Ceridian(DAY) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section covers Ceridian's financial statements, management's analysis, market risks, and internal control assessments Condensed Consolidated Financial Statements (unaudited) This section presents Ceridian's unaudited financial statements, highlighting revenue growth, a shift to net income, and key accounting changes Financial Statements Overview Ceridian reported increased revenues and a shift to net income for the nine months ended September 30, 2019, with improved operating cash flow Condensed Consolidated Balance Sheet Data (in millions) | Account | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and equivalents | $270.9 | $217.8 | | Total current assets | $3,004.3 | $2,934.1 | | Goodwill | $1,961.2 | $1,927.4 | | Total assets | $5,436.2 | $5,247.8 | | Liabilities & Equity | | | | Total current liabilities | $2,743.2 | $2,769.6 | | Long-term debt, less current portion | $659.3 | $663.5 | | Total liabilities | $3,583.1 | $3,632.3 | | Total stockholders' equity | $1,853.1 | $1,615.5 | Condensed Consolidated Statements of Operations (in millions, except per share data) | Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $202.3 | $178.1 | $602.3 | $545.9 | | Gross profit | $88.8 | $73.5 | $270.4 | $228.9 | | Operating profit | $6.5 | $16.2 | $52.6 | $35.8 | | Net income (loss) attributable to Ceridian | $62.7 | $4.2 | $80.2 | $(58.5) | | Diluted EPS | $0.42 | $0.03 | $0.54 | $(0.63) | Condensed Consolidated Statements of Cash Flows (in millions) | Cash Flow Activity | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $24.6 | $(18.1) | | Net cash used in investing activities | $(124.8) | $(15.6) | | Net cash provided by (used in) financing activities | $17.1 | $(483.9) | Notes to Financial Statements Notes detail accounting policy changes, the RITEQ acquisition, revenue disaggregation, a service incident loss, and a significant income tax benefit - Adopted new accounting standards ASC 606 (Revenue) and ASC 842 (Leases) as of January 1, 2019, applying changes retrospectively, altering revenue timing and bringing operating lease assets onto the balance sheet[36][38] - On September 13, 2019, the company acquired RITEQ, an Australian workforce management solutions provider, for approximately $19.4 million[56] Disaggregation of Revenue (in millions) | Revenue Source | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Cloud Revenue | $165.5 | $131.7 | $475.8 | $385.9 | | - Dayforce | $143.7 | $110.4 | $411.0 | $320.3 | | - Powerpay | $21.8 | $21.3 | $64.8 | $65.6 | | Total Bureau Revenue | $36.8 | $46.4 | $126.5 | $160.0 | | Total Revenue | $202.3 | $178.1 | $602.3 | $545.9 | - An isolated service incident on September 26, 2019, resulted in $18.8 million of duplicate payroll payments, with $12.6 million unrecovered and recorded as a loss[114] - The company released $65.8 million of its valuation allowance against domestic deferred tax assets, resulting in a significant income tax benefit[104][105] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong Dayforce Cloud revenue growth, improved gross margins, a net income surge from a tax benefit, and a solid liquidity position Results of Operations Q3 2019 saw total revenue increase by 13.6% driven by Cloud growth, improved gross margins, and a significant tax benefit boosting net income Q3 2019 vs Q3 2018 Revenue Growth (Constant Currency) | Revenue Category | Growth (Reported) | Growth (Constant Currency) | | :--- | :--- | :--- | | Total Revenue | 13.6% | 14.0% | | Total Cloud Revenue | 25.7% | 26.2% | | - Dayforce Revenue | 30.2% | 30.5% | | Total Bureau Revenue | (20.7)% | (20.4)% | - The number of live Dayforce customers grew to 4,169 as of September 30, 2019, with the proportion of customers live for two or more years increasing from 62% to 68%, contributing to improved profitability[135][139][162] Gross Margin Analysis | Gross Margin Type | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Gross Margin | 43.9% | 41.3% | 44.9% | 41.9% | | Cloud Recurring Services | 70.2% | 65.8% | 69.9% | 66.1% | | Professional Services & Other | (7.7)% | (13.6)% | (8.6)% | (15.6)% | - Investment income from customer trust funds increased to $18.3 million in Q3 2019, driven by a higher average float balance and a 22 basis point increase in average yield to 2.33%[155] Liquidity and Capital Resources The company maintains a strong liquidity position, supported by cash reserves and an undrawn revolving credit facility, with manageable debt levels - Primary sources of liquidity as of September 30, 2019, include $270.9 million in cash and equivalents and $300.0 million available under a revolving credit facility[197] - Total principal debt balance was $673.2 million as of September 30, 2019, with a credit rating upgrade reducing the interest rate on term debt[197][198] - For the nine months ended September 30, 2019, capital expenditures totaled $38.4 million, and acquisition costs were $29.4 million[206] Non-GAAP Measures The company utilizes non-GAAP measures like Constant Currency Revenue and Adjusted EBITDA to assess performance, showing strong growth and margin expansion Adjusted EBITDA Reconciliation (in millions) | Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Operating profit | $6.5 | $16.2 | $52.6 | $35.8 | | Depreciation and amortization | $14.9 | $14.3 | $43.9 | $42.4 | | Share-based compensation | $11.4 | $4.8 | $27.0 | $19.5 | | Other non-recurring charges (e) | $12.6 | $— | $12.6 | $— | | Adjusted EBITDA | $46.4 | $36.4 | $140.2 | $118.8 | | Adjusted EBITDA Margin | 22.9% | 20.4% | 23.3% | 21.8% | - Other non-recurring charges of $12.6 million in Q3 and YTD 2019 represent the loss on unrecovered duplicate payments from the isolated service incident[222] Quantitative and Qualitative Disclosures about Market Risk The company faces market risks including foreign currency fluctuations, interest rate changes affecting float income and debt, and pension obligations - Primary market risks include foreign currency exchange rates, interest rate fluctuations impacting customer trust fund investments and debt, and pension obligation risks related to a frozen defined benefit plan[231] - A 100 basis point change in interest rates is estimated to have an approximately $18 million impact on float revenue and a $7 million impact on net interest expense over a twelve-month period[155][165] Controls and Procedures Management concluded disclosure controls were ineffective due to a material weakness in internal control over financial reporting from a duplicate payment incident - A material weakness in internal control over financial reporting was identified as of September 30, 2019[240] - The weakness relates to ineffective controls to detect duplicate payments in advance, stemming from a September 26, 2019 incident that caused $18.8 million in duplicate payments[239][240] - Due to this material weakness, the CEO and CFO concluded that disclosure controls were not effective, with remediation efforts including additional monitoring controls underway[237][240] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and a list of exhibits filed with the report Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business or financial condition - Ceridian is not presently a party to any legal proceedings believed to have a material adverse effect on its business[244] Risk Factors A new material risk factor relates to the identified material weakness in internal control over financial reporting, with potential adverse impacts - A new risk factor was disclosed concerning the recently identified material weakness in internal control over financial reporting[246] - The material weakness stems from an isolated service incident resulting in duplicate customer payroll payments, with failure to remediate potentially leading to inaccurate reporting and loss of investor confidence[247] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - None Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - Exhibits filed include CEO and CFO certifications (Sections 302 and 906 of Sarbanes-Oxley) and XBRL interactive data files[252]