Ceridian(CDAY) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (unaudited) The unaudited statements detail financial position, performance, and cash flows for the periods ended June 30, 2020 Condensed Consolidated Balance Sheets The balance sheet shows total assets of $5.85 billion, with increased cash and decreased customer trust funds Condensed Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and equivalents | $526.9 | $281.3 | | Customer trust funds | $2,659.8 | $3,204.1 | | Goodwill | $2,004.5 | $1,973.5 | | Total assets | $5,853.9 | $6,085.7 | | Liabilities & Equity | | | | Customer trust funds obligations | $2,594.8 | $3,193.6 | | Long-term debt, less current portion | $958.6 | $666.3 | | Total liabilities | $3,868.2 | $4,203.4 | | Total stockholders' equity | $1,985.7 | $1,882.3 | Condensed Consolidated Statements of Operations Revenue slightly decreased in Q2 2020 while growing for H1 2020, though net income declined in both periods Q2 2020 vs Q2 2019 Statement of Operations (in millions, except per share data) | Metric | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Total revenue | $192.6 | $196.3 | | Gross profit | $78.6 | $88.0 | | Operating profit | $4.0 | $18.7 | | Net income | $5.5 | $6.3 | | Diluted EPS | $0.04 | $0.04 | H1 2020 vs H1 2019 Statement of Operations (in millions, except per share data) | Metric | H1 2020 | H1 2019 | | :--- | :--- | :--- | | Total revenue | $415.3 | $400.0 | | Gross profit | $179.1 | $181.6 | | Operating profit | $30.3 | $46.1 | | Net income | $14.1 | $17.5 | | Diluted EPS | $0.09 | $0.12 | Condensed Consolidated Statements of Cash Flows H1 2020 cash flow shows increased operating cash and a reversal to positive investing cash flow Six Months Ended June 30 Cash Flow Summary (in millions) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $23.9 | $10.2 | | Net cash provided by (used in) investing activities | $101.2 | $(101.9) | | Net cash (used in) provided by financing activities | $(230.3) | $1,349.6 | | Net (decrease) increase in cash, restricted cash, and equivalents | $(117.6) | $1,265.3 | Notes to Condensed Consolidated Financial Statements Notes detail the Excelity acquisition, revenue disaggregation, debt changes, and share-based compensation - On May 29, 2020, the company acquired 100% of Excelity Global Solutions Pte. Ltd., a human capital management service provider in the Asia-Pacific region, for $77.2 million, adding $49.5 million to goodwill[42][44] - Investment income from customer trust funds (float revenue) decreased to $11.5 million in Q2 2020 from $20.3 million in Q2 2019, and to $31.1 million in H1 2020 from $44.6 million in H1 2019[48] - Total share-based compensation expense was $15.3 million for Q2 2020 and $27.8 million for H1 2020, up from $9.6 million and $15.6 million in the respective prior-year periods[74] Revenue Disaggregation by Solution (in millions) | Revenue Source | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Dayforce revenue | $151.5 | $134.5 | $320.3 | $267.3 | | Total Powerpay revenue | $16.4 | $21.2 | $38.5 | $43.0 | | Total Cloud revenue | $167.9 | $155.7 | $358.8 | $310.3 | | Total Bureau revenue | $24.7 | $40.6 | $56.5 | $89.7 | | Total revenue | $192.6 | $196.3 | $415.3 | $400.0 | - As of June 30, 2020, the company has approximately $897.1 million in remaining performance obligations (contracted backlog) expected to be recognized as revenue over the next three years[93] Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes performance, focusing on Dayforce growth, COVID-19 impacts, and enhanced liquidity Overview and COVID-19 Impact The company focuses on its Dayforce platform while navigating business challenges from the COVID-19 pandemic - The company's flagship product is Dayforce, a single cloud application for HR, payroll, benefits, workforce, and talent management[117] - The company launched Dayforce Wallet in 2020, an on-demand pay feature allowing employees instant access to their earned wages[118] - The COVID-19 pandemic has negatively impacted the business through curtailed customer demand, lower client employment levels, and delays in implementation services[123] - As of June 30, 2020, there were 4,603 live Dayforce customers, an increase from 4,006 a year prior[125] Results of Operations Q2 revenue declined due to Bureau weakness and COVID-19, while H1 revenue grew, driven by Cloud solutions Q2 2020 vs Q2 2019 Revenue Performance (Constant Currency) | Revenue Category | % Change (Reported) | % Change (Constant Currency) | | :--- | :--- | :--- | | Total Dayforce revenue | +12.6% | +13.5% | | Total Cloud revenue | +7.8% | +8.9% | | Total Bureau revenue | -39.2% | -38.4% | | Total revenue | -1.9% | -0.9% | - The estimated impact of the COVID-19 pandemic in Q2 2020 was an approximately $8 million decline in revenue from lower employment levels and a $7 million decline in float revenue[135] - The average yield on customer trust funds was 1.55% in Q2 2020, a decline of 86 basis points from Q2 2019, primarily due to central bank rate cuts[139] Adjusted EBITDA Reconciliation (in millions) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Operating profit | $4.0 | $18.7 | $30.3 | $46.1 | | Adjustments (Depreciation, Share-based comp, etc.) | $33.5 | $25.3 | $62.4 | $47.7 | | Adjusted EBITDA | $37.5 | $44.0 | $92.7 | $93.8 | | Adjusted EBITDA Margin | 19.5% | 22.4% | 22.3% | 23.5% | Liquidity and Capital Resources Liquidity was strengthened by a precautionary $295 million credit facility draw to counter COVID-19 uncertainty - On April 2, 2020, the company borrowed $295.0 million under its 2018 Revolving Credit Facility as a precautionary measure to increase its cash position due to COVID-19 uncertainty[180] - The company's total debt balance was $973.5 million as of June 30, 2020[180] - Excluding customer trust funds, net cash provided by operating activities for H1 2020 was $12.7 million, while financing activities provided $341.1 million, primarily from the credit facility draw[187] Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from foreign currency, interest rates, and pension obligations - The company is exposed to foreign currency risk, particularly from the Canadian Dollar, but does not currently have an active hedging program[213] - Interest rate risk affects the investment income from customer trust funds, which are invested in high-quality, short-to-medium term securities to protect principal[214] - The company maintains a frozen U.S. pension plan, with risk tied to actuarial assumptions like asset returns and discount rates; the expected rate of return for 2020 is 5.70%[217] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2020 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[219] - No material changes were made to internal controls over financial reporting during Q2 2020, despite an increase in remote work due to COVID-19[220] PART II. OTHER INFORMATION Legal Proceedings Current legal proceedings are not expected to have a material adverse effect on the business - Ceridian is not currently a party to any legal proceedings that are expected to have a material adverse effect on its business, financial condition, or liquidity[222] Risk Factors Key risks include the COVID-19 pandemic, the new Dayforce Wallet, and reliance on third-party providers - The COVID-19 pandemic is a major risk, with potential to adversely affect business through declining customer employment levels, reduced demand, and lower float revenue[224] - The Dayforce Wallet service introduces credit risk, as the company advances wages on behalf of customers who may fail to repay the funds[249] - The business is subject to a variety of complex U.S. and international laws regarding privacy and data protection (e.g., GDPR) and financial services, with non-compliance posing significant risks[231][234][237] - The company relies heavily on third-party service providers for data centers (NaviSite, Microsoft Azure), payment processing, and other integral business functions[239][240][242] - Customer funds held in trust are subject to market, interest rate, and credit risks, and any loss of principal could have a material adverse effect on the company's financial condition[253] Exhibits This section lists filed exhibits, including management compensation agreements and officer certifications - Filed exhibits include forms of employee and director equity award agreements, including a Performance-Based Stock Option Award Agreement for CEO David Ossip[257] - Certifications by the Principal Executive Officer and Principal Financial Officer pursuant to Sarbanes-Oxley Sections 302 and 906 are included as exhibits[257]