Ceridian(CDAY) - 2020 Q3 - Quarterly Report

Front Matter Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements concerning the human capital management industry and the company's operations, performance, and financial condition, which are subject to inherent risks and uncertainties that could cause actual results to differ materially - The impact of the COVID-19 pandemic on business, operations, and financial results - Inability to attain or maintain profitability and significant competition for solutions - Risks related to migrating Bureau customers to Cloud solutions and developing new features - Compliance with data protection regulations, including the FTC's consent order, and risks of system interruptions or cyber-security breaches - Reductions in customers' employment levels or their financial viability[11] PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2020, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, along with notes detailing accounting policies and specific financial activities Condensed Consolidated Balance Sheets As of September 30, 2020, total assets were $5,918.0 million, a decrease from $6,085.7 million at year-end 2019, primarily due to reduced customer trust funds, while total stockholders' equity increased to $2,036.3 million from $1,882.3 million Condensed Consolidated Balance Sheet Highlights (in millions) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $5,918.0 | $6,085.7 | | Cash and equivalents | $554.6 | $281.3 | | Customer trust funds | $2,646.6 | $3,204.1 | | Goodwill | $2,011.3 | $1,973.5 | | Total Liabilities | $3,881.7 | $4,203.4 | | Customer trust funds obligations | $2,581.2 | $3,193.6 | | Long-term debt, less current portion | $957.2 | $666.3 | | Total Stockholders' Equity | $2,036.3 | $1,882.3 | Condensed Consolidated Statements of Operations For Q3 2020, the company reported a net loss of $0.8 million on revenues of $204.4 million, a significant decrease from Q3 2019's net income of $62.7 million due to a one-time tax benefit, with nine-month net income at $13.3 million compared to $80.2 million year-over-year Statement of Operations Summary (in millions, except per share data) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $204.4 | $202.3 | $619.7 | $602.3 | | Gross Profit | $76.7 | $88.8 | $255.8 | $270.4 | | Operating (Loss) Profit | $(0.6) | $6.5 | $29.7 | $52.6 | | Net (Loss) Income | $(0.8) | $62.7 | $13.3 | $80.2 | | Diluted EPS | $(0.01) | $0.42 | $0.09 | $0.54 | Notes to Condensed Consolidated Financial Statements The notes provide details on significant accounting policies, business combinations, debt structure, share-based compensation, and revenue disaggregation, highlighting the acquisition of Excelity, a precautionary draw on the revolving credit facility, and a significant year-over-year decrease in float revenue - On May 29, 2020, the company acquired 100% of Excelity Global Solutions Pte. Ltd. for $77.2 million, a human capital management service provider in the Asia-Pacific region[53] Investment Income from Customer Trust Funds (Float Revenue, in millions) | Period | 2020 | 2019 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $10.6 | $18.3 | | Nine Months Ended Sep 30 | $41.7 | $62.9 | - 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 amid COVID-19 uncertainty[78] Disaggregated Revenue by Solution (in millions) | Revenue Source | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Cloud Revenue | $176.7 | $165.5 | $535.5 | $475.8 | | Total Bureau Revenue | $27.7 | $36.8 | $84.2 | $126.5 | | Total Revenue | $204.4 | $202.3 | $619.7 | $602.3 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting the continued growth of its Dayforce Cloud solution, which is partially offset by the planned decline in Bureau revenue, detailing the adverse impacts of the COVID-19 pandemic, including reduced employment levels at customers and lower float revenue from interest rate cuts, and its bolstered liquidity position Overview and COVID-19 Impact Ceridian is a global HCM software company focused on its flagship Dayforce cloud platform, which launched Dayforce Wallet in 2020, facing significant headwinds from the COVID-19 pandemic, leading to curtailed customer demand, lower employment levels, and reduced float revenue due to central bank rate cuts - The company's flagship cloud HCM platform, Dayforce, grew to 4,704 live customers as of September 30, 2020, a net increase of 341 customers in the first nine months of the year[145] - The COVID-19 pandemic has caused curtailed customer demand, declining employment levels at customers, and lower customer utilization of professional services, with rate cuts by the U.S. Federal Reserve and Bank of Canada also negatively affecting float revenue[150] Results of Operations For Q3 2020, total revenue grew 1.0% year-over-year, driven by a 6.8% increase in Cloud revenue, largely offset by a 24.7% decline in Bureau revenue and lower float revenue, with COVID-19 estimated to have caused a revenue decline of approximately $10 million from lower employment levels and $6 million from lower float revenue, and Adjusted EBITDA for Q3 2020 decreased 28.4% to $33.2 million Q3 2020 vs. Q3 2019 Revenue Growth (Constant Currency) | Revenue Category | As Reported Growth | Constant Currency Growth | | :--- | :--- | :--- | | Total Revenue | 1.0% | 1.1% | | Total Cloud Revenue | 6.8% | 6.8% | | - Dayforce Revenue | 9.8% | 9.8% | | - Powerpay Revenue | (13.3)% | (12.8)% | | Total Bureau Revenue | (24.7)% | (24.7)% | - The estimated negative impact of COVID-19 on Q3 2020 revenue was approximately $10 million from lower employment levels at customers and approximately $6 million from reduced float revenue[166] - Float revenue for Q3 2020 was $10.6 million, down from $18.3 million in Q3 2019, with the average yield on customer trust funds declining by 81 basis points to 1.52% due to central bank rate cuts[173] Adjusted EBITDA Reconciliation Summary (in millions) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net (Loss) Income | $(0.8) | $62.7 | $13.3 | $80.2 | | Adjustments | $34.0 | $(16.3) | $112.6 | $48.4 | | Adjusted EBITDA | $33.2 | $46.4 | $125.9 | $140.2 | | Adjusted EBITDA Margin | 16.2% | 22.9% | 20.3% | 23.3% | Liquidity and Capital Resources The company's primary liquidity sources are cash on hand, operating cash flow, and its credit facilities, with cash and equivalents at $554.6 million as of September 30, 2020, and a precautionary draw of $295.0 million from its revolving credit facility in April 2020, which management believes is sufficient for the foreseeable future - As of September 30, 2020, the company had cash and equivalents of $554.6 million and total debt of $970.8 million[217] - A precautionary draw of $295.0 million was made on the 2018 Revolving Credit Facility on April 2, 2020, to preserve financial flexibility amid the COVID-19 pandemic[217] - Net cash provided by operating activities, excluding customer trust fund activity, was $36.1 million for the nine months ended September 30, 2020[226] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks related to foreign currency exchange rates, primarily the Canadian Dollar, interest rate fluctuations affecting investment income and debt service costs, and obligations tied to its closed U.S. pension plan, with these risks potentially amplified by the COVID-19 pandemic - The company's results are subject to fluctuations from foreign currency exchange rates, particularly the Canadian Dollar, but it does not currently have an active hedging program[256] - Interest rate risk affects the float revenue from customer trust funds, where a 100 basis point change in market rates would result in an approximate $17 million change in annual float revenue[173][257] - The company has a closed U.S. pension plan, and its obligations are subject to risks from actuarial assumptions and asset returns, with a contribution of $105.0 million made to the plan in October 2020[260] Item 4. Controls and Procedures Based on an evaluation as of September 30, 2020, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective, with no material changes to internal controls over financial reporting during the third quarter of 2020 - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[263] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[264] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company 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 - The company reports no material legal proceedings[267] Item 1A. Risk Factors This section updates the company's risk factors, emphasizing the ongoing adverse effects of the COVID-19 pandemic on business operations and financial results, highlighting new risks related to the Dayforce Wallet product, including credit risk and potential fraud, and detailing reliance on third-party service providers and increasing complexity of regulatory compliance - COVID-19 Pandemic: The pandemic has adversely affected and will likely continue to affect business through reduced customer employment levels, delayed service implementations, and lower float revenue[269] - Dayforce Wallet Risk: The on-demand pay service introduces credit risk, as Ceridian advances funds on behalf of customers before being repaid, and a customer's failure to repay could result in credit losses[298] - Third-Party Reliance: The business depends on third-party providers for data centers (NaviSite, Microsoft Azure), payment processing, and program management for the Dayforce Wallet, where a disruption or failure could have a material adverse effect[287][288][296] - Regulatory and Compliance Risk: The company is subject to a variety of U.S. and international laws regarding privacy, data protection (e.g., GDPR), and financial services, with failure to comply potentially resulting in fines, penalties, and reputational harm[277][281][284] Other Items (Unregistered Sales, Defaults, Disclosures, Other Info, Exhibits) This section confirms there were no unregistered sales of equity securities, no defaults upon senior securities, no mine safety disclosures to report, and no other material information for the period, also listing the exhibits filed with the Form 10-Q - Item 2: No unregistered sales of equity securities and use of proceeds[305] - Item 3: No defaults upon senior securities[306] - Item 6: A list of exhibits filed with the report is provided, including certifications and XBRL data files[311]