.3 million as of September 30,

   2019, and USD $5.1 million as of December 31, 2018)

 

 

 

 

 

 

Total debt

 

 

673.2

 

 

 

678.3

 

Less unamortized discount on Term Debt

 

 

1.5

 

 

 

1.7

 

Less unamortized debt issuance costs on Senior Notes and Term Debt

 

 

5.6

 

 

 

6.3

 

Less current portion of long-term debt

 

 

6.8

 

 

 

6.8

 

Long-term debt, less current portion

 

$

659.3

 

 

$

663.5

 

 

18


Senior Secured Credit Facility

On April 30, 2018, Ceridian completed the refinancing of its debt by entering into a new credit agreement. Pursuant to the terms of the new credit agreement, Ceridian became borrower of (i) a $680.0 million term loan debt facility (the “2018 Term Debt”) and (ii) a $300.0 million revolving credit facility (the “2018 Revolving Credit Facility”) (the 2018 Term Debt and the 2018 Revolving Credit Facility are together referred to as the “2018 Senior Secured Credit Facility”). The 2018 Senior Secured Credit Facility is secured by all assets of Ceridian. The 2018 Term Debt has a maturity date of April 30, 2025, and the 2018 Revolving Credit Facility has a maturity date of April 30, 2023. The 2018 Term Debt was initially subject to an interest rate of LIBOR plus 3.25%. As a result of a ratings upgrade on March 26, 2019, of our senior secured credit facilities by Moody’s Investors Service, from B3 to B2, the Company’s floating rate term debt interest rate is reduced from LIBOR plus 3.25% to LIBOR plus 3.00%, so long as the rating is maintained. Accrued interest related to the 2018 Senior Secured Credit Facility was $0.1 million and $0.1 million as of September 30, 2019, and December 31, 2018, respectively, and is included within Other accrued expenses in our condensed consolidated balance sheets.

In connection with the refinancing completed on April 30, 2018, we recognized a loss on debt extinguishment of $7.1 million within interest expense, net on our condensed consolidated statement of operations during the nine months ended September 30, 2018.

Senior Notes

Using the net proceeds received from the IPO and concurrent private placement, we satisfied and discharged the indenture governing our outstanding $475.0 million principal amount senior notes due 2021 (“Senior Notes”) on April 30, 2018, and the Senior Notes were redeemed on May 30, 2018. In connection with the redemption of the Senior Notes, we recognized a loss on debt extinguishment of $18.6 million within interest expense, net on our condensed consolidated statements of operations during the nine months ended September 30, 2018.

Future Payments and Maturities of Debt

The future principal payments and maturities of our debt are as follows:

 

Years Ending December 31,

 

Amount

 

 

 

(Dollars in millions)

 

2019

 

$

1.7

 

2020

 

 

6.8

 

2021

 

 

6.8

 

2022

 

 

6.8

 

2023

 

 

6.8

 

Thereafter

 

 

644.3

 

 

 

$

673.2

 

 

Fair Value of Debt

Our debt does not trade in active markets. Based on the borrowing rates currently available to us for bank loans with similar terms and average maturities and the limited trades of our debt, the fair value of our debt was estimated to be $674.4 million and $649.5 million as of September 30, 2019, and December 31, 2018, respectively.

9. Employee Benefit Plans

The components of net periodic cost for our defined benefit pension plan and for our postretirement benefit plan are included in the following tables:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net Periodic Pension Cost

 

(Dollars in millions)

 

Interest cost

 

$

4.5

 

 

$

4.1

 

 

$

13.6

 

 

$

12.3

 

Actuarial loss amortization

 

 

3.2

 

 

 

3.6

 

 

 

9.6

 

 

 

10.8

 

Less: Expected return on plan assets

 

 

(5.9

)

 

 

(6.5

)

 

 

(17.7

)

 

 

(19.5

)

Net periodic pension cost

 

$

1.8

 

 

$

1.2

 

 

$

5.5

 

 

$

3.6

 

19


 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net Periodic Postretirement Benefit

 

(Dollars in millions)

 

Service benefit

 

$

 

 

$

 

 

$

 

 

$

 

Interest cost

 

 

0.2

 

 

 

0.1

 

 

 

0.4

 

 

 

0.3

 

Actuarial gain amortization

 

 

(0.6

)

 

 

(0.6

)

 

 

(1.8

)

 

 

(1.8

)

Prior service credit amortization

 

 

(0.1

)

 

 

(0.1

)

 

 

(0.2

)

 

 

(0.3

)

Net periodic postretirement benefit gain

 

$

(0.5

)

 

$

(0.6

)

 

$

(1.6

)

 

$

(1.8

)

 

10. Share-Based Compensation

Prior to November 1, 2013, Ceridian employees participated in a share-based compensation plan of the former ultimate parent of Ceridian, the 2007 Stock Incentive Plan (“2007 SIP”). Effective November 1, 2013, although most participants who held stock options under the 2007 SIP converted their options to a newly created option plan, the 2013 Ceridian HCM Holding Inc. Stock Incentive Plan, as amended (“2013 SIP”), a small number of participants maintained their stock options in the 2007 SIP. Concurrent with the IPO and legal reorganization, all outstanding stock options under the 2007 SIP were converted into options to purchase common stock of Ceridian. As of September 30, 2019, there were 2,500 stock options outstanding under the 2007 SIP.

Stock options awarded under the 2013 SIP vest either annually on a pro rata basis over a four- or five-year period or on a specific date if certain performance criteria are satisfied and certain equity values are attained. In addition, upon termination of service, all vested options must be exercised generally within 90 days after termination, or these awards will be forfeited. The stock option awards have a 10-year contractual term and have an exercise price that is not less than the fair market value of the underlying stock on the date of grant. As of September 30, 2019, there were 5,448,040 stock options and restricted stock units outstanding under the 2013 SIP. We do not intend to grant any additional awards under the 2007 SIP or the 2013 SIP.

As part of the 2013 SIP, the Board of Directors approved a stock appreciation rights program that authorized the issuance of up to 600,000 stock appreciation rights. The performance criteria for all stock appreciation rights was met on April 30, 2018, resulting in the vesting and cash settlement of all outstanding stock appreciation rights. We recognized $1.5 million of share-based compensation related to the vesting of these stock appreciation rights during the nine months ended September 30, 2018.

On April 24, 2018, in connection with the IPO, the Board of Directors approved the Ceridian HCM Holding Inc. 2018 Equity Incentive Plan (“2018 EIP”), which authorizes the issuance of up to 13,500,000 shares of common stock to eligible participants through equity awards. (the “Share Reserve”). The Share Reserve may be increased on March 31 of each of the first ten calendar years during the term of the 2018 EIP, by the lesser of (i) three percent of the number of shares of our common stock outstanding on each January 31 immediately prior to the data of increase or (ii) such number of shares of our common stock determined by the Board of Directors. On March 31, 2019, the Share Reserve was increased by three percent of the number of shares of common stock outstanding on January 31, 2019, or 4,196,193 shares.

Equity awards under the 2018 EIP vest annually on a pro rata basis, generally over a four-year period. In addition, upon termination of service, all vested awards must be exercised within 90 days after termination, or these awards will be forfeited. The equity awards have a 10-year contractual term and have an exercise price that is not less than the fair market value of the underlying stock on the date of the grant. As of September 30, 2019, there were 9,041,226 stock options and restricted stock units outstanding and 8,654,967 shares available for future grants of equity awards under the 2018 EIP.

20


On November 9, 2018, the Board of Directors approved the Ceridian HCM Holding Inc. Global Employee Stock Purchase Plan (the “GESPP”), and the Company’s stockholders approved the GESPP on May 1, 2019. The GESPP authorizes the issuance of up to 2,500,000 shares of common stock to eligible participants through purchases via payroll deductions. The purchase price is the lower of (i) 85% of the fair market value of a share of common stock on the offering date (the first trading day of the offering period commencing on January 1 and concluding on December 31) or (ii) 85% of the fair market value of a share of common stock on the purchase date. The GESPP shall continue for 10-years, unless terminated sooner as provided under the GESPP. During 2019, shares were purchased on June 28 and September 30 and will be purchased on December 31. In subsequent years, quarterly purchase periods will commence on January 1, April 1, July 1, and October 1. Shares will be purchased on the last trading day of the respective purchase periods.  

Total share-based compensation expense was $10.4 million and $4.8 million for three months ended September 30, 2019, and 2018, respectively, and $26.0 million and $19.5 million for the nine months ended September 30, 2019, and 2018, respectively.

Performance-Based Stock Options

Performance-based option activity under the 2007 SIP and the 2013 SIP for the period was as follows:

 

 

 

Shares

 

 

Weighted

Average

Exercise

Price

(per share)

 

 

Weighted

Average

Remaining

Contractual

Term

(in years)

 

 

Aggregate

Intrinsic Value

(in millions)

 

Performance-based options outstanding at December 31,

   2018

 

 

366,377

 

 

$

13.50

 

 

 

3.1

 

 

$

7.7

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(290,319

)

 

 

(13.48

)

 

 

 

 

 

 

Forfeited or expired

 

 

 

 

 

 

 

 

 

 

 

 

Performance-based options outstanding at September 30,

   2019

 

 

76,058

 

 

$

13.56

 

 

 

2.8

 

 

$

2.7

 

Performance-based options exercisable at September 30,

   2019

 

 

76,058

 

 

$

13.56

 

 

 

2.8

 

 

$

2.7

 

 

The performance criteria for all outstanding performance-based stock options was met on June 7, 2018, resulting in the vesting of all outstanding performance-based stock options on this date. We recognized $4.8 million of share-based compensation expense related to the vesting of these performance-based stock options during the nine months ended September 30, 2018. As of September 30, 2019, there was no share-based compensation expense related to unvested performance-based stock options not yet recognized.

Term-Based Stock Options

Term-based option activity, including stock options under the 2007 SIP, the 2013 SIP and the 2018 EIP, for the period was as follows:

 

 

 

Shares

 

 

Weighted

Average

Exercise

Price

(per share)

 

 

Weighted

Average

Remaining

Contractual

Term

(in years)

 

 

Aggregate

Intrinsic Value

(in millions)

 

Term-based options outstanding at December 31, 2018

 

 

13,549,769

 

 

$

19.28

 

 

 

7.5

 

 

$

206.8

 

Granted

 

 

4,227,022

 

 

 

49.66

 

 

 

 

 

 

 

Exercised

 

 

(3,896,797

)

 

 

(17.34

)

 

 

 

 

 

 

Forfeited or expired

 

 

(262,923

)

 

 

(23.01

)

 

 

 

 

 

 

Term-based options outstanding at September 30, 2019

 

 

13,617,071

 

 

$

29.19

 

 

 

8.0

 

 

$

276.9

 

Term-based options exercisable at September 30, 2019

 

 

3,946,615

 

 

$

18.21

 

 

 

6.2

 

 

$

122.9

 

 

21


As of September 30, 2019, there was $91.2 million of share-based compensation expense related to unvested term-based awards not yet recognized, which is expected to be recognized over a weighted average period of 2.2 years.

Restricted Stock Units

Restricted stock units (“RSUs”) activity, including RSUs under the 2013 SIP and the 2018 EIP, for the period was as follows:

 

 

 

Shares

 

RSUs outstanding at December 31, 2018

 

 

664,073

 

Granted

 

 

168,958

 

Shares issued upon vesting of RSUs

 

 

(14,394

)

Forfeited or canceled

 

 

(20,000

)

RSUs outstanding at September 30, 2019

 

 

798,637

 

RSUs releasable at September 30, 2019

 

 

272,045

 

 

During the nine months ended September 30, 2019, 161,439 RSUs vested. As of September 30, 2019, there were 526,592 unvested RSUs outstanding and 272,045 vested RSUs outstanding. RSUs generally vest annually over a one-, three-, or four-year period. As of September 30, 2019, there was $14.2 million of share-based compensation expense related to unvested RSUs not yet recognized, which is expected to be recognized over a weighted average period of 2.1 years.

 

Global Employee Stock Purchase Plan

 

The first GESPP purchase period ended on June 30, 2019, resulting in the issuance of 114,627 shares of our common stock at a purchase price of $28.70 on June 28, 2019, the last trading day of the quarter. The second GESPP purchase period ended on September 30, 2019, resulting in the issuance of 68,785 shares of our common stock at a purchase price of $28.70.

 

The fair value of the stock purchase rights granted under the GESPP was estimated using the following weighted-average assumptions:

 

 

 

Nine Months Ended

September 30, 2019

 

Expected volatility

 

 

34.9

%

Expected dividend rate

 

 

 

Risk-free interest rate

 

 

2.3

%

Expected term (in years)

 

 

0.4

 

Grant date fair value per share

 

$

8.95

 

 

 

 

11. Revenue

Our Solutions

We currently categorize our solutions into two categories, Cloud and Bureau.

 

Cloud revenue is generated from solutions that are delivered via two cloud offerings, Dayforce and Powerpay. The Dayforce offering is differentiated from our market competition as being a single application with continuous calculation that offers a comprehensive range of functionality, including global HR, payroll, benefits, workforce management, and talent management on web and native iOS and Android platforms. Dayforce recurring revenue is primarily generated from monthly recurring fees charged on a per-employee, per-month (“PEPM”) basis and investment income generated from holding Dayforce customer funds in trust before funds are remitted to taxing authorities, Dayforce customer employees, or other third parties. Dayforce professional services and other revenue is primarily generated from implementation and post go-live professional services revenue. Other sources of Dayforce revenues include revenue from the sale, rental and maintenance of time clocks; revenue from the sale of third-party services; and billable travel expenses for Dayforce customers. The Powerpay offering is our solution designed primarily for small market Canadian customers, which typically have fewer than 20 employees. Powerpay recurring revenue is primarily generated from recurring fees charged on a per-employee, per-process basis and investment income generated from holding Powerpay customer funds in trust before funds are remitted to taxing authorities, Powerpay customer employees, or other third parties. Typical processes include the customer’s payroll runs, year-end tax packages, and delivery of customers’ remittance advices or checks. Powerpay professional services revenue is primarily generated from the setup of the Powerpay customer on their platform.

22


 

Bureau revenue is generated primarily from solutions delivered via a service-bureau model. These solutions are delivered via three primary service lines: payroll, payroll-related tax filing services, and outsourced human resource solutions. Revenue from payroll services is generated from recurring fees charged on a per-process basis. Typical processes include the customer’s payroll runs, year-end tax packages, and delivery of customers’ remittance advices or checks. In addition to customers who use our payroll services, certain customers use our tax filing services on a stand-alone basis. Our outsourced human resource solutions are tailored to meet the needs of individual customers, and entail our contracting to perform many of the duties of a customer’s human resources department, including payroll processing, time and labor management, performance management, and recruiting. We also perform individual services for customers, such as check printing, wage attachment and disbursement, and Affordable Care Act (“ACA”) management. Additional items included in Bureau revenue are fees for custom professional services to Bureau customers; investment income generated from holding Bureau customer funds in trust before funds are remitted to taxing authorities, Bureau customer employees, or other third parties; consulting services related to Bureau offerings; and revenue from the sale of third party services to Bureau customers.

Disaggregation of Revenue

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(Dollars in millions)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dayforce

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

$

109.4

 

 

$

82.5

 

 

$

314.7

 

 

$

237.9

 

Professional services and other

 

 

34.3

 

 

 

27.9

 

 

 

96.3

 

 

 

82.4

 

Total Dayforce revenue

 

 

143.7

 

 

 

110.4

 

 

 

411.0

 

 

 

320.3

 

Powerpay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

21.6

 

 

 

21.0

 

 

 

64.0

 

 

 

64.7

 

Professional services and other

 

 

0.2

 

 

 

0.3

 

 

 

0.8

 

 

 

0.9

 

Total Powerpay revenue

 

 

21.8

 

 

 

21.3

 

 

 

64.8

 

 

 

65.6

 

Total Cloud revenue

 

 

165.5

 

 

 

131.7

 

 

 

475.8

 

 

 

385.9

 

Bureau

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

36.4

 

 

 

46.0

 

 

 

125.0

 

 

 

157.9

 

Professional services and other

 

 

0.4

 

 

 

0.4

 

 

 

1.5

 

 

 

2.1

 

Total Bureau revenue

 

 

36.8

 

 

 

46.4

 

 

 

126.5

 

 

 

160.0

 

Total revenue

 

$

202.3

 

 

$

178.1

 

 

$

602.3

 

 

$

545.9

 

 

Contract Balances

The Company records a contract asset when revenue recognized for professional service performance obligations exceed the billings. Contract assets were $40.2 million and $40.0 million as of September 30, 2019, and December 31, 2018, respectively. Contract assets expected to be recognized in revenue within twelve months are included within Prepaid expenses and other current assets, with the remaining contract assets included within Other assets on our condensed consolidated balance sheets.  

Deferred Revenue

Deferred revenue primarily consists of billings or payments received in advance of revenue recognition. The changes in deferred revenue were as follows:

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

 

(Dollars in millions)

 

Deferred revenue, beginning of period

 

$

23.2

 

 

$

16.5

 

New billings

 

 

262.0

 

 

 

203.4

 

Revenue recognized

 

 

(258.0

)

 

 

(198.7

)

Deferred revenue, end of period

 

$

27.2

 

 

$

21.2

 

 

23


Transaction Price for Remaining Performance Obligations

In accordance with ASC Topic 606, the following represents the aggregate amount of transaction price allocated to the remaining performance obligations that are unsatisfied as of the end of the reporting period. As of September 30, 2019, approximately $830.9 million of revenue is expected to be recognized over the next three years from remaining performance obligations, which represents contracted revenue for recurring services and fixed price professional services, primarily implementation services, that has not yet been recognized, including deferred revenue and unbilled amounts that will be recognized as revenue in future periods. In accordance with the practical expedient provided in ASC Topic 606, performance obligations that are billed and recognized as they are delivered, primarily professional services contracts that are on a time and materials basis, are excluded from the transaction price for remaining performance obligations disclosed above.

12. Supplementary Data to Statements of Operations  

Other expense, net for the three months ended September 30, 2019, consisted of net periodic benefit expense, excluding service cost, of $1.3 million and foreign currency translation expense of $0.3 million. Other expense, net for the three months ended September 30, 2018, consisted of net periodic benefit expense, excluding service cost, of $0.6 million and foreign currency translation expense of $0.3 million.

Other expense, net for the nine months ended September 30, 2019, consisted of net periodic benefit expense, excluding service cost, of $3.9 million and foreign currency translation expense of $0.8 million. Other income, net for the nine months ended September 30, 2018, consisted of foreign currency translation income of $2.5 million and net periodic benefit expense, excluding service costs, of $1.8 million. For the nine months ended September 30, 2018, the foreign currency translation is primarily related to remeasurement gains and losses resulting from an intercompany payable of a U.S. subsidiary denominated in Canadian dollars. This intercompany payable was repaid in the second quarter of 2018.

13. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss were as follows:

 

 

 

Foreign

Currency

Translation

Adjustment

 

 

Unrealized Gain

(Loss) from

Invested

Customer Trust

Funds

 

 

Pension

Liability

Adjustment

 

 

Total

 

 

 

(Dollars in millions)

 

Balance as of December 31, 2018

 

$

(207.5

)

 

$

(18.3

)

 

$

(150.1

)

 

$

(375.9

)

Other comprehensive income (loss) before income taxes

   and reclassifications

 

 

17.3

 

 

 

42.3

 

 

 

(0.3

)

 

 

59.3

 

Income tax expense

 

 

 

 

 

(10.6

)

 

 

(1.8

)

 

 

(12.4

)

Reclassifications to earnings

 

 

 

 

 

 

 

 

7.8

 

 

 

7.8

 

Other comprehensive income

 

 

17.3

 

 

 

31.7

 

 

 

5.7

 

 

 

54.7

 

Cumulative-effect adjustment related to the adoption

   of ASU 2018-02 (Please refer to Note 2)

 

 

 

 

 

0.4

 

 

 

(27.5

)

 

 

(27.1

)

Balance as of September 30, 2019

 

$

(190.2

)

 

$

13.8

 

 

$

(171.9

)

 

$

(348.3

)

 

14. Income Taxes

Our income tax provision represents federal, state, and international taxes on our income recognized for financial statement purposes and includes the effects of temporary differences between financial statement income and income recognized for tax return purposes. Deferred tax assets and liabilities are recorded for temporary differences between the financial reporting basis and the tax basis of assets and liabilities as adjusted for the expected benefits of utilizing net operating loss carryforwards. We record a valuation allowance to reduce our deferred tax assets to reflect the net deferred tax assets that we believe will be realized. In assessing the likelihood that we will be able to recover our deferred tax assets and the need for a valuation allowance, we consider all available evidence, both positive and negative, including historical levels of pre-tax book income, expiration of net operating losses, expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies, as well as current tax laws. As of September 30, 2019, we determined that we no longer have a requirement to carry a full valuation allowance against our domestic deferred tax assets that are not offset by the reversal of deferred tax liabilities. As a result of this determination, we have released $65.8 million of the valuation allowance, which has a positive impact on our income tax provision.  As of September 30, 2019, we continue to record a valuation allowance of $17.4 million against certain deferred tax assets primarily attributable to state net operating loss carryovers.

24


We recorded an income tax benefit of $57.5 million during the nine months ended September 30, 2019, consisting primarily of $65.8 million tax benefit from the release of our valuation allowance, a $5.9 million tax benefit attributable to stock option exercises, partially offset by $5.5 million of base erosion anti-abuse tax (“BEAT”) in the U.S., $6.6 million of income tax expense from foreign operations, and other tax expenses of $2.1 million. 

The total amount of unrecognized tax benefits as of September 30, 2019, and December 31, 2018, were $1.4 million, including $0.2 million of accrued interest, and $1.3 million, including $0.2 million of accrued interest, respectively. Of the total amount of unrecognized tax benefits as of September 30, 2019, $1.4 million represents the amount that, if recognized, would favorably impact our effective income tax rate. It is reasonable to expect that the amount of unrecognized tax benefits will change in the next twelve months; however, we do not expect the change to have a significant impact on our results of operations or financial condition.

We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions. With a few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2015.

15. Leases

Our leases primarily consist of office space. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For leases beginning 2019 and later, we account for lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) separately from the non-lease components (e.g., common-area maintenance costs).

Most leases include options to renew, and the lease renewal is at our sole discretion. Therefore, the depreciable life of assets and leasehold improvements is limited by the expected lease term unless there is a transfer of title or purchase option reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

We rent or sublease certain real estate to third parties. Our sublease portfolio mainly consists of operating leases for space within our office facilities.  

Supplemental balance sheet information related to leases were as follows:

 

Lease Type

 

Balance Sheet Classification

 

September 30, 2019

 

 

 

 

 

(Dollars in millions)

 

ASSETS

 

 

 

 

 

 

Operating lease assets

 

Trade and other receivables, net

 

$

2.7

 

Operating lease assets

 

Prepaid expenses and other current assets

 

 

1.3

 

Operating lease assets

 

Right of use lease asset

 

 

36.8

 

Total lease assets

 

 

 

$

40.8

 

LIABILITIES

 

 

 

 

 

 

Current

 

 

 

 

 

 

Operating lease liabilities

 

Short-term lease liabilities

 

 

13.3

 

Noncurrent

 

 

 

 

 

 

Operating lease liabilities

 

Long-term lease liabilities

 

 

31.8

 

Total lease liabilities

 

 

 

$

45.1

 

 

The components of lease expense were as follows:

 

 

 

Three Months

Ended September 30,

 

 

Nine Months

Ended September 30,

 

 

 

2019

ASC Topic 842

 

 

2018

ASC Topic 840

 

 

2019

ASC Topic 842

 

 

2018

ASC Topic 840

 

Lease Cost

 

(Dollars in millions)

 

Operating lease cost

 

$

4.2

 

 

$

4.5

 

 

$

12.6

 

 

$

14.5

 

Sublease income

 

 

(1.0

)

 

 

(1.4

)

 

 

(3.3

)

 

 

(4.7

)

Net lease cost

 

$

3.2

 

 

$

3.1

 

 

$

9.3

 

 

$

9.8

 

 

25


Maturities of operating lease liabilities is as follows for each period presented:

 

 

 

September 30, 2019

 

 

December 31, 2018

 

Years Ending December 31,

 

ASC Topic 842

 

 

ASC Topic 840

 

 

 

(Dollars in millions)

 

2019

 

$

4.0

 

 

$

13.6

 

2020

 

 

14.3

 

 

 

11.8

 

2021

 

 

10.3

 

 

 

7.7

 

2022

 

 

10.0

 

 

 

7.4

 

2023

 

 

8.2

 

 

 

6.2

 

Thereafter

 

 

12.4

 

 

 

9.4

 

Total lease payments (a)

 

$

59.2

 

 

$

56.1

 

Less: Interest

 

 

7.5

 

 

 

 

Present value of lease liabilities

 

$

51.7

 

 

$

56.1

 

 

(a)

Maturities of lease liabilities have not been reduced by minimum sublease rentals of $9.6 million due in the future under noncancellable subleases. 

Weighted average remaining lease term and weighted average discount rate were as follows:

 

 

 

 

 

September 30, 2019

 

Weighted average remaining lease term (in years)

 

 

 

 

Operating leases

 

 

 

 

5.7

 

Weighted average discount rate

 

 

 

 

 

 

Operating leases

 

 

 

 

5.03

%

 

We had operating cash outflows related to operating leases of $11.1 million for the nine months ended September 30, 2019. This represents cash paid for amounts included in the measurement of lease liabilities.

16. Commitments and Contingencies

Unrecovered Duplicate Payments

We identified an isolated service incident on September 26, 2019, that resulted in duplicate payments for certain of our U.S. payroll customers totaling $18.8 million. Through October 31, 2019, $12.6 million remained unrecovered, and we have recorded a loss for this amount within selling, general, and administrative expense in our condensed consolidated statement of operations for the period ended September 30, 2019.  Our recovery efforts are ongoing, and future collections will be recognized as a reduction to selling, general, and administrative expense in the period recovered.

Legal Matters

We are subject to claims and a number of judicial and administrative proceedings considered normal in the course of our current and past operations, including employment-related disputes, contract disputes, disputes with our competitors, intellectual property disputes, government audits and proceedings, customer disputes, and tort claims. In some proceedings, the claimant seeks damages as well as other relief, which, if granted, would require substantial expenditures on our part.

Our general terms and conditions in customer contracts frequently include a provision indicating that we will indemnify and hold our customers harmless from and against any and all claims alleging that the services and materials furnished by us violate any third party’s patent, trade secret, copyright or other intellectual property right. We are not aware of any material pending litigation concerning these indemnifications.

Some of these matters raise difficult and complex factual and legal issues and are subject to many uncertainties, including the facts and circumstances of each particular action, and the jurisdiction, forum, and law under which each action is proceeding. Because of these complexities, final disposition of some of these proceedings may not occur for several years. As such, we are not always able to estimate the amount of our possible future liabilities, if any.

26


There can be no certainty that we may not ultimately incur charges in excess of presently established or future financial accruals or insurance coverage. Although occasional adverse decisions or settlements may occur, it is management’s opinion that the final disposition of these proceedings will not, considering the merits of the claims and available resources or reserves and insurance, and based upon the facts and circumstances currently known, have a material adverse effect on our financial position or results of operations.

17. Related Party Transactions

Management Agreements

Prior to our IPO, Ceridian was party to management agreements with affiliates of our sponsors, Fidelity National Financial, Inc. (“FNF”) and THL Managers VI, LLC (“THLM”). FNF assigned its management agreement to Cannae Holdings, LLC (“Cannae”) in November 2017. Pursuant to these management agreements, Cannae and THLM each, respectively, agreed to provide us with financial advisory, strategic, and general oversight services. These management agreements provided that we pay annual management fees to each of Cannae and THLM in an amount equal to the greater of (a) $0.9 million, or (b) 0.5 percent of Adjusted EBITDA. Adjusted EBITDA, for purposes of the management agreements, was EBITDA as defined in the 2014 Senior Secured Credit Facility, further adjusted to exclude the payments made pursuant to the management agreements and certain stock options or other equity compensation.

We recorded a management fee expense in selling, general, and administrative expense of $12.0 million for the nine months ended September 30, 2018, related to these management agreements. In April 2018, the management agreements terminated upon consummation of our IPO. Upon termination, the management agreement provided that we pay a termination fee equal to the net present value of the management fee for a seven-year period, which was $11.3 million.       

Service and Vendor Related Agreements

Ceridian is a party to a service agreement with CompuCom Systems, Inc. (“CompuCom”), an investment portfolio company of THL Partners. Pursuant to the service agreement, CompuCom agrees to provide us with service desk and desk side support services. Pursuant to this arrangement, we made payments to CompuCom totaling $0.4 million and $0.6 million during the three months ended September 30, 2019, and 2018, respectively, and $1.3 million and $1.3 million during the nine months ended September 30, 2019, and 2018, respectively.  

Other Transactions

On July 23, 2018, Ronald F. Clarke was appointed to our Board of Directors. Mr. Clarke has been the chief executive officer of FleetCor Technologies Inc. (“FleetCor Technologies”) since August 2000 and its chairman of the board of directors since March 2003. We provide services to FleetCor Technologies or one of its wholly owned affiliates through certain commercial arrangements entered into in the ordinary course of business, which include provision of Dayforce HCM services, reseller or referral arrangements whereby we resell or refer FleetCor Technologies services to its customers, and other administrative services. For these services, we have recorded revenue of $0.2 million and $0.5 million for the three months ended September 30, 2019, and 2018, respectively, and $0.6 million and $1.8 million for the nine months ended September 30, 2019, and 2018, respectively.    

We provide Dayforce and related services to The Stronach Group, for which we recorded revenue of $0.1 million for the three months ended September 30, 2019, and $0.2 million and $0.2 million for the nine months ended September 30, 2019, and 2018, respectively. Alon Ossip, the brother of our chief executive officer, David Ossip, is the chief executive officer (on leave), and is currently a minority shareholder, of The Stronach Group.

We provide payroll-related tax filings services to FNF for which we recorded revenue of $0.1 million and $0.1 million for the three months ended September 30, 2019, and 2018, respectively, and $0.3 million and $0.3 million for the nine months ended September 30, 2019, and 2018, respectively.   

27


We provide Dayforce and related services to certain investment portfolio companies of THLM and Cannae. Revenue from these portfolio companies was as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(Dollars in millions)

 

American Blue Ribbon Holdings, LLC

 

$

0.5

 

 

$

0.5

 

 

$

1.4

 

 

$

1.5

 

Essex Bargain Hunt Superstores

 

 

0.2

 

 

 

0.1

 

 

 

0.4

 

 

 

0.4

 

Guaranteed Rate

 

 

0.2

 

 

 

 

 

 

0.7

 

 

 

0.2

 

System One Holdings LLC

 

 

 

 

 

0.1

 

 

 

 

 

 

0.4

 

Philips Feed Services

 

 

0.1

 

 

 

0.1

 

 

 

0.2

 

 

 

0.2

 

 

18. Net Income (Loss) per Share

We compute net income (loss) per share of common stock using the treasury stock method.

Basic net income (loss) per share is computed by dividing net income (loss) attributable to Ceridian available to common stockholders by the weighted-average number of shares of common stock outstanding during the period.

For the calculation of diluted net income (loss) per share, net income (loss) per share is adjusted by the effect of dilutive securities, including awards under our share-based compensation plans. Diluted net income (loss) per share is computed by dividing the resulting net income (loss) attributable to Ceridian available to common stockholders by the weighted-average number of fully diluted common shares outstanding. During the nine months ended September 30, 2018, our potential dilutive shares, such as stock options, RSUs, and shares of senior and junior convertible preferred stock were not included in the computation of diluted net loss per share as the effect of including these shares in the calculation would have been anti-dilutive.

The numerators and denominators of the basic and diluted net income (loss) per share computations are calculated as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

 

*As Adjusted

 

 

 

 

 

 

*As Adjusted

 

 

 

(Dollars in millions, except share and per share data)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Ceridian

 

$

62.7

 

 

$

4.2

 

 

$

80.2

 

 

$

(58.5

)

Less: Loss from discontinued operations

 

 

 

 

 

(3.0

)

 

 

 

 

 

(14.8

)

Net income (loss) from continuing operations attributable

   to Ceridian

 

 

62.7

 

 

 

7.2

 

 

 

80.2

 

 

 

(43.7

)

Less: Senior Preferred Stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

7.7

 

Net income (loss) from continuing operations attributable

   to Ceridian available to common stockholders

 

$

62.7

 

 

$

7.2

 

 

$

80.2

 

 

$

(51.4

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding - basic

 

 

142,780,819

 

 

 

137,768,764

 

 

 

141,369,339

 

 

 

105,730,178

 

Effect of dilutive equity instruments

 

 

6,372,408

 

 

 

7,295,934

 

 

 

6,910,604

 

 

 

 

Weighted-average shares outstanding - diluted

 

 

149,153,227

 

 

 

145,064,698

 

 

 

148,279,943

 

 

 

105,730,178

 

Net income (loss) per share from continuing operations

   attributable to Ceridian - basic

 

$

0.44

 

 

$

0.05

 

 

$

0.57

 

 

$

(0.49

)

Net loss per share from discontinued operations - basic

 

$

 

 

$

(0.02

)

 

$

 

 

$

(0.14

)

Net income (loss) per share attributable to Ceridian - basic

 

$

0.44

 

 

$

0.03

 

 

$

0.57

 

 

$

(0.63

)

Net income (loss) per share from continuing operations

   attributable to Ceridian - diluted

 

$

0.42

 

 

$

0.05

 

 

$

0.54

 

 

$

(0.49

)

Net loss per share from discontinued operations - diluted

 

$

 

 

$

(0.02

)

 

$

 

 

$

(0.14

)

Net income (loss) per share attributable to Ceridian - diluted

 

$

0.42

 

 

$

0.03

 

 

$

0.54

 

 

$

(0.63

)

 

28


The following potentially dilutive weighted-average shares were excluded from the calculation of diluted net income (loss) per share because their effect would have been anti-dilutive:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Senior convertible preferred stock

 

 

 

 

 

 

 

 

 

 

 

7,358,603

 

Junior convertible preferred stock

 

 

 

 

 

 

 

 

 

 

 

25,508,456

 

Stock options

 

 

4,185,519

 

 

 

148,370

 

 

 

3,099,587

 

 

 

14,127,557

 

Restricted stock units

 

 

11,957

 

 

 

 

 

 

12,821

 

 

 

561,836

 

 

29


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of our financial condition and results of operations as of, and for, the periods presented. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and notes thereto included elsewhere in report and in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2018, in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2019 (our “2018 Form 10-K”). This discussion and analysis contains forward-looking statements, including statement regarding industry outlook, our expectations for the future of our business, and our liquidity and capital resources as well as other non-historical statements. These statements are based on current expectations and are subject to numerous risks and uncertainties, including but not limited to the risks and uncertainties described in Part II, Item 1A, “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by these forward-looking statements. Any reference to a “Note” in this discussion relates to the accompanying notes to the unaudited condensed consolidated financial statements included elsewhere in this report unless otherwise indicated.

Overview

Ceridian is a global human capital management (“HCM”) software company. We categorize our solutions into two categories: Cloud and Bureau solutions. Cloud revenue is generated from HCM solutions that are delivered via two cloud offerings: Dayforce, our flagship cloud HCM platform, and Powerpay, a cloud HR and payroll solution for the Canadian small business market. We also continue to support customers using our Bureau solutions, which we generally stopped actively selling to new customers following the acquisition of Dayforce in 2012. We invest in maintenance and necessary updates to support our Bureau customers and continue to migrate them to Dayforce.

Dayforce provides HR, payroll, benefits, workforce management, and talent management functionality. Our platform is used by organizations, regardless of industry or size, to optimize management of the entire employee lifecycle, including attracting, engaging, paying, deploying, and developing their people. Dayforce was built as a single application from the ground up that combines a modern, consumer-grade user experience with proprietary application architecture, including a single employee record and a rules engine spanning all areas of HCM. Dayforce provides continuous real-time calculations across all modules to enable, for example, payroll administrators access to data through the entire pay period, and managers access to real-time data to optimize work schedules. Our platform is designed to make work life better for our customers and their employees by improving HCM decision-making processes, streamlining workflows, exposing strategic organizational insights, and simplifying legislative compliance. The platform is designed to ease administrative work for both employees and managers, creating opportunities for companies to increase employee engagement. We are a founder-led organization, and our culture combines the agility and innovation of a start-up with a history of deep domain and operational expertise.

We sell Dayforce through our direct sales force on a subscription per-employee, per-month (“PEPM”) basis. Our subscriptions are typically structured with an initial fixed term of between three and five years, with evergreen renewal thereafter. Dayforce can serve customers of all sizes, ranging from 100 to over 100,000 employees. We have rapidly grown the Dayforce platform to more than 4,150 live Dayforce customers as of September 30, 2019. For the three and nine months ended September 30, 2019, we added over 160 and 450 net new live Dayforce customers, respectively.

On April 30, 2018, we completed our initial public offering ("IPO"), in which we issued and sold 21,000,000 shares of common stock at a public offering price of $22.00 per share. We granted the underwriters a 30-day option to purchase an additional 3,150,000 shares of common stock at the offering price, which was exercised in full. A total of 24,150,000 shares of common stock were issued in our IPO. Concurrently with our IPO, we issued an additional 4,545,455 shares of our common stock in a private placement at $22.00 per share. We received gross proceeds of $631.3 million from the IPO and concurrent private placement before deducting underwriting discounts, commissions, and other offering related expenses.  

We applied a portion of the net proceeds from the IPO to satisfy and to discharge the indenture governing our outstanding $475.0 million principal amount senior notes due 2021, and they were redeemed on May 30, 2018 (“Senior Notes”). Concurrently, we also refinanced our remaining debt under our (i) $702.0 million (original principal amount) senior term debt and (ii) $130.0 million revolving credit facility, including accrued interest and related costs and expenses, with new senior credit facilities consisting of a $680.0 million term loan debt facility and a $300.0 million revolving credit facility. Please refer to Note 8, “Debt,” for further discussion of the debt transactions.

30


The IPO, private placement, and debt refinancing had the following impacts to our results of operations and cash during the three months ended June 30, 2018:

 

 

 

Impact to

Statement of

Operations

 

 

Impact to Cash

 

 

 

(Dollars in millions)

 

Gross proceeds from the IPO and private placement

 

 

 

 

 

$

631.3

 

Costs capitalized within stockholders’ equity

 

 

 

 

 

 

(36.3

)

Redemption of Senior Notes

 

 

 

 

 

 

(475.0

)

Debt refinancing fees, reflected as a reduction to long-term

   debt

 

 

 

 

 

 

(3.6

)

IPO and debt refinancing related expenses reflected

   within results of operations:

 

 

 

 

 

 

 

 

Cost of revenue

 

$

(2.1

)

 

 

 

 

Selling, general, and administrative

 

 

(23.2

)

 

 

 

 

Impact on operating profit

 

$

(25.3

)

 

 

 

 

Interest expense

 

 

(25.7

)

 

 

 

 

Impact on net loss

 

$

(51.0

)

 

 

(51.0

)

Non-cash IPO-related share-based compensation expense

 

 

 

 

 

 

8.1

 

Non-cash interest expense adjustments

 

 

 

 

 

 

(4.9

)

Cash to balance sheet from the IPO and private placement

 

 

 

 

 

$

68.6

 

Proceeds from issuance of the new $680.0 million Senior

   Term Debt

 

 

 

 

 

 

680.0

 

Repayment of the $702.0 million Senior Term Debt

 

 

 

 

 

 

(657.0

)

Cash to balance sheet from the IPO, private placement

   and debt refinancing

 

 

 

 

 

$

91.6

 

 

Contemporaneously with the IPO and concurrent private placement, we distributed our interest in LifeWorks to our existing stockholders of record prior to the IPO on a pro rata basis in accordance with their pro rata interests in us (“LifeWorks Disposition”). As a result of the LifeWorks Disposition, we no longer have any material obligation under the LifeWorks joint venture agreement. Please refer to Note 3, “Discontinued Operations,” for further discussion of the LifeWorks Disposition.

Our Business Model

Our business model focuses on supporting the rapid growth of Dayforce and maximizing the lifetime value of our Dayforce customer relationships. Due to our subscription model, where we recognize subscription revenues ratably over the term of the subscription period, and high customer retention rates, we have a high level of visibility into our future revenues. The profitability of a customer depends, in large part, on how long they have been a customer. Because in our business model, PEPM subscription fees are not charged until the customer goes live, and because we incur costs in advance of receiving PEPM revenue that are not fully offset by our implementation fees, we estimate that it takes an average of 2.5 years before we are able to recover our implementation, customer acquisition, and other direct costs on a new Dayforce customer contract. As the proportion of Dayforce customers who have been live for two or more years increases, our related profitability increases. The following sets forth the number of live Dayforce customers at the end of each quarter presented:

 

 

 

September

 

 

June 30,

 

 

March 31,

 

 

December

 

 

September

 

 

June 30,

 

 

March 31,

 

 

December

 

 

 

30, 2019

 

 

2019

 

 

2019

 

 

31, 2018

 

 

30, 2018

 

 

2018

 

 

2018

 

 

31, 2017

 

Live Dayforce

   customers

 

 

4,169

 

 

 

4,006

 

 

 

3,851

 

 

 

3,718

 

 

 

3,465

 

 

 

3,308

 

 

 

3,154

 

 

 

3,001

 

Dayforce customers

   live for two or more

   years

 

 

2,855

 

 

 

2,690

 

 

 

2,480

 

 

 

2,339

 

 

 

2,148

 

 

 

2,014

 

 

 

1,872

 

 

 

1,770

 

Proportion of

   Dayforce customers

   live for two or more

   years

 

 

68

%

 

 

67

%

 

 

64

%

 

 

63

%

 

 

62

%

 

 

61

%

 

 

59

%

 

 

59

%

 

31


Over the lifetime of the customer relationship, we have the opportunity to realize additional PEPM revenue, both as the customer grows or rolls out the Dayforce solution to additional employees, and also by selling additional functionality. We incur on-going costs to manage the account, to support customers, and to sell additional functionality. These costs, however, are significantly less than the costs initially incurred to acquire and to implement the customer.

How We Assess Our Performance

In assessing our performance, we consider a variety of performance indicators in addition to revenue and net income. Set forth below is a description of our key performance measures.

Live Dayforce Customers

We use the number of customers live on Dayforce as an indicator of future revenue and the overall performance of the business and to assess the performance of our implementation services. We had 4,169 customers live on Dayforce as of September 30, 2019, compared to 3,465 customers live on Dayforce as of September 30, 2018. Please refer to the “Our Business Model” section above for the number of live Dayforce customers at the end of the quarters presented.

Adjusted EBITDA

We believe that Adjusted EBITDA and Adjusted EBITDA margin, non-GAAP financial measures, are useful to management and investors as supplemental measures to evaluate our overall operating performance. Adjusted EBITDA and Adjusted EBITDA margin are components of our management incentive plan and are used by management to assess performance and to compare our operating performance to our competitors. We define Adjusted EBITDA as net income or loss before interest, taxes, depreciation, and amortization, as adjusted to exclude net income or loss from discontinued operations, sponsor management fees, non-cash charges for asset impairments, gains or losses on assets and liabilities held in a foreign currency other than the functional currency of a company subsidiary, share-based compensation expense and related employer taxes, severance charges, restructuring consulting fees, transaction costs, and certain other non-recurring charges. Adjusted EBITDA margin is determined by calculating the percentage Adjusted EBITDA is of Total Revenue. Management believes that Adjusted EBITDA and Adjusted EBITDA margin are helpful in highlighting management performance trends because Adjusted EBITDA and Adjusted EBITDA margin exclude the results of decisions that are outside the normal course of our business operations. Please refer to the “Results of Operations” section below for a discussion of Adjusted EBITDA and Adjusted EBITDA margin.  

32


Results of Operations

Three Months Ended September 30, 2019 Compared With Three Months Ended September 30, 2018

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

Increase/ (Decrease)

 

 

% of Revenue

 

 

 

2019

 

 

2018

 

 

Amount

 

 

%

 

 

2019

 

 

2018

 

 

 

 

 

 

 

As Adjusted (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

 

��

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud

 

$

131.0

 

 

$

103.5

 

 

$

27.5

 

 

 

26.6

%

 

 

64.8

%

 

 

58.1

%

Bureau

 

 

36.4

 

 

 

46.0

 

 

 

(9.6

)

 

 

(20.9

)%

 

 

18.0

%

 

 

25.8

%

Total recurring services

 

 

167.4

 

 

 

149.5

 

 

 

17.9

 

 

 

12.0

%

 

 

82.7

%

 

 

83.9

%

Professional services and other

 

 

34.9

 

 

 

28.6

 

 

 

6.3

 

 

 

22.0

%

 

 

17.3

%

 

 

16.1

%

Total revenue

 

 

202.3

 

 

 

178.1

 

 

 

24.2

 

 

 

13.6

%

 

 

100.0

%

 

 

100.0

%

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud

 

 

39.0

 

 

 

35.4

 

 

 

3.6

 

 

 

10.2

%

 

 

19.3

%

 

 

19.9

%

Bureau

 

 

10.4

 

 

 

13.7

 

 

 

(3.3

)

 

 

(24.1

)%

 

 

5.1

%

 

 

7.7

%

Total recurring services

 

 

49.4

 

 

 

49.1

 

 

 

0.3

 

 

 

0.6

%

 

 

24.4

%

 

 

27.6

%

Professional services and other

 

 

37.6

 

 

 

32.5

 

 

 

5.1

 

 

 

15.7

%

 

 

18.6

%

 

 

18.2

%

Product development and management

 

 

17.5

 

 

 

14.5

 

 

 

3.0

 

 

 

20.7

%

 

 

8.7

%

 

 

8.1

%

Depreciation and amortization

 

 

9.0

 

 

 

8.5

 

 

 

0.5

 

 

 

5.9

%

 

 

4.4

%

 

 

4.8

%

Total cost of revenue

 

 

113.5

 

 

 

104.6

 

 

 

8.9

 

 

 

8.5

%

 

 

56.1

%

 

 

58.7

%

Gross profit

 

 

88.8

 

 

 

73.5

 

 

 

15.3

 

 

 

20.8

%

 

 

43.9

%

 

 

41.3

%

Selling, general, and administrative expense

 

 

82.3

 

 

 

57.3

 

 

 

25.0

 

 

 

43.6

%

 

 

40.7

%

 

 

32.2

%

Operating profit

 

 

6.5

 

 

 

16.2

 

 

 

(9.7

)

 

 

(59.9

)%

 

 

3.2

%

 

 

9.1

%

Interest expense, net

 

 

7.8

 

 

 

8.8

 

 

 

(1.0

)

 

 

(11.4

)%

 

 

3.9

%

 

 

4.9

%

Other expense, net

 

 

1.6

 

 

 

0.9

 

 

 

0.7

 

 

 

77.8

%

 

 

0.8

%

 

 

0.5

%

(Loss) income from continuing operations

   before income taxes

 

 

(2.9

)

 

 

6.5

 

 

 

(9.4

)

 

 

(144.6

)%

 

 

(1.4

)%

 

 

3.6

%

Income tax benefit

 

 

(65.6

)

 

 

(0.7

)

 

 

(64.9

)

 

 

(9271.4

)%

 

 

(32.4

)%

 

 

(0.4

)%

Income from continuing operations

 

 

62.7

 

 

 

7.2

 

 

 

55.5

 

 

 

770.8

%

 

 

31.0

%

 

 

4.0

%

Loss from discontinued operations

 

 

 

 

 

(3.0

)

 

 

3.0

 

 

 

100.0

%

 

 

 

 

 

(1.7

)%

Net income

 

$

62.7

 

 

$

4.2

 

 

 

58.5

 

 

 

1392.9

%

 

 

31.0

%

 

 

2.4

%

Adjusted EBITDA (a)

 

$

46.4

 

 

$

36.4

 

 

$

10.0

 

 

 

27.5

%

 

 

22.9

%

 

 

20.4

%

Adjusted EBITDA margin (a)

 

 

22.9

%

 

 

20.4

%

 

 

2.5

%

 

 

12.4

%

 

 

 

 

 

 

 

 

 

(a)

Please refer to the “Non-GAAP Measures” section for a discussion and reconciliation of Adjusted EBITDA and Adjusted EBITDA margin, a non-GAAP financial measure.

(b)

Please refer to Note 2 of the notes to the condensed consolidated financial statements for a summary of adjustments.

 

33


Revenue. The following table sets forth certain information regarding our revenues for the three months ended September 30, 2019, compared with the three months ended September 30, 2018.

 

 

 

Three Months Ended September 30,

 

 

Percentage

change in

revenue as

reported

 

 

Impact of

changes in

foreign

currency (a)

 

 

Percentage

change in

revenue on

constant

currency basis

(a)

 

 

 

2019

 

 

2018

 

 

2019 vs. 2018

 

 

 

 

 

 

2019 vs. 2018

 

 

 

 

 

 

 

As Adjusted (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dayforce

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

$

109.4

 

 

$

82.5

 

 

 

32.6

%

 

 

(0.4

)%

 

 

33.0

%

Professional services and other

 

 

34.3

 

 

 

27.9

 

 

 

22.9

%

 

 

(0.3

)%

 

 

23.2

%

Total Dayforce revenue

 

 

143.7

 

 

 

110.4

 

 

 

30.2

%

 

 

(0.3

)%

 

 

30.5

%

Powerpay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

21.6

 

 

 

21.0

 

 

 

2.9

%

 

 

(0.9

)%

 

 

3.8

%

Professional services and other

 

 

0.2

 

 

 

0.3

 

 

 

(33.3

)%

 

 

(33.3

)%

 

 

 

Total Powerpay revenue

 

 

21.8

 

 

 

21.3

 

 

 

2.3

%

 

 

(1.4

)%

 

 

3.7

%

Total Cloud revenue

 

 

165.5

 

 

 

131.7

 

 

 

25.7

%

 

 

(0.5

)%

 

 

26.2

%

Bureau

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

36.4

 

 

 

46.0

 

 

 

(20.9

)%

 

 

(0.3

)%

 

 

(20.6

)%

Professional services and other

 

 

0.4

 

 

 

0.4

 

 

 

 

 

 

 

 

 

 

Total Bureau revenue

 

 

36.8

 

 

 

46.4

 

 

 

(20.7

)%

 

 

(0.3

)%

 

 

(20.4

)%

Total revenue

 

$

202.3

 

 

$

178.1

 

 

 

13.6

%

 

 

(0.4

)%

 

 

14.0

%

 

(a)

Please refer to the “Non-GAAP Measures” section for additional information on our constant currency revenue, a non-GAAP financial measure.

(b)

Please refer to Note 2 of the notes to the condensed consolidated financial statements for a summary of adjustments.

Total revenue increased $24.2 million, or 13.6%, to $202.3 million for the three months ended September 30, 2019, compared to $178.1 million for the three months ended September 30, 2018. This increase was primarily attributable to an increase in Cloud revenue of $33.8 million, or 25.7%, from $131.7 million for the three months ended September 30, 2018, to $165.5 million for the three months ended September 30, 2019. The Cloud revenue increase was driven by an increase of $27.5 million, or 26.6%, in Cloud recurring services revenue, and $6.3 million, or 22.3%, in Cloud professional services and other revenue. The increase in Cloud recurring services revenue of $27.5 million was due to $19.8 million from new customers, add-ons, and revenue uplift from migrations of Bureau customers, net of customer losses; $5.0 million from the migration of Bureau customers; and $2.7 million from increased float revenue related to Cloud recurring services revenue.

The increase in Cloud revenue of $33.8 million was partially offset by a decline in Bureau revenue of $9.6 million, or 20.7%. Of the $9.6 million decline in Bureau revenue for the three months ended September 30, 2019, approximately 52% was attributable to customer migrations to Dayforce. Excluding the impact of migrations to Dayforce, Bureau revenue declined by $4.6 million, or 9.9%.

On a constant currency basis, total revenue grew 14.0%, reflecting a 26.2% increase in Cloud revenue, partially offset by a 20.4% decline in Bureau revenue. Cloud revenue growth reflected a 27.0% increase in Cloud recurring services revenue and a 23.0% increase in Cloud professional services and other revenue. Please refer to the “Non-GAAP Measures” section for additional information on our constant currency revenue.

Cloud revenue by solution. Cloud revenue was $165.5 million for the three months ended September 30, 2019, an increase of $33.8 million, or 25.7%, compared to Cloud revenue for the three months ended September 30, 2018. Dayforce revenue increased 30.2%, and Powerpay revenue increased 2.3% for the three months ended September 30, 2019, as compared to revenues for the three months ended September 30, 2018. On a constant currency basis, Dayforce revenue increased 30.5%, and Powerpay revenue increased 3.7% for the three months ended September 30, 2019. Our new business sales to Dayforce and Powerpay customers comprised approximately 85% of our increase in Cloud revenue for the three months ended September 30, 2019, and approximately 15% consisted primarily of customer migrations to Dayforce from our Bureau solutions. As we migrate our Bureau customers to Dayforce, we typically experience a revenue increase from such customers driven by increased product density on the Dayforce platform.

34


Float revenue. Investment income from invested customer trust funds included in recurring services revenue was $18.3 million and $15.8 million for the three months ended September 30, 2019, and 2018, respectively. The average float balance for our customer trust funds for the three months ended September 30, 2019, was $3,117.5 million, compared to $2,965.9 million for the three months ended September 30, 2018. On a constant currency basis, the average float balance for our customer trust funds increased 5.5% for the three months ended September 30, 2019, compared to three months ended September 30, 2018. The average yield was 2.33% during the three months ended September 30, 2019, an increase of 22 basis points compared to the average yield in the three months ended September 30, 2018. For the three months ended September 30, 2019, approximately 39% of our average float balance consisted of Canadian customer trust funds, compared to approximately 40% for the three months ended September 30, 2018. Based on current market conditions, portfolio composition and investment practices, a 100 basis point change in market investment rates would result in approximately $18 million of change in float revenue over the ensuing twelve month period. There are no incremental costs of revenue associated with changes in float revenue.

Cost of revenue. Total cost of revenue for the three months ended September 30, 2019, was $113.5 million, an increase of $8.9 million, or 8.5%, compared to the three months ended September 30, 2018. Recurring services cost of revenue for the three months ended September 30, 2019, was consistent with the three months ended September 30, 2018. Professional services and other cost of revenue increased $5.1 million, or 15.7%, for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, primarily due to additional costs incurred to implement new customers.

In accordance with ASC 350, we are required to capitalize certain software development costs. Please refer to Note 2, “Summary of Significant Accounting Policies,” for further discussion of our accounting policy for internally developed software costs. Costs related to software development activities that do not qualify for capitalization, such as development, quality assurance, testing of new technologies, enhancements to our existing solutions that do not result in additional functionality, and costs related to the management of our solutions are presented as product development and management expense. The increase in product development and management expense of $3.0 million for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, reflected increases in Dayforce product development efforts, including the build out of our international offerings; and increases in product management labor costs. For the three months ended September 30, 2019, and 2018, our investment in software development was $17.4 million and $14.4 million, respectively, consisting of $8.7 million and $7.5 million, of research and development expense, which is included within product development and management expense, and $8.7 million and $6.9 million in capitalized software development, respectively.

Depreciation and amortization expense associated with cost of revenue increased by $0.5 million for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, as we continue to capitalize Dayforce related and other development costs and subsequently amortize these costs.

The table below presents total gross margin and solution gross margins for the periods presented:

 

 

 

Three Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

As Adjusted (a)

 

Total gross margin

 

 

43.9

%

 

 

41.3

%

Gross margin by solution:

 

 

 

 

 

 

 

 

Cloud recurring services

 

 

70.2

%

 

 

65.8

%

Bureau recurring services

 

 

71.4

%

 

 

70.2

%

Professional services and other

 

 

(7.7

)%

 

 

(13.6

)%

 

(a)

Please refer to Note 2 of the notes to the condensed consolidated financial statements for a summary of adjustments.

Total gross margin is defined as total gross profit as a percentage of total revenue, inclusive of product development and management costs, as well as depreciation and amortization associated with cost of revenue. Gross margin for each solution in the table above is defined as total revenue less cost of revenue for the applicable solution as a percentage of total revenue for that related solution, exclusive of any product development and management or depreciation and amortization cost allocations.

The overall 13.6% increase in revenue outpaced the 8.5% increase in cost of revenue, and gross profit increased by $15.3 million, or 20.8%, as we continued to leverage our investment in people and processes to realize economies of scale, while also expanding our service offerings internationally.

35


Cloud recurring services gross margin was 70.2% for the three months ended September 30, 2019, compared to 65.8% for the three months ended September 30, 2018. The increase in Cloud recurring services gross margin reflects an increase in the proportion of Dayforce customers live for more than two years, which increased from 62% as of September 30, 2018, to 68% as of September 30, 2019, and was also attributable to consistent configuration that has enabled us to continue to realize economies of scale in hosting and customer support. Professional services and other gross margin was (7.7)% for the three months ended September 30, 2019, improving from (13.6)% for the three months ended September 30, 2018, reflecting continued productivity improvements in implementing new customers.

Selling, general, and administrative expense. Selling, general, and administrative expense increased $25.0 million for the three months ended September 30, 2019, compared to the three months ended September 30, 2018. Excluding the impact of share-based compensation and related employer taxes, restructuring consulting fees, severance expense, and certain other non-recurring charges; selling, general, and administrative expenses would have increased $6.7 million. This adjusted increase of $6.7 million was primarily related to a $6.2 million increase in sales and marketing expenses. Please refer to the “Non-GAAP Measures” section for additional information on the excluded items.

Operating profit. We realized operating profit of $6.5 million for the three months ended September 30, 2019, compared to $16.2 million for the three months ended September 30, 2018. Excluding the impact of share-based compensation and related employer taxes, restructuring consulting fees, severance expense, and certain other non-recurring charges; operating profit would have been $32.8 million and $22.7 million for the three months ended September 30, 2019, and 2018, respectively. This $10.1 million adjusted increase was primarily due to a $24.2 million increase in revenue and gross margin improvements.

Interest expense, net. Interest expense, net was $7.8 million and $8.8 million for the three months ended September 30, 2019, and 2018, respectively, primarily due to an increase in interest income. A 100 basis point change in LIBOR rates would result in an approximately $7 million change in our interest expense, net over the ensuing twelve-month period.  

Other expense, net. For the three months ended September 30, 2019, and 2018, we incurred other expense, net of $1.6 million and $0.9 million, respectively, which was primarily comprised of net periodic pension expense.

Income tax benefit. For the three months ended September 30, 2019, and 2018, we recorded an income tax benefit of $65.6 million, and $0.7, respectively. The $64.9 million increase reflects a tax benefit of $65.8 million from the release of our valuation allowance, a $6.0 million increase in the tax benefit from the tax deduction related to stock option exercises, and a $1.7 million reduction in tax expense attributable to the Global Intangible Low Taxed Income tax (“GILTI”), partially offset by a $4.4 million increase in state tax expenses, a $2.1 million increase for enacted tax rate changes, a $1.2 million increase in the base erosion anti-abuse tax (“BEAT”) in the U.S., and other tax expense increases of $0.9 million. BEAT and GILTI were enacted as a part of the 2017 Tax Reform. The IRS continues to issue 2017 Tax Reform administrative guidance, which could impact tax expense related to these Tax Reform provisions in future periods. Please refer to Note 14, “Income Taxes,” for additional information on the release of our valuation allowance.

Loss from discontinued operations. As a result of the LifeWorks Disposition, the financial results of the LifeWorks business have been included within discontinued operations for all periods presented. For the three months ended September 30, 2018, the loss from discontinued operations of $3.0 million was related to income tax expense incurred as a result of the LifeWorks Disposition.

Net income. We realized net income of $62.7 million for the three months ended September 30, 2019, compared to $4.2 million for the three months ended September 30, 2018.

Adjusted EBITDA. Adjusted EBITDA increased by $10.0 million to $46.4 million, for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, and Adjusted EBITDA margin was 22.9% for the three months ended September 30, 2019, compared with the Adjusted EBITDA margin of 20.4% for the three months ended September 30, 2018.

36


Nine Months Ended September 30, 2019 Compared With Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Increase/ (Decrease)

 

 

% of Revenue

 

 

 

2019

 

 

2018

 

 

Amount

 

 

%

 

 

2019

 

 

2018

 

 

 

 

 

 

 

As Adjusted (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud

 

$

378.7

 

 

$

302.6

 

 

 

76.1

 

 

 

25.1

%

 

 

62.9

%

 

 

55.4

%

Bureau

 

 

125.0

 

 

 

157.9

 

 

 

(32.9

)

 

 

(20.8

)%

 

 

20.8

%

 

 

28.9

%

Total recurring services

 

 

503.7

 

 

 

460.5

 

 

 

43.2

 

 

 

9.4

%

 

 

83.6

%

 

 

84.4

%

Professional services and other

 

 

98.6

 

 

 

85.4

 

 

 

13.2

 

 

 

15.5

%

 

 

16.4

%

 

 

15.6

%

Total revenue

 

 

602.3

 

 

 

545.9

 

 

 

56.4

 

 

 

10.3

%

 

 

100.0

%

 

 

100.0

%

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

��

 

 

 

 

 

 

 

 

Cloud

 

 

114.0

 

 

 

102.6

 

 

 

11.4

 

 

 

11.1

%

 

 

18.9

%

 

 

18.8

%

Bureau

 

 

35.0

 

 

 

46.7

 

 

 

(11.7

)

 

 

(25.1

)%

 

 

5.8

%

 

 

8.6

%

Total recurring services

 

 

149.0

 

 

 

149.3

 

 

 

(0.3

)

 

 

(0.2

)%

 

 

24.7

%

 

 

27.3

%

Professional services and other

 

 

107.1

 

 

 

98.7

 

 

 

8.4

 

 

 

8.5

%

 

 

17.8

%

 

 

18.1

%

Product development and management

 

 

49.1

 

 

 

43.3

 

 

 

5.8

 

 

 

13.4

%

 

 

8.2

%

 

 

7.9

%

Depreciation and amortization

 

 

26.7

 

 

 

25.7

 

 

 

1.0

 

 

 

3.9

%

 

 

4.4

%

 

 

4.7

%

Total cost of revenue

 

 

331.9

 

 

 

317.0

 

 

 

14.9

 

 

 

4.7

%

 

 

55.1

%

 

 

58.1

%

Gross profit

 

 

270.4

 

 

 

228.9

 

 

 

41.5

 

 

 

18.1

%

 

 

44.9

%

 

 

41.9

%

Selling, general, and administrative expense

 

 

217.8

 

 

 

193.1

 

 

 

24.7

 

 

 

12.8

%

 

 

36.2

%

 

 

35.4

%

Operating profit

 

 

52.6

 

 

 

35.8

 

 

 

16.8

 

 

 

46.9

%

 

 

8.7

%

 

 

6.6

%

Interest expense, net

 

 

25.2

 

 

 

74.4

 

 

 

(49.2

)

 

 

(66.1

)%

 

 

4.2

%

 

 

13.6

%

Other expense (income), net

 

 

4.7

 

 

 

(0.7

)

 

 

5.4

 

 

 

771.4

%

 

 

0.8

%

 

 

(0.1

)%

Income (loss) from continuing operations

   before income taxes

 

 

22.7

 

 

 

(37.9

)

 

 

60.6

 

 

 

159.9

%

 

 

3.8

%

 

 

(6.9

)%

Income tax (benefit) expense

 

 

(57.5

)

 

 

6.3

 

 

 

(63.8

)

 

 

(1012.7

)%

 

 

(9.5

)%

 

 

1.2

%

Income (loss) from continuing operations

 

 

80.2

 

 

 

(44.2

)

 

 

124.4

 

 

 

281.4

%

 

 

13.3

%

 

 

(8.1

)%

Loss from discontinued operations

 

 

 

 

 

(14.8

)

 

 

14.8

 

 

 

100.0

%

 

 

 

 

 

(2.7

)%

Net income (loss)

 

 

80.2

 

 

 

(59.0

)

 

 

139.2

 

 

 

235.9

%

 

 

13.3

%

 

 

(10.8

)%

Net loss attributable to noncontrolling

   interest

 

 

 

 

 

(0.5

)

 

 

0.5

 

 

 

100.0

%

 

 

 

 

 

(0.1

)%

Net income (loss) attributable to Ceridian

 

$

80.2

 

 

$

(58.5

)

 

 

138.7

 

 

 

237.1

%

 

 

13.3

%

 

 

(10.7

)%

Adjusted EBITDA (a)

 

$

140.2

 

 

$

118.8

 

 

 

21.4

 

 

 

18.0

%

 

 

23.3

%

 

 

21.8

%

Adjusted EBITDA margin (a)

 

 

23.3

%

 

 

21.8

%

 

 

1.5

%

 

 

6.8

%

 

 

 

 

 

 

 

 

 

(a)

Please refer to the “Non-GAAP Measures” section for a discussion and reconciliation of Adjusted EBITDA, a non-GAAP financial measure.

(b)

Please refer to Note 2 of the notes to the condensed consolidated financial statements for a summary of adjustments.

 

37


Revenue. The following table sets forth certain information regarding our revenues for the nine months ended September 30, 2019, compared with the nine months ended September 30, 2018.

 

 

 

Nine Months Ended September 30,

 

 

Percentage

change in

revenue as

reported

 

 

Impact of

changes in

foreign

currency (a)

 

 

Percentage

change in

revenue on

constant

currency basis

(a)

 

 

 

2019

 

 

2018

 

 

2019 vs. 2018

 

 

 

 

 

 

2019 vs. 2018

 

 

 

 

 

 

 

As Adjusted (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dayforce

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

$

314.7

 

 

$

237.9

 

 

 

32.3

%

 

 

(0.8

)%

 

 

33.1

%

Professional services and other

 

 

96.3

 

 

 

82.4

 

 

 

16.9

%

 

 

(0.7

)%

 

 

17.6

%

Total Dayforce revenue

 

 

411.0

 

 

 

320.3

 

 

 

28.3

%

 

 

(0.8

)%

 

 

29.1

%

Powerpay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

64.0

 

 

 

64.7

 

 

 

(1.1

)%

 

 

(3.3

)%

 

 

2.2

%

Professional services and other

 

 

0.8

 

 

 

0.9

 

 

 

(11.1

)%

 

 

(11.1

)%

 

 

 

Total Powerpay revenue

 

 

64.8

 

 

 

65.6

 

 

 

(1.2

)%

 

 

(3.4

)%

 

 

2.2

%

Total Cloud revenue

 

 

475.8

 

 

 

385.9

 

 

 

23.3

%

 

 

(1.2

)%

 

 

24.5

%

Bureau

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

125.0

 

 

 

157.9

 

 

 

(20.8

)%

 

 

(0.7

)%

 

 

(20.1

)%

Professional services and other

 

 

1.5

 

 

 

2.1

 

 

 

(28.6

)%

 

 

 

 

 

(28.6

)%

Total Bureau revenue

 

 

126.5

 

 

 

160.0

 

 

 

(20.9

)%

 

 

(0.7

)%

 

 

(20.2

)%

Total revenue

 

$

602.3

 

 

$

545.9

 

 

 

10.3

%

 

 

(1.1

)%

 

 

11.4

%

 

(a)

Please refer to “Non-GAAP Measures” section for additional information on our constant currency revenue, a non-GAAP financial measure.

(b)

Please refer to Note 2 of the notes to the condensed consolidated financial statements for a summary of adjustments.

 

Total revenue increased $56.4 million, or 10.3%, to $602.3 million for the nine months ended September 30, 2019, compared to $545.9 million for the nine months ended September 30, 2018. This increase was primarily attributable to an increase in Cloud revenue of $89.9 million, or 23.3%, from $385.9 million for the nine months ended September 30, 2018, to $475.8 million for the nine months ended September 30, 2019. The Cloud revenue increase was driven by an increase of $76.1 million, or 25.1%, in Cloud recurring services revenue, and $13.8 million, or 16.6%, in Cloud professional services and other revenue. The increase in Cloud recurring services revenue of $76.1 million was due to $49.3 million from new customers, add-ons, and revenue uplift from migrations of Bureau customers, net of customer losses; $14.0 million from the migration of Bureau customers; and $12.8 million from increased float revenue related to Cloud recurring services revenue.

The increase in Cloud revenue of $89.9 million was partially offset by a decline in Bureau revenue of $33.5 million, or 20.9%. Of the $33.5 million decline in Bureau revenue for the nine months ended September 30, 2019, approximately 42% was attributable to customer migrations to Dayforce. Excluding the impact of migrations to Dayforce, Bureau revenue declined by $19.5 million, or 12.2%.

On a constant currency basis, total revenue grew 11.4%, reflecting a 24.5% increase in Cloud revenue, partially offset by a 20.2% decline in Bureau revenue. Cloud revenue growth reflected a 26.5% increase in Cloud recurring services revenue and a 17.4% increase in Cloud professional services and other revenue. Please refer to the “Non-GAAP Measures” section for additional information on our constant currency revenue.

Cloud revenue by solution. Cloud revenue was $475.8 million for the nine months ended September 30, 2019, an increase of $89.9 million, or 23.3%, compared to cloud revenue for the nine months ended September 30, 2018. Dayforce revenue increased 28.3%, and Powerpay revenue declined 1.2% for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. On a constant currency basis, Dayforce revenue increased 29.1%, and Powerpay revenue increased 2.2% for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. Powerpay revenue is recognized on a per-employee, per-process basis, and the timing of customer processing at year- end can vary from year to year. A larger proportion of year-end processing occurred in the fourth quarter of 2018 and a smaller proportion of year-end processing occurred in the first quarter of 2019 as compared to the comparable periods in the prior year. This pull-forward of revenue into the fourth quarter of 2018

38


was driven by the fact that December 31 was a Monday, and a number of customers processed their first 2019 payroll on Monday, December 31, 2018. We estimate that approximately $1 million in Powerpay revenue that would otherwise have been recognized in the first quarter of 2019 was recognized in the fourth quarter of 2018. Excluding this pull-forward, Powerpay revenue on a constant currency basis would have grown by approximately 4%. Our new business sales to Dayforce and Powerpay customers comprised 84% of our increase in Cloud revenue for the nine months ended September 30, 2019, and the remaining 16% consisted primarily of customer migrations to Dayforce from our Bureau solutions. As we migrate our Bureau customers to Dayforce, we typically experience of revenue increase from such customers driven by increased product density on the Dayforce platform.

Float revenue. Investment income from invested customer trust funds included in recurring services revenue was $62.9 million and $49.6 million for the nine months ended September 30, 2019, and 2018, respectively. The average float balance for our customer trust funds for the nine months ended September 30, 2019, was $3,524.9 million, compared to $3,457.5 million for the nine months ended September 30, 2018. On a constant currency basis, the average float balance for our customer trust funds increased 3.2% for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. The average yield was 2.39% during the nine months ended September 30, 2019, an increase of 48 basis points compared to the average yield in the nine months ended September 30, 2018. For the nine months ended September 30, 2019, approximately 36% of our average float balance consisted of Canadian customer trust funds, compared to approximately 37% for the nine months ended September 30, 2018. Based on current market conditions, portfolio composition and investment practices, a 100 basis point change in market investment rates would result in approximately $18 million of change in float revenue over the ensuing twelve month period.

Cost of revenue. Total cost of revenue for the nine months ended September 30, 2019, was $331.9 million, an increase of $14.9 million, or 4.7%, compared to the nine months ended September 30, 2018. Recurring services cost of revenue for the nine months ended September 30, 2019, was consistent with the nine months ended September 30, 2018. Professional services and other cost of revenue increased $8.4 million, or 8.5% for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, primarily due to additional costs incurred to implement new customers.

In accordance with ASC 350, we are required to capitalize certain software development costs. Please refer to Note 2, “Summary of Significant Accounting Policies,” for further discussion of our accounting policy for internally developed software costs. Costs related to software development activities that do not qualify for capitalization, such as development, quality assurance, testing of new technologies, enhancements to our existing solutions that do not result in additional functionality, and costs related to the management of our solutions are presented as product development and management expense. The increase in product development and management expense of $5.8 million for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, reflected increases in Dayforce product development efforts, including the build out of our international offerings; and increases in product management labor costs. For the nine months ended September 30, 2019, and 2018, our investment in software development was $48.1 million and $40.9 million, respectively, consisting of $24.6 million and $21.5 million, of research and development expense, which is included within product development and management expense, and $23.5 million and $19.4 million in capitalized software development, respectively.

Depreciation and amortization expense associated with cost of revenue increased by $1.0 million for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, as we continue to capitalize Dayforce related and other development costs and subsequently amortize those costs.

The table below presents total gross margin and solution gross margins for the periods presented:

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

As Adjusted (a)

 

Total gross margin

 

 

44.9

%

 

 

41.9

%

Gross margin by solution:

 

 

 

 

 

 

 

 

Cloud recurring services

 

 

69.9

%

 

 

66.1

%

Bureau recurring services

 

 

72.0

%

 

 

70.4

%

Professional services and other

 

 

(8.6

)%

 

 

(15.6

)%

 

(a)

Please refer to Note 2 of the notes to the condensed consolidated financial statements for a summary of adjustments.

The overall 10.3% increase in revenue outpaced the 4.7% increase in cost of revenue, and gross profit increased by $41.5 million, or 18.1%, as we continued to leverage our investment in people and processes to realize economies of scale.

39


Cloud recurring services gross margin was 69.9% for the nine months ended September 30, 2019, compared to 66.1% for the nine months ended September 30, 2018. The increase in Cloud recurring services gross margin reflects an increase in the proportion of Dayforce customers live for more than two years, which increased from 62% as of September 30, 2018, to 68% as of September 30, 2019, and was also attributable to consistent configuration that has enabled us to realize economies of scale in customer support and hosting costs. Professional services and other gross margin was (8.6)% for the nine months ended September 30, 2019, improving from (15.6)% for the nine months ended September 30, 2018, reflecting continued productivity improvements in implementing new customers.

Selling, general, and administrative expense. Selling, general, and administrative expense increased $24.7 million for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. Excluding the impact of share-based compensation and related employer taxes, sponsor management fees, restructuring consulting fees, transaction costs associated with our IPO and debt refinancing, severance expense, and certain other non-recurring charges; selling, general, and administrative expenses would have increased $21.1 million. This adjusted increase of $21.1 million was primarily due to a $17.7 million increase in sales and marketing expense and increased costs associated with being a public company. Please refer to the “Non-GAAP Measures” section for additional information on the excluded items.

Operating profit. Operating profit increased $16.8 million to $52.6 million, for the nine months ended September 30, 2019, from $35.8 million for the nine months ended September 30, 2018. Excluding the impact of share-based compensation and related employer taxes, sponsor management fees, restructuring consulting fees, transaction costs associated with our IPO and debt refinancing, severance expense, and certain other non-recurring charges; operating profit would have been $100.2 million and $78.2 million for the nine months ended September 30, 2019, and 2019, respectively. This $22.0 million adjusted increase was primarily due to a $56.4 million increase in revenue and gross margin improvements.

Interest expense, net. Interest expense, net for the nine months ended September 30, 2019, was $25.2 million, compared to $74.4 million for the nine months ended September 30, 2018. This reduction in interest expense, net was primarily due to the refinancing of our debt during the nine months ended September 30, 2018, and an increase in interest income during the nine months ended September 30, 2019. The refinancing of our debt resulted in a $25.7 million loss on extinguishment of debt and a $21.6 million reduction in interest expense due to the extinguishment of our Senior Notes, representing five months of interest on the Senior Notes in the prior year. A 100 basis point change in LIBOR rates would result in an approximately $7 million change in our interest expense, net over the ensuing twelve-month period. Please refer to Note 8, “Debt,” for additional information.

Other expense (income), net. For the nine months ended September 30, 2019, we incurred $4.7 million of other expense, net, compared to $0.7 million of other income, net, for the nine months ended September 30, 2018. The other expense, net, for the nine months ended September 30, 2019, was primarily comprised of net periodic pension expense of $3.9 million. The other income, net for the nine months ended September 30, 2018, was comprised of foreign currency translation gains of $2.5 million, partially offset by net periodic benefit plan expense of $1.8 million. The foreign currency translation gains were primarily related to an intercompany payable of a U.S. subsidiary denominated in Canadian dollars, this intercompany payable was repaid in the second quarter of 2018.

Income tax (benefit) expense. For the nine months ended September 30, 2019, we recorded an income tax benefit of $57.5 million, compared to income tax expense of $6.3 million for the nine months ended September 30, 2018. The $63.8 million change reflects a tax benefit of $65.8 million from the release of our valuation allowance, a $7.8 million reduction in tax expense attributable to GILTI, a $7.7 million increase in the tax benefit from the tax deduction related to stock option exercises, and other tax expense reductions of $2.1 million, partially offset by a $12.7 million increase in tax expense attributable to improved operating results, a $2.8 million increase in state tax expense, a $2.1 million increase for enacted tax rate changes, and a $2.0 million increase in BEAT. BEAT and GILTI were enacted as a part of the 2017 Tax Reform.  The IRS continues to issue 2017 Tax Reform administrative guidance, which could impact tax expense related to these Tax Reform provisions in future periods. Please refer to Note 14, “Income Taxes,” for additional information on the release of our valuation allowance.

Loss from discontinued operations. As a result of the LifeWorks Disposition, the financial results of the LifeWorks business have been included within discontinued operations for all periods presented. For the nine months ended September 30, 2018, loss from discontinued operations was $14.8 million, primarily related to income tax expense incurred as a result of the LifeWorks Disposition.

Net income (loss) attributable to Ceridian. Net income was $80.2 million for the nine months ended September 30, 2019, which included a tax benefit of $65.8 from the release of our valuation allowance. Net loss attributable to Ceridian was $58.5 million for the nine months ended September 30, 2018, which included $51.0 million of expenses related to our IPO and debt refinancing transactions.

Adjusted EBITDA. Adjusted EBITDA increased by $21.4 million to $140.2 million, for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, and Adjusted EBITDA margin was 23.3% for the nine months ended September 30, 2019, compared with 21.8% for the nine months ended September 30, 2018.

40


Liquidity and Capital Resources

Our primary sources of liquidity are our existing cash and equivalents, cash provided by operating activities, borrowings under our credit facilities, and proceeds from equity offerings. As of September 30, 2019, we had cash and equivalents of $270.9 million and availability under our revolving credit facility of $300.0 million. No cash amounts were drawn on the revolving credit facility and $2.4 million in letters of credit were issued under the facility as of September 30, 2019. Our total principal debt balance was $673.2 million as of September 30, 2019.

On March 26, 2019, Moody’s Investor Service upgraded the rating of our senior secured credit facilities from B3 to B2, which reduced the floating rate term debt interest rate from LIBOR plus 3.25% to LIBOR plus 3.00%, so long as the rating is maintained. This 25 basis point rate reduction will result in a savings of approximately $1.7 million over the ensuing twelve-month period. Please refer to Note 8, “Debt,” to our condensed consolidated financial statements, for further information on our debt.

Our primary liquidity needs are related to funding of general business requirements, including the payment of interest and principal on our debt, capital expenditures, pension contributions, and product development.

Our customer trust funds are held and invested with the primary objectives being to protect the principal balance and to ensure adequate liquidity to meet cash flow requirements. In accordance with these objectives, we maintain approximately 47% of customer trust funds in liquidity portfolios with maturities ranging from one to 120 days, consisting of high-quality bank deposits, money market mutual funds, commercial paper, or collateralized short-term investments; and we maintain approximately 53% of customer trust funds in fixed income portfolios with maturities ranging from 120 days to 10 years, consisting of U.S. Treasury and agency securities, Canada government and provincial securities, as well as highly rated asset-backed, mortgage-backed, municipal, corporate and bank securities. To maintain sufficient liquidity in the trust to meet payment obligations, we also have financing arrangements and may pledge fixed income securities for short-term financing. The assets held in trust are intended for the specific purpose of satisfying client fund obligations and therefore are not freely available for our general business use.

We believe that our cash flow from operations, availability under our revolving credit facility, and available cash and equivalents will be sufficient to meet our liquidity needs for the foreseeable future. We anticipate that to the extent that we require additional liquidity, it will be funded through the issuance of equity, the incurrence of additional debt, or a combination thereof. We cannot assure you that we will be able to obtain this additional liquidity on reasonable terms, or at all. Additionally, our liquidity and our ability to meet our obligations and to fund our capital requirements are also dependent on our future financial performance, which is subject to general economic, financial, and other factors that are beyond our control. Accordingly, we cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available from additional debt or otherwise to meet our liquidity needs. Although we have no specific current plans to do so, if we decide to pursue one or more significant acquisitions, we may incur additional debt or sell additional equity to finance such acquisitions, which would result in additional expenses or dilution.

41


Statements of Cash Flows

Changes in cash flows due to purchases of customer trust fund marketable securities and proceeds from the sale or maturity of customer trust fund marketable securities, as well as the carrying value of customer trust fund accounts as of period end dates can vary significantly due to several factors, including the specific day of the week the period ends, which impacts the timing of funds collected from customers and payments made to satisfy customer obligations to employees, taxing authorities, and others. The customer trust funds are fully segregated from our operating cash accounts and are evaluated and tracked separately by management. Therefore, we have provided the table below excluding the cash flows and restricted cash and equivalents held within our customer trust funds to provide supplemental information regarding the cash flows related to our core business.

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

As Adjusted (a)

 

Net cash provided by (used in) operating activities - continuing operations, excluding

   customer trust funds

 

$

43.4

 

 

$

(14.8

)

Net cash used in investing activities, excluding customer trust funds

 

 

(67.8

)

 

 

(28.7

)

Net cash provided by financing activities, excluding customer trust funds

 

 

71.6

 

 

 

141.6

 

Effect of exchange rate changes on cash and equivalents

 

 

5.9

 

 

 

(1.5

)

Net increase in cash and equivalents - continuing operations

 

 

53.1

 

 

 

96.6

 

Net cash used in operating activities - discontinued operations

 

 

 

 

 

(3.3

)

Net increase in cash and equivalents

 

 

53.1

 

 

 

93.3

 

Elimination of cash from discontinued operations

 

 

 

 

 

0.5

 

Cash and equivalents at beginning of period

 

 

217.8

 

 

 

94.2

 

Cash and equivalents at end of period

 

 

270.9

 

 

 

188.0

 

 

 

 

 

 

 

 

 

 

Net customer trust funds restricted cash used in operating activities

 

 

(18.8

)

 

 

 

Net customer trust funds restricted cash used in investing activities

 

 

(57.0

)

 

 

13.1

 

Net customer trust funds restricted cash provided by financing activities

 

 

(54.5

)

 

 

(625.5

)

Effect of exchange rate changes on restricted cash and equivalents

 

 

1.3

 

 

 

(0.7

)

Net decrease in restricted cash and equivalents

 

 

(129.0

)

 

 

(613.1

)

Restricted cash and equivalents included in customer trust funds at beginning of period

 

 

888.5

 

 

 

2,317.6

 

Restricted cash and equivalents included in customer trust funds at end of period

 

 

759.5

 

 

 

1,704.5

 

 

 

 

 

 

 

 

 

 

Net decrease in cash, restricted cash, and equivalents

 

 

(75.9

)

 

 

(519.3

)

Cash, restricted cash, and equivalents at beginning of period

 

 

1,106.3

 

 

 

2,411.8

 

Cash, restricted cash, and equivalents at end of period

 

$

1,030.4

 

 

$

1,892.5

 

 

(a)

Please refer to Note 2 of the notes to the condensed consolidated financial statements for a summary of adjustments.

Operating Activities

Net cash provided by operating activities from continuing operations, excluding customer trust fund activity, was $43.4 million during the nine months ended September 30, 2019, primarily attributable to net income of $80.2 million with adjustments for certain non-cash items, primarily $75.9 million of deferred income tax benefit, $43.9 million of depreciation and amortization, and $26.0 million of non-cash share-based compensation expense, partially offset by a net working capital reduction of $37.3 million. The deferred income tax benefit of $75.9 million was primarily related to a tax benefit of $65.8 million from the release of our valuation allowance. The net $37.3 million change in working capital included reductions in liabilities of $18.5 million for employee compensation and benefits, primarily due to pension contributions; $10.4 million for accrued taxes, primarily due to cash tax payments partially offset by additional provision accruals; and increases in assets of $10.1 million for prepaid expenses and other current assets, primarily due to annual maintenance contracts. Included within net cash flows provided by operating activities for the nine months ended September 30, 2019, was $28.9 million in cash tax payments, $28.9 million in cash interest payments on our long-term debt, and $18.0 million in pension contributions.

42


Net cash used in operating activities from continuing operations of $14.8 million during the nine months ended September 30, 2018, was primarily attributable to a net loss from continuing operations of $44.2 million and a net change in working capital of $51.1 million, partially offset by certain non-cash items, primarily $42.4 million of depreciation and amortization, a $25.7 million loss on extinguishment of debt, primarily attributable to a call premium and debt issuance costs, and $18.0 million of share-based compensation expense. The net $51.1 million change in working capital included reductions of $27.7 million in liabilities for employee compensation and benefits, primarily due to payments of accrued incentive compensation; $15.5 million in liabilities for accrued interest primarily as a result of $55.1 million in cash interest payments on our long-term debt; and $8.4 million in accounts payable and other accrued expenses. Included within net cash flows used in operating activities for the nine months ended September 30, 2018, was $17.7 million in cash taxes paid and $18.5 million in pension payments.

Investing Activities

During the nine months ended September 30, 2019, net cash used in investing activities from continuing operations, excluding customer trust fund activity, was $67.8 million, related to capital expenditures of $38.4 million and acquisition costs, net of cash acquired, of $29.4 million. Our capital expenditures included $27.6 million for software and technology and $10.8 million for property and equipment.

During the nine months ended September 30, 2018, net cash used in investing activities from continuing operations, excluding customer trust fund activity, was $28.7 million, related to capital expenditures. Our capital expenditures included $21.9 million for software and technology and $6.8 million for property and equipment.

Financing Activities

Net cash provided by financing activities from continuing operations, excluding the change in customer trust fund obligations, was $71.6 million during the nine months ended September 30, 2019. This cash inflow is primarily attributable to proceeds from the issuance of common stock under share-based compensation plans of $76.7 million, partially offset by payments on our long-term debt obligations of $5.1 million.

Net cash provided by financing activities from continuing operations, excluding the change in customer trust fund obligations, was $141.6 million during the nine months ended September 30, 2018. This cash inflow is primarily attributable to the net proceeds received from our IPO and concurrent private placement of $595.0 million, a net increase in the principal of our term loan of $23.0 million, and proceeds from the issuance of common stock upon exercise of stock options of $22.2 million, partially offset by payment to redeem our Senior Notes of $475.0 million and payment of debt refinancing costs of $23.3 million.

Cash Flows from Discontinued Operations

During the nine months ended September 30, 2018, net cash used in discontinued operations was $3.3 million. The net cash used in discontinued operations was primarily related to changes in working capital.

Backlog

Backlog is equivalent to our remaining performance obligations, which represents contracted revenue for recurring services and fixed price professional services, primarily implementation services, that has not yet been recognized, including deferred revenue and unbilled amounts that will be recognized as revenue in future periods. Please refer to Note 11, “Revenue,” to our condensed consolidated financial statements for further discussion of our remaining performance obligations.

Off-Balance Sheet Arrangements

As of September 30, 2019, we did not have any “off-balance sheet arrangements” (as such term is defined in Item 303 of Regulation S-K).  

Critical Accounting Policies and Estimates

Our critical accounting policy on revenue recognition has been updated as a result of the adoption of ASU No. 2016-02. For discussion of our new revenue recognition policy and recently adopted accounting pronouncements, please refer to Note 2, “Summary of Significant Accounting Policies,” to our condensed consolidated financial statements included herein.

43


Non-GAAP Measures

Constant Currency Revenue

The following tables set forth certain information regarding our revenue on a constant currency basis for the three and nine months ended September 30, 2019, compared with the three and nine months ended September 30, 2018. We present revenue on a constant currency basis to assess how our underlying business performed excluding the effect of foreign currency rate fluctuations. We calculate revenue on a constant currency basis by applying a fixed planning rate of $1.30 Canadian dollar to $1.00 U.S. dollar foreign exchange rate to revenue originally booked in Canadian dollars for all applicable periods.

 

 

 

Three Months Ended September 30,

 

 

Increase/ (Decrease)

 

 

 

2019

 

 

2018

 

 

Amount

 

 

%

 

 

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

Constant Currency Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dayforce

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

$

109.6

 

 

$

82.4

 

 

$

27.2

 

 

 

33.0

%

Professional services and other

 

 

34.5

 

 

 

28.0

 

 

 

6.5

 

 

 

23.2

%

Total Dayforce revenue

 

 

144.1

 

 

 

110.4

 

 

 

33.7

 

 

 

30.5

%

Powerpay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

22.0

 

 

 

21.2

 

 

 

0.8

 

 

 

3.8

%

Professional services and other

 

 

0.3

 

 

 

0.3

 

 

 

 

 

 

 

Total Powerpay revenue

 

 

22.3

 

 

 

21.5

 

 

 

0.8

 

 

 

3.7

%

Total Cloud revenue

 

 

166.4

 

 

 

131.9

 

 

 

34.5

 

 

 

26.2

%

Bureau

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

36.6

 

 

 

46.1

 

 

 

(9.5

)

 

 

(20.6

%)

Professional services and other

 

 

0.4

 

 

 

0.4

 

 

 

 

 

 

0.0

%

Total Bureau revenue

 

 

37.0

 

 

 

46.5

 

 

 

(9.5

)

 

 

(20.4

%)

Total constant currency revenue

 

$

203.4

 

 

$

178.4

 

 

$

25.0

 

 

 

14.0

%

 

 

 

Nine Months Ended September 30,

 

 

Increase/ (Decrease)

 

 

 

2019

 

 

2018

 

 

Amount

 

 

%

 

 

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

Constant Currency Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dayforce

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

$

316.0

 

 

$

237.5

 

 

$

78.5

 

 

 

33.1

%

Professional services and other

 

 

96.8

 

 

 

82.3

 

 

 

14.5

 

 

 

17.6

%

Total Dayforce revenue

 

 

412.8

 

 

 

319.8

 

 

 

93.0

 

 

 

29.1

%

Powerpay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

65.4

 

 

 

64.0

 

 

 

1.4

 

 

 

2.2

%

Professional services and other

 

 

0.9

 

 

 

0.9

 

 

 

 

 

 

 

Total Powerpay revenue

 

 

66.3

 

 

 

64.9

 

 

 

1.4

 

 

 

2.2

%

Total Cloud revenue

 

 

479.1

 

 

 

384.7

 

 

 

94.4

 

 

 

24.5

%

Bureau

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

125.8

 

 

 

157.4

 

 

 

(31.6

)

 

 

(20.1

%)

Professional services and other

 

 

1.5

 

 

 

2.1

 

 

 

(0.6

)

 

 

(28.6

%)

Total Bureau revenue

 

 

127.3

 

 

 

159.5

 

 

 

(32.2

)

 

 

(20.2

%)

Total constant currency revenue

 

$

606.4

 

 

$

544.2

 

 

$

62.2

 

 

 

11.4

%

44


Adjusted EBITDA and Adjusted EBITDA Margin

We believe that Adjusted EBITDA and Adjusted EBITDA margin, non-GAAP financial measures, are useful to management and investors as supplemental measures to evaluate our overall operating performance. Adjusted EBITDA is a component of our management incentive plan and Adjusted EBITDA and Adjusted EBITDA margin are used by management to assess performance and to compare our operating performance to our competitors. We define Adjusted EBITDA as net income (loss) before interest, taxes, depreciation, and amortization, as adjusted to exclude net income (loss) from discontinued operations, sponsor management fees, non-cash charges for asset impairments, gain (loss) on assets and liabilities held in a foreign currency other than the functional currency of a company subsidiary, share-based compensation expense and related employer taxes, severance charges, restructuring consulting fees, transaction costs, and certain other non-recurring charges. Adjusted EBITDA margin is determined by calculating the percentage Adjusted EBITDA is of total revenue. Management believes that Adjusted EBITDA and Adjusted EBITDA margin are helpful in highlighting management performance trends because Adjusted EBITDA and Adjusted EBITDA margin exclude the results of decisions that are outside the control of operating management.  

Our presentation of Adjusted EBITDA and Adjusted EBITDA margin are intended as supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. Adjusted EBITDA and Adjusted EBITDA margin should not be considered as alternatives to operating profit (loss), net income (loss), earnings per share, or any other performance measures derived in accordance with GAAP, or as measures of operating cash flows or liquidity. Our presentation of Adjusted EBITDA and Adjusted EBITDA margin should not be construed to imply that our future results will be unaffected by these items. Adjusted EBITDA and Adjusted EBITDA margin are included in this discussion because they are key metrics used by management to assess our operating performance.

Adjusted EBITDA and Adjusted EBITDA margin are not defined under GAAP, are not measures of net income (loss), operating profit (loss), or any other performance measures derived in accordance with GAAP, and are subject to important limitations. Our use of the terms Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to similarly titled measures of other companies in our industry and are not measures of performance calculated in accordance with GAAP.

Adjusted EBITDA and Adjusted EBITDA margin have important limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:

 

Adjusted EBITDA and Adjusted EBITDA margin do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

Adjusted EBITDA and Adjusted EBITDA margin do not reflect changes in, or cash requirements for, our working capital needs;

 

Adjusted EBITDA and Adjusted EBITDA margin do not reflect any charges for the assets being depreciated and amortized that may need to be replaced in the future;

 

Adjusted EBITDA and Adjusted EBITDA margin do not reflect the impact of share-based compensation and related employer taxes upon our results of operations;

 

Adjusted EBITDA and Adjusted EBITDA margin do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;

 

Adjusted EBITDA and Adjusted EBITDA margin do not reflect our income tax expense or the cash requirements to pay our income taxes; and

 

Adjusted EBITDA and Adjusted EBITDA margin do not reflect certain other non-recurring charges.

In evaluating Adjusted EBITDA and Adjusted EBITDA margin, you should be aware that in the future we may incur expenses similar to those eliminated in this presentation.

45


The following table reconciles operating profit to Adjusted EBITDA for the periods presented:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

 

As Adjusted (g)

 

 

 

 

 

 

As Adjusted (g)

 

 

 

(Dollars in millions)

 

Operating profit

 

$

6.5

 

 

$

16.2

 

 

$

52.6

 

 

$

35.8

 

Other (expense) income, net

 

 

(1.6

)

 

 

(0.9

)

 

 

(4.7

)

 

 

0.7

 

Depreciation and amortization

 

 

14.9

 

 

 

14.3

 

 

 

43.9

 

 

 

42.4

 

EBITDA from continuing operations (a)

 

 

19.8

 

 

 

29.6

 

 

 

91.8

 

 

 

78.9

 

Sponsorship management fees (b)

 

 

 

 

 

 

 

 

 

 

 

12.0

 

Intercompany foreign exchange loss (gain)

 

 

0.3

 

 

 

0.3

 

 

 

0.8

 

 

 

(2.5

)

Share-based compensation

 

 

11.4

 

 

 

4.8

 

 

 

27.0

 

 

 

19.5

 

Severance charges (c)

 

 

0.8

 

 

 

1.1

 

 

 

4.4

 

 

 

4.1

 

Restructuring consulting fees (d)

 

 

1.5

 

 

 

0.6

 

 

 

3.6

 

 

 

3.1

 

Other non-recurring charges (e)

 

 

12.6

 

 

 

 

 

 

12.6

 

 

 

 

Transaction costs (f)

 

 

 

 

 

 

 

 

 

 

 

3.7

 

Adjusted EBITDA

 

$

46.4

 

 

$

36.4

 

 

$

140.2

 

 

$

118.8

 

Adjusted EBITDA margin

 

 

22.9

%

 

 

20.4

%

 

 

23.3

%

 

 

21.8

%

 

(a)

We define EBITDA from continuing operations as net income (loss) before interest, taxes, depreciation and amortization, and net income (loss) from discontinued operations.

(b)

Represents expenses related to our management, monitoring, consulting, transaction, and advisory fees and related expenses paid to the affiliates of our sponsors pursuant to the management agreement with THLM and Cannae. In April 2018, the management agreements terminated upon consummation of our IPO.

(c)

Represents costs for severance compensation paid to employees whose positions have been eliminated, resulting primarily from the shift of business from our Bureau solutions to our Cloud solutions.

(d)

Represents consulting fees and expenses incurred during the periods presented in connection with any acquisition, investment, disposition, recapitalization, equity offering, issuance or repayment of debt, issuance of equity interests, or refinancing.

(e)

Represents loss on unrecovered duplicate payments associated with our isolated service incident. Please refer to Note 16, “Commitments and Contingencies,” for further discussion.

(f)

Represents expenses related to the IPO and refinancing of our debt that were not eligible for capitalization.

(g)

Please refer to Note 2 of the notes to the condensed consolidated financial statements for a summary of adjustments.

 

The following tables present a reconciliation of our reported results to our non-GAAP Adjusted EBITDA basis for all periods presented:

 

 

 

Three Months Ended September 30, 2019

 

 

 

As Reported

 

 

Share-based

compensation

 

 

Severance

charges

 

 

Other

operating

expenses (a)

 

 

Adjusted

 

 

 

(Dollars in millions)

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

$

49.4

 

 

$

0.9

 

 

$

0.3

 

 

$

 

 

$

48.2

 

Professional services and other

 

 

37.6

 

 

 

0.5

 

 

 

 

 

 

 

 

 

37.1

 

Product development and management

 

 

17.5

 

 

 

1.0

 

 

 

 

 

 

 

 

 

16.5

 

Depreciation and amortization

 

 

9.0

 

 

 

 

 

 

 

 

 

 

 

 

9.0

 

Total cost of revenue

 

 

113.5

 

 

 

2.4

 

 

 

0.3

 

 

 

 

 

 

110.8

 

Sales and marketing

 

 

35.5

 

 

 

1.3

 

 

 

0.5

 

 

 

 

 

 

33.7

 

General and administrative

 

 

46.8

 

 

 

7.7

 

 

 

 

 

 

14.1

 

 

 

25.0

 

Operating profit

 

 

6.5

 

 

 

11.4

 

 

 

0.8

 

 

 

14.1

 

 

 

32.8

 

Other expense, net

 

 

1.6

 

 

 

 

 

 

 

 

 

0.3

 

 

 

1.3

 

Depreciation and amortization

 

 

14.9

 

 

 

 

 

 

 

 

 

 

 

 

14.9

 

EBITDA from continuing operations

 

$

19.8

 

 

$

11.4

 

 

$

0.8

 

 

$

14.4

 

 

$

46.4

 

 

(a)

Other operating expenses includes intercompany foreign exchange loss (gain), restructuring consulting fees, and loss on unrecovered duplicate payments.

46


 

 

 

Three Months Ended September 30, 2018

 

 

 

As Reported

As Adjusted (b)

 

 

Share-based

compensation

 

 

Severance

charges

 

 

Other

operating

expenses (a)

 

 

Adjusted

 

 

 

(Dollars in millions)

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

$

49.1

 

 

$

0.3

 

 

$

0.3

 

 

$

 

 

$

48.5

 

Professional services and other

 

 

32.5

 

 

 

0.2

 

 

 

0.1

 

 

 

 

 

 

32.2

 

Product development and management

 

 

14.5

 

 

 

0.3

 

 

 

 

 

 

 

 

 

14.2

 

Depreciation and amortization

 

 

8.5

 

 

 

 

 

 

 

 

 

 

 

 

8.5

 

Total cost of revenue

 

 

104.6

 

 

 

0.8

 

 

 

0.4

 

 

 

 

 

 

103.4

 

Sales and marketing

 

 

28.2

 

 

 

0.7

 

 

 

 

 

 

 

 

 

27.5

 

General and administrative

 

 

29.1

 

 

 

3.3

 

 

 

0.7

 

 

 

0.6

 

 

 

24.5

 

Operating profit

 

 

16.2

 

 

 

4.8

 

 

 

1.1

 

 

 

0.6

 

 

 

22.7

 

Other expense, net

 

 

0.9

 

 

 

 

 

 

 

 

 

0.3

 

 

 

0.6

 

Depreciation and amortization

 

 

14.3

 

 

 

 

 

 

 

 

 

 

 

 

14.3

 

EBITDA from continuing operations

 

$

29.6

 

 

$

4.8

 

 

$

1.1

 

 

$

0.9

 

 

$

36.4

 

 

(a)

Other operating expenses includes intercompany foreign exchange loss (gain) and restructuring consulting fees.

(b)

Please refer to Note 2 of the notes to the condensed consolidated financial statements for a summary of adjustments.

 

 

 

Nine Months Ended September 30, 2019

 

 

 

As Reported

 

 

Share-based

compensation

 

 

Severance

charges

 

 

Other

operating

expenses (a)

 

 

Adjusted

 

 

 

(Dollars in millions)

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

$

149.0

 

 

$

2.1

 

 

$

1.1

 

 

$

 

 

$

145.8

 

Professional services and other

 

 

107.1

 

 

 

1.2

 

 

 

0.4

 

 

 

 

 

 

105.5

 

Product development and management

 

 

49.1

 

 

 

2.2

 

 

 

0.1

 

 

 

 

 

 

46.8

 

Depreciation and amortization

 

 

26.7

 

 

 

 

 

 

 

 

 

 

 

 

26.7

 

Total cost of revenue

 

 

331.9

 

 

 

5.5

 

 

 

1.6

 

 

 

 

 

 

324.8

 

Sales and marketing

 

 

105.6

 

 

 

3.6

 

 

 

1.9

 

 

 

 

 

 

100.1

 

General and administrative

 

 

112.2

 

 

 

17.9

 

 

 

0.9

 

 

 

16.2

 

 

 

77.2

 

Operating profit

 

 

52.6

 

 

 

27.0

 

 

 

4.4

 

 

 

16.2

 

 

 

100.2

 

Other expense, net

 

 

4.7

 

 

 

 

 

 

 

 

 

0.8

 

 

 

3.9

 

Depreciation and amortization

 

 

43.9

 

 

 

 

 

 

 

 

 

 

 

 

43.9

 

EBITDA from continuing operations

 

$

91.8

 

 

$

27.0

 

 

$

4.4

 

 

$

17.0

 

 

$

140.2

 

 

(a)

Other operating expenses includes intercompany foreign exchange loss (gain), restructuring consulting fees, and loss on unrecovered duplicate payments.

47


 

 

 

Nine Months Ended September 30, 2018

 

 

 

As Reported

As Adjusted (b)

 

 

Share-based

compensation

 

 

Severance

charges

 

 

Other

operating

expenses (a)

 

 

Adjusted

 

 

 

(Dollars in millions)

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

$

149.3

 

 

$

1.7

 

 

$

1.1

 

 

$

 

 

$

146.5

 

Professional services and other

 

 

98.7

 

 

 

1.0

 

 

 

0.7

 

 

 

 

 

 

97.0

 

Product development and management

 

 

43.3

 

 

 

0.9

 

 

 

0.1

 

 

 

 

 

 

42.3

 

Depreciation and amortization

 

 

25.7

 

 

 

 

 

 

 

 

 

 

 

 

25.7

 

Total cost of revenue

 

 

317.0

 

 

 

3.6

 

 

 

1.9

 

 

 

 

 

 

311.5

 

Sales and marketing

 

 

86.9

 

 

 

3.5

 

 

 

1.0

 

 

 

 

 

 

82.4

 

General and administrative

 

 

106.2

 

 

 

12.4

 

 

 

1.2

 

 

 

18.8

 

 

 

73.8

 

Operating profit

 

 

35.8

 

 

 

19.5

 

 

 

4.1

 

 

 

18.8

 

 

 

78.2

 

Other (income) expense, net

 

 

(0.7

)

 

 

 

 

 

 

 

 

(2.5

)

 

 

1.8

 

Depreciation and amortization

 

 

42.4

 

 

 

 

 

 

 

 

 

 

 

 

42.4

 

EBITDA from continuing operations

 

$

78.9

 

 

$

19.5

 

 

$

4.1

 

 

$

16.3

 

 

$

118.8

 

 

(a)

Other operating expenses includes sponsor management fees, intercompany foreign exchange loss (gain), restructuring consulting fees, and transaction costs.

(b)

Please refer to Note 2 of the notes to the condensed consolidated financial statements for a summary of adjustments.

 

48


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks related to foreign currency exchange rates, interest rates, and pension obligations. We seek to minimize or to manage these market risks through normal operating and financing activities. We do not trade or use instruments with the objective of earning financial gains on the market fluctuations, nor do we use instruments where there are not underlying exposures.

Foreign Currency Risk. Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Canadian Dollar. Due to the relative size of our international operations to date, we have not instituted an active hedging program. We expect our international operations to continue to grow in the near term, and we are monitoring the foreign currency exposure to determine if we should begin a hedging program.

Interest Rate Risk. In connection with our U.S. and Canadian payroll and tax filing services, we collect funds for payment of payroll and taxes; temporarily hold such funds in trust until payment is due; remit the funds to the customers’ employees and appropriate taxing authority; file federal, state and local tax returns; and handle related regulatory correspondence and amendments. We invest the U.S. customer trust funds in high- quality bank deposits, money market mutual funds, or collateralized short-term investments. We also invest these funds in U.S. Treasury and agency securities, as well as highly rated asset-backed, mortgage-backed, municipal, and corporate securities. Our Canadian customer trust funds are invested in securities issued by the government and provinces of Canada, highly rated Canadian banks and corporations, asset-backed trusts, and mortgages.

We do not enter into investments for trading or speculative purposes. Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our securities as “available for sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary.

We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on our operating results or financial condition. Fluctuations in the value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized only if we sell the underlying securities.

Pension Obligation Risk. We provide a pension plan for certain current and former U.S. employees that closed to new participants on January 2, 1995. In 2007, the U.S. pension plan was amended (1) to exclude from further participation any participant or former participant who was not employed by the company or another participating employer on January 1, 2008, (2) to discontinue participant contributions, and (3) to freeze the accrual of additional benefits as of December 31, 2007. In applying relevant accounting policies, we have made critical estimates related to actuarial assumptions, including assumptions of expected returns on plan assets, discount rates, and health care cost trends. The cost of pension benefits in future periods will depend on actual returns on plan assets, assumptions for future periods, contributions, and benefit experience. In 2018, we contributed $18.5 million to our pension plan. The effective discount rate used in accounting for pension and other benefit obligations in 2018 ranged from 3.70% to 3.92%. The expected rate of return on plan assets for qualified pension benefits in 2019 is 6.00%.

49


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures, as defined in Rule 13(a)-15(e) of the Exchange Act, are controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q pursuant to Rule 13a-15(b) of the Exchange Act. Based on that evaluation, and due to the material weakness in internal control over financial reporting described below, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Form 10-Q are not effective. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected.

We have not engaged an independent registered accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements, although we have engaged such a firm to provide audit and review services relating to the Company’s financial statements for the current fiscal year ending December 31, 2019. Presently, we are an “Emerging Growth Company” (“EGC”) as that term is defined in each of Section 2(a)(19) of the Securities Act and Section 3(a)(80) of the Exchange Act, which means that our management is not required to perform an annual assessment of the effectiveness of our internal control over financial reporting. Because we now expect our EGC status to end on or before December 31, 2019, we believe that management will be required to conduct an ICFR assessment for the current fiscal year, and the company to include management’s report in our Annual Report on Form 10-K for the fiscal year ending December 31, 2019. Should this occur, our independent public registered accounting firm will be required to attest to and report on management’s assessment of the effectiveness of the Company’s internal control over financial reporting in connection with its audit of our annual financial statements to be included in such Form 10-K.

We identified an isolated service incident on September 26, 2019, that resulted in duplicate payments for certain of our U.S. payroll customers totaling $18.8 million. We have recorded a loss for the full amount of unrecovered duplicate payments as of September 30, 2019, less funds subsequently recovered through October 31, 2019. Our recovery efforts are ongoing, and future collections will be recognized as a reduction to selling, general, and administration expense in the period recovered.

As a result of the above, we identified a material weakness in our internal control over financial reporting as we have determined that our controls to detect duplicate payments, in advance of funding, were ineffective due to not sufficiently designing controls to detect such duplicate payments.  As a result of this material weakness, we concluded that our internal control over financial reporting was ineffective as of September 30, 2019. We have subsequently implemented additional monitoring controls to detect and to prevent duplicate payments in advance of funding.  

We have performed additional analyses and other procedures to enable management to conclude that, notwithstanding the existence of the material weakness described above, the condensed consolidated financial statements and related footnotes included in this Form 10-Q fairly present, in all material respects, our financial condition, results of operations, and cash flows for the periods presented in conformity with U.S. GAAP. Please refer to Note 16 to the condensed consolidated financial statements for additional information.

Changes in Internal Control over Financial Reporting

Except for the material weakness discussed above, there have been no other changes to our internal control over financial reporting during the three months ended September 30, 2019, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

 

50


PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, we believe would individually or taken together have a material adverse effect on our business, financial condition or liquidity. Discussion of Legal Matters is incorporated by reference from Part I, Item 1, Note 16, “Commitments and Contingencies,” of this Form 10-Q and should be considered an integral part of Part II, Item 1, “Legal Proceedings”.

ITEM 1A. RISK FACTORS

We expect that our Form 10-K for the year ended December 31, 2019 will include the below risk factor. Other than the below, there have been no material changes to our principal risks that we believe are material to our business, results of operations and financial condition, from the risk factors previously disclosed in our 2018 Form 10-K which is accessible on the SEC’s website at www.sec.gov.

Our recently identified material weakness in our internal control over financial reporting and our failure to remediate such material weakness and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business, financial condition, and results of operations.

We are required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of our IPO, which is the year ended December 31, 2019, and in each year thereafter. Our auditors will also need to attest to the effectiveness of our internal control over financial reporting in the future to the extent that we are no longer an emerging growth company, as defined by the JOBS Act, and are not a smaller reporting company.

In the third quarter of 2019, we identified a material weakness related to an isolated service incident that resulted in duplicate payments for certain of our U.S. payroll customers. As a result, we have determined that our controls to detect duplicate payments were ineffective.  As a result of this material weakness, we concluded that our internal control over financial reporting was ineffective as of September 30, 2019. Although we have subsequently implemented additional monitoring controls to detect and to prevent duplicate payments in advance of funding, remediation will not be considered complete until the applicable controls have operated effectively for a sufficient period of time. We expect the material weakness will be fully remediated before December 31, 2019. However, we cannot guarantee that this material weakness will be remediated or that we will not have additional material weaknesses in the future. Please see Part I., Item 4. “Controls and Procedures” for a complete description of this material weakness and remediation. Additionally, this material weakness could impact our customer relationships and result in additional loss and reputational risk.  In 2017, we identified a material weakness related to our assessment of valuation allowance and classification of deferred tax liabilities associated with intangible assets for 2016 and prior periods. We remediated the material weakness and did not have a material weakness in connection with the 2017 audit. We may identify additional material weaknesses in internal controls in future periods. If we are unable to maintain adequate internal control over financial reporting or if we identify additional material weaknesses in our internal control over financial reporting or are unable to adequately remediate any material weaknesses that are identified, we may be unable to report our financial information accurately on a timely basis, may suffer adverse regulatory consequences or violations of applicable stock exchange listing rules, may breach the covenants under our credit facilities, and incur additional costs. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements, which could have a material adverse effect on our business, financial condition, and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

51


ITEM 6. EXHIBITS

(a) Exhibits

The following exhibits are filed or furnished as a part of this report:

 

Exhibit No.

 

Description 

 

 

 

10.1

 

Waiver Agreement, dated as of September 6, 2019, by and among Ceridian HCM Holding Inc., Cannae Holdings, LLC, and certain funds affiliated with Thomas H. Lee Partners, L.P. (incorporated by reference to Exhibit 10.1 to the Current Report filed on Form 8-K by the Company on September 6, 2019, dated September 4, 2019).

 

 

 

31.1

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

52


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

CERIDIAN HCM HOLDING INC.

 

 

 

Date: November 7, 2019

By:

/s/ David D. Ossip

 

 

Name:

David D. Ossip

 

 

Title:

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

Date: November 7, 2019

By:

/s/ Arthur Gitajn

 

 

Name:

Arthur Gitajn

 

 

Title:

Executive Vice President and Chief Financial Officer

 

 

 

(Principal Financial Officer and

 

 

 

Principal Accounting Officer)

 

53