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CDAY Ceridian HCM Holding

Filed: 5 Nov 20, 4:22pm

 

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, 2020

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: 147,803,003 shares of Common Stock, $0.01 par value per share, as of October 30, 2020.

 

 


Table of Contents

 

Ceridian HCM Holding Inc.

Table of Contents

 

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Table of Contents

 

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:

 

 

the impact of the Coronavirus disease 2019 (“COVID-19”) pandemic on our business, operations, and financial results;

 

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 with 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, data, and financial services laws, regulations and standards;

 

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

 

the risk of loss caused by customer failure to repay distribution of earned net wages and associated tax amounts made on behalf of our customers for our Dayforce Wallet or other services;

 

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

 

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

 

reductions in our customers’ employment levels or other overall declines in the financial viability of our current and prospective 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, and identify 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;

 

general economic, political and market forces beyond our control; or

 

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

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Table of Contents

 

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, 2019 (“2019 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.

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Ceridian HCM Holding Inc.

Condensed Consolidated Balance Sheets

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

(Dollars in millions, except share data)

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

554.6

 

 

$

281.3

 

Trade and other receivables, net

 

 

91.4

 

 

 

80.4

 

Prepaid expenses and other current assets

 

 

78.7

 

 

 

57.9

 

Total current assets before customer trust funds

 

 

724.7

 

 

 

419.6

 

Customer trust funds

 

 

2,646.6

 

 

 

3,204.1

 

Total current assets

 

 

3,371.3

 

 

 

3,623.7

 

Right of use lease asset

 

 

37.5

 

 

 

32.0

 

Property, plant, and equipment, net

 

 

132.2

 

 

 

128.3

 

Goodwill

 

 

2,011.3

 

 

 

1,973.5

 

Other intangible assets, net

 

 

197.3

 

 

 

177.9

 

Other assets

 

 

168.4

 

 

 

150.3

 

Total assets

 

$

5,918.0

 

 

$

6,085.7

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

7.7

 

 

$

10.8

 

Current portion of long-term lease liabilities

 

 

10.3

 

 

 

8.8

 

Accounts payable

 

 

26.6

 

 

 

43.2

 

Deferred revenue

 

 

26.1

 

 

 

25.5

 

Employee compensation and benefits

 

 

75.8

 

 

 

75.9

 

Other accrued expenses

 

 

13.7

 

 

 

13.9

 

Total current liabilities before customer trust funds obligations

 

 

160.2

 

 

 

178.1

 

Customer trust funds obligations

 

 

2,581.2

 

 

 

3,193.6

 

Total current liabilities

 

 

2,741.4

 

 

 

3,371.7

 

Long-term debt, less current portion

 

 

957.2

 

 

 

666.3

 

Employee benefit plans

 

 

108.2

 

 

 

117.2

 

Long-term lease liabilities, less current portion

 

 

34.1

 

 

 

30.1

 

Other liabilities

 

 

40.8

 

 

 

18.1

 

Total liabilities

 

 

3,881.7

 

 

 

4,203.4

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par, 500,000,000 shares authorized, 147,647,117 and

   144,386,618 shares issued and outstanding, respectively

 

 

1.5

 

 

 

1.4

 

Additional paid in capital

 

 

2,565.5

 

 

 

2,449.1

 

Accumulated deficit

 

 

(216.5

)

 

 

(229.8

)

Accumulated other comprehensive loss

 

 

(314.2

)

 

 

(338.4

)

Total stockholders’ equity

 

 

2,036.3

 

 

 

1,882.3

 

Total liabilities and equity

 

$

5,918.0

 

 

$

6,085.7

 

 

See accompanying notes to condensed consolidated financial statements.

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Ceridian HCM Holding Inc.

Condensed Consolidated Statements of Operations

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

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

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

$

168.1

 

 

$

167.4

 

 

$

508.7

 

 

$

503.7

 

Professional services and other

 

 

36.3

 

 

 

34.9

 

 

 

111.0

 

 

 

98.6

 

Total revenue

 

 

204.4

 

 

 

202.3

 

 

 

619.7

 

 

 

602.3

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

54.3

 

 

 

49.4

 

 

 

155.8

 

 

 

149.0

 

Professional services and other

 

 

40.2

 

 

 

37.6

 

 

 

120.7

 

 

 

107.1

 

Product development and management

 

 

22.9

 

 

 

17.5

 

 

 

57.5

 

 

 

49.1

 

Depreciation and amortization

 

 

10.3

 

 

 

9.0

 

 

 

29.9

 

 

 

26.7

 

Total cost of revenue

 

 

127.7

 

 

 

113.5

 

 

 

363.9

 

 

 

331.9

 

Gross profit

 

 

76.7

 

 

 

88.8

 

 

 

255.8

 

 

 

270.4

 

Selling, general, and administrative

 

 

77.3

 

 

 

82.3

 

 

 

226.1

 

 

 

217.8

 

Operating (loss) profit

 

 

(0.6

)

 

 

6.5

 

 

 

29.7

 

 

 

52.6

 

Interest expense, net

 

 

5.9

 

 

 

7.8

 

 

 

19.4

 

 

 

25.2

 

Other (income) expense, net

 

 

(0.2

)

 

 

1.6

 

 

 

2.7

 

 

 

4.7

 

(Loss) income before income taxes

 

 

(6.3

)

 

 

(2.9

)

 

 

7.6

 

 

 

22.7

 

Income tax benefit

 

 

(5.5

)

 

 

(65.6

)

 

 

(5.7

)

 

 

(57.5

)

Net (loss) income

 

$

(0.8

)

 

$

62.7

 

 

$

13.3

 

 

$

80.2

 

Net (loss) income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.01

)

 

$

0.44

 

 

$

0.09

 

 

$

0.57

 

Diluted

 

$

(0.01

)

 

$

0.42

 

 

$

0.09

 

 

$

0.54

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

147,141,403

 

 

 

142,780,819

 

 

 

145,798,169

 

 

 

141,369,339

 

Diluted

 

 

147,141,403

 

 

 

149,153,227

 

 

 

152,105,719

 

 

 

148,279,943

 

 

See accompanying notes to condensed consolidated financial statements.

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Ceridian HCM Holding Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(Dollars in millions, Unaudited)

 

Net (loss) income

 

$

(0.8

)

 

$

62.7

 

 

$

13.3

 

 

$

80.2

 

Items of other comprehensive income before income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

12.8

 

 

 

(6.5

)

 

 

(14.7

)

 

 

17.3

 

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

 

 

(0.2

)

 

 

3.1

 

 

 

43.3

 

 

 

42.3

 

Change in pension liability adjustment (1)

 

 

3.3

 

 

 

2.5

 

 

 

9.9

 

 

 

7.5

 

Other comprehensive income (loss) before income taxes

 

 

15.9

 

 

 

(0.9

)

 

 

38.5

 

 

 

67.1

 

Income tax expense, net

 

 

1.4

 

 

 

8.8

 

 

 

14.3

 

 

 

12.4

 

Other comprehensive income (loss) after income taxes

 

 

14.5

 

 

 

(9.7

)

 

 

24.2

 

 

 

54.7

 

Comprehensive income

 

$

13.7

 

 

$

53.0

 

 

$

37.5

 

 

$

134.9

 

 

(1)

The amount of the pension liability adjustment recognized in the condensed consolidated statements of operations within other (income) expense, net was $3.3 million and $2.6 million during the three months ended September 30, 2020, and 2019, respectively, and $9.9 million and $7.8 million during the nine months ended September 30, 2020, and 2019, respectively. 

 

See accompanying notes to condensed consolidated financial statements.

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Ceridian HCM Holding Inc.

Condensed Consolidated Statements of Stockholders’ Equity

 

 

 

Common Stock

 

 

Additional

Paid In

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

 

 

Shares

 

 

$

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

 

 

(Dollars in millions, except share data, Unaudited)

 

Balance as of December 31, 2019

 

 

144,386,618

 

 

$

1.4

 

 

$

2,449.1

 

 

$

(229.8

)

 

$

(338.4

)

 

$

1,882.3

 

Net income

 

 

 

 

 

 

 

 

 

 

 

8.6

 

 

 

 

 

 

8.6

 

Issuance of common stock under share-based compensation plans

 

 

551,328

 

 

 

 

 

 

11.4

 

 

 

 

 

 

 

 

 

11.4

 

Share-based compensation

 

 

 

 

 

 

 

 

12.5

 

 

 

 

 

 

 

 

 

12.5

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(49.1

)

 

 

(49.1

)

Change in unrealized gain, net of tax of $6.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17.4

 

 

 

17.4

 

Change in pension liability adjustment, net of tax of $0.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.5

 

 

 

2.5

 

Balance as of March 31, 2020

 

 

144,937,946

 

 

$

1.4

 

 

$

2,473.0

 

 

$

(221.2

)

 

$

(367.6

)

 

$

1,885.6

 

Net income

 

 

 

 

 

 

 

 

 

 

 

5.5

 

 

 

 

 

 

5.5

 

Issuance of common stock under share-based compensation plans

 

 

1,865,986

 

 

 

0.1

 

 

 

40.1

 

 

 

 

 

 

 

 

 

40.2

 

Share-based compensation

 

 

 

 

 

 

 

 

15.3

 

 

 

 

 

 

 

 

 

15.3

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21.6

 

 

 

21.6

 

Change in unrealized gain, net of tax of $5.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15.0

 

 

 

15.0

 

Change in pension liability adjustment, net of tax of $0.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.5

 

 

 

2.5

 

Balance as of June 30, 2020

 

 

146,803,932

 

 

$

1.5

 

 

$

2,528.4

 

 

$

(215.7

)

 

$

(328.5

)

 

$

1,985.7

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(0.8

)

 

 

 

 

 

(0.8

)

Issuance of common stock under share-based compensation plans

 

 

843,185

 

 

 

 

 

 

18.6

 

 

 

 

 

 

 

 

 

18.6

 

Share-based compensation

 

 

 

 

 

 

 

 

18.5

 

 

 

 

 

 

 

 

 

18.5

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12.8

 

 

 

12.8

 

Change in unrealized loss, net of tax of $0.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.7

)

 

 

(0.7

)

Change in pension liability adjustment, net of tax of $1.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.2

 

 

 

2.2

 

Balance as of September 30, 2020

 

 

147,647,117

 

 

$

1.5

 

 

$

2,565.5

 

 

$

(216.5

)

 

$

(314.2

)

 

$

2,036.3

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid In

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

 

 

Shares

 

 

$

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

 

 

(Dollars in millions, except share data, Unaudited)

 

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

 

 

 

 

 

 

 

 

 

 

 

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.

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Ceridian HCM Holding Inc.

Condensed Consolidated Statements of Cash Flows

 

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

 

(Dollars in millions, Unaudited)

 

Net income

 

$

13.3

 

 

$

80.2

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Deferred income tax benefit

 

 

 

 

 

(75.9

)

Depreciation and amortization

 

 

36.9

 

 

 

43.9

 

Amortization of debt issuance costs and debt discount

 

 

0.9

 

 

 

0.8

 

Net periodic pension and postretirement cost

 

 

2.5

 

 

 

3.9

 

Non-cash share-based compensation

 

 

46.3

 

 

 

26.0

 

Other

 

 

0.6

 

 

 

1.8

 

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

 

 

 

 

 

 

 

 

Trade and other receivables

 

 

(2.5

)

 

 

(10.6

)

Prepaid expenses and other current assets

 

 

(8.0

)

 

 

(10.1

)

Accounts payable and other accrued expenses

 

 

(12.0

)

 

 

(2.5

)

Deferred revenue

 

 

0.6

 

 

 

2.6

 

Employee compensation and benefits

 

 

(2.8

)

 

 

(18.5

)

Accrued interest

 

 

0.3

 

 

 

 

Accrued taxes

 

 

(8.7

)

 

 

(10.4

)

Other assets and liabilities

 

 

(20.1

)

 

 

(6.6

)

Net cash provided by operating activities

 

 

47.3

 

 

 

24.6

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Purchase of customer trust funds marketable securities

 

 

(25.3

)

 

 

(335.1

)

Proceeds from sale and maturity of customer trust funds marketable securities

 

 

304.1

 

 

 

278.1

 

Expenditures for property, plant, and equipment

 

 

(13.6

)

 

 

(10.8

)

Expenditures for software and technology

 

 

(30.6

)

 

 

(27.6

)

Acquisition costs, net of cash and restricted cash acquired

 

 

(58.3

)

 

 

(29.4

)

Net cash provided by (used in) investing activities

 

 

176.3

 

 

 

(124.8

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Decrease in customer trust funds obligations, net

 

 

(601.4

)

 

 

(54.5

)

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

 

 

70.2

 

 

 

76.7

 

Repayment of long-term debt obligations

 

 

(7.9

)

 

 

(5.1

)

Proceeds from revolving credit facility

 

 

295.0

 

 

 

 

Net cash (used in) provided by financing activities

 

 

(244.1

)

 

 

17.1

 

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

 

 

(7.9

)

 

 

7.2

 

Net decrease in cash, restricted cash, and equivalents

 

 

(28.4

)

 

 

(75.9

)

Cash, restricted cash, and equivalents at beginning of period

 

 

1,658.6

 

 

 

1,106.3

 

Cash, restricted cash, and equivalents at end of period

 

$

1,630.2

 

 

$

1,030.4

 

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

   balance sheets

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

554.6

 

 

$

270.9

 

Restricted cash and equivalents included in customer trust funds

 

 

1,075.6

 

 

 

759.5

 

Total cash, restricted cash, and equivalents

 

$

1,630.2

 

 

$

1,030.4

 

 

See accompanying notes to condensed consolidated financial statements.

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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,” “us,” or the “Company”) 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 (“U.S.”) and Canada.  

On August 28, 2020, we completed a secondary offering in which certain of our stockholders (the “Selling Stockholders”) sold 7,717,347 shares of our common stock in an underwritten public offering at a public offering price of $72.18 per share.  All proceeds from the sale of this common stock went to the selling stockholders. During the three months ended September 30, 2020, we incurred $0.4 million of expenses related to the August 28, 2020, secondary offering.  Expenses associated with our secondary offering are recorded within selling, general and administrative expense in our condensed consolidated statements of operations.

2. Summary of Significant Accounting Policies

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 2019 Form 10-K. The following notes should be read in conjunction with these policies and other disclosures in our 2019 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 income (loss), and cash flows from all periods presented. Interim results are not necessarily indicative of results for a full year.

 

Internally Developed Software Costs

In accordance with Accounting Standards Codification (“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. Research and development costs, product management, and other software maintenance costs related to software development are expensed as incurred.

Deferred Costs

Deferred costs, which primarily consist of deferred sales commissions, included within Other assets on our condensed consolidated balance sheets were $118.8 million and $106.4 million as of September 30, 2020, and December 31, 2019, respectively. Amortization expense for the deferred costs was $9.8 million and $8.1 million for the three months ended September 30, 2020, and 2019, respectively, and $27.9 million and $23.5 million for the nine months ended September 30, 2020, and 2019 respectively.

Recently Issued Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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

10


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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. The amendments in this update should be applied on a retrospective basis to all periods presented. The adoption of this guidance will not have a significant impact on our annual defined benefit plan and other postretirement plan disclosures.

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform,” which provides guidance for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this guidance apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this guidance provide for an optional method in which modifications of contracts within the scope of ASC Topic 310, Receivables, and ASC Topic 470, Debt, should be accounted for by prospectively adjusting the effective interest rate, in addition to several other optional methods and exceptions. The amendments in this update are effective for all entities beginning March 12, 2020 and are available to be used through December 31, 2022. We do not expect the adoption of this guidance to have a significant impact on our financial statements.

3. Business Combinations

On May 29, 2020, we completed the purchase of 100% of the outstanding shares of Excelity Global Solutions Pte. Ltd. (“Excelity”) for $77.2 million. Excelity is a human capital management service provider in the Asia-Pacific region.

The financial results of Excelity have been included within our condensed consolidated financial statements from the acquisition date forward and are classified as a Bureau solution. The acquisition of Excelity was recorded using the acquisition method of accounting, in which the assets and liabilities assumed are recognized at their fair value. As of September 30, 2020, we have conducted a preliminary assessment of certain assets and liabilities related to the acquisition of Excelity. 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 the current estimate of these items. After consideration of the Excelity acquisition, management has concluded that we continue to have 1 operating and reportable segment. This conclusion aligns with how management monitors operating performance, allocates resources, and deploys capital.  

The major classes of assets and liabilities to which we allocated the purchase price were as follows:

 

 

 

(Dollars in millions)

 

Cash and equivalents

 

$

6.6

 

Trade receivables, prepaid expenses, and other current assets

 

 

10.8

 

Customer trust funds

 

 

12.3

 

Property, plant, and equipment and other assets

 

 

4.2

 

Goodwill

 

 

47.6

 

Other intangible assets, net

 

 

20.7

 

Accounts payable and other current liabilities

 

 

(2.2

)

Customer trust funds obligations

 

 

(13.1

)

Other non-current liabilities

 

 

(9.7

)

Total purchase price

 

$

77.2

 

 

 

4. Fair Value Measurements

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

Our financial assets and liabilities measured at fair value on a recurring basis were categorized as follows:

 

 

 

September 30, 2020

 

 

 

Level 1

 

 

Level 2

 

 

 

Level 3

 

 

Total

 

 

 

(Dollars in millions)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale customer trust funds assets

 

$

 

 

$

1,571.0

 

(a)

 

$

 

 

$

1,571.0

 

Total assets measured at fair value

 

$

 

 

$

1,571.0

 

 

 

$

 

 

$

1,571.0

 

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Table of Contents

 

 

 

 

December 31, 2019

 

 

 

Level 1

 

 

Level 2

 

 

 

Level 3

 

 

Total

 

 

 

(Dollars in millions)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale customer trust funds assets

 

$

-

 

 

$

1,826.8

 

(a)

 

$

-

 

 

$

1,826.8

 

Total assets measured at fair value

 

$

-

 

 

$

1,826.8

 

 

 

$

-

 

 

$

1,826.8

 

 

(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, 2020, and the year ended December 31, 2019, we completed business combinations which required the assets acquired and liabilities assumed to be measured at fair value on a nonrecurring basis. Please refer to Note 3, “Business Combinations,” for additional information.

5. Customer Trust Funds

Investment income from invested customer trust funds, also referred to as float revenue or float, is a component of our compensation for providing services under agreements with our customers. Investment income from invested customer trust funds included in recurring services revenue was $10.6 million and $18.3 million for the three months ended September 30, 2020, and 2019, respectively, and $41.7 million and $62.9 million for the nine months ended September 30, 2020, and 2019, respectively. Investment income includes interest income, realized gains and losses from sales of customer trust funds’ investments, and unrealized credit losses determined to be unrecoverable.

The amortized cost of customer trust funds as of September 30, 2020, and December 31, 2019, is the original cost of assets acquired. The amortized cost and fair values of investments of customer trust funds available for sale were as follows:

 

 

 

September 30, 2020

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gain

 

 

Loss

 

 

Value

 

 

 

(Dollars in millions)

 

Money market securities, investments carried at cost and

   other cash equivalents

 

$

1,050.6

 

 

$

 

 

$

 

 

$

1,050.6

 

Available for sale investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

441.9

 

 

 

23.6

 

 

 

 

 

 

465.5

 

Canadian and provincial government securities

 

 

379.8

 

 

 

16.1

 

 

 

 

 

 

395.9

 

Corporate debt securities

 

 

466.1

 

 

 

19.8

 

 

 

(0.1

)

 

 

485.8

 

Asset-backed securities

 

 

201.2

 

 

 

5.4

 

 

 

 

 

 

206.6

 

Mortgage-backed securities

 

 

12.5

 

 

 

0.2

 

 

 

 

 

 

12.7

 

Other securities

 

 

4.5

 

 

 

 

 

 

 

 

 

4.5

 

Total available for sale investments

 

 

1,506.0

 

 

 

65.1

 

 

 

(0.1

)

 

 

1,571.0

 

Invested customer trust funds

 

 

2,556.6

 

 

$

65.1

 

 

$

(0.1

)

 

 

2,621.6

 

Trust receivables

 

 

24.6

 

 

 

 

 

 

 

 

 

 

 

25.0

 

Total customer trust funds

 

$

2,581.2

 

 

 

 

 

 

 

 

 

 

$

2,646.6

 

 

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Table of Contents

 

 

 

December 31, 2019

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gain

 

 

Loss

 

 

Value

 

 

 

(Dollars in millions)

 

Money market securities, investments carried at cost and

   other cash equivalents

 

$

1,348.1

 

 

$

 

 

$

 

 

$

1,348.1

 

Available for sale investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

542.4

 

 

 

7.1

 

 

 

(0.3

)

 

 

549.2

 

Canadian and provincial government securities

 

 

406.7

 

 

 

5.4

 

 

 

(0.7

)

 

 

411.4

 

Corporate debt securities

 

 

562.2

 

 

 

9.0

 

 

 

(0.3

)

 

 

570.9

 

Asset-backed securities

 

 

270.0

 

 

 

1.7

 

 

 

(0.3

)

 

 

271.4

 

Mortgage-backed securities

 

 

19.8

 

 

 

0.2

 

 

 

(0.1

)

 

 

19.9

 

Other securities

 

 

4.0

 

 

 

 

 

 

 

 

 

4.0

 

Total available for sale investments

 

 

1,805.1

 

 

 

23.4

 

 

 

(1.7

)

 

 

1,826.8

 

Invested customer trust funds

 

 

3,153.2

 

 

$

23.4

 

 

$

(1.7

)

 

 

3,174.9

 

Trust receivables (a)

 

 

40.4

 

 

 

 

 

 

 

 

 

 

 

29.2

 

Total customer trust funds

 

$

3,193.6

 

 

 

 

 

 

 

 

 

 

$

3,204.1

 

 

(a)

The fair value of trust receivables as of December 31, 2019, included a loss of $11.2 million related to unrecovered duplicate payments resulting from an isolated service incident on September 26, 2019. Ceridian was liable for these unrecovered duplicate payments and had reimbursed the customer trust for the resulting losses as of March 31, 2020. Please refer to Note 14, “Commitments and Contingencies,” for further discussion of the September 26, 2019, isolated service incident.

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.

 

 

 

September 30, 2020

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

 

(Dollars in millions)

 

Corporate debt securities

 

$

 

 

$

 

 

$

(0.1

)

 

$

5.8

 

 

$

(0.1

)

 

$

5.8

 

Total available for sale investments

 

$

 

 

$

 

 

$

(0.1

)

 

$

5.8

 

 

$

(0.1

)

 

$

5.8

 

 

Management does not believe that any individual unrealized loss was unrecoverable as of September 30, 2020. 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, 2020, 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, 2020

 

 

 

Cost

 

 

Fair Value

 

 

 

(Dollars in millions)

 

Due in one year or less

 

$

1,398.7

 

 

$

1,402.0

 

Due in one to three years

 

 

689.9

 

 

 

719.2

 

Due in three to five years

 

 

343.5

 

 

 

362.2

 

Due after five years

 

 

124.5

 

 

 

138.2

 

Invested customer trust funds

 

$

2,556.6

 

 

$

2,621.6

 

 

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6. Goodwill and Intangible Assets

Goodwill

Goodwill and changes therein were as follows:

 

 

 

(Dollars in millions)

 

Balance at December 31, 2018

 

$

1,927.4

 

Acquisitions

 

 

25.7

 

Translation

 

 

20.4

 

Balance at December 31, 2019

 

 

1,973.5

 

Acquisition

 

 

47.6

 

Translation

 

 

(9.8

)

Balance at September 30, 2020

 

$

2,011.3

 

 

Please refer to Note 3, “Business Combinations,” for further discussion of the Excelity acquisition.

Intangible Assets

Other intangible assets consisted of the following:

 

 

 

September 30, 2020

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

Estimated Life

Range (Years)

 

 

(Dollars in millions)

 

 

 

Customer lists and relationships

 

$

225.9

 

 

$

(207.5

)

 

$

18.4

 

 

5-15

Trade name

 

 

177.4

 

 

 

(2.0

)

 

 

175.4

 

 

3 and Indefinite

Technology

 

 

157.3

 

 

 

(153.8

)

 

 

3.5

 

 

3-4

Total other intangible assets

 

$

560.6

 

 

$

(363.3

)

 

$

197.3

 

 

 

 

 

 

December 31, 2019

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

 

 

Estimated Life

Range (Years)

 

 

(Dollars in millions)

 

 

 

Customer lists and relationships

 

$

212.5

 

 

$

(208.2

)

 

$

4.3

 

 

5-15

Trade name

 

 

174.0

 

 

 

(2.1

)

 

 

171.9

 

 

3 and Indefinite

Technology

 

 

156.1

 

 

 

(154.4

)

 

 

1.7

 

 

3-4

Total other intangible assets

 

$

542.6

 

 

$

(364.7

)

 

$

177.9

 

 

 

 

 

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.  

 

Amortization expense related to definite-lived intangible assets was $0.8 million and $4.7 million for the three months ended September 30, 2020, and 2019, respectively, and $1.6 million and $13.9 million for the nine months ended September 30, 2020, and 2019, respectively.

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7. Debt

Overview

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(Dollars in millions)

 

Term Debt, interest rate of 2.6% and 4.8%, respectively

 

$

666.4

 

 

$

671.5

 

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

   letters of credit, which were $0.7 million and $1.9 million, respectively)

 

 

295.0

 

 

 

 

Canada Line of Credit (CDN $7.0 million letter of credit capacity, which was fully utilized; USD $5.3 million and USD $5.4 million, respectively)

 

 

 

 

 

 

Financing lease liabilities (Please refer to Note 13)

 

 

9.4

 

 

 

12.4

 

Total debt

 

 

970.8

 

 

 

683.9

 

Less unamortized discount on Term Debt

 

 

1.2

 

 

 

1.4

 

Less unamortized debt issuance costs on Term Debt

 

 

4.7

 

 

 

5.4

 

Less current portion of long-term debt

 

 

7.7

 

 

 

10.8

 

Long-term debt, less current portion

 

$

957.2

 

 

$

666.3

 

 

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 substantially 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 has been reduced from LIBOR plus 3.25% to LIBOR plus 3.00%, so long as the rating is maintained. On February 19, 2020, Ceridian completed the first amendment to the 2018 Senior Secured Credit Facility in which the 2018 Term Debt interest rate was reduced from LIBOR plus 3.00% to LIBOR plus 2.50%. Further, the interest rate trigger under the applicable rating by Moody’s Investor Service was removed by the first amendment. Accrued interest related to the 2018 Senior Secured Credit Facility was $0.4 million and $0.1 million as of September 30, 2020, and December 31, 2019, respectively, and is included within Other accrued expenses in our condensed consolidated balance sheets.

On April 2, 2020, in light of the uncertainty and volatility in the global financial markets resulting from the COVID-19 pandemic, Ceridian elected to borrow $295.0 million under the 2018 Revolving Credit Facility as a precautionary measure to increase our cash position and to preserve financial flexibility.

Future Payments and Maturities of Debt

The future principal payments and maturities of our indebtedness, excluding financing lease obligations, are as follows:

 

Years Ending December 31,

 

Amount

 

 

 

(Dollars in millions)

 

2020

 

$

1.7

 

2021

 

 

6.8

 

2022

 

 

6.8

 

2023

 

 

301.8

 

2024

 

 

6.8

 

Thereafter

 

 

637.5

 

 

 

$

961.4

 

 

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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 $927.8 million and $675.1 million as of September 30, 2020, and December 31, 2019, respectively.

8. 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,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net Periodic Pension Cost

 

(Dollars in millions)

 

Interest cost

 

$

3.2

 

 

$

4.5

 

 

$

9.6

 

 

$

13.6

 

Actuarial loss amortization

 

 

3.9

 

 

 

3.2

 

 

 

11.7

 

 

 

9.6

 

Less: Expected return on plan assets

 

 

(5.7

)

 

 

(5.9

)

 

 

(17.1

)

 

 

(17.7

)

Net periodic pension cost

 

$

1.4

 

 

$

1.8

 

 

$

4.2

 

 

$

5.5

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net Periodic Postretirement Benefit

 

(Dollars in millions)

 

Interest cost

 

$

0.1

 

 

$

0.2

 

 

$

0.4

 

 

$

0.4

 

Actuarial gain amortization

 

 

(0.6

)

 

 

(0.6

)

 

 

(1.8

)

 

 

(1.8

)

Prior service credit amortization

 

 

(0.1

)

 

 

(0.1

)

 

 

(0.3

)

 

 

(0.2

)

Net periodic postretirement benefit gain

 

$

(0.6

)

 

$

(0.5

)

 

$

(1.7

)

 

$

(1.6

)

 

In October 2020, we contributed $105.0 million to the U.S. pension plan, which represented $17.0 million of required minimum contributions and $88.0 million of voluntary contributions.

 

9. Share-Based Compensation

Our share-based compensation consists of performance-based stock options, term-based stock options, restricted stock units (“RSUs”), and performance stock units (“PSUs”). We also offer an employee stock purchase plan.  

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 initial public offering (“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, 2020, there were 2,500 stock options outstanding under the 2007 SIP.

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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, 2020, there were 2,882,412 stock options and RSUs outstanding under the 2013 SIP. We do not intend to grant any additional awards under the 2007 SIP or the 2013 SIP.

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) 3 percent of the number of shares of our common stock outstanding on each January 31 immediately prior to the date of increase or (ii) such number of shares of our common stock determined by the Board of Directors. Effective on March 31, 2020, the Share Reserve was increased by 4,199,089 shares, pursuant to the terms of the 2018 EIP. 

Equity awards under the 2018 EIP vest either annually or quarterly on a pro rata basis, generally over a one-, three-, or 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, 2020, there were 12,354,165 stock options, RSUs, and PSUs outstanding and 9,541,117 shares available for future grants of equity awards under the 2018 EIP.

Total share-based compensation expense was $18.5 million and $10.4 million for the three months ended September 30, 2020, and 2019, respectively, and $46.3 million and $26.0 million for the nine months ended September 30, 2020, and 2019, respectively.

Performance-Based Stock Options

Performance-based stock option activity under the 2007 SIP, the 2013 SIP, and the 2018 EIP 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,

   2019

 

 

68,281

 

 

$

13.58

 

 

 

2.6

 

 

$

3.7

 

Granted

 

 

1,818,728

 

 

 

65.27

 

 

 

 

 

 

 

Exercised

 

 

(31,678

)

 

 

(13.46

)

 

 

 

 

 

 

Forfeited or expired

 

 

0

 

 

 

0

 

 

 

 

 

 

 

Performance-based options outstanding at September 30,

   2020

 

 

1,855,331

 

 

$

64.25

 

 

 

9.5

 

 

$

34.1

 

Performance-based options exercisable at September 30,

   2020

 

 

36,603

 

 

$

13.68

 

 

 

2.1

 

 

$

2.5

 

 

The performance criteria for all outstanding performance-based stock options under the 2007 SIP and the 2013 SIP was met on June 7, 2018, resulting in the vesting of all outstanding performance-based stock options under the 2007 SIP and the 2013 SIP on this date. 

During the nine months ended September 30, 2020, 1,500,000 performance-based stock options (“Performance Option Award”) were granted under the 2018 EIP with an exercise price of $65.26. The vesting conditions for the Performance Option Award are based on the Company’s performance on the New York Stock Exchange (“NYSE”) with 750,000 shares available to vest when the Company’s per share closing price on the NYSE meets or exceeds $110.94, or 1.7 times the exercise price, for ten consecutive trading days, and the remaining 750,000 shares are available to vest when the Company’s per share closing price on the NYSE meets or exceeds $130.52, or 2.0 times the exercise price, for ten consecutive trading days. The Performance Option Award has a minimum time-based vesting period of 3 years. The vesting conditions must be achieved prior to May 8, 2025, or any unvested portion of the Performance Option Award will terminate. A Monte Carlo simulation model was used to determine the fair value of these performance-based stock options. The Monte Carlo model utilizes multiple input variables that determine the probability of satisfying the market conditions stipulated in the award. We have estimated an expected term of 5.3 years, based on the vesting period and contractual term.

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The remaining performance-based stock options granted during the nine months ended September 30, 2020, under the 2018 EIP primarily include vesting conditions based on migrations of customers to Dayforce. There are 2 tranches of stock options, in which the vesting conditions must be met either prior to September 13, 2021, or September 13, 2022.  

 

As of September 30, 2020, there was $26.2 million of share-based compensation expense related to unvested performance-based stock option awards not yet recognized, which is expected to be recognized over a weighted average period of 2.5 years.

 

Term-Based Stock Options

Term-based stock option activity 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, 2019

 

 

13,144,937

 

 

$

29.74

 

 

 

7.8

 

 

$

501.3

 

Granted

 

 

2,262,708

 

 

 

65.82

 

 

 

 

 

 

 

Exercised

 

 

(3,033,856

)

 

 

(20.23

)

 

 

 

 

 

 

Forfeited or expired

 

 

(500,715

)

 

 

(28.60

)

 

 

 

 

 

 

Term-based options outstanding at September 30, 2020

 

 

11,873,074

 

 

$

39.09

 

 

 

8.0

 

 

$

517.2

 

Term-based options exercisable at September 30, 2020

 

 

3,681,857

 

 

$

26.98

 

 

 

7.0

 

 

$

205.0

 

 

As of September 30, 2020, there was $95.9 million of share-based compensation expense related to unvested term-based stock options not yet recognized, which is expected to be recognized over a weighted average period of 1.9 years.

Restricted Stock Units

RSU activity under the 2013 SIP and the 2018 EIP, for the period was as follows:

 

 

 

Shares

 

RSUs outstanding at December 31, 2019

 

 

819,818

 

Granted

 

 

629,554

 

Shares issued upon vesting of RSUs

 

 

(63,144

)

Forfeited or canceled

 

 

(17,109

)

RSUs outstanding at September 30, 2020

 

 

1,369,119

 

RSUs releasable at September 30, 2020

 

 

422,635

 

 

During the nine months ended September 30, 2020, 215,441 RSUs vested. As of September 30, 2020, there were 946,484 unvested RSUs outstanding and 422,635 vested RSUs outstanding. RSUs generally vest annually over a one-, three-, or four-year period. As of September 30, 2020, there was $45.4 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 1.8 years.

 

Performance Stock Units

During the nine months ended September 30, 2020, 145,017 PSUs were granted under the 2018 EIP and 3,464 PSUs were forfeited and cancelled. The vesting conditions for the PSUs are based on the Company’s performance against Cloud revenue and adjusted EBITDA margin goals under the Company’s 2020 Management Incentive Plan (the “2020 MIP”) for the incentive period of January 1, 2020 through December 31, 2020. The maximum incentive vesting of PSUs may not exceed 125% under the 2020 MIP. Both the Cloud revenue and adjusted EBITDA margin goals are calculated based on the Company’s operating results, adjusted for foreign currency and interest rate impacts plus other unique impacts as approved by the Compensation Committee or the Board of Directors. Upon vesting of a PSU, a participant will receive shares of common stock of the Company. The probability of vesting of PSUs will continue to be evaluated throughout the period, and share-based compensation expense will be recognized in accordance with that probability. As of September 30, 2020, there was $10.0 million of share-based compensation expense related to unvested PSUs not yet recognized.

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Table of Contents

 

Global Employee Stock Purchase Plan

On November 9, 2018, the Board of Directors approved the Ceridian HCM Holding Inc. Global Employee Stock Purchase Plan (“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. A total of 2,102,709 shares of common stock are available for future issuances under the plan at September 30, 2020. 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 ten years, unless terminated sooner as provided under the GESPP. During 2020 and subsequent years, quarterly purchase periods commence on January 1, April 1, July 1, and October 1. Shares are purchased on the last trading day of the respective purchase periods.

Our GESPP activity was as follows: 

 

Period Ended

 

Shares Issued

 

 

Purchase Price

(per share)

 

March 31, 2020

 

 

49,802

 

 

$

42.56

 

June 30, 2020

 

 

42,706

 

 

 

59.52

 

September 30, 2020

 

 

42,719

 

 

 

59.52

 

 

 

10. Revenue

Our Solutions

We categorize our solutions into two categories: Cloud and Bureau offerings.

 

Cloud revenue is generated from solutions that are delivered via 2 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 human resource, 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 the allocation of 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 the allocation of 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.

 

Bureau revenue is generated primarily from solutions delivered via a service-bureau model. These solutions are delivered via 3 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; the allocation of 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; revenue from the sale of third party services to Bureau customers; and Excelity revenue.

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Table of Contents

 

Disaggregation of Revenue

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(Dollars in millions)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dayforce

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

$

122.7

 

 

$

109.4

 

 

$

369.3

 

 

$

314.7

 

Professional services and other

 

 

35.1

 

 

 

34.3

 

 

 

108.8

 

 

 

96.3

 

Total Dayforce revenue

 

 

157.8

 

 

 

143.7

 

 

 

478.1

 

 

 

411.0

 

Powerpay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

18.6

 

 

 

21.6

 

 

 

56.6

 

 

 

64.0

 

Professional services and other

 

 

0.3

 

 

 

0.2

 

 

 

0.8

 

 

 

0.8

 

Total Powerpay revenue

 

 

18.9

 

 

 

21.8

 

 

 

57.4

 

 

 

64.8

 

Total Cloud revenue

 

 

176.7

 

 

 

165.5

 

 

 

535.5

 

 

 

475.8

 

Bureau

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

26.8

 

 

 

36.4

 

 

 

82.8

 

 

 

125.0

 

Professional services and other

 

 

0.9

 

 

 

0.4

 

 

 

1.4

 

 

 

1.5

 

Total Bureau revenue

 

 

27.7

 

 

 

36.8

 

 

 

84.2

 

 

 

126.5

 

Total revenue

 

$

204.4

 

 

$

202.3

 

 

$

619.7

 

 

$

602.3

 

Recurring services revenue includes float revenue of $10.6 million and $18.3 million for the three months ended September 30, 2020, and 2019, respectively, and $41.7 million and $62.9 million for the nine months ended September 30, 2020, and 2019, respectively.  

Contract Balances

The Company records a contract asset when revenue recognized for professional service performance obligations exceed the contractual amount of billings for implementation related professional services. Contract assets were $53.4 million and $43.2 million as of September 30, 2020, and December 31, 2019, 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 payments received in advance of revenue recognition. The changes in deferred revenue were as follows:

 

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

 

(Dollars in millions)

 

Deferred revenue, beginning of period

 

$

25.5

 

 

$

23.2

 

New billings

 

 

313.2

 

 

 

262.0

 

Revenue recognized

 

 

(312.4

)

 

 

(258.0

)

Effect of exchange rate

 

 

(0.2

)

 

 

 

Deferred revenue, end of period

 

$

26.1

 

 

$

27.2

 

 

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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, 2020, approximately $926.1 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.

11. 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, 2019

 

$

(178.4

)

 

$

10.2

 

 

$

(170.2

)

 

$

(338.4

)

Other comprehensive income (loss) before income taxes

   and reclassifications

 

 

(14.7

)

 

 

43.3

 

 

 

 

 

 

28.6

 

Income tax expense

 

 

 

 

 

(11.6

)

 

 

(2.7

)

 

 

(14.3

)

Reclassifications to earnings

 

 

 

 

 

 

 

 

9.9

 

 

 

9.9

 

Other comprehensive (loss) income

 

 

(14.7

)

 

 

31.7

 

 

 

7.2

 

 

 

24.2

 

Balance as of September 30, 2020

 

$

(193.1

)

 

$

41.9

 

 

$

(163.0

)

 

$

(314.2

)

 

12. 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, 2020, we continue to record a valuation allowance of $12.0 million against deferred tax assets attributable to state net operating loss carryovers.

We recorded an income tax benefit of $5.7 million during the nine months ended September 30, 2020, primarily attributable to tax benefits of $6.8 million for a reduction in the base erosion anti-abuse (“BEAT”) in the U.S., $2.8 million associated with share-based compensation, and a $2.3 million reduction associated with unremitted foreign earnings, partially offset by tax expense of $6.2 million, primarily attributable to $4.8 million in U.S. state taxes.

The total amount of unrecognized tax benefits as of September 30, 2020, and December 31, 2019, were $1.8 million, including $0.3 million of accrued interest, and $1.5 million, including $0.2 million of accrued interest, respectively. Of the total amount of unrecognized tax benefits as of September 30, 2020, $1.8 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.

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13. Leases

 

Supplemental balance sheet information related to leases was as follows:

 

Lease Type

 

Balance Sheet Classification

 

September 30, 2020

 

 

December 31, 2019

 

 

 

 

 

(Dollars in millions)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

Operating lease assets

 

Trade and other receivables, net

 

$

5.4

 

 

$

5.5

 

Operating lease assets

 

Prepaid expenses and other current assets

 

 

2.2

 

 

 

1.2

 

Operating lease assets

 

Right of use lease asset

 

 

37.5

 

 

 

32.0

 

Financing lease assets

 

Property, plant, and equipment, net

 

 

8.2

 

 

 

8.8

 

Total lease assets

 

 

 

$

53.3

 

 

$

47.5

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

Financing lease liabilities

 

Current portion of long-term debt

 

$

0.9

 

 

$

4.0

 

Operating lease liabilities

 

Current portion of long-term lease liabilities

 

 

10.3

 

 

 

8.8

 

Noncurrent

 

 

 

 

 

 

 

 

 

 

Financing lease liabilities

 

Long-term debt, less current portion

 

 

8.5

 

 

 

8.4

 

Operating lease liabilities

 

Long-term lease liabilities, less current portion

 

 

34.1

 

 

 

30.1

 

Total lease liabilities

 

 

 

$

53.8

 

 

$

51.3

 

 

The components of lease expense were as follows:

 

 

 

Three Months

Ended September 30,

 

 

Nine Months

Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Lease Cost

 

(Dollars in millions)

 

Operating lease cost

 

$

2.4

 

 

$

4.2

 

 

$

7.0

 

 

$

12.6

 

Financing lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation of lease assets

 

 

0.2

 

 

 

 

 

 

0.6

 

 

 

 

Interest on lease liabilities

 

 

0.1

 

 

 

 

 

 

0.3

 

 

 

 

Sublease income

 

 

(1.1

)

 

 

(1.0

)

 

 

(3.2

)

 

 

(3.3

)

Total lease cost, net

 

$

1.6

 

 

$

3.2

 

 

$

4.7

 

 

$

9.3

 

 

14. Commitments and Contingencies

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.

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.

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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. During the year ended December 31, 2019, we recorded a loss of $11.2 million for the amount unrecovered, within selling, general, and administrative expense in our consolidated statement of operations. Our recovery efforts continued through the second quarter of 2020, resulting in collections of $0.4 million during the nine months ended September 30, 2020, which was recognized as a reduction to selling, general, and administrative expense. We are no longer pursuing collection efforts of the remaining amount unrecovered.    

15. Related Party Transactions    

We provide services to FleetCor Technologies Inc. (“FleetCor Technologies”) a related party due to a shared board member, through certain commercial arrangements entered into in the ordinary course of business, which include provision of Dayforce services and other administrative services. For these services, we have recorded revenue of $0.2 million for the three months ended September 30, 2020, and 2019, respectively, and $0.7 million and $0.6 million for the nine months ended September 30, 2020, and 2019 respectively.    

We are party to a service agreement with The Dun and Bradstreet Corporation (“Dun and Bradstreet”), a related party due to certain shared board members. Pursuant to the service agreement, we made payments to Dun and Bradstreet totaling $0.4 million for the nine months ended September 30, 2020.  

We provide Dayforce and related services to The Stronach Group, for which we recorded revenue of $0.1 million and $0.2 million for the nine months ended September 30, 2020, and 2019, respectively. The brother of our chief executive officer is the chief executive officer, and is currently a minority shareholder, of The Stronach Group.

We provide payroll-related tax filings services to Fidelity National Financial, Inc., a related party until August 2019 due to certain shared board members, for which we recorded revenue of $0.1 million and $0.3 million for the three and nine months ended September 30, 2019, respectively.    

We provide Dayforce and related services to certain investment portfolio companies of THL Managers VI, LLC and Cannae Holdings, Inc., which are considered related parties due to certain shared board members. Revenue from these related parties was as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(Dollars in millions)

 

American Blue Ribbon Holdings, LLC

 

$

0.4

 

 

$

0.5

 

 

$

1.2

 

 

$

1.4

 

Essex Technology Group, LLC

 

 

0.1

 

 

 

0.2

 

 

 

0.4

 

 

 

0.4

 

Guaranteed Rate, Inc.

 

 

0.3

 

 

 

0.2

 

 

 

0.6

 

 

 

0.7

 

HighTower Advisors

 

 

0.1

 

 

 

0.1

 

 

 

0.1

 

 

 

0.1

 

Ten-X, LLC

 

 

0.1

 

 

 

0.1

 

 

 

0.2

 

 

 

0.3

 

Philips Feed Services

 

 

0.1

 

 

 

0.1

 

 

 

0.2

 

 

 

0.2

 

 

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16. Net Income (Loss) per Share

We compute net income (loss) per share of common stock using the treasury stock method. The basic and diluted net income (loss) per share computations were calculated as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

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

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(0.8

)

 

$

62.7

 

 

$

13.3

 

 

$

80.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding - basic

 

 

147,141,403

 

 

 

142,780,819

 

 

 

145,798,169

 

 

 

141,369,339

 

Effect of dilutive equity instruments

 

 

 

 

 

6,372,408

 

 

 

6,307,550

 

 

 

6,910,604

 

Weighted-average shares outstanding - diluted

 

 

147,141,403

 

 

 

149,153,227

 

 

 

152,105,719

 

 

 

148,279,943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share - basic

 

$

(0.01

)

 

$

0.44

 

 

$

0.09

 

 

$

0.57

 

Net (loss) income per share - diluted

 

$

(0.01

)

 

$

0.42

 

 

$

0.09

 

 

$

0.54

 

 

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,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Performance-based stock options

 

 

 

 

 

 

 

 

 

 

 

 

Term-based stock options

 

 

7,430,543

 

 

 

4,185,519

 

 

 

1,213,832

 

 

 

3,099,587

 

Restricted stock units

 

 

767,683

 

 

 

11,957

 

 

 

15,502

 

 

 

12,821

 

Performance stock units

 

 

385,240

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

 

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, 2019, in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2020 (our “2019 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. Revenue from our Cloud and Bureau solutions include an allocation of investment income generated from holding customer funds in trust before funds are remitted to taxing authorities, also referred to as float revenue or float. 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, revealing 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.

In 2020, we launched the Dayforce Wallet, which gives our customers’ employees greater control over their financial well-being by providing them with instant access to their earnings. This on-demand pay feature allows employees more choice over when they get paid by making any day payday. Dayforce Wallet enables workers to access their already-earned wages anytime during the pay period, net of taxes, withholdings and other payroll deductions. Leveraging Dayforce’s continuous pay calculations, Dayforce Wallet processes a same-day payroll each time a worker requests their pay. The solution is compliant with federal, state, and local remittances and requires no changes to payroll processing including the funding, timing, and close-out of pay.  

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 4,704 live Dayforce customers as of September 30, 2020. For the three and nine months ended September 30, 2020, we added 101 and 341 net new live Dayforce customers, respectively.

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 historically had 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 current 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 offset by our implementation fees, we estimate that it takes approximately two years before we are able to recover our implementation, customer acquisition, and other direct costs on a new Dayforce customer contract.

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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 to existing customers that do not currently utilize our full platform. We also incur costs to manage the account, to retain customers, and to sell additional functionality. These costs, however, are significantly less than the costs initially incurred to acquire and to implement the customer.

COVID-19 Pandemic

 

In March 2020, the World Health Organization declared the outbreak of coronavirus (COVID-19) to be a pandemic. The global spread of the COVID-19 pandemic has created significant global volatility, uncertainty, and economic disruption. We have experienced and may continue to experience curtailed customer demand, primarily as a result of declining employment levels at our customers in certain sectors, such as retail and hospitality, as well as lower customer utilization of professional services and customer delays in implementation services, due to the effects of the COVID-19 pandemic. Additionally, the federal funds rate cuts by the U.S. Federal Reserve and the overnight rate target by the Bank of Canada have had and will continue to have negative effects on our float revenue.  The broader implications of the pandemic on our results of operations and overall financial performance remain uncertain. Please refer to the Results of Operations section below for further discussion of the financial impacts of the COVID-19 pandemic during the three and nine months ended September 30, 2020. Please refer to Part II, Item 1A Risk Factors for further discussion of the potential impact of the pandemic on our business.

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 4,704 customers live on Dayforce as of September 30, 2020, compared to 4,169 customers live on Dayforce as of September 30, 2019.

Constant Currency Revenue

We present revenue on a constant currency basis to assess how our underlying business performed, excluding the effect of foreign currency rate fluctuations. We believe this non-GAAP financial measure is useful to management and investors. We have calculated revenue on a constant currency basis by applying the average foreign exchange rate in effect during the comparable prior period.

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 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 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, and certain other non-recurring charges. Adjusted EBITDA margin is determined by calculating the percentage that 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.

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Table of Contents

 

Results of Operations

Three Months Ended September 30, 2020 Compared With Three Months Ended September 30, 2019

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

Increase/ (Decrease)

 

 

% of Revenue

 

 

 

2020

 

 

2019

 

 

Amount

 

 

%

 

 

2020

 

 

2019

 

 

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud

 

$

141.3

 

 

$

131.0

 

 

$

10.3

 

 

 

7.9

%

 

 

69.1

%

 

 

64.8

%

Bureau

 

 

26.8

 

 

 

36.4

 

 

 

(9.6

)

 

 

(26.4

)%

 

 

13.1

%

 

 

18.0

%

Total recurring services

 

 

168.1

 

 

 

167.4

 

 

 

0.7

 

 

 

0.4

%

 

 

82.2

%

 

 

82.7

%

Professional services and other

 

 

36.3

 

 

 

34.9

 

 

 

1.4

 

 

 

4.0

%

 

 

17.8

%

 

 

17.3

%

Total revenue

 

 

204.4

 

 

 

202.3

 

 

 

2.1

 

 

 

1.0

%

 

 

100.0

%

 

 

100.0

%

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud

 

 

41.8

 

 

 

39.0

 

 

 

2.8

 

 

 

7.2

%

 

 

20.5

%

 

 

19.3

%

Bureau

 

 

12.5

 

 

 

10.4

 

 

 

2.1

 

 

 

20.2

%

 

 

6.1

%

 

 

5.1

%

Total recurring services

 

 

54.3

 

 

 

49.4

 

 

 

4.9

 

 

 

9.9

%

 

 

26.6

%

 

 

24.4

%

Professional services and other

 

 

40.2

 

 

 

37.6

 

 

 

2.6

 

 

 

6.9

%

 

 

19.7

%

 

 

18.6

%

Product development and management

 

 

22.9

 

 

 

17.5

 

 

 

5.4

 

 

 

30.9

%

 

 

11.2

%

 

 

8.7

%

Depreciation and amortization

 

 

10.3

 

 

 

9.0

 

 

 

1.3

 

 

 

14.4

%

 

 

5.0

%

 

 

4.4

%

Total cost of revenue

 

 

127.7

 

 

 

113.5

 

 

 

14.2

 

 

 

12.5

%

 

 

62.5

%

 

 

56.1

%

Gross profit

 

 

76.7

 

 

 

88.8

 

 

 

(12.1

)

 

 

(13.6

)%

 

 

37.5

%

 

 

43.9

%

Selling, general, and administrative

 

 

77.3

 

 

 

82.3

 

 

 

(5.0

)

 

 

(6.1

)%

 

 

37.8

%

 

 

40.7

%

Operating (loss) profit

 

 

(0.6

)

 

 

6.5

 

 

 

(7.1

)

 

 

(109.2

)%

 

 

(0.3

)%

 

 

3.2

%

Interest expense, net

 

 

5.9

 

 

 

7.8

 

 

 

(1.9

)

 

 

(24.4

)%

 

 

2.9

%

 

 

3.9

%

Other (income) expense, net

 

 

(0.2

)

 

 

1.6

 

 

 

(1.8

)

 

 

(112.5

)%

 

 

(0.1

)%

 

 

0.8

%

Loss before income taxes

 

 

(6.3

)

 

 

(2.9

)

 

 

(3.4

)

 

 

(117.2

)%

 

 

(3.1

)%

 

 

(1.4

)%

Income tax benefit

 

 

(5.5

)

 

 

(65.6

)

 

 

60.1

 

 

 

91.6

%

 

 

(2.7

)%

 

 

(32.4

)%

Net (loss) income

 

$

(0.8

)

 

$

62.7

 

 

$

(63.5

)

 

 

(101.3

)%

 

 

(0.4

)%

 

 

31.0

%

Adjusted EBITDA (a)

 

$

33.2

 

 

$

46.4

 

 

$

(13.2

)

 

 

(28.4

)%

 

 

16.2

%

 

 

22.9

%

Adjusted EBITDA margin (a)

 

 

16.2

%

 

 

22.9

%

 

 

(6.7

)%

 

 

(29.3

)%

 

 

 

 

 

 

 

 

 

(a)

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

 

 

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Table of Contents

 

Revenue. The following table sets forth certain information regarding our revenues for the three months ended September 30, 2020, compared with the three months ended September 30, 2019.

 

 

 

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)

 

 

 

2020

 

 

2019

 

 

2020 vs. 2019

 

 

 

 

 

 

2020 vs. 2019

 

 

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dayforce recurring services, excluding float

 

$

115.1

 

 

$

97.6

 

 

 

17.9

%

 

 

(—

)%

 

 

17.9

%

Dayforce float

 

 

7.6

 

 

 

11.8

 

 

 

(35.6

)%

 

 

(—

)%

 

 

(35.6

)%

Total Dayforce recurring services

 

 

122.7

 

 

 

109.4

 

 

 

12.2

%

 

 

(—

)%

 

 

12.2

%

Powerpay recurring services, excluding float

 

 

16.7

 

 

 

18.6

 

 

 

(10.2

)%

 

 

(0.5

)%

 

 

(9.7

)%

Powerpay float

 

 

1.9

 

 

 

3.0

 

 

 

(36.7

)%

 

 

(—

)%

 

 

(36.7

)%

Total Powerpay recurring services

 

 

18.6

 

 

 

21.6

 

 

 

(13.9

)%

 

 

(0.5

)%

 

 

(13.4

)%

Total Cloud recurring services

 

 

141.3

 

 

 

131.0

 

 

 

7.9

%

 

 

(—

)%

 

 

7.9

%

Dayforce professional services and other

 

 

35.1

 

 

 

34.3

 

 

 

2.3

%

 

 

(—

)%

 

 

2.3

%

Powerpay professional services and other

 

 

0.3

 

 

 

0.2

 

 

 

50.0

%

 

 

(—

)%

 

 

50.0

%

Total Cloud professional services and

   other

 

 

35.4

 

 

 

34.5

 

 

 

2.6

%

 

 

(—

)%

 

 

2.6

%

Total Cloud revenue

 

 

176.7

 

 

 

165.5

 

 

 

6.8

%

 

 

(—

)%

 

 

6.8

%

Bureau recurring services, excluding float

 

 

25.7

 

 

 

32.9

 

 

 

(21.9

)%

 

 

(—

)%

 

 

(21.9

)%

Bureau float

 

 

1.1

 

 

 

3.5

 

 

 

(68.6

)%

 

 

(—

)%

 

 

(68.6

)%

Total Bureau recurring services

 

 

26.8

 

 

 

36.4

 

 

 

(26.4

)%

 

 

(—

)%

 

 

(26.4

)%

Bureau professional services and other

 

 

0.9

 

 

 

0.4

 

 

 

125.0

%

 

 

(—

)%

 

 

125.0

%

Total Bureau revenue

 

 

27.7

 

 

 

36.8

 

 

 

(24.7

)%

 

 

(—

)%

 

 

(24.7

)%

Total revenue

 

$

204.4

 

 

$

202.3

 

 

 

1.0

%

 

 

(0.1

)%

 

 

1.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dayforce

 

$

157.8

 

 

$

143.7

 

 

 

9.8

%

 

 

(—

)%

 

 

9.8

%

Powerpay

 

 

18.9

 

 

 

21.8

 

 

 

(13.3

)%

 

 

(0.5

)%

 

 

(12.8

)%

Total Cloud revenue

 

$

176.7

 

 

$

165.5

 

 

 

6.8

%

 

 

(—

)%

 

 

6.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dayforce, excluding float

 

$

150.2

 

 

$

131.9

 

 

 

13.9

%

 

 

(—

)%

 

 

13.9

%

Powerpay, excluding float

 

 

17.0

 

 

 

18.8

 

 

 

(9.6

)%

 

 

(0.6

)%

 

 

(9.0

)%

Cloud revenue, excluding float

 

 

167.2

 

 

 

150.7

 

 

 

10.9

%

 

 

(0.1

)%

 

 

11.0

%

Cloud float

 

 

9.5

 

 

 

14.8

 

 

 

(35.8

)%

 

 

(—

)%

 

 

(35.8

)%

Total Cloud revenue

 

$

176.7

 

 

$

165.5

 

 

 

6.8

%

 

 

(—

)%

 

 

6.8

%

 

(a)

We have calculated revenue on a constant currency basis by applying the average foreign exchange rate in effect during the comparable prior period.

Total revenue increased $2.1 million, or 1.0%, to $204.4 million for the three months ended September 30, 2020, compared to $202.3 million for the three months ended September 30, 2019. This increase was primarily attributable to an increase in Cloud revenue of $11.2 million, or 6.8%, from $165.5 million for the three months ended September 30, 2019, to $176.7 million for the three months ended September 30, 2020. The increase in Cloud revenue was partially offset by a decline in Bureau revenue of $9.1 million, or 24.7%. The Cloud revenue increase was driven by an increase of $10.3 million, or 7.9%, in Cloud recurring services revenue, and $0.9 million, or 2.6%, in Cloud professional services and other revenue. The increase in Cloud recurring services revenue of $10.3 million was due to $10.5 million from new customers, add-ons, and revenue uplift from migrations of Bureau customers, net of customer losses and $5.1 million from the migration of Bureau customers, partially offset by a $5.3 million decline in float revenue related to Cloud recurring services revenue.

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Table of Contents

 

The COVID-19 pandemic has had an adverse impact on our revenue streams during the three months ended September 30, 2020, primarily in the form of lower employment levels at our customers, lower float revenue resulting from reductions in the U.S. Federal Reserve federal funds rate and the Bank of Canada overnight rate target, lower average float balances for our customer trust funds, lower demand for professional services, and customer delays in implementation services, among other effects. We estimate the impact of lower employment levels at our customers was an approximately $10 million decline to our revenue for the three months ended September 30, 2020, of which approximately $8 million was related to Dayforce and approximately $2 million was related to Powerpay. In addition, we estimate the impact to float revenue was approximately $6 million for the three months ended September 30, 2020. Of the approximately $6 million impact on float revenue, approximately $4 million was due to rate reductions during the first quarter of 2020, and approximately $2 million was due to lower average float balances for our customer trust funds.

Cloud revenue was $176.7 million for the three months ended September 30, 2020, an increase of $11.2 million, or 6.8%, compared to the three months ended September 30, 2019. Dayforce revenue increased 9.8%, and Powerpay revenue declined 13.3% for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. Powerpay is designed primarily for small market Canadian customers, which typically have fewer than 20 employees, and these customers have been more adversely affected by the COVID-19 pandemic than larger Dayforce customers. Our new business sales to Dayforce and Powerpay customers comprised approximately 54% of our increase in Cloud revenue for the three months ended September 30, 2020, and approximately 46% consisted of customer migrations to Dayforce from our Bureau solutions. The percentage of new business sales compared to customer migrations was adversely affected by the impact of the COVID-19 pandemic on our revenues, as 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 of customer migrations to Dayforce from our Bureau solutions.

The decrease of new business sales from the comparable period, which comprised approximately 85% of our increase in Cloud revenue, was due to the adverse effect of the COVID-19 pandemic on our revenues. 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.

Bureau revenue declined $9.1 million, or 24.7%, for the three months ended September 30, 2020, which included approximately $7 million of Excelity revenue. Of the $9.1 million decline, approximately 56% was attributable to customer migrations to Dayforce. Excluding the impact of migrations to Dayforce, Bureau revenue declined by $4.0 million, or 10.9%, primarily attributable to a reduction of employment levels and float revenue due to the COVID-19 pandemic.

Excluding float revenue and on a constant currency basis, total revenue grew 5.4%, reflecting an 11.0% increase in Cloud revenue, partially offset by a 20.1% decline in Bureau revenue. Excluding float revenue and on a constant currency basis, Cloud revenue growth reflected a 13.5% increase in Cloud recurring services revenue and a 2.6% increase in Cloud professional services and other revenue. Excluding float revenue and on a constant currency basis, Dayforce revenue increased 13.9%, reflecting a 17.9% increase in Dayforce recurring service revenue and a 2.3% increase in Dayforce professional services and other revenue. Excluding float revenue and on a constant currency basis, Powerpay revenue declined 9.0%.

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Table of Contents

 

Float revenue included in recurring services revenue was $10.6 million and $18.3 million for the three months ended September 30, 2020, and 2019, respectively. Float revenue allocated to Cloud revenue was $9.5 million and $14.8 million, respectively, for the three months ended September 30, 2020, and 2019, respectively. The average float balance for our customer trust funds for the three months ended September 30, 2020, was $2,745.1 million, compared to $3,117.5 million for the three months ended September 30, 2019. On a constant currency basis, the average float balance for our customer trust funds for the three months ended September 30, 2020, declined 11.6% compared to the three months ended September 30, 2019. This decline was primarily attributable to lower payroll balances and associated tax payments as a result of the COVID-19 pandemic impact to employment levels at our customers. The average yield was 1.52% during the three months ended September 30, 2020, a decline of 81 basis points compared to the average yield during the three months ended September 30, 2019, primarily due to reductions in the U.S. Federal Reserve federal funds rate and the Bank of Canada overnight rate target. For the three months ended September 30, 2020 and 2019, approximately 39% of our average float balance consisted of Canadian customer trust funds. Based on current market conditions, portfolio composition and investment practices, a 100 basis point change in market investment rates would result in approximately $17 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, 2020, was $127.7 million, an increase of $14.2 million, or 12.5%, compared to the three months ended September 30, 2019. Recurring services cost of revenue for the three months ended September 30, 2020, increased $4.9 million, or 9.9%, compared with the three months ended September 30, 2019, primarily due to additional costs related to global expansion, including Excelity which is classified as a Bureau solution, and costs to support the growing Dayforce customer base. Professional services and other cost of revenue increased $2.6 million, or 6.9%, for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, primarily due to additional costs incurred to take new customers live.

Product development and management expense increased $5.4 million for the three months ended September 30, 2020, compared to the three months ended September 30, 2019. Excluding the impact of share-based compensation and related employer taxes, and severance expense; product development and management expense would have increased by $2.7 million.  This adjusted increase reflects additional personnel costs and Dayforce product development efforts that are not eligible for capitalization. For the three months ended September 30, 2020, and 2019, our investment in software development was $19.7 million and $17.4 million, respectively, consisting of $9.4 million and $8.7 million, of research and development expense, which is included within product development and management expense, and $10.3 million and $8.7 million in capitalized software development costs, respectively.

Depreciation and amortization expense associated with cost of revenue increased by $1.3 million for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, as we continue to capitalize Dayforce related and other development costs and subsequently to amortize these costs.

Gross profit. The following table presents total gross margin and solution gross margins for the periods presented:

 

 

 

Three Months Ended September 30,

 

 

 

2020

 

 

2019

 

Total gross margin

 

 

37.5

%

 

 

43.9

%

Gross margin by solution:

 

 

 

 

 

 

 

 

Cloud recurring services

 

 

70.4

%

 

 

70.2

%

Bureau recurring services

 

 

53.4

%

 

 

71.4

%

Professional services and other

 

 

(10.7

)%

 

 

(7.7

)%

 

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.

Total gross margin for the three months ended September 30, 2020, declined 6.4% compared to total gross margin for the three months ended September 30, 2019, and gross profit declined by $12.1 million, or 13.6%. The $12.1 million decline in gross profit was primarily attributable to the $7.7 million decline in float revenue for the three months ended September 30, 2020, compared to the three months ended September 30, 2019.

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Table of Contents

 

Cloud recurring services gross margin was 70.4% for the three months ended September 30, 2020, compared to 70.2% for the three months ended September 30, 2019. Excluding float revenue, Cloud recurring services gross margin was 68.3% for the three months ended September 30, 2020, compared to 66.4% for the three months ended September 30, 2019. The increase in Cloud recurring services gross margin, excluding float revenue, reflects an increase in the proportion of Dayforce customers live for more than two years, which increased from 68% as of September 30, 2019, to 74% as of September 30, 2020, and was also attributable to consistent configuration that has enabled us to continue to realize economies of scale in hosting and customer support. Bureau recurring services gross margin declined from 71.4% for the three months ended September 30, 2019, to 53.4% for the three months ended September 30, 2020, primarily due to lower Bureau recurring revenue, including lower high margin float revenue, as well as the acquisition of Excelity, which is classified as Bureau currently. Professional services and other gross margin was (10.7)% for the three months ended September 30, 2020, compared to (7.7)% for the three months ended September 30, 2019, reflecting additional costs incurred to take new customers live and lower utilization during the COVID-19 pandemic.

Selling, general, and administrative expense. Selling, general, and administrative expense was reduced by $5.0 million for the three months ended September 30, 2020, compared to the three months ended September 30, 2019. 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 by $4.1 million. This adjusted increase reflects an increase of $3.4 million in sales and marketing expense, primarily employee-related costs, and $0.7 million in general and administrative expense, primarily customer list amortization expense. Please refer to the “Non-GAAP Measures” section for additional information on the excluded items.

Interest expense, net. Interest expense, net was $5.9 million and $7.8 million for the three months ended September 30, 2020, and 2019, respectively, which was primarily due to a reduction in our term debt interest rate and a reduction in LIBOR rates generally, partially offset by increased debt outstanding under our revolving credit facility. A 100 basis point change in LIBOR rates would result in an approximately $10 million change in our interest expense, net over the ensuing twelve-month period.  

Other (income) expense, net. For the three months ended September 30, 2020, and 2019, we realized other income, net of $0.2 million and incurred other expense, net of $1.6 million, respectively. Other income, net was comprised of foreign currency translation gain, partially offset by net periodic pension expense for the three months ended September 30, 2020.  For the three months ended September 30, 2019, other expense, net was primarily comprised of net periodic pension expense.

Income tax benefit. For the three months ended September 30, 2020, and 2019, we recorded income tax benefit of $5.5 million and $65.6 million, respectively. The $60.1 million reduction in income tax benefit was primarily due to the $65.8 million tax benefit from the release of valuation allowance recognized during the three months ended September 30, 2019, that was not repeated during the three months ended September 31, 2020, and other increases of $0.6 million, partially offset by a $6.3 million reduction attributable to lower base erosion anti-abuse tax (“BEAT”) in the U.S.

Net (loss) income. We realized net loss of $0.8 million for the three months ended September 30, 2020, compared to net income of $62.7 million for the three months ended September 30, 2019, which included a one-time $65.8 million tax benefit.

Adjusted EBITDA. Adjusted EBITDA declined by $13.2 million to $33.2 million, for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, and Adjusted EBITDA margin was 16.2% for the three months ended September 30, 2020, compared with Adjusted EBITDA margin of 22.9% for the three months ended September 30, 2019. Please refer to the “Non-GAAP Measures” section for additional information on the excluded items.

 

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Table of Contents

 

Nine Months Ended September 30, 2020 Compared With Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Increase/ (Decrease)

 

 

% of Revenue

 

 

 

2020

 

 

2019

 

 

Amount

 

 

%

 

 

2020

 

 

2019

 

 

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud

 

$

425.9

 

 

$

378.7

 

 

$

47.2

 

 

 

12.5

%

 

 

68.7

%

 

 

62.9

%

Bureau

 

 

82.8

 

 

 

125.0

 

 

 

(42.2

)

 

 

(33.8

)%

 

 

13.4

%

 

 

20.8

%

Total recurring services

 

 

508.7

 

 

 

503.7

 

 

 

5.0

 

 

 

1.0

%

 

 

82.1

%

 

 

83.6

%

Professional services and other

 

 

111.0

 

 

 

98.6

 

 

 

12.4

 

 

 

12.6

%

 

 

17.9

%

 

 

16.4

%

Total revenue

 

 

619.7

 

 

 

602.3

 

 

 

17.4

 

 

 

2.9

%

 

 

100.0

%

 

 

100.0

%

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud

 

 

122.2

 

 

 

114.0

 

 

 

8.2

 

 

 

7.2

%

 

 

19.7

%

 

 

18.9

%

Bureau

 

 

33.6

 

 

 

35.0

 

 

 

(1.4

)

 

 

(4.0

)%

 

 

5.4

%

 

 

5.8

%

Total recurring services

 

 

155.8

 

 

 

149.0

 

 

 

6.8

 

 

 

4.6

%

 

 

25.1

%

 

 

24.7

%

Professional services and other

 

 

120.7

 

 

 

107.1

 

 

 

13.6

 

 

 

12.7

%

 

 

19.5

%

 

 

17.8

%

Product development and management

 

 

57.5

 

 

 

49.1

 

 

 

8.4

 

 

 

17.1

%

 

 

9.3

%

 

 

8.2

%

Depreciation and amortization

 

 

29.9

 

 

 

26.7

 

 

 

3.2

 

 

 

12.0

%

 

 

4.8

%

 

 

4.4

%

Total cost of revenue

 

 

363.9

 

 

 

331.9

 

 

 

32.0

 

 

 

9.6

%

 

 

58.7

%

 

 

55.1

%

Gross profit

 

 

255.8

 

 

 

270.4

 

 

 

(14.6

)

 

 

(5.4

)%

 

 

41.3

%

 

 

44.9

%

Selling, general, and administrative

 

 

226.1

 

 

 

217.8

 

 

 

8.3

 

 

 

3.8

%

 

 

36.5

%

 

 

36.2

%

Operating profit

 

 

29.7

 

 

 

52.6

 

 

 

(22.9

)

 

 

(43.5

)%

 

 

4.8

%

 

 

8.7

%

Interest expense, net

 

 

19.4

 

 

 

25.2

 

 

 

(5.8

)

 

 

(23.0

)%

 

 

3.1

%

 

 

4.2

%

Other expense, net

 

 

2.7

 

 

 

4.7

 

 

 

(2.0

)

 

 

(42.6

)%

 

 

0.4

%

 

 

0.8

%

Income before income taxes

 

 

7.6

 

 

 

22.7

 

 

 

(15.1

)

 

 

(66.5

)%

 

 

1.2

%

 

 

3.8

%

Income tax benefit

 

 

(5.7

)

 

 

(57.5

)

 

 

51.8

 

 

 

(90.1

)%

 

 

(0.9

)%

 

 

(9.5

)%

Net income

 

$

13.3

 

 

$

80.2

 

 

$

(66.9

)

 

 

(83.4

)%

 

 

2.1

%

 

 

13.3

%

Adjusted EBITDA (a)

 

$

125.9

 

 

$

140.2

 

 

$

(14.3

)

 

 

(10.2

)%

 

 

20.3

%

 

 

23.3

%

Adjusted EBITDA margin (a)

 

 

20.3

%

 

 

23.3

%

 

 

(3.0

)%

 

 

(12.8

)%

 

 

 

 

 

 

 

 

 

(a)

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

 

32


Table of Contents

 

Revenue. The following table sets forth certain information regarding our revenues for the nine months ended September 30, 2020, compared with the nine months ended September 30, 2019.

 

 

 

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)

 

 

 

2020

 

 

2019

 

 

2020 vs. 2019

 

 

 

 

 

 

2020 vs. 2019

 

 

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dayforce recurring services, excluding float

 

$

339.3

 

 

$

274.6

 

 

 

23.6

%

 

 

(0.3

)%

 

 

23.9

%

Dayforce float

 

 

30.0

 

 

 

40.1

 

 

 

(25.2

)%

 

 

(0.3

)%

 

 

(24.9

)%

Total Dayforce recurring services

 

 

369.3

 

 

 

314.7

 

 

 

17.3

%

 

 

(0.4

)%

 

 

17.7

%

Powerpay recurring services, excluding float

 

 

50.1

 

 

 

54.9

 

 

 

(8.7

)%

 

 

(0.9

)%

 

 

(7.8

)%

Powerpay float

 

 

6.5

 

 

 

9.1

 

 

 

(28.6

)%

 

 

(1.1

)%

 

 

(27.5

)%

Total Powerpay recurring services

 

 

56.6

 

 

 

64.0

 

 

 

(11.6

)%

 

 

(1.0

)%

 

 

(10.6

)%

Total Cloud recurring services

 

 

425.9

 

 

 

378.7

 

 

 

12.5

%

 

 

(0.4

)%

 

 

12.9

%

Dayforce professional services and other

 

 

108.8

 

 

 

96.3

 

 

 

13.0

%

 

 

(0.4

)%

 

 

13.4

%

Powerpay professional services and other

 

 

0.8

 

 

 

0.8

 

 

 

(—

)%

 

 

(—

)%

 

 

(—

)%

Total Cloud professional services and

   other

 

 

109.6

 

 

 

97.1

 

 

 

12.9

%

 

 

(0.4

)%

 

 

13.3

%

Total Cloud revenue

 

 

535.5

 

 

 

475.8

 

 

 

12.5

%

 

 

(0.5

)%

 

 

13.0

%

Bureau recurring services, excluding float

 

 

77.6

 

 

 

111.3

 

 

 

(30.3

)%

 

 

(0.3

)%

 

 

(30.0

)%

Bureau float

 

 

5.2

 

 

 

13.7

 

 

 

(62.0

)%

 

 

(0.7

)%

 

 

(61.3

)%

Total Bureau recurring services

 

 

82.8

 

 

 

125.0

 

 

 

(33.8

)%

 

 

(0.4

)%

 

 

(33.4

)%

Bureau professional services and other

 

 

1.4

 

 

 

1.5

 

 

 

(6.7

)%

 

 

(—

)%

 

 

(6.7

)%

Total Bureau revenue

 

 

84.2

 

 

 

126.5

 

 

 

(33.4

)%

 

 

(0.3

)%

 

 

(33.1

)%

Total revenue

 

$

619.7

 

 

$

602.3

 

 

 

2.9

%

 

 

(0.4

)%

 

 

3.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dayforce

 

$

478.1

 

 

$

411.0

 

 

 

16.3

%

 

 

(0.4

)%

 

 

16.7

%

Powerpay

 

 

57.4

 

 

 

64.8

 

 

 

(11.4

)%

 

 

(0.9

)%

 

 

(10.5

)%

Total Cloud revenue

 

$

535.5

 

 

$

475.8

 

 

 

12.5

%

 

 

(0.5

)%

 

 

13.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dayforce, excluding float

 

$

448.1

 

 

$

370.9

 

 

 

20.8

%

 

 

(0.4

)%

 

 

21.2

%

Powerpay, excluding float

 

 

50.9

 

 

 

55.7

 

 

 

(8.6

)%

 

 

(0.9

)%

 

 

(7.7

)%

Cloud revenue, excluding float

 

 

499.0

 

 

 

426.6

 

 

 

17.0

%

 

 

(0.4

)%

 

 

17.4

%

Cloud float

 

 

36.5

 

 

 

49.2

 

 

 

(25.8

)%

 

 

(0.4

)%

 

 

(25.4

)%

Total Cloud revenue

 

$

535.5

 

 

$

475.8

 

 

 

12.5

%

 

 

(0.5

)%

 

 

13.0

%

 

(a)

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

 

Total revenue increased $17.4 million, or 2.9%, to $619.7 million for the nine months ended September 30, 2020, compared to $602.3 million for the nine months ended September 30, 2019. This increase was primarily attributable to an increase in Cloud revenue of $59.7 million, or 12.5%, from $475.8 million for the nine months ended September 30, 2019, to $535.5 million for the nine months ended September 30, 2020. The Cloud revenue increase was driven by an increase of $47.2 million, or 12.5%, in Cloud recurring services revenue, and $12.5 million, or 12.9%, in Cloud professional services and other revenue. The increase in Cloud recurring services revenue of $47.2 million was due to $43.2 million from new customers, add-ons, and revenue uplift from migrations of Bureau customers, net of customer losses and $16.7 million from the migration of Bureau customers, partially offset by a decline of $12.7 million from float revenue related to Cloud recurring services revenue.

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The COVID-19 pandemic has had an adverse impact on our revenue streams during the nine months ended September 30, 2020, primarily in the form of lower employment levels at our customers, lower float revenue resulting from reductions in the U.S. Federal Reserve federal funds rate and the Bank of Canada overnight rate target, lower average float balances for our customer trust funds, lower demand for professional services, and customer delays in implementation services, among other effects. We estimate the impact of lower employment levels at our customers was an approximately $18 million decline to our revenue for the nine months ended September 30, 2020, of which approximately $13 million was related to Dayforce and approximately $5 million was related to Powerpay. In addition, we estimate the impact to float revenue was approximately $14 million for the nine months ended September 30, 2020. Of the approximately $14 million impact on float revenue, approximately $9 million was due to rate reductions during the first quarter of 2020, and approximately $5 million was due to lower average float balances for our customer trust funds.

Cloud revenue was $535.5 million for the nine months ended September 30, 2020, an increase of $59.7 million, or 12.5%, compared to the nine months ended September 30, 2019. Dayforce revenue increased 16.3%, and Powerpay revenue declined 11.4% for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. On a constant currency basis, Dayforce revenue increased 16.7%, and Powerpay revenue declined 10.5% for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. Powerpay is designed primarily for small market Canadian customers, which typically have fewer than 20 employees, and these customers have been more adversely affected by the COVID-19 pandemic than larger Dayforce customers.  Our new business sales to Dayforce and Powerpay customers comprised approximately 72% of our increase in Cloud revenue for the nine months ended September 30, 2020, and approximately 28% 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.

Bureau revenue declined $42.3 million, or 33.4% for the nine months ended September 30, 2020. Of the $42.3 million decline, approximately 40% was attributable to customer migrations to Dayforce. Excluding the impact of migrations to Dayforce, Bureau revenue declined by $25.6 million, or 20.2%.

Excluding float revenue and on a constant currency basis, total revenue grew 7.6%, reflecting a 17.4% increase in Cloud revenue, partially offset by a 29.7% decline in Bureau revenue. Excluding float revenue and on a constant currency basis, Cloud revenue growth reflected a 18.6% increase in Cloud recurring services revenue and a 13.3% increase in Cloud professional services and other revenue. Excluding float revenue and on a constant currency basis, Dayforce revenue increased 21.2%, reflecting a 23.9% increase in Dayforce recurring service revenue and a 13.4% increase in Dayforce professional services and other revenue. Excluding float revenue and on a constant currency basis, Powerpay revenue declined 7.7%.

Float revenue included in recurring services revenue was $41.7 million and $62.9 million for the nine months ended September 30, 2020, and 2019, respectively. Float revenue allocated to Cloud revenue was $36.5 million and $49.2 million for the nine months ended September 30, 2020, and 2019, respectively. The average float balance for our customer trust funds for the nine months ended September 30, 2020, was $3,269.7 million, compared to $3,524.9 million for the nine months ended September 30, 2019. On a constant currency basis, the average float balance for our customer trust funds declined 6.8% for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. The average yield was 1.70% during the nine months ended September 30, 2020, a decline of 69 basis points compared to the average yield in the nine months ended September 30, 2019. For the nine months ended September 30, 2020, approximately 34% of our average float balance consisted of Canadian customer trust funds, compared to approximately 36% for the nine months ended September 30, 2019. Based on current market conditions, portfolio composition and investment practices, a 100 basis point change in market investment rates would result in approximately $17 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, 2020, was $363.9 million, an increase of $32.0 million, or 9.6%, compared to the nine months ended September 30, 2019. Recurring services cost of revenue increased $6.8 million, or 4.6% for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, primarily due to additional costs related to global expansion, including Excelity, which is classified as a Bureau solution, and costs to support the growing Dayforce customer base. The increase in cost of revenue for professional services and other of $13.6 million, or 12.7% for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was primarily due to additional costs incurred to implement new customers.

Product development and management expense increased $8.4 million for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. Excluding the impact of share-based compensation and related employer taxes, and severance expense; product development and management expense would have increased by $4.3 million.  This adjusted increase reflects additional personnel costs and Dayforce product development efforts, including costs to build out the Dayforce Wallet and our international offerings that are not eligible for capitalization. For the nine months ended September 30, 2020, and 2019, our investment in software development was $53.9 million and $48.1 million, respectively, consisting of $25.1 million and $24.6 million, of research and development expense, which is included within product development and management expense, and $28.8 million and $23.5 million in capitalized software development, respectively.

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Depreciation and amortization expense associated with cost of revenue increased by $3.2 million for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, as we continue to capitalize Dayforce related and other development costs and subsequently amortize those costs.

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

 

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

Total gross margin

 

 

41.3

%

 

 

44.9

%

Gross margin by solution:

 

 

 

 

 

 

 

 

Cloud recurring services

 

 

71.3

%

 

 

69.9

%

Bureau recurring services

 

 

59.4

%

 

 

72.0

%

Professional services and other

 

 

(8.7

)%

 

 

(8.6

)%

 

Total gross margin for the nine months ended September 30, 2020, declined 3.6% compared to total gross margin for the nine months ended September 30, 2019, and gross profit declined $14.6 million.

Cloud recurring services gross margin was 71.3% for the nine months ended September 30, 2020, compared to 69.9% for the nine months ended September 30, 2019. Excluding float revenue, Cloud recurring service gross margin was 68.6% for the nine months ended September 30, 2020, compared to 65.4% for the nine months ended September 30, 2019. 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 68% as of September 30, 2019, to 74% as of September 30, 2020, and was also attributable to consistent configuration that has enabled us to realize economies of scale in customer support and hosting costs. Bureau recurring services gross margin declined from 72.0% for the nine months ended September 30, 2019, to 59.4% for the nine months ended September 30, 2020, primarily due to lower Bureau recurring revenue, including high margin float revenue. Professional services and other gross margin was (8.7)% for the nine months ended September 30, 2020, compared to (8.6)% for the nine months ended September 30, 2019.

Selling, general, and administrative expense. Selling, general, and administrative expense increased by $8.3 million for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. 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 by $2.8 million. This adjusted increase of $2.8 million reflects an increase of $8.7 million in sales and marketing, primarily personnel costs, partially offset by a $5.9 million reduction in general and administrative expense, primarily customer list amortization expense. Please refer to the “Non-GAAP Measures” section for additional information on the excluded items.

Interest expense. Interest expense was $19.4 million for the nine months ended September 30, 2020, compared to $25.2 million for the nine months ended September 30, 2019, which was primarily due to a reduction in our term debt interest rate and a reduction in LIBOR rates generally, partially offset by increased debt outstanding under our revolving credit facility. A 100 basis point change in LIBOR rates would result in an approximately $10 million change in our interest expense over the ensuing twelve-month period.

Other expense, net. For the nine months ended September 30, 2020 and 2019, other expense, net of $2.7 million and $4.7 million, respectively, was comprised of net periodic pension expense and foreign currency translation loss.

Income tax benefit. For the nine months ended September 30, 2020, and 2019, we recorded income tax benefit of $5.7 million and $57.5 million, respectively. The $51.8 million reduction in tax benefit was primarily due to the $65.8 million tax benefit from the release of the valuation allowance recognized during the nine months ended September 30, 2019, that was not repeated during the nine months ended September 30, 2020, partially offset by a $12.3 million reduction attributable to lower base erosion anti-abuse tax (“BEAT”) in the U.S., and a $1.8 million reduction attributable to unremitted foreign earnings.

Net income. Net income was $13.3 million for the nine months ended September 30, 2020, compared to $80.2 million for the nine months ended September 30, 2019, which included a one-time $65.8 million tax benefit.

Adjusted EBITDA. Adjusted EBITDA declined by $14.3 million to $125.9 million, for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, and Adjusted EBITDA margin was 20.3% for the nine months ended September 30, 2020, compared with 23.3% for the nine months ended September 30, 2019. Please refer to the “Non-GAAP Measures” section for additional information on the excluded items.

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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, 2020, we had cash and equivalents of $554.6 million. On April 2, 2020, in light of the current uncertainty in the global capital markets resulting from the COVID-19 pandemic, Ceridian elected to borrow $295.0 million under the 2018 Revolving Credit Facility as a precautionary measure to increase our cash position and to preserve financial flexibility. Our total debt balance was $970.8 million as of September 30, 2020.

On February 19, 2020, Ceridian completed the first amendment to the 2018 Senior Secured Credit Facility, in which the 2018 Term Debt interest rate was reduced from LIBOR plus 3.00% to LIBOR plus 2.50%. Further, the interest rate trigger under the applicable rating by Moody’s Investor Service was removed by the first amendment. The 50 basis point rate reduction will result in savings of approximately $3.4 million over the ensuing twelve-month period. Please refer to Note 7, “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, available cash and equivalents, and remaining availability under our revolving credit facility 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 indebtedness, 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 indebtedness 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.

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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,

 

 

 

2020

 

 

2019

 

 

 

(Dollars in millions)

 

Net cash provided by operating activities, excluding customer trust funds

 

$

36.1

 

 

$

43.4

 

Net cash used in investing activities, excluding customer trust funds

 

 

(114.8

)

 

 

(67.8

)

Net cash provided by financing activities, excluding customer trust funds

 

 

357.3

 

 

 

71.6

 

Effect of exchange rate changes on cash and equivalents

 

 

(5.3

)

 

 

5.9

 

Net increase in cash and equivalents

 

 

273.3

 

 

 

53.1

 

Cash and equivalents at beginning of period

 

 

281.3

 

 

 

217.8

 

Cash and equivalents at end of period

 

 

554.6

 

 

 

270.9

 

 

 

 

 

 

 

 

 

 

Net customer trust funds restricted cash provided by (used in) operating activities

 

 

11.2

 

 

 

(18.8

)

Net customer trust funds restricted cash provided by (used in) investing activities

 

 

291.1

 

 

 

(57.0

)

Net customer trust funds restricted cash used in financing activities

 

 

(601.4

)

 

 

(54.5

)

Effect of exchange rate changes on restricted cash and equivalents

 

 

(2.6

)

 

 

1.3

 

Net decrease in restricted cash and equivalents

 

 

(301.7

)

 

 

(129.0

)

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

 

 

1,377.3

 

 

 

888.5

 

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

 

 

1,075.6

 

 

 

759.5

 

 

 

 

 

 

 

 

 

 

Net decrease in cash, restricted cash, and equivalents

 

 

(28.4

)

 

 

(75.9

)

Cash, restricted cash, and equivalents at beginning of period

 

 

1,658.6

 

 

 

1,106.3

 

Cash, restricted cash, and equivalents at end of period

 

$

1,630.2

 

 

$

1,030.4

 

 

Operating Activities

Net cash provided by operating activities, excluding customer trust fund activity, was $36.1 million during the nine months ended September 30, 2020, primarily attributable to net income of $13.3 million and the net impact of adjustments for certain non-cash items of $87.2 million, including $46.3 million of non-cash share-based compensation expense and $36.9 million of depreciation and amortization. These items were partially offset by net working capital reductions of $64.4 million, which included a $20.1 million net change in other assets and liabilities primarily due to deferred commissions and contract assets, a $12.0 million reduction in accounts payable and other current assets due to timing of payments, an $8.7 million reduction of accrued taxes, primarily due to cash tax payments partially offset by additional provision accruals, and an $8.0 million increase in prepaid expenses and other current assets, primarily due to payments for annual maintenance contracts. Included within net cash flows provided by operating activities for the nine months ended September 30, 2020, was $20.5 million in cash interest payments on our long-term debt and $1.9 million in cash tax payments, net of refunds.

Net cash provided by operating activities, 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 and the net impact of adjustments for certain non-cash items of $6.0, including $75.9 million of deferred income tax benefit, offset by $43.9 million of depreciation and amortization and $26.0 million of non-cash share-based compensation expense, partially offset by net working capital reductions of $37.3 million, which included reductions of $18.5 million in liabilities for employee compensation and benefits, primarily due to payments of accrued incentive compensation and 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 payments for 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.

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Investing Activities

During the nine months ended September 30, 2020, net cash used in investing activities, excluding customer trust fund activity, was $114.8 million, related to acquisition costs, net of cash acquired of $70.6 million and capital expenditures of $44.2 million. Our capital expenditures included $30.6 million for software and technology and $13.6 million for property and equipment.

During the nine months ended September 30, 2019, net cash used in investing activities, 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.

Financing Activities

Net cash provided by financing activities, excluding the change in customer trust fund obligations, was $357.3 million during the nine months ended September 30, 2020. This cash inflow is primarily attributable to proceeds from a draw on the 2018 Revolving Credit Facility of $295.0 million and proceeds from the issuance of common stock upon exercise of stock options of $70.2 million, partially offset by payments on our long-term debt obligations of $7.9 million. The payments on our long-term debt obligations included $5.1 million in principal payments towards our 2018 Term Loan and $2.8 million in payments towards our financing lease obligations.

Net cash provided by financing activities, 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 upon exercise of stock options of $76.7 million, partially offset by principal payments on our long-term debt obligations of $5.1 million.

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 10, “Revenue,” to our condensed consolidated financial statements for further discussion of our remaining performance obligations.

Off-Balance Sheet Arrangements

As of September 30, 2020, 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

During the nine months ended September 30, 2020, there were no significant changes to our critical accounting policies and estimates as described in the consolidated financial statements contained in our 2019 Form 10-K.

Non-GAAP Measures

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 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 before interest, taxes, depreciation, and amortization, as adjusted to exclude 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, 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.  

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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 net income, 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 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 that Adjusted EBITDA and Adjusted EBITDA margin do not reflect the following:

 

our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

changes in, or cash requirements for, our working capital needs;

 

any charges for the assets being depreciated and amortized that may need to be replaced in the future;

 

the impact of share-based compensation and related employer taxes upon our results of operations;

 

the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;

 

our income tax expense or the cash requirements to pay our income taxes; and

 

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.

The following table reconciles net income to Adjusted EBITDA for the periods presented:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(Dollars in millions)

 

Net (loss) income

 

$

(0.8

)

 

$

62.7

 

 

$

13.3

 

 

$

80.2

 

Interest expense, net

 

 

5.9

 

 

 

7.8

 

 

 

19.4

 

 

 

25.2

 

Income tax benefit

 

 

(5.5

)

 

 

(65.6

)

 

 

(5.7

)

 

 

(57.5

)

Depreciation and amortization

 

 

13.0

 

 

 

14.9

 

 

 

36.9

 

 

 

43.9

 

EBITDA (a)

 

 

12.6

 

 

 

19.8

 

 

 

63.9

 

 

 

91.8

 

Intercompany foreign exchange (gain) loss

 

 

(1.2

)

 

 

0.3

 

 

 

0.1

 

 

 

0.8

 

Share-based compensation (b)

 

 

19.3

 

 

 

11.4

 

 

 

48.5

 

 

 

27.0

 

Severance charges (c)

 

 

2.2

 

 

 

0.8

 

 

 

6.9

 

 

 

4.4

 

Restructuring consulting fees (d)

 

 

0.3

 

 

 

1.5

 

 

 

6.9

 

 

 

3.6

 

Other non-recurring charges (e)

 

 

 

 

 

12.6

 

 

 

(0.4

)

 

 

12.6

 

Adjusted EBITDA

 

$

33.2

 

 

$

46.4

 

 

$

125.9

 

 

$

140.2

 

Adjusted EBITDA margin

 

 

16.2

%

 

 

22.9

%

 

 

20.3

%

 

 

23.3

%

 

(a)

We define EBITDA as net income or loss before interest, taxes, and depreciation and amortization.

(b)

Represents share-based compensation expense and related employer taxes.

(c)

Represents costs for severance compensation paid to employees whose positions have been eliminated or who have been terminated not for cause.

(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 (recovery) loss on unrecovered duplicate payments associated with an isolated service incident. Please refer to Note 14, “Commitments and Contingencies,” for further discussion.

 

 

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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, 2020

 

 

 

As reported

 

 

Share-based

compensation

 

 

Severance

charges

 

 

Other

operating

expenses (a)

 

 

Adjusted

 

 

 

(Dollars in millions)

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

$

54.3

 

 

$

1.8

 

 

$

0.8

 

 

$

 

 

$

51.7

 

Professional services and other

 

 

40.2

 

 

 

1.0

 

 

 

 

 

 

 

 

 

39.2

 

Product development and management

 

 

22.9

 

 

 

2.9

 

 

 

0.8

 

 

 

 

 

 

19.2

 

Depreciation and amortization

 

 

10.3

 

 

 

 

 

 

 

 

 

 

 

 

10.3

 

Total cost of revenue

 

 

127.7

 

 

 

5.7

 

 

 

1.6

 

 

 

 

 

 

120.4

 

Sales and marketing

 

 

39.5

 

 

 

2.0

 

 

 

0.4

 

 

 

 

 

 

37.1

 

General and administrative

 

 

37.8

 

 

 

11.6

 

 

 

0.2

 

 

 

0.3

 

 

 

25.7

 

Operating (loss) profit

 

 

(0.6

)

 

 

19.3

 

 

 

2.2

 

 

 

0.3

 

 

 

21.2

 

Other expense, net

 

 

(0.2

)

 

 

 

 

 

 

 

 

(1.2

)

 

 

1.0

 

Depreciation and amortization

 

 

13.0

 

 

 

 

 

 

 

 

 

 

 

 

13.0

 

EBITDA

 

$

12.6

 

 

$

19.3

 

 

$

2.2

 

 

$

(0.9

)

 

$

33.2

 

 

(a)

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

 

 

 

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

 

$

19.8

 

 

$

11.4

 

 

$

0.8

 

 

$

14.4

 

 

$

46.4

 

 

(a)

Other operating expenses includes intercompany foreign exchange loss, restructuring consulting fees, and other non-recurring charges.

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Nine Months Ended September 30, 2020

 

 

 

As reported

 

 

Share-based

compensation

 

 

Severance

charges

 

 

Other

operating

expenses (a)

 

 

Adjusted

 

 

 

(Dollars in millions)

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring services

 

$

155.8

 

 

$

4.5

 

 

$

1.6

 

 

$

 

 

$

149.7

 

Professional services and other

 

 

120.7

 

 

 

2.5

 

 

 

0.9

 

 

 

 

 

 

117.3

 

Product development and management

 

 

57.5

 

 

 

5.2

 

 

 

1.2

 

 

 

 

 

 

51.1

 

Depreciation and amortization

 

 

29.9

 

 

 

 

 

 

 

 

 

 

 

 

29.9

 

Total cost of revenue

 

 

363.9

 

 

 

12.2

 

 

 

3.7

 

 

 

 

 

 

348.0

 

Sales and marketing

 

 

116.2

 

 

 

6.0

 

 

 

1.4

 

 

 

 

 

 

108.8

 

General and administrative

 

 

109.9

 

 

 

30.3

 

 

 

1.8

 

 

 

6.5

 

 

 

71.3

 

Operating profit

 

 

29.7

 

 

 

48.5

 

 

 

6.9

 

 

 

6.5

 

 

 

91.6

 

Other expense, net

 

 

2.7

 

 

 

 

 

 

 

 

 

0.1

 

 

 

2.6

 

Depreciation and amortization

 

 

36.9

 

 

 

 

 

 

 

 

 

 

 

 

36.9

 

EBITDA

 

$

63.9

 

 

$

48.5

 

 

$

6.9

 

 

$

6.6

 

 

$

125.9

 

 

(a)

Other operating expenses includes intercompany foreign exchange loss, restructuring consulting fees, and other non-recurring charges.

 

 

 

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

 

$

91.8

 

 

$

27.0

 

 

$

4.4

 

 

$

17.0

 

 

$

140.2

 

 

(a)

Other operating expenses includes intercompany foreign exchange loss, restructuring consulting fees, and other non-recurring charges.

 

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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. These market risks may be amplified by events and factors surrounding the COVID-19 pandemic. 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 may 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 unrecoverable.

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 October 2020, we contributed $105.0 million to the U.S. pension plan, which represented $17.0 million of required minimum contributions and $88.0 million of voluntary contributions. In 2019, we contributed $18.0 million to our U.S. pension plan. The effective discount rate used in accounting for pension and other benefit obligations in 2019 ranged from 2.52% to 2.81%. The expected rate of return on plan assets for qualified pension benefits in 2020 is 5.70%.

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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, 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 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.

Changes in Internal Control over Financial Reporting

There were no changes to our internal controls over financial reporting during the three months ended September 30, 2020, that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION

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 14, “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

In addition to the other information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes in the Company's risk factors from those disclosed in Part I, Item 1A, of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 with the exception of the items listed below.

Our business has been adversely affected and will likely continue to be adversely affected by the COVID-19 pandemic.

The global spread of the COVID-19 pandemic has created significant global volatility, uncertainty, and economic disruption. The COVID-19 pandemic began to adversely affect our operations in March 2020.  The extent to which the COVID-19 pandemic will continue to adversely affect our business, operations, and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including but not limited to:

 

the duration and scope of the pandemic;

 

governmental, business, and individuals’ actions that have been and continue to be taken in response to the pandemic;

 

the impact of the pandemic on economic activity and actions taken in response;

 

the declining employment levels of our customers;

 

the effect on our customers’ demand for or the delays in implementing our services;

 

our ability to sell and to provide our services to our current and future customers, including as a result of travel restrictions and people working from home;

 

the ability of our customers to pay for our services or to make us whole for advances of earned net wages and associated tax amounts made on their behalf by us; and

 

our ability to safely and efficiently navigate our employees’ return to the workplace and adapt to the evolving business environment resulting from the COVID-19 pandemic.

Existing or potential customers have and may continue to reduce employee headcount, to slow down decision-making, to delay planned work, or to seek to modify existing agreements, especially those customers significantly adversely affected by the pandemic’s economic impact in areas where we have significant concentrations, including the retail and hospitality sectors.

Further, the effects of the pandemic have and may continue to reduce our float revenue as our customers employ fewer employees and as governments take actions to stimulate the global economy, such as the U.S. Federal Reserve and Bank of Canada lowering interest rates. A sustained downturn in the financial markets and asset values may have the effect of reducing our float revenue, or limiting our ability to liquidate securities held in our customer trust funds. The effects of the pandemic, including remote working arrangements for employees, may also impact our financial reporting systems and internal control over financial reporting, including our ability to ensure information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.  

Any of these consequences of the pandemic could cause or contribute to the risks and uncertainties enumerated in the Form 10-K.  As we cannot predict the duration or scope of the COVID-19 pandemic, the anticipated negative financial impact to our business, financial condition, results of operations and/or stock price cannot be reasonably estimated, but could be material and could last for an extended period of time. 

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Our quarterly results of operations may fluctuate significantly and may not fully reflect the underlying performance of our business.

Our quarterly results of operations, including the levels of our revenues, gross margin, profitability, cash flow, and deferred revenue, may vary significantly in the future, and period-to-period comparisons of our results of operations may not be meaningful. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control, and as a result, may not fully reflect the underlying performance of our business. Fluctuation in quarterly results may negatively impact the value of our common stock. Factors that may cause fluctuations in our quarterly financial results include, without limitation:

 

our ability to attract new Cloud customers;

 

our ability to replace declining Bureau revenue with Cloud revenue;

 

the addition or loss of large Cloud customers, including through acquisitions or consolidations;

 

the addition or loss of employees by our Cloud customers;

 

the timing and number of paydays in a period;

 

the adoption of the Dayforce Wallet by customers and their employees;

 

the losses, if any, caused by customer failure to repay advances we make on their behalf for our Dayforce Wallet or other services;

 

the timing of recognition of revenues;

 

the tenure of our Cloud customers during that period;

 

the amount and timing of operating expenses related to the maintenance and expansion of our business, operations, and infrastructure;

 

network outages or security breaches;

 

general economic, industry, and market conditions;

 

customer renewal rates;

 

increases or decreases in the number of elements of our services or pricing changes upon any renewals of customer agreements;

 

changes in our pricing policies or those of our competitors;

 

the mix of applications sold during a period;

 

seasonal variations in sales of our applications, which has historically been highest in the fourth quarter of a calendar year;

 

fluctuation in market interest rates, which impacts debt interest expense as well as float revenue;

 

the timing and success of new application and service introductions by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers, or strategic partners; and

 

the impact of new accounting rules.

 

Our Dayforce Wallet program presents the potential for our employer customers or employee customers to become the victim of fraud or other similar illegal behavior.

As part of the Dayforce Wallet program, our third-party financial institution partner will issue payroll cards and execute transactions for each Dayforce Wallet account. These transactions give rise to the potential for fraud against our employer customers or employee customers when they are used for bill payments, purchases and peer-to-peer transfers. Our third-party financial institution partner has responsibility for managing potential payment fraud to which the Dayforce Wallet users are subject. If any of our employer customers or employee customers become victims of fraud or similar illegal behavior, we might face legal liabilities and other losses that could have a material adverse effect on our business, financial condition, and results of operations.

Our solutions and our business are subject to a variety of U.S. and international laws and regulations, including those regarding privacy, data protection, and information security. Any failure by us or our third party service providers, as well as the failure of our platform or services, to comply with applicable laws and regulations could have a material adverse effect on our business, financial condition, and results of operations.

We are subject to a variety of U.S. and international laws and regulations, including regulation by various federal government agencies, including the FTC, and state and local agencies.

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Privacy and Data Protection Laws

The United States and various state and foreign governments have adopted or proposed limitations on, or requirements regarding, the collection, distribution, use, security, and storage of personal identifiable information (“PII”) of individuals; and the FTC and many state attorneys general are applying federal and state consumer protection laws to impose standards on the online collection, use and dissemination of data. Self-regulatory obligations, other industry standards, policies, and other legal obligations may apply to our collection, distribution, use, security, or storage of PII or other data relating to individuals. In addition, most states and some foreign governments have enacted laws requiring companies to notify individuals of data security breaches involving certain types of PII. These obligations may be interpreted and applied in an inconsistent manner from one jurisdiction to another and may conflict with one another, other regulatory requirements, or our internal practices. Any failure or perceived failure by us to comply with U.S., E.U., or other foreign privacy or security laws, regulations, policies, industry standards, or legal obligations, or any security incident that results in the unauthorized access to, or acquisition, release, or transfer of, PII may result in governmental enforcement actions, litigation, fines and penalties, or adverse publicity and could cause our customers to lose trust in us, which could harm our reputation and have a material adverse effect on our business, financial condition, and results of operations.

We expect that there will continue to be new proposed laws, regulations, and industry standards concerning privacy, data protection and information security in the United States, Canada, the European Union, and other jurisdictions, and we cannot yet determine the impact such future laws, regulations, and standards may have on our business. For example, in May 2018, the General Data Protection Regulation came into force, bringing with it a complete overhaul of E.U. data protection laws: the new rules supersede E.U. data protection legislation, impose more stringent E.U. data protection requirements, and provide for greater penalties for non-compliance. Changing definitions of what constitutes PII may also limit or inhibit our ability to operate or to expand our business, including limiting strategic partnerships that may involve the sharing of data. Also, some jurisdictions require that certain types of data be retained on servers within these jurisdictions. Our failure to comply with applicable laws, directives, and regulations may result in enforcement action against us, including fines and imprisonment, and damage to our reputation, any of which may have an adverse effect on our business and operating results. Further, the E.U. requires that certain data transfer mechanisms be put in place before PII can be transferred from the E.U. to another jurisdiction. These validity of these mechanisms- namely the Privacy Shield, which permits US-based participating companies such as Ceridian to move PII from the E.U. to the US; and the EU Standard Contractual Clauses, which Ceridian uses extensively- continue to be challenged by civil society before E.U. regulators and courts of law. Should these mechanisms be invalidated, Ceridian may not be able to transfer customers’ PII and its own from Europe to the U.S. and other jurisdictions to run its business and deliver services to customers.  

If our service is perceived to cause, or is otherwise unfavorably associated with, violations of privacy or data security requirements, it may subject us or our customers to public criticism and potential legal liability. Public concerns regarding PII processing, privacy and security may cause some of our customers’ end users to be less likely to visit their websites or otherwise interact with them. If enough end users choose not to visit our customers’ websites or otherwise interact with them, our customers could stop using our platform. This, in turn, may reduce the value of our services and slow or eliminate the growth of our business. Existing and potential privacy laws and regulations concerning privacy and data security and increasing sensitivity of consumers to unauthorized processing of PII may create negative public reactions to technologies, products, and services such as ours.

Evolving and changing definitions of what constitutes PII and / or “Personal Data” within the United States, Canada, the European Union, and elsewhere, especially relating to the classification of internet protocol, or IP addresses, machine or device identification numbers, location data and other information, may limit or inhibit our ability to operate or to expand our business. Future laws, regulations, standards and other obligations could impair our ability to collect or to use information that we utilize to provide email delivery and marketing services to our customers, thereby impairing our ability to maintain and to grow our customer base and to increase revenue. Future restrictions on the collection, use, sharing, or disclosure of our customers’ data or additional requirements for express or implied consent of customers for the use and disclosure of such information may limit our ability to develop new services and features.

Financial Services Laws

The United States and various state and foreign governments have adopted regulations which may be applicable to our Dayforce Wallet or other services with which we and/or or our third-party providers must comply. The obligations include undertakings imposed, for example, by state money transmission laws, commercial lending laws, the Office of Foreign Asset Control, the Bank Secrecy Act, Gramm-Leach-Bliley Act and the National Automated Clearing House Association. Any failure or perceived failure by us or one of our third party providers to comply with financial services laws, regulations, policies, industry standards, or legal obligations, may result in governmental enforcement actions, litigation, fines and penalties, or adverse publicity, and could cause our customers to lose trust in us, which could harm our reputation and have a material adverse effect on our business, financial condition, and results of operations.

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We rely on third party service providers for many aspects of our business, including, but not limited to, the operation of data centers; the execution of Automated Clearing House, or ACH, and wire transfers to support our customer payroll and tax services; the monitoring of applicable laws; the printing and delivery of checks; serving as an independent trustee of our U.S. client funds trust; and providing program management and other financial related services for our Dayforce Wallet program. If any third-party service providers on which we rely experience a disruption, go out of business, experience a decline in quality, or terminate their relationship with us, we could experience a material adverse effect on our business, financial condition, and results of operation.

We rely on third party service providers for many integral aspects of our business. A failure on the part of any of our third-party service providers to fulfill their contracts with us could result in a material adverse effect on our business, financial condition, and results of operation. We depend on our third parties for many services, including, but not limited to:

Upkeep of data centers

We host Dayforce and Powerpay applications and serve all of our customers from data centers operated by third party providers, primarily NaviSite, in Boston, Massachusetts; Redhill, England; Santa Clara, California; Toronto, Canada; Vancouver, Canada; Woking, England; Sydney, Australia; London, England; and Oregon. We also host Dayforce Australia in Microsoft Azure in Melbourne, Australia and Sydney, Australia. While we control and have access to our servers and all of the components of our network that are located in our external data centers, we do not control the operation of these facilities. The owners of our data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. These parties may also seek to cap their maximum contractual liability resulting in us being financially responsible for losses caused by their actions or omissions. Additionally, we host our internal systems through data centers that we operate and lease or own in Atlanta, Georgia; Fountain Valley, California; Louisville, Kentucky; and St. Petersburg, Florida. If we are unable to renew our agreements with our third party providers or to renew our leases on commercially reasonable terms, or if one of our data center operators is acquired, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur significant costs and possible service interruption in connection with any such transfer. Both our third party data centers and data centers that we lease and operate are subject to break-ins, sabotage, intentional acts of vandalism, and other misconduct. Any such acts could result in a breach of the security of our or our customers’ data.

Problems faced by our third party data center locations, with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Our third party data centers operators could decide to close their facilities without adequate notice. In addition, any financial difficulties, such as bankruptcy, faced by our third party data centers operators or any of the service providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict. Additionally, if our data centers are unable to keep up with our growing needs for capacity, this could adversely affect the growth of our business. Any changes in third party service levels at our data centers or any security breaches, errors, defects, disruptions, or other performance problems with our applications could adversely affect our reputation, damage our customers’ stored files, result in lengthy interruptions in our services, or otherwise result in damage or losses to our customers for which they may seek compensation from us. Interruptions in our services might reduce our revenues, cause us to issue refunds to customers for prepaid and unused subscription services, subject us to potential liability, or adversely affect our renewal rates.

Processing of electronic funds transfers

We currently have agreements with four banks in the United States, two banks in Canada, and one financial payments company in the United Kingdom to execute electronic funds transfers to support our customer payroll and tax services in the United States, Canada, and the United Kingdom. If one or more of these parties fails to process electronic funds transfers on a timely basis, or at all, then our relationship with our customers could be harmed and we could be subject to claims by a customer with respect to the failed transfers, with little or no recourse to the banks. In addition, these parties have no obligation to renew their agreements with us on commercially reasonable terms, or at all, and transferring to alternative providers could prove time-consuming and costly. If these parties terminate their relationships with us, restrict or fail to increase the dollar amounts of funds that they will process on behalf of our customers, their doing so may impede our ability to process funds and could have a material adverse effect on our business, financial condition, and results of operations.

Check printing and delivery

In Canada, we rely on a third party vendor to print payroll checks, and in Canada and the United States we rely on third party couriers, such as Federal Express and Purolator, to ship printed reports, year-end slips, and pay checks to our customers. Relying on third party check printers and couriers puts us at risk from disruptions in their operations, such as employee strikes, inclement weather, and their ability to perform tasks on our behalf. If these vendors fail to perform their tasks, we could incur liability or suffer damages to our reputation, or both. If we are forced to use other third party couriers, transferring to these competitor couriers could prove time-consuming, our costs could increase and we may not be able to meet shipment deadlines. Moreover, we may not be able to obtain terms as favorable as those we currently use, which could further increase our costs.

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Monitoring of changes to applicable laws

We and our third party providers must monitor for any changes or updates in laws that are applicable to the solutions that we or our third party providers provide to our customers. In addition, we are reliant on our third party providers to modify the solutions that they provide to our customers to enable our clients to comply with changes to such laws and regulations. If our third party providers fail to reflect changes or updates in applicable laws in the solutions that they provide to our customers, we could be subject to negative customer experiences, harm to our reputation, loss of customers, claims for any fines, penalties or other damages suffered by our customers, and other financial harm.

Trustee of U.S. client funds trust

In the United States, we rely on a state-chartered trust company to serve as the independent trustee of our clients’ funds trust. Our client funds are held in accounts in the name of the clients’ fund trust and our independent trustee, in order to maintain bankruptcy remoteness of those funds from us.  We rely on our independent trustee to maintain regulatory compliance with all applicable laws. It may be difficult to find a replacement trustee for our clients’ funds trust in the event the trustee terminates its relationship with us or fails to perform under our agreement with the trustee. If that were to occur, we may be unable to provide the Dayforce Wallet or our standard payroll services to our customers and their employees, which could harm our relationship with our customers and their employees, could subject us to claims by a customer, their employees, and regulatory sanctions with respect to the failure, and could result in a material adverse effect on our business, financial condition, and results of operations.

Program manager of our U.S. Dayforce Wallet program

We rely on a third party financial institution to serve as the issuing bank, the program manager and perform other financial related services with respect to our Dayforce Wallet product. In that regard, the third party financial institution, among other things, maintains our omnibus wallet funds account and performs the necessary regulatory and payments processing activity required by the Dayforce Wallet platform. We do not have the necessary regulatory approvals to hold wallet funds in or move funds from an account, nor do we have access to the payment systems needed to move the funds from the omnibus wallet funds account and the omnibus card holder account. As a result, if our third party financial institution partner fails to perform under our agreement with it, or terminates its agreement with us, we may be unable to provide the Dayforce Wallet service to our customers until we enter into a new relationship with a new third party financial institution, which could harm our relationship with our customers and their employees, could subject us to claims by a customer, their employees, and regulatory sanctions with respect to the failure, and could result in a material adverse effect on our business, financial condition, and results of operations.

A failure on the part of any of our third party service providers could result in a material adverse effect on our business, financial condition, and results of operations.

 

For our Dayforce Wallet service, we advance earned net wages and associated tax amounts on behalf of customers in connection with the “on demand pay” payroll feature of the service in order to provide their employees access to earned wages in advance of their standard payroll cycles. A customer may fail to satisfy its obligation to repay us for those advanced monies which could have a material adverse effect on our business, financial condition, and results of operations.

In contrast to our standard payroll processing business where a customer’s account is generally debited prior to any disbursement on its behalf, in the case of our “on demand pay” service, credit is provided to our customers and funds are advanced on the customers’ behalf in order to fund the customers’ employees’ interim earned net wage payroll demands (including associated source and other deductions) with the requirement that the customers will repay the advance on the date of their ordinary payroll run. These advances may or may not have priority over other creditors of our customers, and our security interest and/or other credit protection measures may be inadequate to make us whole. There is, therefore, a risk that our customers do not pay back the amounts we have already paid on their behalf, and in that event, we may possess limited legal recourse to recoup those funds from our customers. In the event of a customer’s failure to repay us, we may be required to seek additional sources of short-term liquidity, which may not be available on reasonable terms, or suffer credit losses, which could have a material adverse effect on our business, financial condition, and results of operations.

Regulatory requirements placed on our software and services could impose increased costs on us, delay or prevent our introduction of new products and services, and impair the function or value of our existing products and services.

Our existing products and services may become subject to increasing regulatory requirements, or our new products and services may subject us to increased regulatory requirements, and as these requirements proliferate, we may be required to change or adapt our products and services to comply. Changing regulatory requirements might render our products and services obsolete or might block us from developing new products and services. New products or services, such as the Dayforce Wallet, in turn subject us to incrementally new regulatory requirements, such as the need to obtain, maintain and comply with commercial lending licenses or other requirements

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in certain jurisdictions. These increased regulatory demands might in turn impose additional costs upon us to comply or to further develop our products and services. It might also make introduction of new products and services more costly or more time-consuming than we currently anticipate and could even prevent introduction by us of new products or services or cause the continuation of our existing products or services to become more costly. Accordingly, such regulatory requirements could have a material adverse effect on our business, financial condition, and results of operations.

Catastrophic events may disrupt our business.

Our data centers are located in Atlanta, Georgia; Fountain Valley, California; Louisville, Kentucky; St. Petersburg, Florida. Additionally, our data centers hosted by third parties and our corporate offices are located in Boston, Massachusetts; Melbourne, Australia; Minneapolis, Minnesota; Redhill, England; Santa Clara, California; Sydney, Australia; Toronto, Canada; Vancouver, Canada; Woking, England; London, England; and Oregon. Any location in any part of the world is susceptible to natural disasters or other risks beyond our control and its third party contractors that could impact operations. For example, the west coast of the United States contains active earthquake zones, the Midwest is subject to periodic tornadoes, and the east coast is subject to seasonal hurricanes and snowstorms. Additionally, we employ a substantial number of employees located in the Republic of Mauritius, which is subject to seasonal hurricanes, and the geographic remoteness of the location may create additional delays in recovery from any catastrophic event. Additionally, we rely on our network and third party infrastructure and enterprise applications, internal technology systems, and our website for our development, marketing, operational support, hosted services and sales activities. In the event of a major earthquake, tornado, hurricane, pandemic or other public health emergency or catastrophic event, such as fire, power loss, telecommunications failure, cyber-attack, war, or terrorist attack in any of our domestic or international locations, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our application development, lengthy interruptions in our services, breaches of data security and loss of critical data, all of which could have a material adverse effect on our business, financial condition, and results of operations.

Customer funds and wage funds of their employees that our trustees and third-party financial institution partners hold in trust are subject to market, interest rate, credit, and liquidity risks. The loss of these funds could have a material adverse effect on our business, financial condition, and results of operations.

Both our trustees (in the case of customer funds held in our U.S. clients’ funds trust and our Canada payroll trust) and our third party financial institution partner (in the case of employee wage funds held on their behalf as part of the U.S. Dayforce Wallet program) may invest funds in one of more of the following high-quality bank deposits, money market mutual funds, commercial paper, collateralized short-term investments, 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. Nevertheless, these assets are subject to general market, interest rate, credit, and liquidity risks. These risks may be exacerbated, individually or in unison, during periods of unusual financial market volatility. We are required to fund the payroll and wage funds of our customers and their employees regardless of any loss realized on those investments affecting the principal funds held. In the event of a global financial crisis, such as that experienced in 2008, we could be faced with a severe constriction of the availability of liquidity, which could impact our ability to fund payrolls. Any loss of principal, or inability to access customer funds could have an adverse impact on our cash position and results of operations and could require us to obtain additional sources of liquidity, and 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.

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ITEM 6. EXHIBITS

(a) Exhibits

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

 

Exhibit No.

 

Description 

 

 

 

  10.1*

 

Separation, Release and Consulting Agreement, dated July 2, 2020, by and among Ceridian HCM Holding, Inc., Ceridian Dayforce Inc. and Ozzie Goldschmied (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on July 2, 2020).

 

 

 

10.2**

 

Employment Agreement, dated September 15, 2020, by and between Noémie C. Heuland and Ceridian HCM, Inc.

 

 

 

  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**

 

Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

 

 

 

101.SCH**

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL**

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF**

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB**

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE**

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104**

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

*

Management compensatory plan or arrangement.

**

Filed herewith.

 

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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 5, 2020

By:

/s/ David D. Ossip

 

 

Name:

David D. Ossip

 

 

Title:

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

Date: November 5, 2020

By:

/s/ Noémie Heuland

 

 

Name:

Noémie Heuland

 

 

Title:

Executive Vice President and Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

 

 

 

 

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