Ceridian(DAY) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Unaudited financial statements, management's analysis, market risk, and internal controls are presented Item 1. Condensed Consolidated Financial Statements (unaudited) Unaudited condensed consolidated financial statements and detailed notes for the quarter ended June 30, 2020 Condensed Consolidated Balance Sheets Snapshot of the company's financial position, detailing assets, liabilities, and equity as of June 30, 2020 Balance Sheet Highlights (as of June 30, 2020 vs. December 31, 2019) | Metric | June 30, 2020 (unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Cash and equivalents | $526.9 million | $281.3 million | | Total current assets | $3,350.0 million | $3,623.7 million | | Goodwill | $2,004.5 million | $1,973.5 million | | Total assets | $5,853.9 million | $6,085.7 million | | Total current liabilities | $2,744.5 million | $3,371.7 million | | Long-term debt, less current portion | $958.6 million | $666.3 million | | Total liabilities | $3,868.2 million | $4,203.4 million | | Total stockholders' equity | $1,985.7 million | $1,882.3 million | Condensed Consolidated Statements of Operations Outlines financial performance, presenting revenues, expenses, and net income for Q2 and H1 ended June 30 Statement of Operations Summary (in millions) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $192.6 | $196.3 | $415.3 | $400.0 | | Gross profit | $78.6 | $88.0 | $179.1 | $181.6 | | Operating profit | $4.0 | $18.7 | $30.3 | $46.1 | | Net income | $5.5 | $6.3 | $14.1 | $17.5 | | Diluted EPS | $0.04 | $0.04 | $0.09 | $0.12 | Condensed Consolidated Statements of Cash Flows Details cash flows from operating, investing, and financing activities for the six months ended June 30 Cash Flow Summary (Six Months Ended June 30) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $23.9 million | $10.2 million | | Net cash provided by (used in) investing activities | $101.2 million | ($101.9) million | | Net cash (used in) provided by financing activities | ($230.3) million | $1,349.6 million | | Net (decrease) increase in cash, restricted cash, and equivalents | ($117.6) million | $1,265.3 million | Notes to Condensed Consolidated Financial Statements Detailed disclosures on accounting policies, acquisitions, revenue, debt, and share-based compensation - On May 29, 2020, the company acquired 100% of Excelity Global Solutions Pte. Ltd. for $77.2 million to expand its human capital management services in the Asia-Pacific region[37] - Investment income from customer trust funds (float revenue) decreased to $11.5 million for Q2 2020 from $20.3 million in Q2 2019, and to $31.1 million for H1 2020 from $44.6 million in H1 2019[43] - Total debt increased to $973.5 million as of June 30, 2020, from $683.9 million at year-end 2019, primarily due to drawing $295.0 million from the revolving credit facility as a precautionary measure amid the COVID-19 pandemic[53][55] - 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[66] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, emphasizing Cloud solution growth, COVID-19 impacts, and liquidity Overview and Business Model Describes Ceridian's global HCM software business, focusing on Cloud and Bureau solutions and Dayforce - Ceridian is a global Human Capital Management (HCM) software company with two main solution categories: Cloud (Dayforce and Powerpay) and Bureau. The business model focuses on the rapid growth of Dayforce, a subscription-based platform[100][105] - The company launched Dayforce Wallet in 2020, an on-demand pay feature that gives employees instant access to their earned wages[102] - The number of live Dayforce customers grew to 4,603 as of June 30, 2020, up from 4,006 a year prior[103][109] COVID-19 Pandemic Impact Details adverse effects of the COVID-19 pandemic on customer demand, employment levels, and float revenue - The COVID-19 pandemic has adversely affected the business through curtailed customer demand, declining employment levels at customers (especially in retail and hospitality), and lower float revenue due to interest rate cuts by the U.S. Federal Reserve and Bank of Canada[107] Results of Operations Analyzes revenue, gross profit, and operating expenses, highlighting COVID-19 and float revenue declines Q2 2020 vs. Q2 2019 Revenue Performance (in millions) | Revenue Category | Q2 2020 | Q2 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Cloud Revenue | $167.9 | $155.7 | +7.8% | | Total Bureau Revenue | $24.7 | $40.6 | -39.2% | | Total Revenue | $192.6 | $196.3 | -1.9% | - For Q2 2020, the estimated negative revenue impact from lower customer employment levels due to COVID-19 was $8 million. The impact on float revenue was $7 million[117] H1 2020 vs. H1 2019 Revenue Performance (in millions) | Revenue Category | H1 2020 | H1 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Cloud Revenue | $358.8 | $310.3 | +15.6% | | Total Bureau Revenue | $56.5 | $89.7 | -37.0% | | Total Revenue | $415.3 | $400.0 | +3.8% | - Float revenue declined to $11.5 million in Q2 2020 from $20.3 million in Q2 2019, primarily due to an 86 basis point decline in the average yield and a decrease in average float balances[121] - Gross margin for Q2 2020 declined to 40.8% from 44.8% in Q2 2019, primarily due to the $8.8 million decline in high-margin float revenue[125][126] Liquidity and Capital Resources Discusses cash position, operating cash flows, and credit facilities, including a precautionary draw - Primary sources of liquidity are cash on hand, cash from operations, and credit facilities. As of June 30, 2020, the company had cash and equivalents of $526.9 million[156] - On April 2, 2020, the company borrowed $295.0 million under its revolving credit facility as a precautionary measure to increase its cash position and preserve financial flexibility amid the COVID-19 pandemic[156] Non-GAAP Measures Provides reconciliations and definitions for non-GAAP financial measures, such as Adjusted EBITDA and margin Adjusted EBITDA Reconciliation (in millions) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Operating profit | $4.0 | $18.7 | $30.3 | $46.1 | | Adjusted EBITDA | $37.5 | $44.0 | $92.7 | $93.8 | | Adjusted EBITDA margin | 19.5% | 22.4% | 22.3% | 23.5% | Item 3. Quantitative and Qualitative Disclosures about Market Risk Examines market risks from foreign currency, interest rate fluctuations, and pension obligations - The company's results are subject to fluctuations from foreign currency exchange rates, particularly the Canadian Dollar, but no active hedging program is in place[186] - Interest rate risk affects the income generated from customer trust funds held for payroll and tax services. The portfolio is invested in high-quality, available-for-sale securities, and changes in their value are recorded in other comprehensive income unless sold[187][188] Item 4. Controls and Procedures Management concluded disclosure controls were effective; no material internal control changes - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the Form 10-Q[192] - Despite an increase in employees working from home due to the COVID-19 pandemic, there were no changes during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls over financial reporting[193] PART II. OTHER INFORMATION Details legal proceedings, updated risk factors, and exhibits filed with the quarterly report Item 1. Legal Proceedings No legal proceedings are expected to have a material adverse effect on the company's 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[195] Item 1A. Risk Factors Updates risk factors: COVID-19, Dayforce Wallet, regulatory compliance, and third-party reliance - The COVID-19 pandemic continues to pose a significant risk, with potential adverse effects on customer employee headcount, demand for services, and float revenue due to low interest rates[197][198][199] - The Dayforce Wallet program introduces new risks, including potential fraud against customers and the risk of customer failure to repay advanced wages, which could lead to credit losses[202][218] - The company is subject to a variety of U.S. and international laws regarding privacy and data protection (e.g., GDPR) and financial services, with non-compliance potentially leading to fines and reputational harm[203][205][208] - Ceridian relies heavily on third-party service providers for critical operations, including data centers, electronic funds transfers, and program management for the Dayforce Wallet. A failure by any of these providers could materially harm the business[209][210][216] Item 6. Exhibits Lists exhibits filed, including compensation agreements and Sarbanes-Oxley Act certifications - Exhibits filed with the report include forms of employee and director stock option and restricted stock unit award agreements[228] - Certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits[228]