UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly reporting period ended
For the transition period from to
Commission file number
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of |
(I.R.S. Employer Identification Number) |
(
(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 |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
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).
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.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as the latest practicable date:
Ceridian HCM Holding Inc.
Table of Contents
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Item 1. |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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2 | 
Q1 2022 Form 10-Q
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. Consequently, 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. In particular:
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, 2021 (“2021 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.
3 | Q1 2022 Form 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Ceridian HCM Holding Inc.
Condensed Consolidated Balance Sheets
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March 31, |
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December 31, |
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2022 |
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2021 |
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(Dollars in millions, except share data) |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and equivalents |
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$ |
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$ |
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Restricted cash |
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Trade and other receivables, net |
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Prepaid expenses and other current assets |
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Total current assets before customer funds |
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Customer funds |
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Total current assets |
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Right of use lease asset |
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Property, plant, and equipment, net |
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Goodwill |
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Other intangible assets, net |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
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$ |
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Current portion of long-term lease liabilities |
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Accounts payable |
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Deferred revenue |
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Employee compensation and benefits |
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Other accrued expenses |
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Total current liabilities before customer funds obligations |
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Customer funds obligations |
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Total current liabilities |
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Long-term debt, less current portion |
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Employee benefit plans |
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Long-term lease liabilities, less current portion |
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Other liabilities |
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Total liabilities |
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(Note 14) |
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Stockholders’ equity: |
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Common stock, $ |
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Additional paid in capital |
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Accumulated deficit |
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( |
) |
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( |
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Accumulated other comprehensive loss |
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( |
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( |
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Total stockholders’ equity |
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Total liabilities and equity |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
4 | Q1 2022 Form 10-Q
Ceridian HCM Holding Inc.
Condensed Consolidated Statements of Operations
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Three Months Ended March 31, |
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2022 |
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2021 |
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(Dollars in millions, except share and per share data) |
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(unaudited) |
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Revenue: |
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Recurring |
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$ |
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$ |
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Professional services and other |
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Total revenue |
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Cost of revenue: |
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Recurring |
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Professional services and other |
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Product development and management |
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Depreciation and amortization |
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Total cost of revenue |
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Gross profit |
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Selling, general, and administrative |
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Operating loss |
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( |
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( |
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Interest expense, net |
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Other (income) expense, net |
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( |
) |
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Loss before income taxes |
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( |
) |
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( |
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Income tax expense |
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Net loss |
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$ |
( |
) |
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$ |
( |
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Net loss per share: |
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Basic |
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$ |
( |
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$ |
( |
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Diluted |
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$ |
( |
) |
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$ |
( |
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Weighted-average shares outstanding: |
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Basic |
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Diluted |
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See accompanying notes to condensed consolidated financial statements.
5 | Q1 2022 Form 10-Q
Ceridian HCM Holding Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
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Three Months Ended March 31, |
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2022 |
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2021 |
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(Dollars in millions) |
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(unaudited) |
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Net loss |
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$ |
( |
) |
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$ |
( |
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Items of other comprehensive loss before income taxes: |
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Change in foreign currency translation adjustment |
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Change in unrealized loss from invested customer funds |
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( |
) |
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( |
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Change in pension liability adjustment (a) |
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Other comprehensive loss before income taxes |
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( |
) |
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( |
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Income tax benefit, net |
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( |
) |
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( |
) |
Other comprehensive (loss) income after income taxes |
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( |
) |
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Comprehensive loss |
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$ |
( |
) |
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$ |
( |
) |
See accompanying notes to condensed consolidated financial statements.
6 | Q1 2022 Form 10-Q
Ceridian HCM Holding Inc.
Condensed Consolidated Statements of Stockholders’ Equity
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Common Stock |
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Additional |
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Accumulated |
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Accumulated |
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Total |
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Shares |
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$ |
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Capital |
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Deficit |
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Loss |
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Equity |
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(Dollars in millions, except share data, unaudited) |
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Balance as of December 31, 2021 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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— |
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— |
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( |
) |
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— |
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( |
) |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Issuance of common stock under share-based compensation plans |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Foreign currency translation |
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— |
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— |
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— |
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— |
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Change in unrealized gain, net of tax of ($ |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Change in pension liability adjustment, net of tax of $ |
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— |
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— |
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— |
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— |
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Balance as of March 31, 2022 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Common Stock |
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Additional |
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Accumulated |
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Accumulated |
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Total |
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Shares |
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$ |
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Capital |
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Deficit |
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Loss |
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Equity |
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(Dollars in millions, except share data, unaudited) |
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Balance as of December 31, 2020 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Issuance of common stock under share-based compensation plans |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Equity component of convertible senior notes |
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— |
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— |
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— |
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— |
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Purchase of capped calls related to convertible senior notes |
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— |
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— |
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( |
) |
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— |
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— |
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( |
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Foreign currency translation |
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— |
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— |
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— |
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— |
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Change in unrealized gain, net of tax of $( |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Change in pension liability adjustment, net of tax of $ |
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— |
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— |
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— |
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— |
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Balance as of March 31, 2021 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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See accompanying notes to condensed consolidated financial statements.
7 | Q1 2022 Form 10-Q
Ceridian HCM Holding Inc.
Condensed Consolidated Statements of Cash Flows
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Three Months Ended March 31, |
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2022 |
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2021 |
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(Dollars in millions, unaudited) |
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Net loss |
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$ |
( |
) |
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$ |
( |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Deferred income tax benefit |
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Depreciation and amortization |
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Amortization of debt issuance costs and debt discount |
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Provision for doubtful accounts |
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Net periodic pension and postretirement cost |
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Share-based compensation |
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Change in fair value of contingent consideration |
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— |
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Other |
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Changes in operating assets and liabilities excluding effects of acquisitions and divestitures: |
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Trade and other receivables |
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( |
) |
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Prepaid expenses and other current assets |
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( |
) |
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( |
) |
Accounts payable and other accrued expenses |
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( |
) |
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( |
) |
Deferred revenue |
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( |
) |
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Employee compensation and benefits |
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( |
) |
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( |
) |
Accrued interest |
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( |
) |
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Accrued taxes |
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( |
) |
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Other assets and liabilities |
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( |
) |
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( |
) |
Net cash provided by (used in) operating activities |
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( |
) |
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Cash Flows from Investing Activities |
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Purchase of customer funds marketable securities |
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( |
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( |
) |
Proceeds from sale and maturity of customer funds marketable securities |
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Expenditures for property, plant, and equipment |
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( |
) |
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( |
) |
Expenditures for software and technology |
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( |
) |
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( |
) |
Acquisition costs, net of cash and restricted cash acquired |
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( |
) |
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Net cash used in investing activities |
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( |
) |
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( |
) |
Cash Flows from Financing Activities |
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Increase in customer funds obligations, net |
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Proceeds from issuance of common stock under share-based compensation plans |
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Repayment of long-term debt obligations |
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( |
) |
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( |
) |
Proceeds from revolving credit facility |
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Repayment of revolving credit facility |
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( |
) |
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Proceeds from issuance of convertible senior notes, net of issuance costs |
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Purchases of capped calls related to convertible senior notes |
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( |
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Net cash provided by financing activities |
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Effect of exchange rate changes on cash, restricted cash, and equivalents |
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Net increase in cash, restricted cash, and equivalents |
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Cash, restricted cash, and equivalents at beginning of period |
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Cash, restricted cash, and equivalents at end of period |
|
$ |
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$ |
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||
Reconciliation of cash, restricted cash, and equivalents to the condensed |
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Cash and equivalents |
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$ |
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$ |
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Restricted cash |
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Restricted cash and equivalents included in customer funds |
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Total cash, restricted cash, and equivalents |
|
$ |
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$ |
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||
See accompanying notes to condensed consolidated financial statements.
8 | Q1 2022 Form 10-Q
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.
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 2021 Form 10-K. The following notes should be read in conjunction with these policies and other disclosures in our 2021 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.
Deferred Costs
Deferred costs, which primarily consist of deferred sales commissions, included within Other assets on our condensed consolidated balance sheets were $
9 | Q1 2022 Form 10-Q
Recently Issued and Adopted Accounting Pronouncements from the Financial Accounting Standards Board
Standard |
|
Issuance Date |
|
Description |
|
Adoption Date |
|
Effect on the Financial Statements |
Accounting Standards Update ("ASU") 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) |
|
August 2020 |
|
This amendment simplifies the accounting for convertible instruments by removing certain separation models required under current GAAP for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. |
|
|
We |
|
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting |
|
March 2020 |
|
This amendment provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments 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. |
|
Not yet adopted |
|
This amendment may be elected over time through December 31, 2022 as reference rate reform activities occur. We do not expect the adoption of this guidance to have a significant impact on our financial statements. |
3. Business Combinations
ADAM HCM
On December 3, 2021, we completed the acquisition of
The purchase accounting has not been finalized as of March 31, 2022. Provisional amounts relate to the tax positions, and we expect to finalize the allocation of the purchase price within the one-year measurement period following the acquisition. Intangible assets recorded for this acquisition consist of $
10 | Q1 2022 Form 10-Q
The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows:
|
|
(Dollars in millions) |
|
|
Cash and equivalents |
|
$ |
|
|
Trade receivables, prepaid expenses, and other current assets |
|
|
|
|
Goodwill |
|
|
|
|
Other intangible assets |
|
|
|
|
Other assets |
|
|
|
|
Accounts payable and other current liabilities |
|
|
( |
) |
Total purchase price |
|
$ |
|
|
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:
|
|
March 31, 2022 |
|
||||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
|
Level 3 |
|
|
Total |
|
||||
|
|
(Dollars in millions) |
|
||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Available for sale customer funds assets |
|
$ |
— |
|
|
$ |
|
(a) |
|
$ |
— |
|
|
$ |
|
||
Total assets measured at fair value |
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
DataFuzion contingent consideration |
|
$ |
— |
|
|
$ |
— |
|
|
|
$ |
|
(b) |
$ |
|
||
Total liabilities measured at fair value |
|
$ |
— |
|
|
$ |
— |
|
|
|
$ |
|
|
$ |
|
||
|
|
December 31, 2021 |
|
||||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
|
Level 3 |
|
|
Total |
|
||||
|
|
(Dollars in millions) |
|
||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Available for sale customer funds assets |
|
$ |
— |
|
|
$ |
|
(a) |
|
$ |
— |
|
|
$ |
|
||
Total assets measured at fair value |
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
DataFuzion contingent consideration |
|
$ |
— |
|
|
$ |
— |
|
|
|
$ |
|
(b) |
$ |
|
||
Total liabilities measured at fair value |
|
$ |
— |
|
|
$ |
— |
|
|
|
$ |
|
|
$ |
|
||
During the three months ended March 31, 2022, we recognized expense of $
11 | Q1 2022 Form 10-Q
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During the three months ended March 31, 2022, we did not re-measure any financial assets or liabilities at fair value on a nonrecurring basis. During the year ended December 31, 2021, assets and liabilities acquired as part of business combinations and recognized as part of our convertible debt issuance have been recorded at fair value on a nonrecurring basis.
5. Customer Funds
In certain jurisdictions, we collect funds for payment of payroll and taxes; temporarily hold such funds until payment is due; remit the funds to the clients’ employees and appropriate taxing authorities; file federal, state, and local tax returns; and handle related regulatory correspondence and amendments. The customer assets are held in segregated accounts intended for the specific purpose of satisfying client fund obligations and therefore are not freely available for our general business use. In the U.S. and Canada, these customer funds are held in trusts.
Investment income from invested customer 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 funds included in recurring revenue was $
The amortized cost of customer funds as of March 31, 2022, and December 31, 2021, is the original cost of assets acquired.
|
|
March 31, 2022 |
|
|||||||||||||
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Fair |
|
|||||||
|
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Value |
|
||||
|
|
(Dollars in millions) |
|
|||||||||||||
Money market securities, investments carried at cost |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Available for sale investments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. government and agency securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Canadian and provincial government securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Corporate debt securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Asset-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Mortgage-backed securities |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Other short-term investments |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Other securities |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Total available for sale investments |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Invested customer funds |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|||
Receivables |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total customer funds |
|
$ |
|
|
|
|
|
|
|
|
$ |
|
||||
12 | Q1 2022 Form 10-Q
|
|
December 31, 2021 |
|
|||||||||||||
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Fair |
|
|||||||
|
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Value |
|
||||
|
|
(Dollars in millions) |
|
|||||||||||||
Money market securities, investments carried at cost |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Available for sale investments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. government and agency securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Canadian and provincial government securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Corporate debt securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Asset-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Mortgage-backed securities |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Other short-term investments |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Other securities |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Total available for sale investments |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Invested customer funds |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|||
Receivables |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total customer funds |
|
$ |
|
|
|
|
|
|
|
|
$ |
|
||||
The following represents the gross unrealized losses and the related fair value of the investments of customer funds available for sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
|
|
March 31, 2022 |
|
|||||||||||||||||||||
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|||||||||||||||
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
||||||
|
|
(Dollars in millions) |
|
|||||||||||||||||||||
U.S. government and agency securities |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Canadian and provincial government securities |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|||
Corporate debt securities |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|||
Asset-backed securities |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Other securities |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|||
Total available for sale investments |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Management does not believe that any individual unrealized loss was unrecoverable as of March 31, 2022. 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 March 31, 2022, 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.
|
|
March 31, 2022 |
|
|||||
|
|
Cost |
|
|
Fair Value |
|
||
|
|
(Dollars in millions) |
|
|||||
Due in one year or less |
|
$ |
|
|
$ |
|
||
Due in one to three years |
|
|
|
|
|
|
||
Due in three to five years |
|
|
|
|
|
|
||
Due after five years |
|
|
|
|
|
|
||
Invested customer funds |
|
$ |
|
|
$ |
|
||
13 | Q1 2022 Form 10-Q
6. Goodwill and Intangible Assets
Goodwill
Goodwill and changes therein were as follows:
|
|
(Dollars in millions) |
|
|
Balance at December 31, 2020 |
|
$ |
|
|
Acquisitions |
|
|
|
|
Translation |
|
|
( |
) |
Balance at December 31, 2021 |
|
|
|
|
Acquisition (a) |
|
|
|
|
Translation |
|
|
|
|
Balance at March 31, 2022 |
|
$ |
|
|
Intangible Assets
Other intangible assets consisted of the following:
|
|
March 31, 2022 |
||||||||||||
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net |
|
|
Estimated Life |
|||
|
|
(Dollars in millions) |
|
|
|
|||||||||
Customer lists and relationships |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|||
Trade name |
|
|
|
|
|
( |
) |
|
|
|
|
|||
Technology |
|
|
|
|
|
( |
) |
|
|
|
|
|||
Total other intangible assets |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|
||
|
|
December 31, 2021 |
||||||||||||
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net |
|
|
Estimated Life |
|||
|
|
(Dollars in millions) |
|
|
|
|||||||||
Customer lists and relationships |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|||
Trade name |
|
|
|
|
|
( |
) |
|
|
|
|
|||
Technology |
|
|
|
|
|
( |
) |
|
|
|
|
|||
Total other intangible assets |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|
||
As of October 1 each year, we perform an impairment assessment of our indefinite-lived intangible assets, which includes our Ceridian and Dayforce trade names, which have a carrying value of $
Amortization expense related to definite-lived intangible assets was $
14 | Q1 2022 Form 10-Q
7. Debt
Overview
Our debt obligations consisted of the following as of the periods presented:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
|
|
(Dollars in millions) |
|
|||||
Term Debt, interest rate of |
|
$ |
|
|
$ |
|
||
Revolving Credit Facility ($ |
|
|
— |
|
|
|
— |
|
Convertible Senior Notes, interest rate of |
|
|
|
|
|
|
||
Australia Line of Credit (AUD $ |
|
|
— |
|
|
|
— |
|
Financing lease liabilities (Please refer to Note 13) |
|
|
|
|
|
|
||
Total debt |
|
|
|
|
|
|
||
Less unamortized discount on Term Debt and Convertible Senior Notes (a) |
|
|
|
|
|
|
||
Less unamortized debt issuance costs on Term Debt and Convertible Senior Notes (a) |
|
|
|
|
|
|
||
Less current portion of long-term debt |
|
|
|
|
|
|
||
Long-term debt, less current portion |
|
$ |
|
|
$ |
|
||
Accrued interest and fees related to the debt obligations was $
Senior Secured Credit Facility
On April 30, 2018, we completed the refinancing of our debt by entering into a new credit agreement. Pursuant to the terms of the new credit agreement, we became borrower of (i) a $
The Term Debt will mature on
Convertible Senior Notes
In March 2021, we issued $
15 | Q1 2022 Form 10-Q
The following table presents details of the Convertible Senior Notes:
|
|
Initial Conversion Rate per $ |
|
Initial Conversion Price per Share |
|
|
|
|
|
|
|
|
|
Convertible Senior Notes |
|
|
$ |
|
||
The Convertible Senior Notes will be convertible at the option of the holders at any time only under certain circumstances as outlined in Note 9, “Debt,” to our audited consolidated financial statements in our 2021 Form 10-K. During the quarter ended March 31, 2022, the conditions allowing holders of the Convertible Senior Notes to convert have not been met. The Convertible Senior Notes were therefore not convertible during the first quarter of 2022 and are classified as a noncurrent liability in our condensed consolidated balance sheet as of March 31, 2022.
On December 30, 2021, we notified the holders of the Convertible Senior Notes of our irrevocable election to settle the conversion obligation in connection with the Convertible Senior Notes submitted for conversion on or after January 1, 2022, or at maturity with a combination of cash and shares of our common stock. Generally, under this settlement method, the conversion value will be settled in cash in an amount no less than the principal amount being converted, and any excess of the conversion value over the principal amount will be settled, at our election, in cash or shares of common stock.
On January 1, 2022, we adopted ASU 2020-06 using the modified retrospective transition method. Under such transition, prior-period information has not been retrospectively adjusted for this change in accounting guidance.
In accounting for the Convertible Senior Notes upon the adoption of ASU 2020-06, the Convertible Senior Notes are accounted for as a single liability, and the carrying amount of the Convertible Senior Notes was $
The following table sets forth total interest expense recognized related to the Convertible Senior Notes for the period:
|
|
Three Months Ended March 31, 2022 |
|
|
Three Months Ended March 31, 2021 |
|
||
|
|
(Post-adoption of ASU 2020-06) |
|
|
(Pre-adoption of ASU 2020-06) |
|
||
|
|
(Dollars in millions) |
|
|||||
Contractual interest expense |
|
$ |
|
|
$ |
|
||
Amortization of debt discount |
|
|
— |
|
|
|
|
|
Amortization of debt issuance costs |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Capped Calls
In March 2021, in connection with the pricing of the Convertible Senior Notes, we entered into capped call transactions with the option counterparties (the “Capped Calls”). The Capped Calls each have an initial strike price of $
16 | Q1 2022 Form 10-Q
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) |
|
|
2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
|
|
$ |
|
|
Fair Value of Debt
Our debt does not trade in active markets and was considered to be a Level 2 measurement at March 31, 2022. The fair value of the Term Debt was 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 the Convertible Senior Notes was determined based on the closing trading price per $
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 March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Net Periodic Pension Cost |
|
(Dollars in millions) |
|
|||||
Interest cost |
|
$ |
|
|
$ |
|
||
Actuarial loss amortization |
|
|
|
|
|
|
||
Less: Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
Net periodic pension cost |
|
$ |
|
|
$ |
|
||
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Net Periodic Postretirement Benefit |
|
(Dollars in millions) |
|
|||||
Interest cost |
|
$ |
|
|
$ |
— |
|
|
Actuarial gain amortization |
|
|
( |
) |
|
|
( |
) |
Prior service credit amortization |
|
|
|
|
|
|
||
Net periodic postretirement benefit gain |
|
$ |
( |
) |
|
$ |
( |
) |
9. Share-Based Compensation
Our share-based compensation consists of stock options, restricted stock units (“RSU”), and performance-based stock units (“PSU”). We also offer an employee stock purchase plan.
Effective October 1, 2013, our employees participated in a share-based compensation plan, the 2013 Ceridian HCM Holding Inc. Stock Incentive Plan, as amended ("2013 SIP"). Stock options awarded under the 2013 SIP vest either annually on a pro rata basis over a - or
17 | Q1 2022 Form 10-Q
On April 24, 2018, in connection with our initial public offering ("IPO"), the Board of Directors and our stockholders approved the Ceridian HCM Holding Inc. 2018 Equity Incentive Plan (as amended and restated from time to time, the “2018 EIP”), which authorized the issuance of up to
Equity awards under the 2018 EIP vest either annually or quarterly on a pro rata basis, generally over a -, -, or
Total share-based compensation expense was $
Performance-Based Stock Options
Performance-based stock option activity under the 2013 SIP and the 2018 EIP was as follows:
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Shares |
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Weighted |
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Weighted |
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Aggregate |
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Performance-based options outstanding at December 31, 2021 |
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$ |
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$ |
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Granted |
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— |
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— |
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Exercised |
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( |
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( |
) |
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— |
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— |
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Forfeited or expired |
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— |
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— |
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Performance-based options outstanding at March 31, 2022 |
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$ |
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$ |
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Performance-based options exercisable at March 31, 2022 |
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$ |
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$ |
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Certain outstanding performance-based stock options under the 2018 EIP include equity awards in which vesting conditions must be met prior to September 13, 2022. The performance criteria is based on migrations of certain customers to Dayforce. We recognize share-based compensation for performance-based stock options based on the likelihood of performance criteria achievement. The performance criteria for certain of these awards have been met and share-based compensation expense was recognized during the three months ended March 31, 2022.
As of March 31, 2022, there was $
18 | Q1 2022 Form 10-Q
Term-Based Stock Options
Term-based stock option activity under the 2013 SIP and the 2018 EIP was as follows:
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Shares |
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Weighted |
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Weighted |
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Aggregate |
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Term-based options outstanding at December 31, 2021 |
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$ |
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$ |
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Granted |
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— |
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— |
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Exercised |
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( |
) |
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( |
) |
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— |
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— |
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Forfeited or expired |
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( |
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( |
) |
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— |
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— |
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Term-based options outstanding at March 31, 2022 |
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$ |
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$ |
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Term-based options exercisable at March 31, 2022 |
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$ |
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$ |
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As of March 31, 2022, there was $
Restricted Stock Units
RSU activity under the 2013 SIP and the 2018 EIP was as follows:
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Shares |
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RSUs outstanding at December 31, 2021 |
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Granted |
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Shares issued upon vesting of RSUs |
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( |
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Forfeited or canceled |
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( |
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RSUs outstanding at March 31, 2022 |
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RSUs releasable at March 31, 2022 |
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During the three months ended March 31, 2022,
Performance Stock Units
PSU activity under the 2018 EIP was as follows:
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Shares |
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PSUs outstanding at December 31, 2021 |
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Granted |
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Shares issued upon vesting of PSUs |
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( |
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Forfeited or canceled |
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( |
) |
PSUs outstanding at March 31, 2022 |
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PSUs releasable at March 31, 2022 |
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On February 24, 2022, we granted PSUs under the 2022 Ceridian HCM Holding, Inc. Management Incentive Plan (the “2022 MIP”) for the incentive period of January 1, 2022 through December 31, 2022, and also as part of long term incentive grants to certain members of management. The vesting conditions for the PSUs granted on February 24, 2022, are based on the following performance criteria: (1) the Cloud revenue, excluding float revenue (the “Cloud Revenue Goal”) (2) the adjusted EBITDA, excluding float revenue (the “Adjusted EBITDA Goal”), and (3) the Sales per employee per month (“PEPM”) annual contract value (“ACV”) (the “Sales PEPM ACV Goal”), for fiscal year 2022 (collectively the “Performance Goals”).
19 | Q1 2022 Form 10-Q
Both the Cloud Revenue Goal and the Adjusted EBITDA Goal are calculated based on our operating results on a constant currency basis as adjusted to exclude: float revenue; foreign exchange gain (loss); share-based compensation expense and related employer taxes; severance charges; restructuring consulting fees; significant acquisitions or disposals and related transaction costs; as well as other non-recurring items, subject to the Board of Directors approval. The Sales PEPM ACV Goal is calculated based on the sales of our solutions on a constant currency basis that contribute to Cloud recurring revenue. Any cash payment under the 2022 MIP and the vesting conditions for the PSU awards granted in 2022 will be determined based on our performance against the achievement of the Performance Goals, and the payout that a participant can receive may be between
In 2021, we granted PSUs under the Ceridian HCM Holding Inc. 2021 Management Incentive Plan (the “2021 MIP”) for the incentive period of January 1, 2021 through December 31, 2021, and also as part of long term incentive grants to certain members of management. Upon vesting of a PSU, a participant will receive shares of common stock of the Company. The vesting conditions for the PSUs granted in 2021 were based on identical performance criteria, determined against our achievement of Cloud revenue and adjusted EBITDA margin goals for fiscal year 2021. On February 8, 2022, the Compensation Committee certified that we had achieved performance against the performance criteria equivalent to a total payout of
As of March 31, 2022, there was $
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
Our GESPP activity was as follows:
Period Ended |
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Shares Issued |
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Purchase Price |
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March 31, 2022 |
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$ |
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20 | Q1 2022 Form 10-Q
10. Revenue
Disaggregation of Revenue
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Three Months Ended March 31, |
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2022 |
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2021 |
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(Dollars in millions) |
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Revenue: |
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Cloud |
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Dayforce |
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Recurring |
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$ |
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$ |
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Professional services and other |
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Total Dayforce revenue |
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Powerpay |
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Recurring |
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Professional services and other |
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Total Powerpay revenue |
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Total Cloud revenue |
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Bureau |
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Recurring |
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Professional services and other |
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Total Bureau revenue |
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Total revenue |
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$ |
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$ |
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Recurring revenue includes float revenue of $
Contract Balances
A contract asset is generally recorded when revenue recognized for professional service performance obligations exceed the contractual amount of billings for implementation related professional services. Contract assets were $
Deferred Revenue
Deferred revenue primarily consists of payments received in advance of revenue recognition. The changes in deferred revenue were as follows:
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Three Months Ended March 31, |
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2022 |
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2021 |
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(Dollars in millions) |
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Deferred revenue, beginning of period |
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$ |
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$ |
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New billings |
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Acquired billings |
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— |
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Revenue recognized |
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( |
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( |
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Effect of exchange rate |
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Deferred revenue, end of period |
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$ |
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$ |
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21 | Q1 2022 Form 10-Q
Transaction Price for Remaining Performance Obligations
11. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows:
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Foreign |
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Unrealized Gain |
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Pension |
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Total |
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(Dollars in millions) |
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Balance as of December 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income (loss) before income taxes and reclassifications |
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Income tax benefit (expense) |
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— |
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Reclassifications to earnings |
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— |
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— |
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Other comprehensive income (loss) |
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Balance as of March 31, 2022 |
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$ |
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$ |
( |
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$ |
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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. 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, changes in our debt and equity structure, expectations and risks associated with estimates of future taxable income, ongoing prudent and feasible tax planning strategies, as well as current tax laws. As of March 31, 2022, we have a valuation allowance of $
We recorded an income tax expense of $
There were
We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions.
22 | Q1 2022 Form 10-Q
13. Leases
Supplemental balance sheet information related to leases was as follows:
Lease Type |
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Balance Sheet Classification |
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March 31, 2022 |
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December 31, 2021 |
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(Dollars in millions) |
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ASSETS |
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Operating lease assets |
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Trade and other receivables, net |
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$ |
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$ |
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Operating lease assets |
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Prepaid expenses and other current assets |
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Operating lease assets |
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Right of use lease asset |
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Financing lease assets |
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Total lease assets |
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$ |
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$ |
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LIABILITIES |
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Current |
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Financing lease liabilities |
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$ |
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$ |
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Operating lease liabilities |
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Current portion of long-term lease liabilities |
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Noncurrent |
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Financing lease liabilities |
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Operating lease liabilities |
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Long-term lease liabilities, less current portion |
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Total lease liabilities |
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$ |
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$ |
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T
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Three Months Ended March 31, |
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2022 |
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2021 |
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Lease Cost |
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(Dollars in millions) |
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Operating lease cost |
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$ |
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$ |
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Financing lease cost: |
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Depreciation of lease assets |
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Interest on lease liabilities |
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Sublease income |
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Total lease cost, net |
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$ |
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$ |
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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 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.
23 | Q1 2022 Form 10-Q
15. Net Loss per Share
We compute net loss per share of common stock using the treasury stock method.
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Three Months Ended March 31, |
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2022 |
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2021 |
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(Dollars in millions, except share and per share data) |
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Numerator: |
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Net loss |
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$ |
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$ |
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Denominator: |
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Weighted-average shares outstanding - basic |
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Effect of dilutive equity instruments |
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— |
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— |
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Weighted-average shares outstanding - diluted |
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Net loss per share - basic |
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$ |
( |
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$ |
( |
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Net loss per share - diluted |
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$ |
( |
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$ |
( |
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The following potentially dilutive weighted-average shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive:
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Three Months Ended March 31, |
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2022 |
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2021 |
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Stock options |
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Restricted stock units |
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Performance stock units |
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The shares underlying the conversion option in the Convertible Senior Notes were not considered in the calculation of diluted net loss per share as the effect would have been anti-dilutive. Based on the initial conversion price, the entire outstanding principal amount of the Convertible Senior Notes as of March 31, 2022 would have been convertible into approximately
24 | Q1 2022 Form 10-Q
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 this report and in conjunction with our audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022 (our “2021 Form 10-K”). This discussion and analysis contains forward-looking statements, including statements 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 human resources (“HR”) and payroll solution for the Canadian small business market. We also continue to support customers using our legacy North America Bureau solutions, which we generally stopped actively selling to new customers following the acquisition of Dayforce, and customers using our acquired Bureau solutions in Asia Pacific Japan ("APJ"). We invest in maintenance and necessary updates to support our Bureau customers and continue to migrate them to Dayforce. Revenue from our Cloud and Bureau solutions includes investment income generated from holding customer funds before funds are remitted to taxing authorities, also referred to as float revenue or float.
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.
Dayforce Wallet is a digital wallet for customers' employees on the Dayforce platform, which was launched in the U.S. in 2020 and Canada in 2021. The Dayforce Wallet 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. The on-demand wages are loaded onto a paycard, which customers’ employees can use anywhere credit or debit cards are accepted, generating interchange fee revenue. The Dayforce Wallet mobile app makes it easy for customers' employees to check their pay deposits, account balance and transaction history.
As of March 31, 2022, we had more than 1,100 customers signed onto Dayforce Wallet with over 510 customers live on the product. As of March 31, 2022, the average registration rate increased to 34% of all eligible employees.
25 | Q1 2022 Form 10-Q
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 5,609 live Dayforce customers as of March 31, 2022.1 For the three months ended March 31, 2022, we added 175 net new live Dayforce customers.
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 our high customer retention rates, we have 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. 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.
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 suite of capabilities. 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 take customers live.
Global Events
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 created significant global volatility, uncertainty, and economic disruption. We experienced 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, due to the effects of the COVID-19 pandemic. While we experienced adverse impacts on our revenue in 2021 and 2020, we ended 2021 with employment levels at our customers in-line with pre-pandemic levels. Additionally, the federal funds rate cuts by the U.S. Federal Reserve and the overnight rate target by the Bank of Canada in March 2020 had negative effects on our float revenue in 2021 and 2020. The continued, broader implications of the pandemic on our results of operations and overall financial performance will depend on numerous evolving factors. Consequently, the extent of any potential impacts of COVID-19 remain uncertain and cannot be reasonably estimated.
In February 2022, the Russian Federation (“Russia”) and Belarus commenced a military action with the country of Ukraine. We are closely monitoring the unfolding events due to the Russia-Ukraine conflict and its regional and global ramifications. We do not have operations in Russia, Ukraine or Belarus. We are monitoring any broader economic impact from the current crisis, including increased cybersecurity risks. The specific impact on our financial condition, results of operations, and cash flows is not material as of the date of these financial statements. However, to the extent that such military action spreads to other countries, intensifies, or otherwise remains active, such action could adversely affect our business, financial condition, and results of operations.
Recent Events
Acquisitions
On March 1, 2021, we completed the purchase of 100% of the outstanding shares of Ascender HCM Pty Limited (“Ascender”) for $359.6 million. Ascender is a payroll and HR solutions provider in the Asia Pacific Japan region.
On April 30, 2021, we acquired 100% of the outstanding shares of O5 Systems, Inc. dba Ideal (“Ideal”) for $41.4 million. Ideal is a talent intelligence software provider based in Toronto, Ontario, Canada.
On October 4, 2021, we completed the acquisition of certain assets and liabilities of DataFuzion HCM, Inc. (“DataFuzion”), for $12.5 million in cash consideration and future contingent consideration payments. DataFuzion designs, implements, and supports customer specific data solutions that integrate HCM and ERP systems on their FUZE platform.
On December 3, 2021, we completed the acquisition of 100% of the outstanding interests in ATI ROW, LLC and ADAM HCM MEXICO, S. de R.L. de C.V. (collectively, "ADAM HCM") for $34.5 million. ADAM HCM is a payroll and HCM company in Latin America.
1Excluding the 2021 acquisitions of Ascender and ADAM HCM
26 | Q1 2022 Form 10-Q
Financing and Other
In March 2021, we issued $575.0 million in aggregate principal amount of 0.25% Convertible Senior Notes due 2026. In connection with the pricing of the Convertible Senior Notes, we entered into capped call transactions with the option counterparties.
How We Assess Our Performance
In assessing our performance, we consider a variety of annual and quarterly performance indicators in addition to revenue and net income. Set forth below are descriptions of our quarterly key performance measures. Additional information on our annual performance measures are described in Part II, “Item 7. Management's Discussion and Analysis" under the heading "How We Assess Our Performance" contained in our 2021 Form 10-K.
Live Dayforce Customers
We use the number of live Dayforce customers as an indicator of future revenue and the overall performance of the business and to assess the performance of our implementation services. We had 5,609 customers live on Dayforce as of March 31, 2022, compared to 5,039 customers live on Dayforce as of March 31, 2021.2
Dayforce Recurring Revenue Per Customer
We use Dayforce recurring revenue per customer as an indicator of the average size of our Dayforce recurring customer. Dayforce recurring revenue per customer was $110,947 for the trailing twelve months ended March 31, 2022, compared to $101,230 for the comparable period in 2021.3
To calculate Dayforce recurring revenue per customer, we start with Dayforce recurring revenue on a constant currency basis by applying the same exchange rate to all comparable periods for the trailing twelve months and exclude float revenue, the impact of lower employment levels due to COVID-19 pandemic in 2021 and 2020, and Ascender and ADAM HCM revenue. This amount is divided by the number of live Dayforce customers at the end of the trailing twelve month period, excluding Ascender and ADAM HCM. We calculate and monitor Dayforce recurring revenue per customer on a quarterly basis. Our Dayforce recurring revenue per customer may fluctuate as a results of a number of factors, including the number of live Dayforce customers and the number of customers purchasing the full HCM suite. We have not reconciled the Dayforce recurring revenue per customer because there is no directly comparable GAAP financial measure.
2 Excluding the 2021 acquisitions of Ascender and ADAM HCM
3 Excluding float revenue, the impact of lower employment levels in 2021 and 2020 due to the COVID-19 pandemic, Ascender and ADAM HCM revenue and on a constant currency basis
27 | Q1 2022 Form 10-Q
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. Please refer to the “Results of Operations” section below for further information on constant currency revenue. The average U.S. dollar to Canadian dollar foreign exchange rate was $1.27, with a daily range of $1.25 to $1.29, for the three months ended March 31, 2022, compared to $1.27, with a daily range of $1.24 to $1.29 for the three months ended March 31, 2021. As of March 31, 2022, the U.S. dollar to Canadian dollar foreign exchange rate was $1.25.
EBITDA, Adjusted EBITDA and Adjusted EBITDA margin
We believe that EBITDA, 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. EBITDA, 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 EBITDA as net income (loss) before interest, taxes, depreciation, and amortization, and Adjusted EBITDA as EBITDA, as adjusted to exclude foreign exchange gain (loss), share-based compensation expense and related employer taxes, severance charges, restructuring consulting fees, and certain other non-recurring items. Adjusted EBITDA margin is determined by calculating the percentage that Adjusted EBITDA is of total revenue. Management believes that EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are helpful in highlighting management performance trends because EBITDA, 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 EBITDA, Adjusted EBITDA and Adjusted EBITDA margin.
28 | Q1 2022 Form 10-Q
Results of Operations
Three Months Ended March 31, 2022 Compared With Three Months Ended March 31, 2021
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
Three Months Ended March 31, |
|
|
Increase/(Decrease) |
|
|
% of Revenue |
|
|||||||||||||||
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
|
2022 |
|
|
2021 |
|
||||||
|
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Cloud |
|
$ |
210.2 |
|
|
$ |
165.6 |
|
|
$ |
44.6 |
|
|
|
26.9 |
% |
|
|
71.7 |
% |
|
|
70.6 |
% |
Bureau |
|
|
37.7 |
|
|
|
30.4 |
|
|
|
7.3 |
|
|
|
24.0 |
% |
|
|
12.9 |
% |
|
|
13.0 |
% |
Total recurring |
|
|
247.9 |
|
|
|
196.0 |
|
|
|
51.9 |
|
|
|
26.5 |
% |
|
|
84.5 |
% |
|
|
83.6 |
% |
Professional services and other |
|
|
45.4 |
|
|
|
38.5 |
|
|
|
6.9 |
|
|
|
17.9 |
% |
|
|
15.5 |
% |
|
|
16.4 |
% |
Total revenue |
|
|
293.3 |
|
|
|
234.5 |
|
|
|
58.8 |
|
|
|
25.1 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Cloud |
|
|
64.6 |
|
|
|
46.1 |
|
|
|
18.5 |
|
|
|
40.1 |
% |
|
|
22.0 |
% |
|
|
19.7 |
% |
Bureau |
|
|
17.7 |
|
|
|
13.6 |
|
|
|
4.1 |
|
|
|
30.1 |
% |
|
|
6.0 |
% |
|
|
5.8 |
% |
Total recurring |
|
|
82.3 |
|
|
|
59.7 |
|
|
|
22.6 |
|
|
|
37.9 |
% |
|
|
28.1 |
% |
|
|
25.5 |
% |
Professional services and other |
|
|
54.5 |
|
|
|
44.7 |
|
|
|
9.8 |
|
|
|
21.9 |
% |
|
|
18.6 |
% |
|
|
19.1 |
% |
Product development and management |
|
|
40.4 |
|
|
|
25.8 |
|
|
|
14.6 |
|
|
|
56.6 |
% |
|
|
13.8 |
% |
|
|
11.0 |
% |
Depreciation and amortization |
|
|
13.0 |
|
|
|
11.1 |
|
|
|
1.9 |
|
|
|
17.1 |
% |
|
|
4.4 |
% |
|
|
4.7 |
% |
Total cost of revenue |
|
|
190.2 |
|
|
|
141.3 |
|
|
|
48.9 |
|
|
|
34.6 |
% |
|
|
64.8 |
% |
|
|
60.3 |
% |
Gross profit |
|
|
103.1 |
|
|
|
93.2 |
|
|
|
9.9 |
|
|
|
10.6 |
% |
|
|
35.2 |
% |
|
|
39.7 |
% |
Selling, general, and administrative |
|
|
122.0 |
|
|
|
95.6 |
|
|
|
26.4 |
|
|
|
27.6 |
% |
|
|
41.6 |
% |
|
|
40.8 |
% |
Operating loss |
|
|
(18.9 |
) |
|
|
(2.4 |
) |
|
|
(16.5 |
) |
|
|
(687.5 |
)% |
|
|
(6.4 |
)% |
|
|
(1.0 |
)% |
Interest expense, net |
|
|
5.8 |
|
|
|
5.6 |
|
|
|
0.2 |
|
|
|
3.6 |
% |
|
|
2.0 |
% |
|
|
2.4 |
% |
Other (income) expense, net |
|
|
(0.3 |
) |
|
|
4.6 |
|
|
|
(4.9 |
) |
|
|
(106.5 |
)% |
|
|
(0.1 |
)% |
|
|
2.0 |
% |
Loss before income taxes |
|
|
(24.4 |
) |
|
|
(12.6 |
) |
|
|
(11.8 |
) |
|
|
(93.7 |
)% |
|
|
(8.3 |
)% |
|
|
(5.4 |
)% |
Income tax expense |
|
|
3.0 |
|
|
|
6.6 |
|
|
|
(3.6 |
) |
|
|
(54.5 |
)% |
|
|
1.0 |
% |
|
|
2.8 |
% |
Net loss |
|
$ |
(27.4 |
) |
|
$ |
(19.2 |
) |
|
$ |
(8.2 |
) |
|
|
(42.7 |
)% |
|
|
(9.3 |
)% |
|
|
(8.2 |
)% |
Net profit margin (a) |
|
|
(9.3 |
)% |
|
|
(8.2 |
)% |
|
|
(1.1 |
)% |
|
|
(13.4 |
)% |
|
|
|
|
|
|
||
Adjusted EBITDA (b) |
|
$ |
57.4 |
|
|
$ |
44.5 |
|
|
$ |
12.9 |
|
|
|
29.0 |
% |
|
|
19.6 |
% |
|
|
19.0 |
% |
Adjusted EBITDA margin (b) |
|
|
19.6 |
% |
|
|
19.0 |
% |
|
|
0.6 |
% |
|
|
3.2 |
% |
|
|
|
|
|
|
||
29 | Q1 2022 Form 10-Q
Revenue. The following table sets forth certain information regarding our revenues for the periods presented:
|
|
Three Months Ended March 31, |
|
|
Percentage |
|
|
Impact of |
|
|
Percentage |
|
||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 vs. 2021 |
|
|
|
|
|
2022 vs. 2021 |
|
|||||
|
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Dayforce recurring, excluding float |
|
$ |
180.3 |
|
|
$ |
137.6 |
|
|
|
31.0 |
% |
|
|
0.4 |
% |
|
|
30.6 |
% |
Dayforce float |
|
|
8.3 |
|
|
|
7.7 |
|
|
|
7.8 |
% |
|
|
(— |
)% |
|
|
7.8 |
% |
Total Dayforce recurring |
|
|
188.6 |
|
|
|
145.3 |
|
|
|
29.8 |
% |
|
|
0.4 |
% |
|
|
29.4 |
% |
Powerpay recurring, excluding float |
|
|
19.4 |
|
|
|
18.4 |
|
|
|
5.4 |
% |
|
|
(0.6 |
)% |
|
|
6.0 |
% |
Powerpay float |
|
|
2.2 |
|
|
|
1.9 |
|
|
|
15.8 |
% |
|
|
(— |
)% |
|
|
15.8 |
% |
Total Powerpay recurring |
|
|
21.6 |
|
|
|
20.3 |
|
|
|
6.4 |
% |
|
|
(0.5 |
)% |
|
|
6.9 |
% |
Total Cloud recurring |
|
|
210.2 |
|
|
|
165.6 |
|
|
|
26.9 |
% |
|
|
0.3 |
% |
|
|
26.6 |
% |
Dayforce professional services and other |
|
|
41.6 |
|
|
|
36.8 |
|
|
|
13.0 |
% |
|
|
(0.6 |
)% |
|
|
13.6 |
% |
Powerpay professional services and other |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
(33.3 |
)% |
|
|
(— |
)% |
|
|
(33.3 |
)% |
Total Cloud professional services and |
|
|
41.8 |
|
|
|
37.1 |
|
|
|
12.7 |
% |
|
|
(0.5 |
)% |
|
|
13.2 |
% |
Total Cloud revenue |
|
|
252.0 |
|
|
|
202.7 |
|
|
|
24.3 |
% |
|
|
0.1 |
% |
|
|
24.2 |
% |
Bureau recurring, excluding float |
|
|
36.8 |
|
|
|
29.3 |
|
|
|
25.6 |
% |
|
|
(1.0 |
)% |
|
|
26.6 |
% |
Bureau float |
|
|
0.9 |
|
|
|
1.1 |
|
|
|
(18.2 |
)% |
|
|
(— |
)% |
|
|
(18.2 |
)% |
Total Bureau recurring |
|
|
37.7 |
|
|
|
30.4 |
|
|
|
24.0 |
% |
|
|
(1.0 |
)% |
|
|
25.0 |
% |
Bureau professional services and other |
|
|
3.6 |
|
|
|
1.4 |
|
|
|
157.1 |
% |
|
|
(— |
)% |
|
|
157.1 |
% |
Total Bureau revenue |
|
|
41.3 |
|
|
|
31.8 |
|
|
|
29.9 |
% |
|
|
(0.9 |
)% |
|
|
30.8 |
% |
Total revenue |
|
$ |
293.3 |
|
|
$ |
234.5 |
|
|
|
25.1 |
% |
|
|
(— |
)% |
|
|
25.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Dayforce |
|
$ |
230.2 |
|
|
$ |
182.1 |
|
|
|
26.4 |
% |
|
|
0.2 |
% |
|
|
26.2 |
% |
Powerpay |
|
|
21.8 |
|
|
|
20.6 |
|
|
|
5.8 |
% |
|
|
(0.5 |
)% |
|
|
6.3 |
% |
Total Cloud revenue |
|
$ |
252.0 |
|
|
$ |
202.7 |
|
|
|
24.3 |
% |
|
|
0.1 |
% |
|
|
24.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Dayforce, excluding float |
|
$ |
221.9 |
|
|
$ |
174.4 |
|
|
|
27.2 |
% |
|
|
0.2 |
% |
|
|
27.0 |
% |
Powerpay, excluding float |
|
|
19.6 |
|
|
|
18.7 |
|
|
|
4.8 |
% |
|
|
(0.5 |
)% |
|
|
5.3 |
% |
Cloud float |
|
|
10.5 |
|
|
|
9.6 |
|
|
|
9.4 |
% |
|
|
(— |
)% |
|
|
9.4 |
% |
Total Cloud revenue |
|
$ |
252.0 |
|
|
$ |
202.7 |
|
|
|
24.3 |
% |
|
|
0.1 |
% |
|
|
24.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cloud recurring, excluding float |
|
$ |
199.7 |
|
|
$ |
156.0 |
|
|
|
28.0 |
% |
|
|
0.3 |
% |
|
|
27.7 |
% |
Bureau recurring, excluding float |
|
|
36.8 |
|
|
|
29.3 |
|
|
|
25.6 |
% |
|
|
(1.0 |
)% |
|
|
26.6 |
% |
Total recurring, excluding float |
|
|
236.5 |
|
|
|
185.3 |
|
|
|
27.6 |
% |
|
|
0.1 |
% |
|
|
27.5 |
% |
Total revenue, excluding float |
|
$ |
281.9 |
|
|
$ |
223.8 |
|
|
|
26.0 |
% |
|
|
(— |
)% |
|
|
26.0 |
% |
Total revenue increased $58.8 million, or 25.1%, to $293.3 million for the three months ended March 31, 2022, compared to $234.5 million for the three months ended March 31, 2021. This increase was primarily attributable to an increase in Cloud revenue of $49.3 million, or 24.3%, from $202.7 million for the three months ended March 31, 2021, to $252.0 million for the three months ended March 31, 2022. The Cloud revenue increase was driven by an increase of $44.6 million, or 26.9%, in Cloud recurring revenue and an increase of $4.7 million, or 12.7%, in Cloud professional services and other revenue. Cloud revenue growth was driven by both an increase in customers live on the Dayforce platform and an increase in recurring revenue per customer, as well as the addition of the Cloud revenue generated from acquired businesses during 2021. Bureau revenue increased $9.5 million for the three months ended March 31, 2022, primarily driven by the addition of the Bureau revenue generated from acquired businesses during 2021.
30 | Q1 2022 Form 10-Q
Excluding float revenue and on a constant currency basis, total revenue grew 26.0%, reflecting a 24.9% increase in Cloud revenue and a 32.6% increase in Bureau revenue. Excluding float revenue and on a constant currency basis, Cloud revenue growth reflected a 27.7% increase in Cloud recurring revenue and a 13.2% increase in Cloud professional services and other revenue.
Dayforce revenue increased 26.4%, and Powerpay revenue increased 5.8% for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. Excluding float revenue and on a constant currency basis, Dayforce revenue increased 27.0%, reflecting a 30.6% increase in Dayforce recurring revenue and a 13.6% increase in Dayforce professional services and other revenue. Excluding float revenue and on a constant currency basis, Powerpay revenue increased 5.3%.
Float revenue included in recurring revenue was $11.4 million and $10.7 million for the three months ended March 31, 2022, and 2021, respectively. Float revenue associated with Cloud revenue was $10.5 million and $9.6 million for the three months ended March 31, 2022, and 2021, respectively. The average float balance for our customer funds for the three months ended March 31, 2022, was $5,088.9 million, compared to $4,331.9 million for the three months ended March 31, 2021, an increase of 17.5%. On a constant currency basis, the average float balance for our customer funds for the three months ended March 31, 2022, increased 20.4% compared to the three months ended March 31, 2021. The average yield was 0.91% during the three months ended March 31, 2022, a decline of 11 basis points compared to the average yield during the three months ended March 31, 2021. For both the three months ended March 31, 2022 and 2021, approximately 30% of our average float balance consisted of customer funds outside of the U.S., primarily our Canadian customer funds.
Cost of revenue. Total cost of revenue for the three months ended March 31, 2022, was $190.2 million, an increase of $48.9 million, or 34.6%, compared to the three months ended March 31, 2021. Recurring cost of revenue for the three months ended March 31, 2022, increased $22.6 million, or 37.9%, compared with the three months ended March 31, 2021, primarily due to the integration of our APJ acquisitions, specifically $11.2 million of costs associated with re-balancing our resources across our global footprint resulting in one-time severance and restructuring costs. Further, the increase in recurring cost of revenue is due to additional costs related to global expansion and costs to support the growing Dayforce customer base. Professional services and other cost of revenue increased $9.8 million, or 21.9%, for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to costs incurred to take new customers live as well as expansion of our capabilities to serve international customers.
Product development and management expense increased $14.6 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The increase reflects additional personnel costs, severance, and share-based compensation. For the three months ended March 31, 2022, and 2021, our investment in software development was $37.7 million and $26.2 million, respectively, consisting of $22.6 million and $15.2 million, of research and development expense, which is included within product development and management expense, and $15.1 million and $11.0 million in capitalized software development costs, respectively.
Depreciation and amortization expense associated with cost of revenue increased by $1.9 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, as we continue to capitalize Dayforce related and other development costs and subsequently amortize these costs.
Gross profit. The following table presents total gross margin and solution gross margins for the periods presented:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Total gross margin |
|
|
35.2 |
% |
|
|
39.7 |
% |
Gross margin by solution: |
|
|
|
|
|
|
||
Cloud recurring |
|
|
69.3 |
% |
|
|
72.2 |
% |
Bureau recurring |
|
|
53.1 |
% |
|
|
55.3 |
% |
Professional services and other |
|
|
(20.0 |
)% |
|
|
(16.1 |
)% |
Total gross margin is defined as total gross profit as a percentage of total revenue, which is 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, which is exclusive of any product development and management or depreciation and amortization cost allocations.
31 | Q1 2022 Form 10-Q
Total gross margin for the three months ended March 31, 2022, declined 450 basis points compared to total gross margin for the three months ended March 31, 2021 due to increased severance related to the re-balancing of our resources across our global footprint and share-based compensation, as well as continued development and expansion of our service offerings. Gross profit increased by $9.9 million, or 10.6% for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due to the $58.8 million or 25.1% increase in revenue which outpaced the increase in cost of revenue.
Cloud recurring gross margin was 69.3% for the three months ended March 31, 2022, compared to 72.2% for the three months ended March 31, 2021. The decrease in cloud recurring gross margin is primarily due to the integration of our APJ acquisitions, specifically a re-balancing of our resources across our global footprint resulting in one-time severance and restructuring costs. Excluding the impact of share-based compensation and related employer taxes, severance expense, and certain other non-recurring items, cloud recurring gross margin increased by 220 basis points, primarily due to an increase in the proportion of Dayforce customers live for more than two years, which increased from 76% as of March 31, 2021, to 80% as of March 31, 2022, and was also attributable to economies of scale in hosting and customer support as we continue to take customers live on Dayforce. Bureau recurring gross margin declined from 55.3% for the three months ended March 31, 2021, to 53.1% for the three months ended March 31, 2022, reflecting a higher proportion of customer support costs to support the end-of-life of our legacy Bureau payroll services, as well as lower margins on acquired Bureau services. Professional services and other gross margin was (20.0)% for the three months ended March 31, 2022, compared to (16.1)% for the three months ended March 31, 2021, reflecting additional costs to take new customers live, expansion of our capabilities to serve international customers, and increased share-based compensation.
Selling, general, and administrative expense. Selling, general, and administrative expense increased $26.4 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. Excluding the impact of share-based compensation and related employer taxes, restructuring consulting fees, severance expense, amortization of acquisition-related intangible assets, and certain other non-recurring items, selling, general, and administrative expenses increased by $17.5 million. This adjusted increase reflects an increase of $8.9 million in general and administrative expense and $8.6 million in sales and marketing expense, both of which are primarily driven by employee-related costs. The increase in general and administrative expense is also driven by additional expense recognized in relation to our recent acquisitions. The increase in sales and marketing expense primarily represents investment in our sales force in order to support our growth initiatives. Please refer to the “Non-GAAP Measures” section for additional information on the excluded items.
Interest expense, net. Interest expense, net was relatively consistent at $5.8 million and $5.6 million for the three months ended March 31, 2022, and 2021, respectively.
Other (income) expense, net. For the three months ended March 31, 2022, and 2021, we realized other income, net of $0.3 million and incurred other expense, net of $4.6 million, respectively. Other income, net was comprised of foreign currency translation gain, partially offset by net periodic pension expense for the three months ended March 31, 2022. For the three months ended March 31, 2021, other expense, net was comprised of foreign currency translation loss and net periodic pension expense.
Income tax expense. For the three months ended March 31, 2022, and 2021, we recorded income tax expense of $3.0 million and $6.6 million, respectively. The $3.6 million decrease in income tax expense was primarily due to the $4.7 million tax benefit from current operations, partially offset by $1.0 million of other tax expenses and benefits.
Net loss. We realized net loss of $27.4 million for the three months ended March 31, 2022, compared to $19.2 million for the three months ended March 31, 2021. The increase in net loss is primarily due to higher share-based compensation, investments in product development and selling capabilities, and further integration of the APJ acquisitions, specifically a re-balancing of our resources across our global footprint. For the three months ended March 31, 2022 and 2021, net profit margin was (9.3)% and (8.2)%, respectively.
Adjusted EBITDA. Adjusted EBITDA increased by $12.9 million to $57.4 million, for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, and Adjusted EBITDA margin was 19.6% for the three months ended March 31, 2022, compared with Adjusted EBITDA margin of 19.0% for the three months ended March 31, 2021. Please refer to the “Non-GAAP Measures” section for a discussion and reconciliation of Adjusted EBITDA and Adjusted EBITDA margin and additional information on the excluded items.
32 | Q1 2022 Form 10-Q
Liquidity and Capital Resources
Our primary sources of liquidity are our existing cash and equivalents, cash provided by operating activities, availability under our Revolving Credit Facility, and proceeds from debt issuances and equity offerings. As of March 31, 2022, we had cash and equivalents of $354.8 million and our total debt balance was $1,240.5 million.
Our primary liquidity needs are related to funding of general business requirements, including the payment of interest and principal on our debt, capital expenditures, product development, and funding Dayforce Wallet on demand pay requests. From time to time, we have made investments in businesses or acquisitions of companies, which are also liquidity needs.
As of March 31, 2022, we held $1.9 million of restricted cash as collateral for bank guarantees. The bank guarantees provide financial assurance that we will fulfill certain lease obligations. The cash is restricted as to withdrawal or use while the related bank guarantee is outstanding.
On February 26, 2021, we elected to borrow $295.0 million under the Revolving Credit Facility to fund our acquisition of Ascender on March 1, 2021. We repaid the $295.0 million draw on March 5, 2021 with proceeds from the issuance of our Convertible Senior Notes.
In March 2021, we issued $575.0 million in aggregate principal amount of 0.25% Convertible Senior Notes due 2026. The total net proceeds from the offering, after deducting initial purchase discounts and issuance costs, were $561.8 million. In connection with the Convertible Senior Notes, we entered into capped call transactions which are expected to reduce the potential dilution of our common stock upon any conversion of the Convertible Senior Notes and/or offset any cash payments we could be required to make in excess of the principal amount of converted Convertible Senior Notes. We used an aggregate amount of $45.0 million of the net proceeds of the Convertible Senior Notes to purchase the Capped Calls. Please refer to Note 7, “Debt,” to our condensed consolidated financial statements for further information on our Convertible Senior Notes, and the related indenture. We used the remainder of the net proceeds from the offering (i) to repay $295.0 million principal amount under the Revolving Credit Facility and pay related accrued interest and (ii) for general corporate purposes.
On December 15, 2021, we completed the second amendment to the Senior Secured Credit Facility, in which the maturity date of the Revolving Credit Facility was extended from April 30, 2023 to January 29, 2025.
We believe that our cash flow from operations, available cash and equivalents, and availability under our Revolving Credit Facility will be sufficient to meet our liquidity needs for the foreseeable future. Dayforce Wallet on demand pay requests are currently funded from our operating cash balances, until it is reimbursed by the customers through their normal payroll funding cycles. We evaluate the creditworthiness of each customer utilizing the Dayforce Wallet feature. 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 provide assurance 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 and Dayforce Wallet on demand pay requests 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 provide assurance 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. 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.
Our customer 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. Accordingly, we maintain on average approximately 45% to 55% of customer 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 on average approximately 45% to 55% of customer 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 to meet payment obligations, we also have financing arrangements and may pledge fixed income securities for short-term financing. The customer assets are held in segregated accounts intended for the specific purpose of satisfying client fund obligations and therefore are not freely available for our general business use.
33 | Q1 2022 Form 10-Q
Statements of Cash Flows
Changes in cash flows due to purchases of customer fund marketable securities and proceeds from the sale or maturity of customer fund marketable securities, as well as the carrying value of customer 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 funds are fully segregated from our operating cash accounts and are evaluated and tracked separately by management. The table below summarizes the activity within the condensed consolidated statements of cash flows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(Dollars in millions) |
|
|||||
Net cash provided by (used in) operating activities |
|
$ |
5.5 |
|
|
$ |
(4.5 |
) |
Net cash used in investing activities |
|
|
(184.7 |
) |
|
|
(404.7 |
) |
Net cash provided by financing activities |
|
|
3,883.7 |
|
|
|
1,040.0 |
|
Effect of exchange rate changes on cash, restricted cash, and equivalents |
|
|
1.7 |
|
|
|
3.4 |
|
Net increase in cash, restricted cash, and equivalents |
|
|
3,706.2 |
|
|
|
634.2 |
|
Cash, restricted cash, and equivalents at beginning of period |
|
|
1,952.9 |
|
|
|
2,228.5 |
|
Cash, restricted cash, and equivalents at end of period |
|
|
5,659.1 |
|
|
|
2,862.7 |
|
|
|
|
|
|
|
|
||
Cash and equivalents |
|
|
354.8 |
|
|
|
339.6 |
|
Restricted cash and equivalents |
|
|
5,304.3 |
|
|
|
2,523.1 |
|
Total cash, restricted cash, and equivalents |
|
$ |
5,659.1 |
|
|
$ |
2,862.7 |
|
Operating Activities
Net cash provided by operating activities was $5.5 million during the three months ended March 31, 2022, primarily attributable to net loss of $27.4 million offset by the net impact of adjustments for certain non-cash items of $64.8 million, including $35.5 million of non-cash share-based compensation expense, $20.9 million of depreciation and amortization, and deferred income tax expense of $4.5 million. Additionally, there were net working capital reductions of $31.9 million. The net working capital reductions included an increase of $14.1 million in prepaid expenses and other current assets, primarily due to an increase in annual software contracts and contract assets, a decrease of $8.2 million in employee compensation and benefits primarily due to annual incentive payments made in the first quarter of 2022 related to our 2021 incentive plans, and a decrease of $4.6 million in accounts payable and other accrued expenses primarily due to timing of payments. Included within net cash flows provided by operating activities for the three months ended March 31, 2022, was $5.3 million in cash interest payments on our long-term debt and $5.7 million in cash tax payments, net of refunds.
Net cash used in operating activities was $4.5 million during the three months ended March 31, 2021, primarily attributable to net working capital reductions of $28.5 million and net loss of $19.2 million, largely offset by the net impact of adjustments for certain non-cash items of $43.2 million, including $22.8 million of non-cash share-based compensation expense and $15.0 million of depreciation and amortization. The net working capital reductions included a $24.7 million reduction in liabilities for employee compensation and benefits due to payments of accrued commissions and incentive compensation, an $8.1 million increase in accounts receivable due to timing of receipts, a $7.1 million increase in prepaid expenses and other current assets, primarily due to payments for annual maintenance contracts, partially offset by an increase of $8.6 million of accrued taxes primarily due to tax accruals. Included within net cash flows provided by operating activities for the three months ended March 31, 2021, was $4.4 million in cash interest payments on our long-term debt and $0.2 million in cash tax payments, net of refunds.
Investing Activities
During the three months ended March 31, 2022, net cash used in investing activities was $184.7 million, consisting of purchases of customer funds marketable securities of $276.9 million and capital expenditures of $19.9 million, partially offset by proceeds from the sale and maturity of customer funds marketable securities of $112.1 million. Our capital expenditures included $17.8 million for software and technology and $2.1 million for property and equipment.
34 | Q1 2022 Form 10-Q
During the three months ended March 31, 2021, net cash used in investing activities was $404.7 million, consisting of acquisition costs, net of cash acquired of $338.3 million, purchases of customer funds marketable securities of $148.5 million, and capital expenditures of $15.3 million, partially offset by proceeds from the sale and maturity of customer funds marketable securities of $97.4 million. Our capital expenditures included $11.9 million for software and technology and $3.4 million for property and equipment.
Financing Activities
Net cash provided by financing activities was $3,883.7 million during the three months ended March 31, 2022. This cash inflow is primarily attributable to an increase in net customer fund obligations of $3,879.8 million and proceeds from issuance of common stock upon exercise of stock options of $6.0 million, partially offset by payments on our long-term debt obligations of $2.1 million.
Net cash provided by financing activities was $1,040.0 million during the three months ended March 31, 2021. This cash inflow is primarily attributable to proceeds from the issuance of our Convertible Senior Notes of $561.8 million, increase in net customer fund obligations of $513.2 million, proceeds from issuance of common stock upon exercise of stock options of $11.3 million, partially offset by the purchase of the capped calls related to the Convertible Senior Notes of $45.0 million and payments on our long-term debt obligations of $1.3 million.
Backlog
Backlog is equivalent to our remaining performance obligations, which represents contracted revenue for recurring 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. As of March 31, 2022, our remaining performance obligations were approximately $1,130.6 million. 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 March 31, 2022, 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 three months ended March 31, 2022, there were no significant changes to our critical accounting policies and estimates as described in Part II, “Item 7. Management's Discussion and Analysis" under the heading "Critical Accounting Policies and Estimates" contained in our 2021 Form 10-K.
Non-GAAP Measures
EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin
We believe that EBITDA, 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. EBITDA, 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 EBITDA as net income (loss) before interest, taxes, depreciation, and amortization, and Adjusted EBITDA as EBITDA, as adjusted to exclude foreign exchange gains (losses), share-based compensation expense and related employer taxes, severance charges, restructuring consulting fees, and certain other non-recurring items. Adjusted EBITDA margin is determined by calculating the percentage that Adjusted EBITDA is of total revenue. Management believes that EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are helpful in highlighting management performance trends because EBITDA, Adjusted EBITDA and Adjusted EBITDA margin exclude the results of decisions that are outside the control of operating management.
35 | Q1 2022 Form 10-Q
Our presentation of EBITDA, 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. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin should not be considered as alternatives to net income (loss), 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 EBITDA, Adjusted EBITDA and Adjusted EBITDA margin should not be construed to imply that our future results will be unaffected by these items. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are included in this discussion because they are key metrics used by management to assess our operating performance.
EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not defined under GAAP, are not measures of net income (loss) or any other performance measures derived in accordance with GAAP, and are subject to important limitations. Our use of the terms EBITDA, 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.
EBITDA, 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 EBITDA, Adjusted EBITDA and Adjusted EBITDA margin do not reflect the following:
In evaluating EBITDA, 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 loss to EBITDA, Adjusted EBITDA for the periods presented:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(Dollars in millions) |
|
|||||
Net loss |
|
$ |
(27.4 |
) |
|
$ |
(19.2 |
) |
Interest expense, net |
|
|
5.8 |
|
|
|
5.6 |
|
Income tax expense |
|
|
3.0 |
|
|
|
6.6 |
|
Depreciation and amortization |
|
|
20.9 |
|
|
|
15.0 |
|
EBITDA (a) |
|
|
2.3 |
|
|
|
8.0 |
|
Foreign exchange (gain) loss |
|
|
(0.8 |
) |
|
|
1.9 |
|
Share-based compensation (b) |
|
|
35.5 |
|
|
|
23.0 |
|
Severance charges (c) |
|
|
17.3 |
|
|
|
2.1 |
|
Restructuring consulting fees (d) |
|
|
1.9 |
|
|
|
7.8 |
|
Other non-recurring items (e) |
|
|
1.2 |
|
|
|
1.7 |
|
Adjusted EBITDA |
|
$ |
57.4 |
|
|
$ |
44.5 |
|
Net profit margin (f) |
|
|
(9.3 |
)% |
|
|
(8.2 |
)% |
Adjusted EBITDA margin |
|
|
19.6 |
% |
|
|
19.0 |
% |
36 | Q1 2022 Form 10-Q
The following tables present a reconciliation of our reported results to our non-GAAP Adjusted EBITDA basis for all periods presented:
|
|
Three Months Ended March 31, 2022 |
|
|||||||||||||||||
|
|
As reported |
|
|
Share-based |
|
|
Severance |
|
|
Other (a) |
|
|
Adjusted (b) |
|
|||||
|
|
(Dollars in millions) |
|
|||||||||||||||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cloud |
|
$ |
64.6 |
|
|
$ |
3.5 |
|
|
$ |
9.6 |
|
|
$ |
— |
|
|
$ |
51.5 |
|
Bureau |
|
|
17.7 |
|
|
|
0.4 |
|
|
|
1.5 |
|
|
|
— |
|
|
|
15.8 |
|
Total recurring |
|
|
82.3 |
|
|
|
3.9 |
|
|
|
11.1 |
|
|
|
— |
|
|
|
67.3 |
|
Professional services and other |
|
|
54.5 |
|
|
|
2.9 |
|
|
|
0.2 |
|
|
|
— |
|
|
|
51.4 |
|
Product development and management |
|
|
40.4 |
|
|
|
5.8 |
|
|
|
3.3 |
|
|
|
— |
|
|
|
31.3 |
|
Depreciation and amortization |
|
|
13.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13.0 |
|
Total cost of revenue |
|
|
190.2 |
|
|
|
12.6 |
|
|
|
14.6 |
|
|
|
— |
|
|
|
163.0 |
|
Sales and marketing |
|
|
58.4 |
|
|
|
5.2 |
|
|
|
2.1 |
|
|
|
— |
|
|
|
51.1 |
|
General and administrative |
|
|
63.6 |
|
|
|
17.7 |
|
|
|
0.6 |
|
|
|
10.5 |
|
|
|
34.8 |
|
Operating (loss) profit |
|
|
(18.9 |
) |
|
|
35.5 |
|
|
|
17.3 |
|
|
|
10.5 |
|
|
|
44.4 |
|
Other (income) expense, net |
|
|
(0.3 |
) |
|
|
— |
|
|
|
— |
|
|
|
(0.4 |
) |
|
|
0.1 |
|
Depreciation and amortization |
|
|
20.9 |
|
|
|
— |
|
|
|
— |
|
|
|
(7.8 |
) |
|
|
13.1 |
|
EBITDA |
|
$ |
2.3 |
|
|
$ |
35.5 |
|
|
$ |
17.3 |
|
|
$ |
2.3 |
|
|
$ |
57.4 |
|
Interest expense, net |
|
|
5.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5.8 |
|
Income tax expense (c) |
|
|
3.0 |
|
|
|
— |
|
|
|
— |
|
|
|
(15.0 |
) |
|
|
18.0 |
|
Depreciation and amortization |
|
|
20.9 |
|
|
|
— |
|
|
|
— |
|
|
|
7.8 |
|
|
|
13.1 |
|
Net (loss) income |
|
$ |
(27.4 |
) |
|
$ |
35.5 |
|
|
$ |
17.3 |
|
|
$ |
(4.9 |
) |
|
$ |
20.5 |
|
37 | Q1 2022 Form 10-Q
|
|
Three Months Ended March 31, 2021 |
|
|||||||||||||||||
|
|
As reported |
|
|
Share-based |
|
|
Severance |
|
|
Other (a) |
|
|
Adjusted (b) |
|
|||||
|
|
(Dollars in millions) |
|
|||||||||||||||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cloud |
|
$ |
46.1 |
|
|
$ |
1.9 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
44.2 |
|
Bureau |
|
|
13.6 |
|
|
|
0.4 |
|
|
|
0.7 |
|
|
|
— |
|
|
|
12.5 |
|
Total recurring |
|
|
59.7 |
|
|
|
2.3 |
|
|
|
0.7 |
|
|
|
— |
|
|
|
56.7 |
|
Professional services and other |
|
|
44.7 |
|
|
|
1.9 |
|
|
|
— |
|
|
|
— |
|
|
|
42.8 |
|
Product development and management |
|
|
25.8 |
|
|
|
3.1 |
|
|
|
0.2 |
|
|
|
— |
|
|
|
22.5 |
|
Depreciation and amortization |
|
|
11.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11.1 |
|
Total cost of revenue |
|
|
141.3 |
|
|
|
7.3 |
|
|
|
0.9 |
|
|
|
— |
|
|
|
133.1 |
|
Sales and marketing |
|
|
46.1 |
|
|
|
2.8 |
|
|
|
0.8 |
|
|
|
— |
|
|
|
42.5 |
|
General and administrative |
|
|
49.5 |
|
|
|
12.9 |
|
|
|
0.4 |
|
|
|
10.3 |
|
|
|
25.9 |
|
Operating (loss) profit |
|
|
(2.4 |
) |
|
|
23.0 |
|
|
|
2.1 |
|
|
|
10.3 |
|
|
|
33.0 |
|
Other expense, net |
|
|
4.6 |
|
|
|
— |
|
|
|
— |
|
|
|
3.3 |
|
|
|
1.3 |
|
Depreciation and amortization |
|
|
15.0 |
|
|
|
— |
|
|
|
— |
|
|
|
(2.2 |
) |
|
|
12.8 |
|
EBITDA |
|
$ |
8.0 |
|
|
$ |
23.0 |
|
|
$ |
2.1 |
|
|
$ |
11.4 |
|
|
$ |
44.5 |
|
Interest expense, net |
|
|
5.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5.6 |
|
Income tax expense (c) |
|
|
6.6 |
|
|
|
— |
|
|
|
— |
|
|
|
(3.8 |
) |
|
|
10.4 |
|
Depreciation and amortization |
|
|
15.0 |
|
|
|
— |
|
|
|
— |
|
|
|
2.2 |
|
|
|
12.8 |
|
Net (loss) income |
|
$ |
(19.2 |
) |
|
$ |
23.0 |
|
|
$ |
2.1 |
|
|
$ |
9.8 |
|
|
$ |
15.7 |
|
38 | Q1 2022 Form 10-Q
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 global events. 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. Our exposure to foreign currency exchange rates has historically been partially hedged as our foreign currency denominated inflows create a natural hedge against our foreign currency denominated expenses. Accordingly, our results of operations and cash flows were not materially affected by fluctuation in foreign currency exchange rates, and we believe that a hypothetical 10% change in foreign currency exchange rates or inability to access foreign funds would not materially affect our ability to meet our operational needs or result in a material foreign currency loss in the future. 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 certain jurisdictions, we collect funds for payment of payroll and taxes; temporarily hold such funds in segregated accounts 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 customer funds in high- quality bank deposits, money market mutual funds, commercial paper or collateralized short-term investments. We may also invest these funds in government securities, as well as highly rated asset-backed, mortgage-backed, corporate, and bank securities.
We have exposure to risks associated with changes in laws and regulations that may affect customer fund balances. For example, a change in regulations, either reducing the amount of taxes to be withheld or allowing less time to remit taxes to government authorities, would reduce our average customer fund balances and float revenue. Based on current market conditions, portfolio composition and investment practices, a 100 basis point increase in market investment rates would result in approximately $24 million increase in float revenue over the ensuing twelve month period. There are no incremental costs of revenue associated with changes in float revenue.
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 a change 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.
A 100 basis point increase in the LIBOR rates would result in approximately $6 million increase in our interest expense, net over the ensuring twelve-month period. Please refer to Note 9, "Debt" for additional information.
We pay floating rates of interest on our Term Debt and Revolving Credit Facility. The interest paid on these borrowings will fluctuate up or down in relation to changes in market interest rates.
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
39 | Q1 2022 Form 10-Q
periods, contributions, and benefit experience. The effective discount rate used in accounting for pension and other benefit obligations in 2021 ranged from 2.00% to 2.36%. The expected rate of return on plan assets for qualified pension benefits in 2022 is 3.30%.
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 Co-Chief Executive Officers 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 Co-Chief Executive Officers 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 Co-Chief Executive Officers 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 March 31, 2022, that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting.
40 | Q1 2022 Form 10-Q
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
On October 21, 2021, a claim was issued by purported stockholder, Bluemoon Capital Ltd., in the Superior Court of Justice of Ontario, Canada. The claim is against the Company, together with David Ossip, Chair and Co-Chief Executive Officer of the Company, Arthur Gitajn, former EVP and Chief Financial Officer of the Company, Gnaneshwar Rao, director of the Company and Brent Bickett, director of the Company, as well as certain third parties. The action, which is a proposed class action, alleges misrepresentations and negligence in connection with the disclosure made by the Company in its April 25, 2018 Prospectuses (which were later incorporated by reference into the Company’s May 24, 2018 Interim Financial Statements and MD&A) regarding matters surrounding the Company’s distribution to its pre-IPO stockholders of its 50% interest in LifeWorks Corporation Ltd. On January 19, 2022, the Ontario court rejected the Norwich Application for discovery by plaintiff (equitable or discretionary remedy in Canada for disclosure of documentation to form an action), which had been filed prior to filing the class action on the basis that it did not meet the key criteria for pre-action discovery. Plaintiff has appealed this decision.
The action seeks unspecified monetary damages under the Ontario Securities Act and at common law.
At this early stage of the proceeding, the ultimate disposition is not yet determinable, but we believe that the likelihood of a material loss arising out of this claim is remote.
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 our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
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.
41 | Q1 2022 Form 10-Q
ITEM 6. EXHIBITS
(a) Exhibits
The following exhibits are filed or furnished as a part of this report:
Exhibit No. |
|
Description |
|
|
|
3.1 |
|
|
|
|
|
3.2 |
|
|
|
|
|
10.1* |
|
|
|
|
|
10.2*** |
|
|
|
|
|
10.3*** |
|
|
|
|
|
10.4*** |
|
Sales Incentive Plan for Rakesh Subramanian, effective February 23, 2022 (redacted). |
|
|
|
10.5*** |
|
|
|
|
|
10.6* |
|
|
|
|
|
10.7* |
|
|
|
|
|
10.8* |
|
|
|
|
|
10.9* |
|
|
|
|
|
31.1** |
|
|
|
|
|
31.2** |
|
|
|
|
|
31.3** |
|
|
|
|
|
32.1** |
|
|
|
|
|
32.2** |
|
|
|
|
|
32.3** |
|
|
|
|
|
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 |
|
|
|
42 | Q1 2022 Form 10-Q
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.
*** Management compensatory plan or arrangement and filed herewith.
43 | Q1 2022 Form 10-Q
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: May 4, 2022 |
By: |
/s/ David D. Ossip |
|
|
|
Name: |
David D. Ossip |
|
|
Title: |
Co-Chief Executive Officer |
|
|
|
(Co-Principal Executive Officer) |
|
|
|
|
Date: May 4, 2022 |
By: |
/s/ Leagh E. Turner |
|
|
|
Name: Leagh E. Turner |
|
|
|
Title: Co-Chief Executive Officer |
|
|
|
(Co-Principal Executive Officer) |
|
|
|
|
|
Date: May 4, 2022 |
By: |
/s/ Noémie C. Heuland |
|
|
|
Name: |
Noémie C. Heuland |
|
|
Title: |
Executive Vice President and Chief Financial Officer |
|
|
|
(Principal Financial Officer) |
|
|
|
|
44 | Q1 2022 Form 10-Q