Company Quick10K Filing
Quick10K
Ceridian HCM Holding
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$50.95 137 $6,980
S-1 2019-03-15 Public Filing
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
8-K 2019-04-09 Officers
8-K 2019-03-14 Other Events
8-K 2019-02-14
8-K 2019-02-05 Earnings, Officers, Exhibits
8-K 2018-10-29 Earnings, Exhibits
8-K 2018-08-08 Earnings, Exhibits
8-K 2018-08-07 Officers, Exhibits
8-K 2018-07-22 Officers, Exhibits
8-K 2018-05-22 Earnings, Exhibits
8-K 2018-05-09 Earnings, Exhibits
8-K 2018-04-30 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
LEN Lennar 16,610
NCLH Norwegian Cruise Line 12,830
GORO Gold Resource 240
AGFS Agrofresh Solutions 165
ALO Alpharma 61
ICCH ICC Holdings 46
HSTC HST Global 0
MDXG Mimedx Group 0
HCGS Highcom Global Security 0
BRTX Biorestorative Therapies 0
CDAY 2019-03-15
Part Ii-Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution.
Item 14. Indemnification of Officers and Directors.
Item 15. Recent Sales of Unregistered Securities
Item 16. Exhibits and Financial Statement Schedules
Item 17. Undertakings
EX-1.1 d714686dex11.htm
EX-5.1 d714686dex51.htm
EX-23.1 d714686dex231.htm

Ceridian HCM Holding Filing 2019-03-15

CDAY Filing


S-1 1 d714686ds1.htm S-1 S-1
Table of Contents

As filed with the Securities and Exchange Commission on March 15, 2019

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Ceridian HCM Holding Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7372   46-3231686

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

3311 East Old Shakopee Road

Minneapolis, Minnesota

55425

(952) 853-8100

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

David D. Ossip

Chief Executive Officer

3311 East Old Shakopee Road

Minneapolis, Minnesota

55425

(952) 853-8100

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

Alexander D. Lynch, Esq.

Weil, Gotshal & Manges LLP

767 Fifth Avenue

New York, New York 10153

(212) 310-8000 (Phone)

(212) 310-8007 (Fax)

 

Scott A. Kitching, Esq.

Executive Vice President, General Counsel and Assistant Secretary

3311 East Old Shakopee Road

Minneapolis, Minnesota 55425

(952) 853-8100

 

Marc D. Jaffe, Esq.

Ian D. Schuman, Esq.

Latham & Watkins LLP

885 Third Avenue

New York, New York 10022

(212) 906-1200 (Phone)

(212) 751-4864 (Fax)

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

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 in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     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 7(a)(2)(B) of the Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

TITLE OF EACH CLASS OF
SECURITIES TO BE REGISTERED
  AMOUNT
TO BE
REGISTERED (1)
  PROPOSED
MAXIMUM
OFFERING PRICE
PER SHARE (1)(2)
  PROPOSED
MAXIMUM
AGGREGATE
OFFERING PRICE (1)(2)
  AMOUNT OF
REGISTRATION FEE (2)(3)

Common stock, $0.01 par value per share

  12,650,000   $48.11   $608,591,500.00   $73,761.29

 

 

(1)

Includes shares of common stock that may be purchased by the underwriters under their option to purchase additional shares of common stock. See “Underwriting.”

(2)

Estimated solely for the purpose of calculating the registration fee. In accordance with Rule 457(c) of the Securities Act of 1933, as amended, the price shown is the average of the high and low sales prices of the common stock on March 8, 2019, as reported on the New York Stock Exchange.

(3)

To be paid in connection with the initial filing of the registration statement.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, Dated March 15, 2019

PRELIMINARY PROSPECTUS

 

LOGO

11,000,000 Shares

Ceridian HCM Holding Inc.

Common Stock

 

 

The selling stockholders named in this prospectus are offering 11,000,000 shares of common stock of Ceridian HCM Holding Inc. (the “Company”). We are not selling any shares of common stock under this prospectus and we will not receive any proceeds from the sale of common stock to be offered by the selling stockholders. See “Use of Proceeds.”

Our common stock is listed on the New York Stock Exchange (“NYSE”) and the Toronto Stock Exchange (“TSX”) under the symbol “CDAY.” On March 14, 2019, the last sale price of our common stock as reported on the NYSE and the TSX was $50.29 per share and $67.48 CAD per share, respectively.

We are an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”) and, as such, are subject to reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

Investing in our common stock involves risk. See “Risk Factors” beginning on page 21 to read about factors you should consider before buying shares of our common stock.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     Per
Share
     Total  

Public offering price

     

Underwriting discounts and commissions (1)

     

Proceeds to the selling stockholders, before expenses

     

We have agreed to reimburse the underwriters for certain expenses in connection with this offering.

 

(1)

We refer you to “Underwriting,” beginning on page 142 of this prospectus, for additional information regarding total underwriter compensation.

To the extent that the underwriters sell more than 11,000,000 shares of common stock, the selling stockholders have granted the underwriters an option to purchase up to an additional 1,650,000 shares of common stock from the selling stockholders at the public offering price less the underwriting discounts and commissions, for 30 days after the date of this prospectus. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders if the underwriters exercise their option to purchase additional shares of our common stock.

 

 

Delivery of the shares is expected to be made on or about                    , 2019.

 

 

 

 

Goldman Sachs & Co. LLC    J.P. Morgan
Credit Suisse    Deutsche Bank Securities

 

Barclays   Citigroup   Jefferies   Piper Jaffray   Wells Fargo Securities
Baird   CIBC Capital Markets   William Blair   Canaccord Genuity   Needham & Company   MUFG

Prospectus dated                    , 2019.


Table of Contents

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1  

THE OFFERING

     13  

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

     15  

RISK FACTORS

     21  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     57  

USE OF PROCEEDS

     59  

DIVIDEND POLICY

     60  

MARKET PRICE OF OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     61  

CAPITALIZATION

     62  

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     63  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     65  

BUSINESS

     95  

MANAGEMENT

     100  

EXECUTIVE AND DIRECTOR COMPENSATION

     108  

PRINCIPAL AND SELLING STOCKHOLDERS

     120  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     123  

DESCRIPTION OF MATERIAL INDEBTEDNESS

     126  

DESCRIPTION OF CAPITAL STOCK

     130  

SHARES ELIGIBLE FOR FUTURE SALE

     134  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

     138  

UNDERWRITING

     142  

LEGAL MATTERS

     153  

EXPERTS

     153  

WHERE YOU CAN FIND MORE INFORMATION

     153  

INDEX TO FINANCIAL STATEMENTS

     F-1  

 

 

You should rely only on the information contained in this prospectus or in any free-writing prospectus we may specifically authorize to be delivered or made available to you. Neither we, the selling stockholders nor the underwriters (or any of our or their respective affiliates) have authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we, the selling stockholders nor the underwriters (or any of our or their respective affiliates) take any responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We, the selling stockholders and the underwriters (or any of our or their respective affiliates) are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus or any free-writing prospectus is only accurate as of its date, regardless of its time of delivery or the time of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

i


Table of Contents

PROSPECTUS SUMMARY

This summary highlights information appearing elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before making a decision to participate in the offering. You should carefully read the entire prospectus, including the information presented under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and notes related thereto included elsewhere in this prospectus before making an investment decision. Unless the context requires otherwise, references to “our company,” “we,” “us,” “our,” and “Ceridian” refer to Ceridian HCM Holding Inc. and its direct and indirect subsidiaries on a consolidated basis.

Overview

Ceridian is a global human capital management (“HCM”) software company. Dayforce, our flagship cloud HCM platform, provides human resources (“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. Our platform is designed to make work life better for our customers and their employees by improving HCM decision-making processes, streamlining workflows, exposing 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.

The employer-employee relationship has undergone significant change. Employees historically viewed their jobs primarily as a source of income. Now, employees increasingly demand transparency, schedule flexibility, career growth, and better work-life balance with real-time access to their personal HR data anytime, anywhere. As organizations try to respond to these trends to attract and retain talent, they are empowering managers to think more strategically about their people. These challenges require organizations to find more efficient ways to manage employees and HCM functions, while navigating changing global operating and regulatory environments at the same time. However, HCM data in status quo solutions are stored in disparate databases, are difficult to access, and are often inaccurate. These status quo solutions that most organizations rely on were not built to manage a modern workforce, do not allow for real-time decision-making, and are not flexible enough to adapt to a changing global and regulatory environment.

We built Dayforce from the ground up to provide a comprehensive, next-generation platform that can solve complex human capital management problems. We carefully designed Dayforce to meet the needs of a homogeneous market with a common set of requirements and compliance challenges across organization sizes and industries. Our solutions deliver the right data to the right user at the right time for actionable intelligence and a superior employee experience. Our scalable platform is built on modern cloud technologies with a single, flexible rules engine capable of addressing complex global regulatory requirements, combined with a data architecture that can continuously calculate payroll throughout the pay period and a single database that enables advanced insights and predictive analytics. We believe that our architecture enables our customers to continue to benefit from advancements in technology, such as artificial intelligence and big data.



 

1


Table of Contents

The breadth of benefits that Dayforce provides throughout an organization has been critical to our success. Employees benefit from our user experience and access to real-time data, which enables organizations to better empower employees with more self-service capabilities. The user experience and self-service capabilities drive faster adoption and free managers and HR administrators from many administrative burdens. Business-level managers benefit from deeper insights into their employee data, which enables them to better optimize their resources and to use predictive analytics to improve operations, such as scheduling, budgeting, and retention. Executive leadership benefits from better real-time data visibility, allowing them to better understand and to manage risk, to monitor and to track broader strategic initiatives, and to reduce technology and operational costs.

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 more than 3,700 live Dayforce customers, representing approximately 3.1 million active global users as of December 31, 2018. In 2018, we added over 715 net new live Dayforce customers. Our customers vary across industries, and no single customer constituted more than 1% of our revenues for the year ended December 31, 2018. We have experienced significant Cloud revenue growth at scale, particularly from Dayforce, which has grown at a compound annual growth rate (“CAGR”) of more than 55% since 2012. Our annual Cloud revenue retention rate continues to exceed 95% due to our intense focus on solving complex problems and our superior customer experience.

Our total revenue increased from $623.4 million in 2016 to $670.8 million in 2017 and to $746.4 million in 2018. Our net loss decreased from $(92.8) million in 2016 to $(63.9) million in 2018. Our total Cloud revenue, which consists primarily of revenues from Dayforce and excludes revenues from our Bureau solutions, increased from $297.8 million in 2016 to $404.3 million in 2017 and to $534.3 million in 2018, representing increases of 35.8% and 32.2%, respectively. We generated operating profit (loss) of $(11.2) million in 2016, $33.0 million in 2017, and $52.8 million in 2018. We generated Adjusted EBITDA of $85.5 million in 2016 compared to $117.8 million in 2017 and $157.1 million in 2018.

We define Adjusted EBITDA as net income or loss before interest, taxes, depreciation, amortization, as adjusted to exclude net income and loss from discontinued operations, sponsor management fees, non-cash charges for asset impairments, gains or losses on assets and liabilities held in a foreign currency other than the functional currency of a company subsidiary, share-based compensation expense, severance charges, restructuring consulting fees, transaction costs, and environmental reserve charges. Adjusted EBITDA is a non-GAAP financial measure. Refer to “Summary Historical Consolidated Financial and Other Data” for discussion regarding our use of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating profit, the most directly comparable measure calculated in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).

For additional discussion of Cloud and Bureau revenue, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Solutions.”

Industry Background

There are several important market dynamics that are transforming the way organizations manage and engage their employees. These trends impact organizations regardless of size, industry, and geography, and represent a significant global opportunity for Ceridian.



 

2


Table of Contents

The employer-employee relationship has changed

Employees expect modern, intuitive solutions that provide them with self-service access to pay, schedules, benefits, performance reviews, learning opportunities, and other key employee data in real-time and on the device of their choice. Organizations now acknowledge the strategic importance of developing and engaging their employees as a means to increase productivity and, in turn, improve business outcomes in a rapidly changing competitive business environment.

Organizations need better access to their data

Organizations have historically captured large amounts of employee-related data, but have been challenged to leverage these data as assets for decision-making. The data are difficult to use because they are inconsistently collected and therefore inaccurate, stored in multiple systems, and not easily consolidated. Insights from their data are poor; reporting is manual, error-prone, and time-consuming; and options for intelligent analytics are extremely limited.

Predictive technologies are changing the way we work

Organizations are generating large volumes of data that can power predictive models to solve extremely complex business problems. Artificial intelligence and other predictive technologies are playing a larger role in organizations and customers are now demanding these predictive technologies in human capital management, particularly in employee scheduling, hiring, retention, and compensation management.

Regulatory requirements are becoming increasingly complex and a source of organizational risk

The complexity of today’s regulatory environment, including labor, tax, and compliance regulations, is a burden on businesses of all sizes. Organizations must comply with complex federal legislation, such as the Affordable Care Act (“ACA”) and the Fair Labor Standards Act in the United States, and also comply with a growing number of changes at the state and local level. In addition to complex labor and tax legislation, data privacy requirements add to the tangle of shifting and sometimes conflicting rules related to HCM. Non-compliance with applicable laws and regulations can result in significant financial penalties for the organization and damage to employment and company brands when failures occur.

Global markets continue to be underserved by HCM solutions

Globalization has resulted in a more internationally distributed and mobile workforce. This trend increases operational complexity by requiring organizations to understand and to comply with ever-changing regulations with respect to tax and employment laws across multiple countries. Legacy HCM and first-generation cloud solutions often lack the capability to develop localized functionality to meet country-specific requirements, which results in unintegrated and error-prone workflows, isolated employee data by country, and a poor user experience for employees. While core HCM solutions for employee data are more mature, areas such as time and attendance and payroll still remain materially underserved.

Incumbent HCM products are plagued by disparate technologies and struggle to meet today’s needs

Many existing solutions have been assembled through a combination of platform acquisitions and vendor partnerships, all of which use different core architectures, multiple databases, and disparate



 

3


Table of Contents

user interfaces. As a result, many of the products offered in the market today spread data across multiple application frameworks and different code bases. These datasets have, in many cases, become liabilities rather than assets for organizations. In world-class products, data must be accessed in real-time, stored in a unified platform, and analyzed to achieve better insights and to drive better decisions.

The HCM technology market is large and underserved

The HCM technology market is one of the largest in the software industry. According to an International Data Corporation (“IDC”) market forecast report, titled “Worldwide and U.S. Human Capital Management and Payroll Applications Forecast, 2018-2022,” published in June 2018, the global market for HCM Payroll and Applications in 2018 is predicted to be $21.1 billion, of which $5.1 billion is for Payroll Applications, and is expected to grow to $30.5 billion by 2022, representing a 9.6% CAGR. The market includes payroll, HR, talent acquisition, workforce management, document management, performance management, compensation management, and succession planning.

Our Dayforce Solution

Dayforce is built from the ground up to provide businesses with a comprehensive modern cloud HCM platform for managing the entire employee lifecycle. Our award-winning software addresses all key areas of HCM, including HR, payroll, benefits, workforce management, and talent management functionality.



 

4


Table of Contents

The key benefits of Dayforce include:

 

   

Single employee record, single application architecture: Our platform is designed around our proprietary single application architecture, which includes a cross-domain rules engine, dataset, and complete employee record. With data stored in a single, central location, our platform provides actionable, data-driven insights across all HR functions to enable better decision-making and to address broad strategic operational challenges related to the entire employee lifecycle. In addition, our differentiated approach eliminates the need for fragile and complex data integrations that attempt to unify disparate HR-related applications, such as payroll and time and attendance. Eliminating integrations greatly simplifies workflows, drives more efficient service delivery, reduces errors, and enhances regulatory compliance. For example, when an employee clocks out and hours are added to the system, Dayforce calculates taxes and net pay in real time instead of having to wait until the end of the pay period to batch transfer hours from the time system to the pay system.

 

Traditional Payroll Workflow

 

  

Dayforce Workflow

 

LOGO    LOGO

 

Data is stuck in the time systems until after the end of the pay period. Once the data are transferred to payroll, there is not enough time to complete audits and adjustments. Payroll gets committed with errors.

  

 

Dayforce enables access to payroll data through the entire pay period and continuous real-time calculation across all modules. This gives administrators greater time and flexibility to ensure accurate pay.

 

   

Actionable insights driven by real-time data and predictive technologies: Dayforce delivers the right data to the right people at the right time. Our platform provides actionable, data-driven insights to assist our customers with fast, informed decision-making. Sophisticated predictive technologies align business strategy with daily operations. For example, Dayforce generates optimized schedules in line with company priorities and employee work preferences, and also includes a set of features that predict employee flight risk accompanied by suggested actions to minimize that risk. This actionable “data-first” approach enables all levels of the organization, from executives and business-line managers to HR and payroll administrators, to make better decisions in real-time and to align organizational strategy with daily operations.

 

   

Built for complex operating and regulatory environments: Maintaining compliance in an increasingly complex regulatory environment is critical to the success and stability of organizations globally. Dayforce was built with compliance and security at its core and has the flexibility to respond to inevitable changes in the regulatory climate. Our proprietary rules engine is a critical strength of our platform and has led to us becoming a leader in the area of compliance. Through the use of our dynamic and fully configurable rules engine, clients are able to customize the system specifically to their business needs, allowing them to spend less



 

5


Table of Contents
 

time tracking compliance with complex local, state, federal, and international labor laws and regulations, and freeing up their time to focus on their business.

 

   

Delivers a better employee experience: Dayforce provides a consumer-grade experience and is built to reflect how users naturally behave. Through our single dataset and native web and mobile applications, users can access our platform on the device of their choice and can enjoy a consistent intuitive user interface across all domains of HCM. Because Dayforce is easy to learn and easy to operate, both managers and employees enthusiastically adopt self-service functionality. Increased self-service usage is designed to drive higher employee and manager engagement, collect more accurate information, and facilitate more efficient operations.

 

   

Grows as our customers expand globally: Our platform is built to scale globally for organizations regardless of industry or size. Our customers are highly diversified and range from small regional businesses to large, global multi-nationals. With our proprietary architecture, we have the ability to enter new international markets, and to localize Dayforce to address both North American-based organizations with employees around the world and organizations outside of North America that operate primarily in their own local markets or regions. To date, our global HR and workforce management functionality is used in over 50 countries, such as the United Kingdom, Australia, Germany, South Africa, and Mexico. In addition, we provide global 24/7 customer support and we use data hosting centers across North America, Europe, and Australia. Our cloud delivery model enables our customers to easily scale without major capital expenditures and eliminates the need for cumbersome data integration, traditionally associated with legacy solutions. Our delivery model also enables us to innovate rapidly and to implement changes easily to allow customers to stay current with changing regulatory, compliance, and tax environments.

Our Growth Strategies

We build technology that makes work life better for people around the world. Our growth strategies include:

 

   

Grow market share in existing geographies: The HCM market is massive, and we have a significant opportunity to increase our penetration in North America. Dayforce has been gaining market share relative to both traditional and first-generation software-as-a-service (“SaaS”) HCM providers as more customers adopt our leading cloud platform. We have experienced significant growth over the last six years and added over 715 live customers in 2018. We intend to capitalize on our market momentum by leveraging our sales and marketing to win new customers.

 

   

Expand globally: We believe that there is a significant opportunity to provide our HCM platform to organizations with employees based outside our core North American markets. From the onset, Dayforce was intentionally designed to be a global platform with the ability for customers to use it for their global HR and workforce management needs. We have successfully deployed Dayforce around the world, and Dayforce is in use in over 50 countries. In 2018, we further differentiated Dayforce by extending native payroll functionality to the United Kingdom. We intend to localize Dayforce to provide native payroll functionality in additional countries, and we believe that providing native payroll will enable us to sell to organizations headquartered or with a significant employee presence in those countries. We believe that ease of localization is a key differentiator for the Dayforce platform.



 

6


Table of Contents
   

Increase sales from existing customers: We intend to sell additional incremental functionality to existing customers that do not currently utilize the full Dayforce platform. Our revenue also increases as our customers grow their workforces, driven by our subscription PEPM pricing structure.

 

   

Expand platform functionality: We believe that our leading market position in technology is based on our ability to continuously innovate and to quickly bring new solutions to market. Since 2012, we have developed a full suite of HCM functionality. We intend to continue to extend the functionality and breadth of our Dayforce platform in the future, taking advantage of modern technologies including artificial intelligence and big data.

 

   

Grow and cultivate our partner ecosystem: Investing in key product and sales partnerships can help us to grow our customer base and to reduce customer acquisition costs. This includes deep relationships with private equity firms and their business partners, other value-added resellers of the Dayforce platform, and third parties that want to offer Dayforce as an extension of their product suites on a referral basis. For example, we launched the Dayforce Software Partner Platform, which enables certified third party software vendors to integrate easily with the Dayforce platform. These initiatives expand our distribution reach and provide additional value to our customers.

 

   

Address the unique changing workforce requirements of the gig economy: The rise of the gig economy has led to the expectation of same-day onboarding and payments for independent freelancers. We believe the on-demand economy, which is part of the broader contingent workforce market, is expected to account for over 40% of the workforce by 2020 in the United States. We believe that our real-time pay and scheduling capabilities and native mobile applications position us well to capitalize on this growing opportunity.

 

   

Promote our culture as a unique differentiator: Our culture combines the agility and innovation of a start-up with a history of deep domain and operational expertise. We focus on our culture and on employee engagement as we believe it helps us to attract, to engage, and to retain top talent who create successful outcomes for our customers, which we believe results in growth through strong customer retention and new customer referrals. In 2018, we were recognized with over 20 awards related to our company culture and workplace experiences, including Glassdoor Employees’ Choice Awards for 2018 Best Places to Work (Canada and United States), Best Workplaces certification (Canada and United States), Brandon Hall’s Excellence in Talent Management Award for Best Advance in High Potential Development, and 2018 Working Mother 100 Best Companies.

Our History

Ceridian was acquired in 2007 by affiliates and co-investors of Thomas H. Lee Partners, L.P. (“THL”) and Cannae Holdings, Inc. (“Cannae”). In April 2012, Ceridian acquired Dayforce Corporation, which had built Dayforce, a cloud HCM solution. In the months following the acquisition, Dayforce founder, David D. Ossip, was named Chief Executive Officer of Ceridian, and shortly thereafter, we generally stopped actively selling our Bureau solutions to new customers in the United States to focus our resources on expanding the Dayforce platform and growing Cloud solutions. For each quarter since September 30, 2016, our Cloud revenue has surpassed our Bureau revenue. Cloud revenue grew from 39% of total revenue during the quarter ended December 31, 2015 to 74% of total revenue during the quarter ended December 31, 2018.



 

7


Table of Contents

As part of our strategy to focus on the growth of our Cloud solutions business, we undertook the following initiatives to simplify our business model:

 

  (i)

sold our consumer-directed benefit services business in 2013,

  (ii)

merged Comdata, our payment systems business unit, with FleetCor Technologies Inc. (“FleetCor Technologies”) in 2014,

  (iii)

sold our benefits administration and post-employment compliance business in 2015,

  (iv)

sold our United Kingdom and Ireland businesses and a portion of our operations that supported such business in the Republic of Mauritius in 2016, and

  (v)

contributed our LifeWorks employee assistance program business to a joint venture, LifeWorks Corporation Ltd. (“LifeWorks”), in 2016, then distributed our ownership in this joint venture to a holding company owned by our stockholders in April 2018.

As a result of these transactions, we only actively sell Dayforce and Powerpay in our HCM segment, which we believe simplifies our business model and positions us well for continued growth.

Our benefits administration and post-employee compliance business, our United Kingdom and Ireland businesses, our divested Mauritius operations, and our LifeWorks joint venture are presented as discontinued operations in our financial statements. Our consumer-directed benefits services business and our benefits administration and post-employment compliance businesses are collectively referred to as our “Divested Benefits Businesses.”

Our Financial Sponsors

THL is a premier private equity firm investing in middle market growth companies, headquartered in North America, exclusively in four industry sectors: Business & Financial Services, Consumer & Retail, Healthcare, and Media, Information Services & Technology. Using the firm’s deep domain expertise and the internal operating capabilities of its Strategic Resource Group, THL seeks to create deal sourcing advantages, and to accelerate growth and improve operations in its portfolio companies in partnership with management teams. Since its founding in 1974, THL has raised over $25.0 billion of equity capital, acquired over 140 portfolio companies, and completed over 360 add-on acquisitions, which collectively represent a combined enterprise value at the time of acquisition of over $200.0 billion.

Cannae is a diversified holding company with investments in restaurants, technology enabled healthcare services, financial services and more. Cannae’s highly experienced and successful management team looks to prudently monetize existing investments with the primary objective of maximizing returns for its stockholders. As of December 31, 2017, Cannae had over $1.0 billion in net asset value under its management. THL and Cannae together are referred to as the “Sponsors.”

Following the closing of this offering, affiliates of the Sponsors are expected to own approximately 59.7% of our outstanding common stock, or 58.5%, if the underwriters’ option to purchase additional shares is fully exercised. Additionally, we are party to a voting agreement with the Sponsors. As a result of the Sponsors’ ownership of our common stock and the voting agreement, the Sponsors are able to exercise significant voting influence over fundamental and significant corporate matters and transactions. Therefore, we will continue to be considered a “controlled company” within the meaning of the corporate governance standards of the NYSE. See “Risk Factors—Risks Related to This Offering and Ownership of Our Common Stock,” “Management–Composition of our Board of Directors” and “Principal and Selling Stockholders.”

Cannae holds approximately 23.5% of our outstanding common stock as of December 31, 2018, or 23.5% following this offering (or 23.5% if the underwriters exercise their option to purchase



 

8


Table of Contents

additional shares in full). On November 7, 2018, Cannae announced that one of its subsidiaries had entered into a three year margin loan pursuant to which it could borrow up to $300.0 million. The margin loan is guaranteed by Cannae for a period of up to one year and is further secured by a pledge of 25.0 million shares of our common stock beneficially owned by Cannae. The loan requires that a certain loan to value ratio (based on the value of the shares of our common stock pledged to secure the loan) be maintained. In the event that the ratio is not maintained, the borrower must post additional cash collateral and/or elect to repay a portion of the loan. See “Risk Factors—Future sales of our common stock, or the perception in the public markets that these sales may occur, could cause the market price for our common stock to decline.”

Our Initial Public Offering, Debt Refinancing and Internal Reorganization

On April 30, 2018, we completed our initial public offering (“IPO”), in which we issued and sold 21,000,000 shares of our common stock at a public offering price of $22.00 per share. We granted the underwriters a 30-day option to purchase an additional 3,150,000 shares of common stock at the offering price, which was exercised in full. A total of 24,150,000 shares of common stock were issued on April 30, 2018. Concurrently, we issued 4,545,455 shares of our common stock in a private placement to THL / Cannae Investors LLC, a stockholder controlled by our Sponsors, at $22.00 per share. We received gross proceeds of $631.3 million from the IPO and concurrent private placement before deducting underwriting discounts, commissions, and other offering related expenses.

We applied a portion of the net proceeds from the IPO to satisfy and to discharge the indenture governing our outstanding $475.0 million principal amount senior notes due 2021, and they were redeemed on May 30, 2018 (the “Senior Notes”). Concurrently, we also refinanced our remaining debt under our (i) $702.0 million (original principal amount) senior term debt and (ii) $130.0 million revolving credit facility, including accrued interest and related costs and expenses, with new senior credit facilities consisting of a $680.0 million term loan debt facility (the “Senior Term Loan”) and a $300.0 million revolving credit facility (the “Revolving Facility”) (the Senior Term Loan and the Revolving Facility are together referred to as the “Senior Credit Facilities”). For an additional description of our Senior Credit Facilities, please see “Description of Material Indebtedness.”

Contemporaneous with the IPO and the concurrent private placement, we distributed our interest in LifeWorks to our existing stockholders prior to the IPO on a pro rata basis in accordance with their pro rata interests in us (the “LifeWorks Disposition”). As a result of the LifeWorks Disposition, we no longer have any material obligations under the LifeWorks joint venture agreement. In addition, upon completion of the LifeWorks Disposition, LifeWorks is no longer a separate segment and has been reclassified to discontinued operations in our consolidated financial statements for all periods presented.

Subsequent to the IPO and concurrent private placement, we completed an internal corporate reorganization, pursuant to which the limited liability companies that held shares in us were merged with and into Ceridian HCM Holding Inc. At the time of these transactions, these limited liability companies had no assets other than equity interests in us or the other limited liability companies. As a result of these transactions, our previous stockholders now hold shares of our common stock directly, rather than through a series of limited liability companies. In addition, the Exchangeable Shares (as defined on page 14 of this prospectus) became exchangeable for shares of our common stock. These transactions had no impact on our assets, liabilities, or operations. We refer to these transactions as the “Internal Reorganization.”



 

9


Table of Contents

The diagram below summarizes our current organizational structure.

 

LOGO

Risks Associated with our Business

Investing in our common stock involves a number of risks. These risks represent challenges to the successful implementation of our strategy and the growth of our business. Some of these risks are:

 

   

We have a history of losses and negative cash flows from operating activities, and we may not be able to attain or to maintain profitability or positive cash flows from operating activities in the future.

 

   

The markets in which we participate are highly competitive, and if we do not compete effectively, it could have a material adverse effect on our business, financial condition, and results of operations.

 

   

Our growth strategy has focused on developing our fast growing Cloud solutions revenue, while our Bureau solutions revenue has declined. Our business could be materially adversely affected by a slowdown in the growth of our Cloud solutions or a faster than anticipated decline in our Bureau solutions revenue.

 

   

If we are not able to provide successful new or enhanced functionality and features, it could affect our ability to retain customers.

 

   

An information security breach of our systems or the loss of, or unauthorized access to, customer information, could have a material adverse effect on our business, market brand, financial condition, and results of operations.

 

   

Any failure by us to comply with, or a failure of any of our products to enable our customers to comply with, current and future regulatory requirements, including applicable privacy, security, and data laws, regulations, and standards, could have a material adverse effect on our business, financial condition, and results of operations.

 

   

If we are unable to develop new solutions, to sell our Cloud solutions into new markets or to further penetrate existing markets, our revenue may not grow as expected.

 

   

If we fail to manage our technical operations infrastructure, our existing customers may experience service outages, and our new customers may experience delays in the deployment of our applications.



 

10


Table of Contents
   

We have entered into a voting agreement with our Sponsors, which provides our Sponsors with rights to nominate a number of designees to our board of directors (the “Board”) and determine the size of our Board which may enable our Sponsors to designate a majority of the Board even if they own less than 50% of the voting power of our common stock.

For a discussion of these and other risks you should consider before making an investment in our common stock, see the section entitled “Risk Factors.”

Corporate Information

Ceridian HCM Holding Inc. was incorporated in Delaware on July 3, 2013. Our principal executive offices are located at 3311 East Old Shakopee Road, Minneapolis, Minnesota 55425, and our telephone number is (952) 853-8100. Our corporate website address is www.ceridian.com. Our website and the information contained on, or that can be accessed through, the website is not deemed to be incorporated by reference in, and is not considered part of, this prospectus. You should not rely on any such information in making your decision whether to purchase our common stock.

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in gross revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company may take advantage of specified reduced reporting and other regulatory requirements for up to five years that are otherwise applicable generally to public companies. These provisions include, among other matters:

 

   

requirement to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations;

 

   

exemption from the auditor attestation requirement on the effectiveness of our system of internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”);

 

   

exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;

 

   

exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board, requiring mandatory audit firm rotation or a supplement to the auditor’s report, in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;

 

   

an exemption from the requirement to seek non-binding advisory votes on executive compensation and golden parachute arrangements; and

 

   

reduced disclosure about executive compensation arrangements.

We will remain an emerging growth company until December 31, 2023 (the last day of the fiscal year following the fifth anniversary of the completion of our IPO) unless, prior to that time, we have more than $1.07 billion in annual gross revenue, have a market value for our common stock held by non-affiliates of more than $700.0 million as of the last day of our second fiscal quarter of the fiscal year and a determination is made that we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or issue more than $1.0 billion of non-convertible debt over a three-year period, whether or not



 

11


Table of Contents

issued in a registered offering. We have availed ourselves of the reduced reporting obligations with respect to executive compensation disclosure in this prospectus and expect to continue to avail ourselves of the reduced reporting obligations available to emerging growth companies in future filings.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An emerging growth company can, therefore, delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing to take advantage of that extended transition period and, as a result, we plan to comply with new and revised accounting standards on the relevant dates on which adoption of those standards is required for private companies.

As a result of our decision to avail ourselves of certain provisions of the JOBS Act, the information that we provide may be different than what you may receive from other public companies in which you hold an equity interest. In addition, it is possible that some investors will find our common stock less attractive as a result of our elections, which may cause a less active trading market for our common stock and more volatility in our stock price.

Trademarks and Trade Names

We and our subsidiaries own or have the rights to various trademarks, trade names and service marks, including the following: Ceridian®, Dayforce®, Makes Work Life Better™, Powerpay® and various logos used in association with these terms. Solely for convenience, the trademarks, trade names and service marks and copyrights referred to herein are listed without the ©, ®, and ™, symbols, but such references are not intended to indicate, in any way, that Ceridian, or the applicable owner, will not assert, to the fullest extent under applicable law, Ceridian’s or their, as applicable, rights to these trademarks, trade names, and service marks. Other trademarks, service marks, or trade names appearing in this prospectus are the property of their respective owners.

Market and Industry Information

Unless otherwise indicated, market data and industry information used throughout this prospectus are based on management’s knowledge of the industry and the good faith estimates of management. We also relied, to the extent available, upon management’s review of independent industry surveys and publications, other publicly available information prepared by a number of sources, including IDC, Glassdoor, and Brandon Hall Group. All of the market data and industry information used in this prospectus involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although we believe that these sources are reliable, neither we nor the underwriters can guarantee the accuracy or completeness of this information, and neither we nor the underwriters have independently verified his information. While we believe the estimated market position, market opportunity, and market size information included in this prospectus is generally reliable, such information, which is derived in part from management’s estimates and beliefs, is inherently uncertain and imprecise. Projections, assumptions, and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in our estimates and beliefs and in the estimates prepared by independent parties.



 

12


Table of Contents

THE OFFERING

 

Common stock offered by the selling stockholders

11,000,000 shares of common stock (or 12,650,000 shares of common stock if the underwriters exercise their option to purchase additional shares in full).

 

Common stock outstanding prior to and after this offering

139,453,710 shares of common stock.

 

Option to purchase additional shares of common stock

The underwriters have an option to purchase an additional 1,650,000 shares of common stock from the selling stockholders. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Use of proceeds

We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. See “Use of Proceeds.”

 

Dividend policy

We do not anticipate paying any dividends on our common stock for the foreseeable future; however, we may change this policy in the future. See “Dividend Policy.”

 

Voting Rights

Upon completion of this offering, our executive officers, directors, and the Sponsors will hold approximately 61.3% (or approximately 60.1% if the underwriters exercise their option to purchase additional shares in full) of the combined voting power of our outstanding capital stock and will have the ability to control the outcome of matters submitted to our stockholders for approval. See “Principal and Selling Stockholders” and “Description of Capital Stock.”

 

Risk factors

Investing in our common stock involves a high degree of risk. See the “Risk Factors” section of this prospectus beginning on page 21 for a discussion of factors you should carefully consider before investing in our common stock.

 

Listing

Our shares of common stock are listed on the NYSE and the TSX under the symbol “CDAY.”

Except as otherwise indicated, the number of shares of our common stock outstanding after this offering is based on 139,453,710 shares outstanding as of December 31, 2018 and:

 

   

assumes no exercise of the underwriters’ option to purchase additional shares;

 

   

excludes (i) an aggregate of 5,000 shares of our common stock issuable upon exercise of outstanding stock options at a weighted average of $20.00 per share, which stock options were granted under our 2007 Ceridian LLC Stock Incentive Plan, (ii)(a) an aggregate of



 

13


Table of Contents
 

8,856,904 shares of our common stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $16.83 per share, and (b) an aggregate of 500,000 shares of our common stock issuable upon the vesting of outstanding restricted stock units, which stock options and restricted stock units were granted under our 2013 Ceridian HCM Holding Inc. Stock Incentive Plan, as amended (the “2013 Plan”), and (iii) an aggregate of 13,500,000 shares of our common stock that are available for equity awards under our Ceridian HCM Holding Inc. 2018 Equity Incentive Plan (the “2018 Plan”);

 

   

gives effect to the Internal Reorganization; and

 

   

gives effect to the exchange of 2,395,269.172 exchangeable shares of our subsidiary, Ceridian AcquisitionCo ULC (the “Exchangeable Shares”), that were outstanding as of December 31, 2018, for 2,395,241 shares of our common stock (the “Share Exchange”).



 

14


Table of Contents

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

We report our financial results in accordance with U.S. GAAP. The following tables set forth our summary historical consolidated financial and other data for the periods as of the dates indicated. We derived the summary consolidated statements of operations data for the years ended December 31, 2018, 2017 and 2016, and the balance sheet data as of December 31, 2018 from the audited consolidated financial statements and related notes thereto included elsewhere in this prospectus. We derived the summary consolidated statements of operations data for the year ended December 31, 2015 from our audited consolidated financial statements and related notes thereto not included in this prospectus. Our historical results are not necessarily indicative of the results to be expected in any future period.

In the second quarter of 2018, contemporaneously with our IPO and concurrent private placement, we distributed our controlling financial interest in LifeWorks to our stockholders of record prior to the IPO on a pro rata basis in accordance with their pro rata interests in us. As a result, the financial statements in this prospectus have been restated to reflect the LifeWorks Disposition and show the former LifeWorks business as discontinued operations for all of the periods presented.



 

15


Table of Contents

You should read the information set forth below together with “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Capitalization,” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 

     Year ended
December 31,
 
     2018     2017     2016     2015  
     (Dollars in millions, except share and per share amounts)  

Consolidated Statements of Operations Data:

    

Total revenue

   $ 746.4     $ 670.8     $ 623.4     $ 611.6  

Cost of revenue

     425.8       407.5       396.4       364.6  

Selling, general, and administrative expenses

     270.7       223.0       225.3       235.5  

Other (income) expense, net

     (2.9     7.3       12.9       27.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

     52.8       33.0       (11.2     (16.3

Interest expense, net

     83.2       87.1       87.4       87.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (30.4     (54.1     (98.6     (104.1

Income tax expense (benefit)

     7.7       (49.6     6.7       4.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (38.1     (4.5     (105.3     (108.4

(Loss) income from discontinued operations

     (25.8     (6.0     12.5       3.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (63.9     (10.5     (92.8     (104.7

Net (loss) income attributable to noncontrolling interest

     (0.5     (1.3     0.1        
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Ceridian

   $ (63.4   $ (9.2   $ (92.9   $ (104.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to Ceridian:

        

Basic

   $ (0.62   $ (0.46   $ (1.65   $ (1.61

Diluted

   $ (0.62   $ (0.46   $ (1.65   $ (1.61

Weighted average shares outstanding:

        

Basic

     114,049,682       65,204,960       64,988,338       64,924,845  

Diluted

     114,049,682       65,204,960       64,988,338       64,924,845  

Statements of Cash Flow Data:

        

Net cash provided by (used in):

        

Operating activities

   $ 9.5     $ (39.8   $ (75.5   $ (18.3

Investing activities

     1,379.2       (407.4     763.0       323.9  

Financing activities

     (1,255.9     406.8       (630.7     (368.2

Other Data:

        

Live Dayforce customers

     3,718       3,001       2,339       1,770  

Annual Cloud revenue retention rate (a)

     96.3     97.0     95.7     95.0

Cloud annualized recurring revenue (ARR) (a)

   $ 506.2     $ 391.0     $ 289.7     $ 209.6  

Adjusted EBITDA (b)

   $ 157.1     $ 117.8     $ 85.5     $ 83.4  

Adjusted EBITDA margin %

     21.0     17.6     13.7     13.6

 

     As of December 31, 2018  
     (Dollars in millions)  

Consolidated Balance Sheet Data:

  

Cash and equivalents

   $ 217.8  

Total assets

     5,154.4  

Long-term debt (c)

     663.5  

Total liabilities

     3,622.4  

Working capital

     169.9  

Total stockholders’ equity

   $ 1,532.0  

 

(a)

Annual Cloud revenue retention rate and Cloud annualized recurring revenue are calculated on an annual basis, and the disclosure reflects data as of the most recent fiscal year end. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How We Assess Our Performance.”



 

16


Table of Contents
(b)

We report our financial results in accordance with U.S. GAAP. To supplement this information, we also use Adjusted EBITDA and Adjusted EBITDA margin, non-GAAP financial measures, in this prospectus. We define Adjusted EBITDA as net income or loss before interest, taxes, depreciation, and amortization, as adjusted to exclude net income and loss from discontinued operations, sponsor management fees, non-cash charges for asset impairments, gains or losses on assets and liabilities held in a foreign currency other than the functional currency of a company subsidiary, share-based compensation expense, severance charges, restructuring consulting fees, transaction costs, and environmental reserve charges. Adjusted EBITDA margin is determined by calculating the percentage Adjusted EBITDA is of Total Revenue. Management believes that Adjusted EBITDA and Adjusted EBITDA margin are useful to management and investors as supplemental measures to evaluate our overall operating performance. Adjusted EBITDA is a component of our management incentive plan, and Adjusted EBITDA and Adjusted EBITDA margin are used by management to assess performance and to compare our operating performance to our competitors. Management believes that Adjusted EBITDA and Adjusted EBITDA margin are helpful in highlighting management performance trends because Adjusted EBITDA and Adjusted EBITDA margin exclude the results of decisions that are outside the normal course of business operations.

Our presentation of Adjusted EBITDA and Adjusted EBITDA margin are intended as supplemental measures of our performance that are not required by, or presented in accordance with, U.S. GAAP. Adjusted EBITDA and Adjusted EBITDA margin should not be considered as alternatives to operating profit (loss), net income (loss), earnings per share, or any other performance measures derived in accordance with U.S. GAAP, or as measures of operating cash flows or liquidity. Our presentation of Adjusted EBITDA and Adjusted EBITDA margin should not be construed to imply that our future results will be unaffected by similar items to those eliminated in this presentation. Adjusted EBITDA and Adjusted EBITDA margin are included in this prospectus because they are key metrics used by management to assess our operating performance.

Adjusted EBITDA and Adjusted EBITDA margin are not defined under U.S. GAAP, are not measures of net income, operating income, or any other performance measures derived in accordance with U.S. GAAP, and are subject to important limitations.

Our use of the terms 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 U.S. GAAP.

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 U.S. GAAP. Some of these limitations are:

 

   

Adjusted EBITDA and Adjusted EBITDA margin do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

Adjusted EBITDA and Adjusted EBITDA margin do not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA and Adjusted EBITDA margin do not reflect any charges for the assets being depreciated and amortized that may need to be replaced in the future;

 

   

Adjusted EBITDA and Adjusted EBITDA margin do not reflect the impact of share-based compensation upon our results of operations;

 

   

Adjusted EBITDA and Adjusted EBITDA margin do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt; and

 

   

Adjusted EBITDA and Adjusted EBITDA margin do not reflect our income tax expense or the cash requirements to pay our income taxes.



 

17


Table of Contents

In evaluating 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 Operating profit to Adjusted EBITDA for the periods presented:

 

     Year ended
December 31,
 
     2018     2017     2016     2015  
     (Dollars in millions)  

Operating profit (loss)

   $ 52.8     $ 33.0     $ (11.2   $ (16.3

Depreciation and amortization

     56.6       53.8       53.2       52.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA from continuing operations (1)

     109.4       86.8       42.0       35.9  

Sponsorship management fees (2)

     12.0       1.9       5.0       1.9  

Asset impairments

     —         —         10.2       22.6  

Intercompany foreign exchange (gain) loss

     (2.9     7.4       (3.4     4.8  

Share-based compensation (3)

     24.7       16.1       12.5       12.8  

Severance charges (4)

     5.4       5.6       8.4       3.8  

Restructuring consulting fees (5)

     4.8       —         4.9       1.6  

Environmental reserve charges (6)

     —         —         5.9       —    

Transaction costs (7)

     3.7       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 157.1     $ 117.8     $ 85.5     $ 83.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA margin

     21.0     17.6     13.7     13.6
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

We define EBITDA from continuing operations as net income or loss before interest, taxes, depreciation and amortization, and net income or loss from discontinued operations.

(2)

Represents expenses related to management, monitoring, consulting, transaction, and advisory fees and related expenses paid to the affiliates of our Sponsors pursuant to the management agreement with THL Managers VI, LLC (“THLM”) and Cannae. See “Certain Relationships and Related Party Transactions—Management Agreements.” In April 2018, the management agreements terminated upon consummation of our IPO. Upon termination, the management agreements provided that we pay a termination fee equal to the net present value of the management fee for a seven-year period, which was $11.3 million. Please refer to Note 16 to our consolidated financial statements, “Related Party Transactions,” included elsewhere in this prospectus.

(3)

Share-based compensation expense during the year ended December 31, 2018 includes $8.1 million of expense recognized upon meeting the performance criteria of stock appreciation rights and performance-based stock options that were triggered by our IPO.

(4)

Represents costs for severance compensation paid to employees whose positions have been eliminated or who have been terminated not for cause.

(5)

Represents consulting fees and expenses incurred during the periods presented in connection with any acquisition, investment, disposition, recapitalization, equity offering, issuance or repayment of debt, issuance of equity interests, or refinancing.

(6)

Reflects charges to increase the reserves for environmental claims from a predecessor company. See Note 12 to our consolidated financial statements for further information regarding our environmental reserves.

(7)

Represents expenses related to the IPO and refinancing of our debt that were not eligible for capitalization.



 

18


Table of Contents

The following tables present a reconciliation or our reported results to our non-GAAP Adjusted EBITDA basis for all periods presented:

 

     Year ended December 31, 2018  
     As
reported
    Share-based
compensation
     Severance
charges
     Other
operating
expenses (1)
    Adjusted  
     (Dollars in millions)  

Cost of revenue:

            

Recurring services

   $ 200.3     $ 2.1      $ 1.3      $ —       $ 196.9  

Professional services and other

     132.2       1.2        1.0        —         130.0  

Product development and management

     59.0       1.1        0.1        —         57.8  

Depreciation and amortization

     34.3       —          —          —         34.3  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total cost of revenue

     425.8       4.4        2.4        —         419.0  

Sales and marketing

     131.9       4.3        1.4        —         126.2  

General and administrative

     138.8       16.0        1.6        20.5       100.7  

Other income, net

     (2.9     —          —          (2.9     —    

Operating profit

     52.8       24.7        5.4        17.6       100.5  

Depreciation and amortization

     56.6       —          —          —         56.6  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

EBITDA from continuing operations

   $ 109.4     $ 24.7      $ 5.4      $ 17.6     $ 157.1  

 

(1)

Other operating expenses includes sponsor management fees, intercompany foreign gain, restructuring consulting fees, and transaction costs.

 

     Year ended December 31, 2017  
     As
reported
     Share-based
compensation
     Severance
charges
     Other
operating
expenses (1)
     Adjusted  
     (Dollars in millions)  

Cost of revenue:

              

Recurring services

   $ 196.8      $ 1.0      $ 2.2      $ —        $ 193.6  

Professional services and other

     135.8        1.1        0.9        —          133.8  

Product development and management

     43.6        0.7        0.7        —          42.2  

Depreciation and amortization

     31.3        —          —          —          31.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of revenue

     407.5        2.8        3.8        —          400.9  

Sales and marketing

     116.7        1.7        1.1        —          113.9  

General and administrative

     106.3        11.6        0.7        1.9        92.1  

Other expense (income), net

     7.3        —          —          7.4        (0.1

Operating profit

     33.0        16.1        5.6        9.3        64.0  

Depreciation and amortization

     53.8        —          —             53.8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA from continuing operations

   $ 86.8      $ 16.1      $ 5.6      $ 9.3      $ 117.8  

 

(1)

Other operating expenses includes sponsor management fees, intercompany foreign exchange loss (gain), and restructuring consulting fees.



 

19


Table of Contents
     Year ended December 31, 2016  
     As
reported
    Share-based
compensation
     Severance
charges
     Other
operating
expenses (1)
     Adjusted  
     (Dollars in millions)  

Cost of revenue:

             

Recurring services

   $ 214.4     $ 2.0      $ 1.6      $ —        $ 210.8  

Professional services and other

     115.6       —          1.7        —          113.9  

Product development and management

     43.3       0.8        1.4        —          41.1  

Depreciation and amortization

     23.1       —          —          —          23.1  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of revenue

     396.4       2.8        4.7        —          388.9  

Sales and marketing

     101.5       1.2        0.7        —          99.6  

General and administrative

     123.8       8.5        3.0        9.9        102.4  

Other expense, net

     12.9       —          —          12.7        0.2  

Operating profit (loss)

     (11.2     12.5        8.4        22.6        32.3  

Depreciation and amortization

     53.2       —          —             53.2  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA from continuing operations

   $ 42.0     $ 12.5      $ 8.4      $ 22.6      $ 85.5  

 

(1)

Other operating expenses includes sponsor management fees, intercompany foreign exchange loss, restructuring consulting fees, asset impairments, and environmental reserve charges.

 

     Year ended December 31, 2015  
     As
reported
    Share-based
compensation
     Severance
charges
     Other
operating
expenses (1)
     Adjusted  
     (Dollars in millions)  

Cost of revenue:

             

Recurring services

   $ 211.0     $ 2.2      $ 1.5      $ —        $ 207.3  

Professional services and other

     91.6       —          0.2        —          91.4  

Product development and management

     44.0       0.6        0.8        —          42.6  

Depreciation and amortization

     18.0       —          —          —          18.0  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of revenue

     364.6       2.8        2.5        —          359.3  

Sales and marketing

     94.1       0.8        0.4        —          92.9  

General and administrative

     141.4       9.2        0.9        3.5        127.8  

Other (income) expense, net

     27.8       —          —          27.4        0.4  

Operating profit (loss)

     (16.3     12.8        3.8        30.9        31.2  

Depreciation and amortization

     52.2       —          —             52.2  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA from continuing operations

   $ 35.9     $ 12.8      $ 3.8      $ 30.9      $ 83.4  

 

(1)

Other operating expenses include sponsor management fees, intercompany foreign exchange loss (gain), and restructuring consulting fees.

(c)

Excludes the current portion of our long-term debt of $6.8 million as of December 31, 2018.



 

20


Table of Contents

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information in this prospectus before purchasing our common stock. If any of the following risks occur, our business, financial condition, and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

Risks Related to Our Business and Industry

We have a history of losses and negative cash flows from operating activities, and we may not be able to attain or to maintain profitability or positive cash flows from operating activities in the future.

We have incurred net losses and negative cash flows from operating activities over the last few years as we made substantial investments in developing, launching, and selling our Cloud solutions. In addition, our highly leveraged capital structure has had a negative effect on our profitability. As a result, we have incurred net losses of $92.9 million in the year ended December 31, 2016, $9.2 million in the year ended December 31, 2017, and $63.4 million in the year ended December 31, 2018. As of December 31, 2018, we had an accumulated deficit of $419.3 million. We incurred negative cash flows from operating activities of $75.5 million and $39.8 million in the years ended December 31, 2016 and 2017, respectively, and positive cash flows from operating activities of $9.5 million in the year ended December 31, 2018. To the extent we are successful in increasing our Cloud customer base, we may also incur increased net losses and negative cash flows from operating activities because costs associated with acquiring and implementing new Cloud customers are generally incurred up front, while subscription revenues are generally recognized ratably over the terms of the agreements. Our recent growth in revenues may not be indicative of our future performance.

We also expect our expenses to increase in the future due to anticipated increases in sales, general, and administrative expenses, including expenses associated with being a public company, and product development and management expenses, which could impact our ability to achieve or to sustain profitability or positive cash flows from operating activities in the future. Additionally, while the majority of our revenue comes from fees charged for use of the software, we are developing new products and services, which may initially have a lower profit margin than our existing Cloud solutions, which could have a material adverse effect on our business, financial condition, and results of operations. Although we believe we will be able to reach profitability and attain positive cash flows from operating activities in the next few years, we cannot provide any assurance that we will able to do so in the future.

The markets in which we participate are highly competitive, and if we do not compete effectively, it could have a material adverse effect on our business, financial condition, and results of operations.

The markets in which we participate are highly competitive, and competition could intensify in the future. We believe the principal competitive factors in our market include breadth and depth of product functionality, scalability and reliability of applications, robust workforce management, comprehensive tax services, modern and innovative cloud technology platforms combined with an intuitive user experience, multi-country and jurisdiction domain expertise in payroll and HCM, quality of implementation and customer service, integration with a wide variety of third party applications and systems, total cost of ownership and ROI, brand awareness, and reputation, pricing and distribution. We face a variety of competitors, some of which are long-established providers of HCM solutions. Many of our current and potential competitors are larger, have greater name recognition, longer

 

21


Table of Contents

operating histories, larger marketing budgets, and significantly greater resources than we do, and are able to devote greater resources to the development, promotion, and sale of their products and services. Some of our competitors could offer HCM solutions bundled as part of a larger product offering. Furthermore, our current or potential competitors may be acquired by third parties with greater available resources and the ability to initiate or to withstand substantial price competition. In addition, many of our competitors have established marketing relationships, access to larger customer bases, and major distribution agreements with consultants, system integrators, and resellers. Our competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their product offerings or resources.

In order to capitalize on customer demand for cloud applications, legacy vendors are modernizing and expanding their applications through cloud acquisitions and organic development. Legacy vendors may also seek to partner with other leading cloud HCM providers. Ceridian also faces competition from vendors selling custom software and point solutions, some of which offer cloud solutions. Our competitors include, without limitation: Automatic Data Processing (“ADP”), The Ultimate Software Group, Inc. (“Ultimate Software”), and Workday, Inc. (“Workday”) for HCM; Kronos Incorporated (“Kronos”) for workforce management; and Cornerstone OnDemand Inc. (“Cornerstone OnDemand”) for talent management. In addition, other companies, such as NetSuite and Microsoft that provide cloud applications in different target markets, may develop applications or acquire companies that operate in our target markets, and some potential customers may elect to develop their own internal applications. Some large businesses may be hesitant to adopt cloud applications such as ours and prefer to upgrade the more familiar applications offered by these vendors that are deployed on-premise, such as Oracle Corporation (“Oracle”) and SAP SE (“SAP”). Our competitors could offer HCM solutions on a standalone basis at a low price or bundled as part of a larger product sale. With the introduction of new technologies and market entrants, competition could intensify in the future.

If our competitors’ products, services, or technologies become more accepted than our applications, if they are successful in bringing their products or services to market earlier than ours, or if their products or services are more technologically capable than ours, it could have a material adverse effect on our business, financial condition, and results of operations. In addition, some of our competitors may offer their products and services at a lower price. If we are unable to achieve our target pricing levels or if we experience significant pricing pressures, it could have a material adverse effect on our business, financial condition, and results of operations.

Our growth strategy has focused on developing our Cloud solutions, which have experienced rapid revenue growth in recent periods that has been offset by revenue declines in our Bureau solutions. If we fail to manage our growth effectively or if our strategy is not successful, we may be unable to execute our business plan, to maintain high levels of service, or to adequately address competitive challenges.

We have recently experienced a period of rapid growth in our operations related to our Cloud solutions. In particular, our recurring services revenue for our Cloud solutions has continued to increase while our recurring services revenue for our Bureau solutions has continued to decline. As we implement our growth strategy for our Cloud solutions, we will continue to migrate employees and resources from our Bureau solutions to our Cloud solutions. Additionally, we are continuing to invest in the infrastructure shared by our Bureau and Cloud solutions, although we are no longer marketing our Bureau solutions to new customers. The growth of our Cloud solutions has placed, and future growth will place, a significant strain on our management, administrative, operational, and financial infrastructure. In order to manage this growth effectively, we will need to continue to improve our operational, financial, and management controls, and our reporting systems and procedures. Failure to effectively manage growth and failure to achieve our growth strategy could result in difficulty or delays in implementing customers, declines in quality or customer satisfaction, increases in costs, difficulties

 

22


Table of Contents

in introducing new features, or other operational difficulties; and any of these difficulties could have a material adverse effect on our business, financial condition, and results of operations.

Our Bureau solutions, which comprise a significant portion of our revenue, may decline at a rate faster than we anticipate, and we may not be able to successfully migrate our Bureau customers to our Cloud solutions or to offset the decline in Bureau revenue with Cloud revenue.

Our growth strategy is focused on the growth and expansion of our Cloud solutions; however, a portion of our revenue continues to be derived from our Bureau customers. We generally ceased marketing our Bureau solutions to new customers in the United States in 2012, and since that time have maintained the Bureau applications for existing customers while migrating customers to our Cloud solutions. Maintenance of our Bureau business requires investment, specifically with respect to compliance updates and security controls. If our investments are not sufficient to adequately update our Bureau solutions, such solutions may lose market acceptance and we may face security vulnerabilities.

In addition, we have marketed our Cloud solutions to our Bureau customers, and some of our Bureau customers have migrated to our Cloud solutions, but there is no guarantee that our remaining Bureau customers will migrate to our Cloud solutions. If such Bureau customers do not migrate, we may lose them in the future or we may be required to make ongoing investments to serve a smaller pool of customers. If our revenue from our Bureau solutions declines at a rate faster than anticipated, we are required to make significant investments in infrastructure shared by our Bureau and Cloud solutions that are not offset by increased revenue, we are not able to successfully convert the remaining Bureau customers to our Cloud solutions, or our Cloud solutions revenue does not grow fast enough to offset the decline in our Bureau solutions revenue, it could have a material adverse effect on our business, financial condition, and results of operations.

If the market for enterprise cloud computing develops slower than we expect or declines, it could have a material adverse effect on our business, financial condition, and results of operations.

The enterprise cloud computing market is not as mature as the market for on-premise enterprise software, and it is uncertain whether cloud computing will achieve and sustain high levels of customer demand and market acceptance. Our success will depend to a substantial extent on the widespread adoption of cloud computing in general, and of HCM solutions in particular. Many enterprises have invested substantial personnel and financial resources to integrate traditional enterprise software into their businesses and therefore may be reluctant or unwilling to migrate to cloud computing. It is difficult to predict customer adoption rates and demand for our applications, the future growth rate and size of the cloud computing market, or the entry of competitive applications. The expansion of the cloud computing market depends on a number of factors, including the cost, performance, and perceived value associated with cloud computing, as well as the ability of cloud computing companies to address security and privacy concerns. If we or other cloud computing providers experience security incidents, loss of customer data, disruptions in delivery, or other problems, the market for cloud computing applications as a whole, including our applications, may be negatively affected. If cloud computing does not achieve widespread adoption or there is a reduction in demand for cloud computing caused by a lack of customer acceptance, technological challenges, weakening economic conditions, security or privacy concerns, competing technologies and products, reductions in corporate spending, or otherwise, it could have a material adverse effect on our business, financial condition, and results of operations.

 

23


Table of Contents

Our revenues from our Cloud solutions have grown substantially over the last few years. Our efforts to increase use of our Cloud solutions and our other applications may not succeed and may reduce our revenue growth rate.

Our revenues from our Cloud solutions have grown substantially over the last few years. Our total Cloud revenues grew from $297.8 million in 2016 to $404.3 million in 2017 and $534.3 million in 2018, a growth rate of 35.8% and 32.2%, respectively. Any factor adversely affecting sales of our Cloud solutions, including application release cycles, delays, or failures in new product functionality, market acceptance, product competition, performance and reliability, reputation, price competition, and economic and market conditions, could have a material adverse effect on our business, financial condition, and results of operations. Our participation in new markets for native payroll, and application expansion in succession management, learning management, and compensation management, is relatively new, and it is uncertain whether these areas will ever result in significant revenues for us. Further, the entry into new markets or the introduction of new features, functionality, or applications beyond our current markets and functionality may not be successful.

Our quarterly results of operations may fluctuate significantly and may not fully reflect the underlying performance of our business.

Our quarterly results of operations, including the levels of our revenues, gross margin, profitability, cash flow, and deferred revenue, may vary significantly in the future, and period-to-period comparisons of our results of operations may not be meaningful. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control, and as a result, may not fully reflect the underlying performance of our business. Fluctuation in quarterly results may negatively impact the value of our common stock. Factors that may cause fluctuations in our quarterly financial results include, without limitation:

 

   

our ability to attract new Cloud customers;

 

   

our ability to replace declining Bureau revenue with Cloud revenue;

 

   

the addition or loss of large Cloud customers, including through acquisitions or consolidations;

 

   

the addition or loss of employees by our Cloud customers;

 

   

the timing and number of paydays in a period;

 

   

the timing of recognition of revenues;

 

   

the tenure of our Cloud customers during that period;

 

   

the amount and timing of operating expenses related to the maintenance and expansion of our business, operations, and infrastructure;

 

   

network outages or security breaches;

 

   

general economic, industry, and market conditions;

 

   

customer renewal rates;

 

   

increases or decreases in the number of elements of our services or pricing changes upon any renewals of customer agreements;

 

   

changes in our pricing policies or those of our competitors;

 

   

the mix of applications sold during a period;

 

   

seasonal variations in sales of our applications, which has historically been highest in the fourth quarter of a calendar year;

 

24


Table of Contents
   

fluctuation in market interest rates, which impacts debt interest expense as well as float revenue;

 

   

the timing and success of new application and service introductions by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers, or strategic partners; and

 

   

the impact of new accounting rules.

If we are not able to provide new or enhanced functionality and features or keep pace with rapid technological changes and evolving industry standards, we will not be able to remain competitive and the demand for our services will likely decline, which could have a material adverse effect on our business, financial condition, and results of operations.

The markets in which we operate are characterized by changes due to rapid technological advances, additional qualification requirements related to technological challenges, and evolving industry standards and changes in the regulatory and legislative environment. Our future success will depend upon our ability to anticipate and to adapt to changes in technology and industry standards, and to effectively develop, to introduce, to market, and to gain broad acceptance of new product and service enhancements incorporating the latest technological advancements. We may not be able to successfully provide new or enhanced functionality and features for our existing solutions that achieve market acceptance or that keep pace with rapid technological developments. For example, we are focused on enhancing the features and functionality of our HCM solutions to enhance their utility for larger customers with complex, dynamic, and global operations. The success of new or enhanced functionality and features depends on several factors, including their overall effectiveness and the timely completion, introduction, and market acceptance of the enhancements, new features, or applications. Failure in this regard may significantly impair our revenue growth. In addition, because our solutions are designed to operate on a variety of systems, we will need to continuously modify and enhance our solutions to keep pace with changes in internet-related hardware, iOS, and other software, and communication, browser, and database technologies. We may not be successful in developing these new or enhanced functionality and features, or in bringing them to market in a timely fashion. If we do not continue to innovate and to deliver high-quality, technologically advanced products and services, we will not remain competitive, which could have a material adverse effect on our business, financial condition, and results of operations. Furthermore, uncertainties about the timing and nature of new functionality, or new functionality to existing platforms or technologies, could increase our research and development expenses. Any failure of our applications to operate effectively with future network platforms and technologies could reduce the demand for our applications, result in customer dissatisfaction, and have a material adverse effect on our business, financial condition, and results of operations.

An information security breach of our systems or the loss of, or unauthorized access to, customer information, the failure to comply with the U.S. Federal Trade Commission’s (“FTC”) ongoing consent order regarding data protection, or a system disruption could have a material adverse effect on our business, market brand, financial condition, and results of operations.

Our business is dependent on our payroll, transaction, financial, accounting, and other data processing systems. We rely on these systems to process, on a daily and time sensitive basis, a large number of complicated transactions. We electronically receive, process, store, and transmit data and personally identifiable information (“PII”) about our customers and their employees, as well as our vendors and other business partners, including names, social security numbers, and checking account numbers. We keep this information confidential. However, our websites, networks, applications and technologies, and other information systems may be targeted for sabotage, disruption, or data misappropriation. The uninterrupted operation of our information systems and our ability to maintain

 

25


Table of Contents

the confidentiality of PII and other customer and individual information that resides on our systems are critical to the successful operation of our business. While we have information security and business continuity programs, these plans may not be sufficient to ensure the uninterrupted operation of our systems or to prevent unauthorized access to the systems by unauthorized third parties. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. These concerns about information security are increased with the mounting sophistication of social engineering. Our network security hardening may be bypassed by phishing and other social engineering techniques that seek to use end user behaviors to distribute computer viruses and malware into our systems, which might disrupt our delivery of services and make them unavailable, and might also result in the disclosure or misappropriation of PII or other confidential or sensitive information. In addition, a significant cyber security breach could prevent or delay our ability to process payment transactions.

Any information security breach in our business processes or of our processing systems has the potential to impact our customer information and our financial reporting capabilities, which could result in the potential loss of business and our ability to accurately report financial results. If any of these systems fail to operate properly or become disabled even for a brief period of time, we could potentially miss a critical filing period, resulting in potential fees and penalties, or lose control of customer data, all of which could result in financial loss, a disruption of our businesses, liability to customers, regulatory intervention, or damage to our reputation. The continued occurrence of high-profile data breaches provides evidence of an external environment increasingly hostile to information security. If our security measures are breached as a result of third party action, employee or subcontractor error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to customer data, our reputation may be damaged, our business may suffer, and we could incur significant liability. We may also experience security breaches that may remain undetected for an extended period of time. Techniques used to obtain unauthorized access or to sabotage systems change frequently and are growing increasingly sophisticated. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures.

This environment demands that we continuously improve our design and coordination of security controls throughout the company. Despite these efforts, it is possible that our security controls over data, training, and other practices we follow may not prevent the improper disclosure of PII or other confidential information. Any issue of data privacy as it relates to unauthorized access to or loss of customer and/or employee information could result in the potential loss of business, damage to our market reputation, litigation, and regulatory investigation and penalties. For example, in December 2009 a criminal hacked into our discontinued U.S. payroll application. Following receipt of an “access letter” in May 2010 from the FTC for a non-public review of the matter, we worked with the FTC and entered into a twenty-year consent order which became final in June 2011. We conceded no wrongdoing in the order and we were not subject to any monetary fines or penalties. However, in connection with the order, we are required to, among other things, maintain a comprehensive information security program that is reasonable and appropriate for our size, complexity, and for the type of PII we collect. We are also required to have portions of our security program, which apply to certain segments of our U.S. business, reviewed by an independent third party on a biennial basis. Maintaining, updating, monitoring, and revising an information security program in an effort to ensure that it remains reasonable and appropriate in light of changes in security threats, changes in technology, and security vulnerabilities that arise from legacy systems is time-consuming and complex, and is an ongoing effort.

There may be other such security vulnerabilities that come to our attention. The independent third party that reviews our security program pursuant to the FTC consent order may determine that the existence of vulnerabilities in our security controls or the failure to remedy them in a timeframe they

 

26


Table of Contents

deem appropriate means that our security program does not provide a reasonable level of assurance that the security, confidentiality, and integrity of PII is protected by Ceridian (or that there was a failure to protect at some point in the reporting period). While we have taken and continue to take steps to ensure compliance with the consent order, if we are determined not to be in compliance with the consent order, or if any new breaches of security occur, the FTC may take enforcement actions or other parties may initiate a lawsuit. Any such resulting fines and penalties could have a material adverse effect on our liquidity and financial results, and any reputational damage therefrom could adversely affect our relationships with our existing customers and our ability to attain new customers. Our continued investment in the security of our technology systems, continued efforts to improve the controls within our technology systems, business processes improvements and the enhancements to our culture of information security may not successfully prevent attempts to breach our security or unauthorized access to PII or other confidential, sensitive or proprietary information. In addition, in the event of a catastrophic occurrence, either natural or man-made, our ability to protect our infrastructure, including PII and other customer data, and to maintain ongoing operations could be significantly impaired. Our business continuity and disaster recovery plans and strategies may not be successful in mitigating the effects of a catastrophic occurrence. Insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our insurance policies may not cover all claims made against us, and defending a suit, regardless of its merit, could be costly and divert management’s attention. If our security is breached, if PII or other confidential information is accessed, if we fail to comply with the consent order or if we experience a catastrophic occurrence, it could have a material adverse effect on our business, financial condition, and results of operations.

Our services present the potential for identity theft, embezzlement, or other similar illegal behavior by our employees with respect to third parties.

The services offered by us generally require or involve collecting PII of our customers and / or their employees, such as their full names, birth dates, addresses, employer records, tax information, social security numbers, and bank account information. This information can be used by criminals to commit identity theft, to impersonate third parties, or to otherwise gain access to the data or funds of an individual. If any of our employees take, convert, or misuse such PII, funds or other documents or data, we could be liable for damages, and our business reputation could be damaged or destroyed. Moreover, if we fail to adequately prevent third parties from accessing PII and/or business information and using that information to commit identity theft, we might face legal liabilities and other losses that could have a material adverse effect on our business, financial condition, and results of operations.

Our solutions and our business are subject to a variety of U.S. and international laws and regulations, including those regarding privacy, data protection, and information security. Any failure by us or our third party service providers, as well as the failure of our platform or services, to comply with applicable laws and regulations could have a material adverse effect on our business, financial condition, and results of operations.

We are subject to a variety of U.S. and international laws and regulations, including regulation by various federal government agencies, including the FTC, and state and local agencies. The United States and various state and foreign governments have adopted or proposed limitations on, or requirements regarding, the collection, distribution, use, security, and storage of PII of individuals; and the FTC and many state attorneys general are applying federal and state consumer protection laws to impose standards on the online collection, use and dissemination of data. Self-regulatory obligations, other industry standards, policies, and other legal obligations may apply to our collection, distribution, use, security, or storage of PII or other data relating to individuals. In addition, most states and some foreign governments have enacted laws requiring companies to notify individuals of data security breaches involving certain types of PII. These obligations may be interpreted and applied in an inconsistent manner from one jurisdiction to another and may conflict with one another, other

 

27


Table of Contents

regulatory requirements, or our internal practices. Any failure or perceived failure by us to comply with U.S., E.U., or other foreign privacy or security laws, regulations, policies, industry standards, or legal obligations, or any security incident that results in the unauthorized access to, or acquisition, release, or transfer of, PII may result in governmental enforcement actions, litigation, fines and penalties, or adverse publicity and could cause our customers to lose trust in us, which could harm our reputation and have a material adverse effect on our business, financial condition, and results of operations.

We expect that there will continue to be new proposed laws, regulations, and industry standards concerning privacy, data protection and information security in the United States, Canada, the European Union, and other jurisdictions, and we cannot yet determine the impact such future laws, regulations, and standards may have on our business. For example, in May 2018, the General Data Protection Regulation came into force, bringing with it a complete overhaul of E.U. data protection laws: the new rules supersede E.U. data protection legislation, impose more stringent E.U. data protection requirements, and provide for greater penalties for non-compliance. Changing definitions of what constitutes PII may also limit or inhibit our ability to operate or to expand our business, including limiting strategic partnerships that may involve the sharing of data. Also, some jurisdictions require that certain types of data be retained on servers within these jurisdictions. Our failure to comply with applicable laws, directives, and regulations may result in enforcement action against us, including fines and imprisonment, and damage to our reputation, any of which may have an adverse effect on our business and operating results. Further, in October 2015, the European Court of Justice issued a ruling invalidating the U.S.-E.U. Safe Harbor Framework, which facilitated transfers of PII to the United States in compliance with applicable E.U. data protection laws. In July 2016, the E.U. and the U.S. political authorities adopted the E.U.-U.S. Privacy Shield, replacing the Safe Harbor Framework and providing a new mechanism for companies to transfer E.U. PII to the United States. U.S. organizations wishing to self-certify under the Privacy Shield must pledge their compliance with its seven core and sixteen supplemental principles, which are based on European Data Protection Law.

If our service is perceived to cause, or is otherwise unfavorably associated with, violations of privacy or data security requirements, it may subject us or our customers to public criticism and potential legal liability. Public concerns regarding PII processing, privacy and security may cause some of our customers’ end users to be less likely to visit their websites or otherwise interact with them. If enough end users choose not to visit our customers’ websites or otherwise interact with them, our customers could stop using our platform. This, in turn, may reduce the value of our services and slow or eliminate the growth of our business. Existing and potential privacy laws and regulations concerning privacy and data security and increasing sensitivity of consumers to unauthorized processing of PII may create negative public reactions to technologies, products, and services such as ours.

Evolving and changing definitions of what constitutes PII and / or “Personal Data” within the United States, Canada, the European Union, and elsewhere, especially relating to the classification of internet protocol, or IP addresses, machine or device identification numbers, location data and other information, may limit or inhibit our ability to operate or to expand our business. Future laws, regulations, standards and other obligations could impair our ability to collect or to use information that we utilize to provide email delivery and marketing services to our customers, thereby impairing our ability to maintain and to grow our customer base and to increase revenue. Future restrictions on the collection, use, sharing, or disclosure of our customers’ data or additional requirements for express or implied consent of customers for the use and disclosure of such information may limit our ability to develop new services and features.

 

28


Table of Contents

Privacy concerns and laws or other domestic or foreign data protection regulations may reduce the effectiveness of our applications, which could have a material adverse effect on our business, financial condition, and results of operations.

Our customers can use our applications to collect, to use, and to store PII regarding their employees, independent contractors, and job applicants. Federal, state, and foreign government bodies and agencies have adopted, are considering adopting, or may adopt laws and regulations regarding the collection, use, storage and disclosure of PII obtained from individuals. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to the businesses of our customers, or to our business directly, may limit the use and adoption of our applications and reduce overall demand, or lead to significant fines, penalties, or liabilities for any non-compliance with such privacy laws. Furthermore, privacy concerns may cause our customers’ workers to resist providing PII necessary to allow our customers to use our applications effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our applications in certain industries.

All of these domestic and international legislative and regulatory initiatives may adversely affect our customers’ ability to process, to handle, to store, to use, and to transmit demographic information and PII from their employees, independent contractors, job applicants, customers, and suppliers, which could reduce demand for our applications. The European Union and many countries in Europe have stringent privacy laws and regulations, which may impact our ability to profitably operate in certain European countries.

Further, international data protection regulations trending toward increased localized data residency rules make transfers from outside the regulation’s jurisdiction increasingly complex and may impact our ability to deliver solutions that meet all customers’ needs. If the processing of PII were to be further curtailed in this manner, our solutions could be less effective, which may reduce demand for our applications, which could have a material adverse effect on our business, financial condition, and results of operations.

In addition to government activity, privacy advocacy groups and the technology and other industries are considering various new, additional, or different self-regulatory standards that may place additional burdens on us. If the processing of PII were to be curtailed in this manner, our solutions would be less effective, which may reduce demand for our applications, which could have a material adverse effect on our business, financial condition, and results of operations.

We rely on third party service providers for many aspects of our business, including, but not limited to, the operation of data centers; the execution of Automated Clearing House, or ACH, and wire transfers to support our customer payroll and tax services; the monitoring of applicable laws; and the printing and delivery of checks. If any third party service providers on which we rely experience a disruption, go out of business, experience a decline in quality, or terminate their relationship with us, we could experience a material adverse effect on our business, financial condition, and results of operation.

We rely on third party service providers for many integral aspects of our business. A failure on the part of any of our third party service providers to fulfill their contracts with us could result in a material adverse effect on our business, financial condition, and results of operation. We depend on our third parties for many services, including, but not limited to:

Upkeep of data centers

We host Dayforce and Powerpay applications and serve all of our customers from data centers operated by third party providers, primarily NaviSite, in Boston, Massachusetts; Redhill, England;

 

29


Table of Contents

Santa Clara, California; Toronto, Canada; Vancouver, Canada; and Woking, England. We also host Dayforce Australia in Microsoft Azure in Melbourne, Australia and Sydney, Australia. While we control and have access to our servers and all of the components of our network that are located in our external data centers, we do not control the operation of these facilities. The owners of our data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. These parties may also seek to cap their maximum contractual liability resulting in us being financially responsible for losses caused by their actions or omissions. Additionally, we host our internal systems through data centers that we operate and lease or own in Atlanta, Georgia; Fountain Valley, California; Louisville, Kentucky; St. Petersburg, Florida; and Winnipeg, Canada. If we are unable to renew our agreements with our third party providers or to renew our leases on commercially reasonable terms, or if one of our data center operators is acquired, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur significant costs and possible service interruption in connection with any such transfer. Both our third party data centers and data centers that we lease and operate are subject to break-ins, sabotage, intentional acts of vandalism, and other misconduct. Any such acts could result in a breach of the security of our or our customers’ data.

Problems faced by our third party data center locations, with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Our third party data centers operators could decide to close their facilities without adequate notice. In addition, any financial difficulties, such as bankruptcy, faced by our third party data centers operators or any of the service providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict. Additionally, if our data centers are unable to keep up with our growing needs for capacity, this could adversely affect the growth of our business. Any changes in third party service levels at our data centers or any security breaches, errors, defects, disruptions, or other performance problems with our applications could adversely affect our reputation, damage our customers’ stored files, result in lengthy interruptions in our services, or otherwise result in damage or losses to our customers for which they may seek compensation from us. Interruptions in our services might reduce our revenues, cause us to issue refunds to customers for prepaid and unused subscription services, subject us to potential liability, or adversely affect our renewal rates.

Processing of electronic funds transfers

We currently have agreements with three banks in the United States, two banks in Canada, and one financial payments company in the United Kingdom to execute electronic funds transfers to support our customer payroll and tax services in the United States, Canada, and the United Kingdom. If one or more of these parties fails to process electronic funds transfers on a timely basis, or at all, then our relationship with our customers could be harmed and we could be subject to claims by a customer with respect to the failed transfers, with little or no recourse to the banks. In addition, these parties have no obligation to renew their agreements with us on commercially reasonable terms, or at all, and transferring to alternative providers could prove time-consuming and costly. If these parties terminate their relationships with us, restrict or fail to increase the dollar amounts of funds that they will process on behalf of our customers, their doing so may impede our ability to process funds and could have a material adverse effect on our business, financial condition, and results of operations.

Check printing and delivery

In Canada, we rely on a third party vendor to print payroll checks, and in Canada and the United States we rely on third party couriers, such as Federal Express and Purolator, to ship printed reports, year-end slips, and pay checks to our customers. Relying on third party check printers and couriers

 

30


Table of Contents

puts us at risk from disruptions in their operations, such as employee strikes, inclement weather, and their ability to perform tasks on our behalf. If these vendors fail to perform their tasks, we could incur liability or suffer damages to our reputation, or both. If we are forced to use other third party couriers, transferring to these competitor couriers could prove time-consuming, our costs could increase and we may not be able to meet shipment deadlines. Moreover, we may not be able to obtain terms as favorable as those we currently use, which could further increase our costs.

Monitoring of changes to applicable laws

We and our third party providers must monitor for any changes or updates in laws that are applicable to the solutions that we or our third party providers provide to our customers. In addition, we are reliant on our third party providers to modify the solutions that they provide to our customers to enable our clients to comply with changes to such laws and regulations. If our third party providers fail to reflect changes or updates in applicable laws in the solutions that they provide to our customers, we could be subject to negative customer experiences, harm to our reputation, loss of customers, claims for any fines, penalties or other damages suffered by our customers, and other financial harm.

A failure on the part of any of our third party service providers could result in a material adverse effect on our business, financial condition, and results of operations.

If we are unable to develop or to sell our existing Cloud solutions into new markets or to further penetrate existing markets, our revenue may not grow as expected.

Our ability to increase revenue will depend, in large part, on our ability to sell our existing Cloud solutions into new markets around the world, to further penetrate our existing markets, and to increase sales from existing customers who do not utilize the full Dayforce suite. The success of any enhancement or new solution or service depends on several factors, including the timely completion, introduction and market acceptance of enhanced or new solutions, the ability to maintain and to develop relationships with third parties, and the ability to attract, to retain and to effectively train sales and marketing personnel. Any new solutions we develop or acquire may not be introduced in a timely or cost-effective manner and may not achieve the market acceptance necessary to generate significant revenue. Any new markets in which we attempt to sell our platform and solutions, including new countries or regions, may not be receptive. Additionally, any expansion into new markets will require commensurate ongoing expansion of our monitoring of local laws and regulations, which increases our costs as well as the risk of the product not incorporating in a timely fashion or at all the necessary changes to enable a customer to be compliant with such laws. Our ability to further penetrate our existing markets depends on the quality of our platform and solutions, and our ability to design our Cloud solutions to meet consumer demand; and our ability to increase sales from existing customers depends on our customers’ satisfaction with our product and need for additional solutions. If we are unable to sell our Cloud solutions into new markets or to further penetrate existing markets, or to increase sales from existing customers, our revenue may not grow as expected, which could have a material adverse effect on our business, financial condition, and results of operations.

Because a growing part of our business consists of sales of applications to manage complex operating environments for our customers, we may experience longer sales cycles and longer deployments. Some customers demand more configuration and integration services, and require increased compliance and initial support costs, which could have a material adverse effect on our business, financial condition, and results of operations in a given period.

A growing portion of our customer base requires applications that manage complex operating environments. Our ability to increase revenues and to maintain profitability depends, in large part, on widespread acceptance of our applications by businesses and other organizations. As we target our

 

31


Table of Contents

sales efforts at these customers, we face greater costs, longer sales cycles, and less predictability in completing some of our sales. For some of our customers, the customer’s decision to use our applications may be an enterprise-wide decision and, therefore, these types of sales require us to provide greater levels of education regarding the use and benefits of our applications. Our typical sales cycles for Dayforce range from three to twelve months, and we expect that this lengthy sales cycle may continue or increase as customers adopt our applications. Longer sales cycles could have a material adverse effect on our business, financial condition, and results of operations in a given period.

It typically takes approximately three to nine months to implement a new customer on Dayforce, depending on the number and type of applications, the complexity and scale of the customers’ business, the configuration requirements, and other factors, many of which are beyond our control. Although our contracts are generally non-cancellable by the customer, at any given time, a significant percentage of our customers may be still in the process of deploying our applications, particularly during periods of rapid growth. Some customers may opt for phased roll outs, which further lengthens the time for us to see profits from such contracts.

Some of our customers may demand more configuration and integration services, which increase our upfront investment in sales and deployment efforts. Additionally, customers may require increased compliance and initial support costs during the onboarding process. As a result of these factors, we must devote a significant amount of sales support and professional services resources to individual customers, increasing the cost and time required to complete sales. The increased costs associated with completing sales and the implementation process for these customers could have a material adverse effect on our business, financial condition, and results of operations.

If our customers are not satisfied with the implementation and professional services provided by us or our partners, it could have a material adverse effect on our business, financial condition, and results of operations.

Our business depends on our ability to implement our solutions on a timely, accurate, and cost-efficient basis and to provide professional services demanded by our customers. Implementation and other professional services may be performed by our own staff, by a third party, or by a combination of the two. Although we perform the majority of our implementations and other professional services with our staff, in some instances we work with third parties to increase the breadth of capability and depth of capacity for delivery of certain services to our customers. In 2017 and 2018, we used third parties to assist us in approximately 20% of our implementation services. If a customer is not satisfied with the quality of work performed by us or a third party or with the implementation or type of professional services or applications delivered, or there are inaccuracies or errors in the work delivered by the third party, then we could incur additional costs to address the situation, the profitability of that work might be impaired, and the customer’s dissatisfaction with such services could damage our ability to expand the number of applications subscribed to by that customer or we could be liable for loss or damage suffered by the customer as a result of such third party’s actions or omissions, any of which could have a material adverse effect on our business, financial condition, and results of operations. If a new customer is dissatisfied with professional service, either performed by us or a third party, the customer could refuse to go-live, which could result in a delay in our collection of revenue or could result in a customer seeking repayment of its implementation fees or suing us for damages, or could force us to enforce the termination provisions in our customer contracts in order to collect revenue. In addition, negative publicity related to our customer relationships, regardless of its accuracy, may affect our ability to compete for new business with current and prospective customers, which could also have a material adverse effect on our business, financial condition, and results of operations.

 

32


Table of Contents

The loss of a significant portion of our customers, or a failure to renew our subscription agreements with a significant portion of our customers, could have a material adverse effect on our business, financial condition, and results of operations.

The loss of a significant portion of our customers, or a failure of some of them to renew their contracts with us, could have a significant impact on our revenues, reputation, and our ability to obtain new customers. Our agreements with our Dayforce customers are typically structured as having an initial fixed term of between three and five years, with evergreen renewal thereafter; consequently, our customers may choose to terminate their agreements with us at any time after the expiration of the initial term by providing us with the amount of written notice stipulated in the agreement. Moreover, acquisitions of our customers could lead to cancellation of our contracts with them or by the acquiring companies, thereby reducing the number of our existing and potential customers. Acquisitions of our partners involved in referring or reselling our solutions could also result in a reduction in the number of our current and potential customers, as our partners may no longer facilitate the adoption of our applications. A failure to retain a significant portion of our customers, or a failure to renew our subscription agreements with a significant portion of customers, could have a material adverse effect on our business, financial condition, and results of operations.

Our customers may fail to pay us in accordance with the terms of their agreements, which could have a material adverse effect on our business, financial condition, and results of operations.

Our agreements with our Dayforce customers are typically structured as having an initial fixed term of between three and five years, with evergreen renewal thereafter. If customers fail to pay us under the terms of our agreements with them, we may be unable to collect amounts due and may be required to incur additional costs enforcing the terms of our contracts, including litigation. The risk of such negative effects increases with the term length of our customer arrangements. Furthermore, some of our customers may seek bankruptcy protection or other similar relief and fail to pay amounts due to us, or to pay those amounts more slowly. If our customers fail to pay us in accordance with the terms of their agreements, it could have a material adverse effect on our business, financial condition, and results of operations.

We often provide service level commitments under our customer contracts. If we fail to meet these contractual commitments, we could be considered to have breached our contractual obligations, be obligated to provide credits, or refund prepaid amounts related to unused subscription services or face contract terminations, which could have a material adverse effect on our business, financial condition, and results of operations.

Our customer agreements typically provide service level commitments which are measured on a monthly or other periodic basis. If we are unable to meet the stated service level commitments or suffer extended periods of unavailability for our applications, we may be contractually obligated to provide these customers with service credits or refunds for prepaid amounts related to unused subscription services, or we could face contract claims for damages or terminations, which could have a material adverse effect on our business, financial condition, and results of operations. In addition, our revenues could be significantly affected if we suffer unscheduled downtime that exceeds the allowed downtimes under our agreements with our customers. Any extended service outages could have a material adverse effect on our business, financial condition, and results of operations.

Any failure to offer high-quality technical support services may adversely affect our relationships with our customers and could have a material adverse effect on our business, financial condition, and results of operations.

Once our applications are deployed, our customers depend on our support organization to resolve technical issues relating to our applications. We may be unable to respond quickly enough to

 

33


Table of Contents

accommodate short-term increases in customer demand for support services. We also may be unable to modify the format of our support services to compete with changes in support services provided by our competitors. Increased customer demand for these services, without corresponding revenues, could increase costs and have an adverse effect on our results of operations. In addition, our sales process is highly dependent on our applications and business reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality technical support, or a market perception that we do not maintain high-quality support, could adversely affect our reputation and our ability to sell our applications to existing and prospective customers, which could have a material adverse effect on our business, financial condition, and results of operations.

Regulatory requirements placed on our software and services could impose increased costs on us, delay or prevent our introduction of new products and services, and impair the function or value of our existing products and services.

Our products and services may become subject to increasing regulatory requirements, and as these requirements proliferate, we may be required to change or adapt our products and services to comply. Changing regulatory requirements might render our products and services obsolete or might block us from developing new products and services. This might in turn impose additional costs upon us to comply or to further develop our products and services. It might also make introduction of new products and services more costly or more time-consuming than we currently anticipate and could even prevent introduction by us of new products or services or cause the continuation of our existing products or services to become more costly. Accordingly, such regulatory requirements could have a material adverse effect on our business, financial condition, and results of operations.

Customers depend on our products and services to enable them to comply with applicable laws, which requires us and our third party providers to constantly monitor applicable laws and to make applicable changes to our solutions. If our solutions have not been updated to enable the customer to comply with applicable laws or we fail to update our solutions on a timely basis, it could have a material adverse effect on our business, financial condition, and results of operations.

Customers rely on our solutions to enable them to comply with payroll, HR, and other applicable laws for which the solutions are intended for use. Changes in tax, benefit, and other laws and regulations could require us to make significant modifications to our products or to delay or to cease sales of certain products, which could result in reduced revenues or revenue growth and our incurring substantial expenses and write-offs. There are thousands of jurisdictions and multiple laws in some or all of such jurisdictions, which may be relevant to the solutions that we or our third party providers provide to our customers. Therefore, we and our third party providers must monitor all applicable laws and as such laws expand, evolve, or are amended in any way, and when new regulations or laws are implemented, we may be required to modify our solutions to enable our customers to comply, which requires an investment of our time and resources. Although we believe that our cloud platform provides us with flexibility to release updates in response to these changes, we cannot be certain that we will be able to make the necessary changes to our solutions and release updates on a timely basis, or at all. In addition, we are reliant on our third party providers to modify the solutions that they provide to our customers as part of our solutions to comply with changes to such laws and regulations. The number of laws and regulations that we are required to monitor will increase as we expand the geographic region in which the solutions are offered. When a law changes, we must then test our solutions to meet the requirements necessary to enable our customers to comply with the new law. If our solutions fail to enable a customer to comply with applicable laws, we could be subject to negative customer experiences, harm to our reputation or loss of customers, claims for any fines, penalties or other damages suffered by our customer, and other financial harm. Additionally, the costs associated with such monitoring implementation of changes are significant. If our solutions do not enable our

 

34


Table of Contents

customers to comply with applicable laws and regulations, it could have a material adverse effect on our business, financial condition, and results of operations.

Additionally, if we fail to make any changes to our products as described herein, which are required as a result of such changes to, or enactment of, any applicable laws in a timely fashion, we could be responsible for fines and penalties implemented by governmental and regulatory bodies. If we fail to provide contracted services, such as processing W-2 tax forms or remitting taxes in accordance with deadlines set by law, our customers could incur fines, penalties, interest, or other damages, which we could be responsible for paying. Our payment of fines, penalties, interest, or other damages as a result of our failure to provide compliance services prior to deadlines may have a material adverse effect on our business, financial condition, and results of operations.

We operate and are subject to tax in multiple jurisdictions. Audits, investigations, and tax proceedings could have a material adverse effect on our business, results of operations, and financial condition.

We are subject to income and non-income taxes in multiple jurisdictions. Income tax accounting often involves complex issues, and judgment is required in determining our worldwide provision for income taxes. We are regularly subject to tax audits in these jurisdictions. We regularly assess the likely outcomes of these audits to determine the appropriateness of our tax reserves as well as our future tax liabilities. In addition, the application of withholding tax, value added tax, goods and services tax, sales tax, and other non-income taxes is not always clear and we may be subject to audits relating to such withholding or non-income taxes. We believe that our tax positions are reasonable and our tax reserves are adequate to cover any potential liability. However, tax authorities in these jurisdictions may challenge our position. If any of these tax authorities successfully challenge our positions, we may be liable for additional tax, penalties, and interest in excess of any reserves established, which may have a significant impact on our results, and operations and future cash flow.

Sales to customers outside the United States or with international operations expose us to risks inherent in international sales.

Over 30% of our revenue for each of the years ended December 31, 2018, 2017, and 2016, was obtained from companies headquartered outside of the United States, primarily from Canada, which accounted for 30.1%, 30.3%, and 30.2% of our revenue in such periods, respectively. Our Ceridian Canada Ltd. (“Ceridian Canada”) operations provide certain HCM solutions for our Canadian customers. We are continuing to expand our international Cloud solutions into other countries. As such, our international operations are subject to risks that could adversely affect those operations or our business as a whole, including:

 

   

costs of localizing products and services for foreign customers;

 

   

difficulties in managing and staffing international operations;

 

   

difficulties and increased expenses introducing corporate policies and controls in our international operations;

 

   

difficulties with or inability to engage global partners;

 

   

reduced or varied protection of intellectual property and other legal rights in some countries;

 

   

longer sales and payment cycles;

 

   

the burdens of complying with a wide variety of foreign laws;

 

   

compliance with applicable anti-bribery laws, including the Foreign Corrupt Practices Act;

 

   

additional regulatory compliance requirements;

 

35


Table of Contents
   

exposure to legal jurisdictions that may not recognize or interpret customer contracts appropriately;

 

   

potentially adverse tax consequences, including the complexities of foreign value added tax systems, the tax cost on the repatriation of earnings, and changes in tax rates;

 

   

restrictions on transfer of funds, laws and business practices favoring local competitors;

 

   

weaker protection for intellectual property and other legal rights than in the United States;

 

   

practical difficulties in enforcing intellectual property and other rights outside of the United States;

 

   

exposure to local economic and political conditions; and

 

   

changes in currency exchange rates, and in particular, changes in the currency exchange rate between U.S. dollars and Canadian dollars.

In addition, we anticipate that customers and potential customers may increasingly require and demand that a single vendor provide HCM solutions and services for their employees in a number of countries. If we are unable to provide the required services on a multinational basis, there may be a negative impact on our new orders and customer retention, which would negatively impact revenue and earnings. Although we have a multinational strategy, additional investment and efforts may be necessary to implement such strategy. Some of our business partners also have international operations and are subject to the risks described above. Even if we are able to successfully manage the risks of international operations, our business may be adversely affected if our business partners are not able to successfully manage these risks.

If we fail to manage our technical operations infrastructure, our existing customers may experience service outages, and our new customers may experience delays in the deployment of our applications, which could have a material adverse effect on our business, financial condition, and results of operations.

We have experienced significant growth in the number of users, transactions, and data that our operations infrastructure supports. We seek to maintain sufficient excess capacity in our operations infrastructure to meet the needs of all of our customers. We also seek to maintain excess capacity to facilitate the rapid provision of new customer activations and the expansion of existing customer activations. In addition, we need to properly manage our technological operations infrastructure in order to support version control, changes in hardware and software parameters, and the evolution of our applications. However, the provision of new hosting infrastructure requires significant lead time. We have experienced, and may in the future experience, website disruptions, outages and other performance problems. These problems may be caused by a variety of factors, including infrastructure changes, human or software errors, viruses, security attacks, fraud, increased resource consumption from expansion or modification to our Dayforce code, spikes in customer usage, and denial of service issues. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. If we do not accurately predict our infrastructure requirements, our existing customers may experience service outages that may subject them to financial penalties, causing us to incur financial liabilities and customer losses, and our operations infrastructure may fail to keep pace with increased sales, causing new customers to experience delays as we seek to obtain additional capacity, which could have a material adverse effect on our business, financial condition, and results of operations.

Aging software infrastructure may lead to increased costs and disruptions in operations that could negatively impact our financial results.

We have risks associated with aging software infrastructure assets. The age of certain of our assets may result in a need for replacement, or higher level of maintenance costs. A higher level of

 

36


Table of Contents

expenses associated with our aging software infrastructure may have a material adverse effect on our business, financial condition, and results of operations.

Our growth depends in part on the success of our strategic relationships with third parties.

In order to grow our business, we anticipate that we will continue to depend on the continuation and expansion of relationships with third parties, such as implementation partners, third party sales channel partners, some of whom have exclusive relationships with us, and technology and content providers. Identifying partners and negotiating and documenting relationships with them requires significant time and resources. In addition, the third parties we partner with may not perform as expected under our agreements, and we may have disagreements or disputes with such third parties, which could negatively affect our brand and reputation.

Additionally, we rely on the expansion of our relationships with our third party partners as we grow our Cloud solutions. Our agreements with third parties are typically non-exclusive and do not prohibit them from working with our competitors. Our competitors may be effective in providing incentives to these same third parties to favor their products or services. In addition, acquisitions of our partners by our competitors could result in a reduction in the number of our current and potential customers, as our partners may no longer facilitate the adoption of our applications by potential customers after an acquisition by any of our competitors.

If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete in the marketplace or to grow our revenues could be impaired, which could have a material adverse effect on our business, financial condition, and results of operations. Even if we are successful, we cannot assure you that these relationships will result in increased customer usage of our applications or increased revenues.

If our current or future applications fail to perform properly, our reputation could be adversely affected, our market share could decline, and we could be subject to liability claims, which could have a material adverse effect on our business, financial condition, and results of operations.

Our applications are inherently complex and may contain material defects or errors. Any defects in functionality or that cause interruptions in the availability of our applications could result in:

 

   

loss or delayed market acceptance and sales;

 

   

breach of warranty or other contractual claims for damages incurred by customers;

 

   

errors in application output and resulting fines or penalties;

 

   

sales credits or refunds for prepaid amounts related to unused subscription services;

 

   

loss of customers;

 

   

diversion of development and customer service resources; and

 

   

injury to our reputation;

any of which could have a material adverse effect on our business, financial condition, and results of operations. In addition, the costs incurred in correcting any material defects or errors might be substantial.

Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss or corruption or cause the information that we

 

37


Table of Contents

collect to be incomplete or contain inaccuracies that our customers regard as significant. Furthermore, the availability or performance of our applications could be adversely affected by a number of factors, including customers’ inability to access the Internet, the failure of our network or software systems, security breaches, or variability in user traffic for our services. We may be required to issue credits or refunds for prepaid amounts related to unused services or otherwise be liable to our customers for damages they may incur resulting from certain of these events. Because of the nature of our business, our reputation could be harmed as a result of factors beyond our control. For example, because our customers access our applications through their Internet service providers, if a service provider fails to provide sufficient capacity to support our applications or otherwise experiences service outages, such failure could interrupt our customers’ access to or experience with our applications, which could adversely affect our reputation or our customers’ perception of our applications’ reliability or otherwise have a material adverse effect on our business, financial condition, and results of operations.

Our insurance intended to cover liability claims may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may not cover all claims made against us, and defending a suit, regardless of its merit, could be costly and divert management’s attention.

We depend on our senior management team, and the loss of one or more key employees or an inability to attract and to retain highly skilled employees could have a material adverse effect on our business, financial condition, and results of operations.

Our success depends largely upon the continued services of our key executive officers. We also rely on our leadership team in the areas of research and development, marketing, sales, services, and general and administrative functions, and on mission-critical individual contributors in all such areas. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. We do not have employment agreements with our executive officers or other key personnel that require them to continue to work for us for any specified period, and, therefore, they could terminate their employment with us at any time. Additionally, we do not maintain key man insurance on any of our executive officers or key employees. The loss of one or more of our executive officers or key employees could have a material adverse effect on our business, financial condition, and results of operations.

To execute our growth plan, we must attract and retain highly qualified personnel. Competition for personnel is intense, including without limitation for individuals with high levels of experience in designing and developing software and Internet-related services and senior sales executives. We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees have or that we have breached their legal obligations, resulting in a diversion of our time and resources. In addition, job candidates and existing employees often consider the value of the stock awards they receive in connection with their employment. If the perceived value of our stock awards declines, it may adversely affect our ability to recruit and to retain highly skilled employees. If we fail to attract new personnel or fail to retain and to motivate our current personnel, it could have a material adverse effect on our business, financial condition, and results of operations.

We have significant operations in the Republic of Mauritius. Changes in the laws and regulations in Mauritius or our non-compliance with applicable laws and regulations could have a material adverse effect on our business, financial condition, and results of operations.

Our Mauritius operations, which employ 685 employees as of December 31, 2018, are subject to the laws and regulations of the Republic of Mauritius. The continuance of these operations depends

 

38


Table of Contents

upon compliance with applicable Mauritius environmental, health, safety, labor, social security, pension, and other laws and regulations. Failure to comply with such laws and regulations could result in fines, penalties, or lawsuits. In addition, there is no assurance that we will be able to comply fully with applicable laws and regulations should there be any amendment to the existing regulatory regime or implementation of any new laws and regulations. Changes in the laws and regulations in Mauritius or our non-compliance with applicable laws and regulations could have a material adverse effect on our business, financial condition, and results of operations. Additionally, Mauritius lacks the infrastructure of countries in which we do business, such as the United States, Canada, and the United Kingdom. Any disruption to the electrical grid or catastrophic event in Mauritius could result in a longer response time in our ability to address the issue due to the remote geographic location of Mauritius, which could have a material adverse effect on our business, financial condition, and results of operations. Furthermore, our business and operations in Mauritius entail the procurement of licenses and permits from the relevant authorities. Difficulties or failure in obtaining the required permits, licenses, and certificates could result in our inability to continue our business in Mauritius in a manner consistent with past practice, which could have a material adverse effect on our business, financial condition, and results of operations.

We may acquire other companies or technologies, which could divert our management’s attention, result in additional indebtedness or dilution to our stockholders, and otherwise disrupt our operations, which could have a material adverse effect on our business, financial condition, and results of operations.

We may in the future seek to acquire or to invest in businesses, applications or technologies that we believe could complement or expand our applications, enhance our technical capabilities, or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated.

In addition, we have limited experience in acquiring other businesses. If we acquire additional businesses, we may not be able to integrate the acquired personnel, operations, and technologies successfully, or to effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including the inability to integrate or to benefit from acquired technologies or services in a profitable manner, unanticipated costs or liabilities associated with the acquisition, difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business, difficulty converting the customers of the acquired business onto our applications and contract terms, and adverse effects to our existing business relationships with business partners and customer as a result of the acquisition.

If an acquired business fails to meet our expectations, it could have a material adverse effect on our business, financial condition, and results of operations. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could increase our interest payments.

In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the event that the book value of goodwill or other intangible assets is impaired, any such impairment would be charged to earnings in the period of impairment. In the future, if our acquisitions do not yield expected returns, we may be required to record charges based on this impairment assessment process, which could have a material adverse effect on our financial condition and results of operations.

 

39


Table of Contents

Adverse economic conditions may have a material adverse effect on our business, financial condition, and results of operations.

Our business depends on the overall demand for HCM solutions and on the economic health of our current and prospective customers. Past financial recessions have resulted in a significant weakening of the economy in North America and globally, the reduction in employment levels, the reduction in prevailing interest rates, more limited availability of credit, a reduction in business confidence and activity, and other difficulties that may affect one or more of the industries to which we sell our applications. In addition, there has been pressure to reduce government spending in the United States, and any tax increases and spending cuts at the federal level might reduce demand for our applications from organizations that receive funding from the U.S. government and could negatively affect the U.S. economy, which could further reduce demand for our applications. Any of these events could have a material adverse effect on our business, financial condition, and results of operations. In addition, there can be no assurance that spending levels for HCM solutions will increase following any recovery.

Catastrophic events may disrupt our business.

Our data centers are located in Atlanta, Georgia; Fountain Valley, California; Louisville, Kentucky; St. Petersburg, Florida; and Winnipeg, Canada. Additionally, our data centers hosted by third parties and our corporate offices are located in Boston, Massachusetts; Melbourne, Australia; Minneapolis, Minnesota; Redhill, England; Santa Clara, California; Sydney, Australia; Toronto, Canada; Vancouver, Canada; and Woking, England. Any location in any part of the world is susceptible to natural disasters or other risks beyond our control and its third party contractors that could impact operations. For example, the west coast of the United States contains active earthquake zones, the Midwest is subject to periodic tornadoes, and the east coast is subject to seasonal hurricanes and snowstorms. Additionally, we employ a substantial number of employees located in the Republic of Mauritius, which is subject to seasonal hurricanes, and the geographic remoteness of the location may create additional delays in recovery from any catastrophic event. Additionally, we rely on our network and third party infrastructure and enterprise applications, internal technology systems, and our website for our development, marketing, operational support, hosted services and sales activities. In the event of a major earthquake, tornado, hurricane, or catastrophic event, such as fire, power loss, telecommunications failure, cyber-attack, war, or terrorist attack in any of our domestic or international locations, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our application development, lengthy interruptions in our services, breaches of data security and loss of critical data, all of which could have a material adverse effect on our business, financial condition, and results of operations.

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

Our success and ability to compete depend in part upon our intellectual property. We primarily rely on copyright, trade secret, and trademark laws; trade secret protection; and confidentiality or license agreements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be ineffective or inadequate.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and to protect these rights. Litigation brought to protect and to enforce our intellectual property rights could be costly, time-consuming, and distracting to management, with no guarantee of success, and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses,

 

40


Table of Contents

counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. Our failure to secure, to protect, and to enforce our intellectual property rights could have a material adverse effect on our business, financial condition, and results of operations.

Litigation and regulatory investigations aimed at us or resulting from actions of our predecessor may result in significant financial losses and harm to our reputation.

We face risk of litigation, regulatory investigations, and similar actions in the ordinary course of our business, including the risk of lawsuits and other legal actions relating to breaches of contractual obligations or tortious claims from customers or other third parties, fines, penalties, interest, or other damages as a result of erroneous transactions, breach of data privacy laws, or lawsuits and legal actions related to our predecessors. Any such action may include claims for substantial or unspecified compensatory damages, as well as civil, regulatory, or criminal proceedings against our directors, officers, or employees; and the probability and amount of liability, if any, may remain unknown for significant periods of time. We may be also subject to various regulatory inquiries, such as information requests, and book and records examinations, from regulators and other authorities in the geographical markets in which we operate. A substantial liability arising from a lawsuit judgment or settlement or a significant regulatory action against us or a disruption in our business arising from adverse adjudications in proceedings against our directors, officers, or employees could have a material adverse effect on our business, financial condition, and results or operations.

Additionally, we are subject to claims and investigations as a result of our predecessor, Control Data Corporation (“CDC”), Ceridian Corporation, and other former entities for whom we are successor-in-interest with respect to assumed liabilities. For example, in September 1989, CDC became party to an environmental matters agreement with Seagate Technology plc (“Seagate”) related to groundwater contamination on a parcel of real estate in Omaha, Nebraska sold by CDC to Seagate. In February 1988, CDC entered into an arrangement with Northern Engraving Corporation and the Minnesota Pollution Control Agency in relation to groundwater contamination at a site in Spring Grove, Minnesota. In August 2017, we received notice of a mesothelioma claim related to CDC. Although we are fully reserved for the groundwater contamination liabilities, we cannot at this time accurately assess the merits of these claims, and we cannot be certain if additional liabilities related to such predecessor companies will surface. Moreover, even if we ultimately prevail in or settle any litigation, regulatory action, or investigation, we could suffer significant harm to our reputation, which could materially affect our ability to attract new customers, to retain current customers, and to recruit and to retain employees, which could have a material adverse effect on our business, financial condition, and results of operations.

We may be sued by third parties for alleged infringement of their proprietary rights.

There is considerable patent and other intellectual property development activity in our industry. Our success depends upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, including parties commonly referred to as “patent trolls,” may own or claim to own intellectual property relating to our industry. From time to time, third parties may claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. In the future, others may claim that our applications and underlying technology infringe or violate their intellectual property rights. However, we may be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our services, or require that we comply with other unfavorable terms. We contractually agree to indemnify our customers with respect to claims of intellectual property infringement relating to our products, and may also be obligated to indemnify our customers or business partners or to pay

 

41


Table of Contents

substantial settlement costs, including royalty payments, in connection with any such claim or litigation, and to obtain licenses, to modify applications, or to refund fees, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations. Any such events could have a material adverse effect on our business, financial condition, and results of operations.

Some of our applications utilize open source software, and any failure to comply with the terms of one or more of these open source licenses could have a material adverse effect on our business, financial condition, and results of operations.

Some of our applications include software covered by open source licenses, which may include, by way of example, GNU General Public License and the Apache License. The terms of various open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our applications. By the terms of certain open source licenses, we could be required to release the source code of our proprietary software and to make our proprietary software available under open source licenses if we combine our proprietary software with open source software in a certain manner. In the event that portions of our proprietary software are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, to re-engineer all or a portion of our technologies, or otherwise to be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our technologies and services. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third party commercial software, as open source licensors generally do not provide warranties or controls on the origin of the software. Many of the risks associated with usage of open source software cannot be eliminated and could have a material adverse effect on our business, financial condition, and results of operations.

We employ third party software for use in or with both our applications and our internal operations, and the inability to maintain these licenses or errors in the software we license could result in increased costs, or reduced service levels, which could have a material adverse effect on our business, financial condition, and results of operations.

Our applications, including Dayforce, incorporate certain third party software obtained under licenses from other companies. Additionally, we are reliant on third party software licenses for our internal operational applications. We anticipate that we will continue to rely on such third party software and development tools from third parties in the future. Although we believe that there are commercially reasonable alternatives to the third party software we currently license, this may not always be the case, or it may be difficult or costly to replace, and our failure to migrate off end of life software may significantly impact our customer’s ability to operate. In addition, integration of the software used in our applications and in our operations with new third party software may require significant work and require substantial investment of our time and resources. Also, our use of additional or alternative third party software would require us to enter into license agreements with third parties.

Additionally, if the quality of our third party software declines, the overall quality of our products may be negatively impacted. To the extent that our applications depend upon the successful operation of third party software in conjunction with our software, any undetected errors or defects in this third party software could prevent the deployment or impair the functionality of our applications, delay new application introductions, and result in a failure of our applications, which could have a material adverse effect on our business, financial condition, and results of operations.

 

42


Table of Contents

Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our applications, and could have a material adverse effect on our business, financial condition, and results of operations.

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication, and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify our applications in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees, or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, resulting in reductions in the demand for Internet-based applications such as ours, any of which could have a material adverse effect on our business, financial condition, and results of operations.

In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease of use, accessibility, and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by “viruses,” “worms,” and similar malicious programs, and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the Internet is adversely affected by these issues, demand for our applications could suffer, which could have a material adverse effect on our business, financial condition, and results of operations.

We may pay employees and taxing authorities amounts due for a payroll period before a customer’s electronic funds transfers are settled with finality to our trust account, or make erroneous payments to employees, taxing authorities, or other entities. If customer payments are rejected by banking institutions or otherwise fail to clear into our trust accounts, or erroneous payments are not quickly resolved, we may require additional sources of short-term liquidity which could have a material adverse effect on our business, financial condition, and results of operations.

Our payroll processing business involves the movement of significant funds from the account of a customer to employees and relevant taxing authorities. We debit a customer’s account prior to any disbursement on its behalf. Under certain circumstances, funds previously credited to our trust account could be reversed after our payment of amounts due to employees and taxing and other regulatory authorities. There is, therefore, a risk that the employer’s funds will be insufficient to cover the amounts we have already paid on its behalf. While such funding shortage or erroneous payments and accompanying financial exposure has only occurred in limited instances in the past, should customers default on their payment obligations in the future or erroneous payment recovery be unsuccessful, we might be required to advance substantial amounts of funds to cover such obligations. In such an event, we may be required to seek additional sources of short-term liquidity, which may not be available on reasonable terms, which could have a material adverse effect on our business, financial condition, and results of operations. Further, should a customer whose funds are reversed subsequently have financial difficulty, collection of the funds advanced by us on its behalf may be difficult.

Customer funds that we hold in trust are subject to market, interest rate, credit, and liquidity risks. The loss of these funds could have a material adverse effect on our business, financial condition, and results of operations.

We invest funds held in trust for our customers in liquid, investment-grade marketable securities, money market securities, and other cash equivalents. Nevertheless, our customer fund assets are

 

43


Table of Contents

subject to general market, interest rate, credit, and liquidity risks. These risks may be exacerbated, individually or in unison, during periods of unusual financial market volatility. In the event of a global financial crisis, such as that experienced in 2008, we could be faced with a severe constriction of the availability of liquidity, which could impact our ability to fund payrolls. Any loss of or inability to access customer funds could have an adverse impact on our cash position and results of operations and could require us to obtain additional sources of liquidity, and could have a material adverse effect on our business, financial condition, and results of operations.

If we are required to collect sales and use taxes in additional jurisdictions, we might be subject to liability for past sales, and our future sales may decrease. Adverse tax laws or regulations could be enacted or existing laws could be applied to us or our customers, which could increase the costs of our services and otherwise have a material adverse effect on our business, financial condition, and results of operations.

The application of federal, state, and local tax laws to services provided electronically is evolving. New income, sales, use, or other tax laws, statutes, rules, regulations, or ordinances could be enacted at any time (possibly with retroactive effect), and could be applied solely or disproportionately to services provided over the Internet. These enactments could adversely affect our sales activity due to the inherent cost increase the taxes would represent and ultimately have a material adverse effect on our results of operations and cash flows.

In addition, existing tax laws, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or applied adversely to us (possibly with retroactive effect), which could require us or our customers to pay additional tax amounts, as well as require us or our customers to pay fines or penalties and interest for past amounts.

For example, we might lose sales or incur significant expenses if states successfully impose broader guidelines on state sales and use taxes. A successful assertion by one or more states requiring us to collect sales or other taxes on the licensing of our software or provision of our services could result in substantial tax liabilities for past transactions and otherwise harm our business. Each state has different rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that change over time. We review these rules and regulations periodically and, when we believe we are subject to sales and use taxes in a particular state, we may voluntarily engage state tax authorities in order to determine how to comply with that state’s rules and regulations. There is no guarantee that we will not be subject to sales and use taxes or related penalties for past sales in states where we currently believe no such taxes are required.

Vendors of services, like us, are typically held responsible by taxing authorities for the collection and payment of any applicable sales and similar taxes. If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our services, we might be liable for past taxes in addition to taxes going forward. Liability for past taxes might also include substantial interest and penalty charges. Our customers are typically wholly responsible for applicable sales and similar taxes. Nevertheless, customers might be reluctant to pay back taxes and might refuse responsibility for interest or penalties associated with those taxes. If we are required to collect and to pay back taxes and the associated interest and penalties, and if our customers fail or refuse to reimburse us for all or a portion of these amounts, we will incur unplanned expenses that may be substantial. Moreover, imposition of such taxes on us going forward will effectively increase the cost of our software and services to our customers and might adversely affect our ability to retain existing customers or to gain new customers in the areas in which such taxes are imposed.

 

44


Table of Contents

We have underfunded pension plan liabilities. We will require current and future operating cash flow to fund these shortfalls. We have no assurance that we will generate sufficient cash flow to satisfy these obligations.

We maintain defined benefit pension plans covering employees who meet age and service requirements. While our U.S. pension plans have been closed and frozen, our net pension liability and cost is materially affected by the discount rate used to measure pension obligations, the longevity and actuarial profile of our plan participants, the level of plan assets available to fund those obligations, and the actual and expected long-term rate of return on plan assets. Significant changes in investment performance or a change in the portfolio mix of invested assets can result in corresponding increases and decreases in the valuation of plan assets, particularly equity securities, or in a change in the expected rate of return on plan assets. Assets available to fund the pension and other postemployment benefit obligations of our plans, as of December 31, 2018, were approximately $381.6 million, or approximately $162.6 million less than the measured pension and post-retirement benefit obligation on a U.S. GAAP basis. In addition, any changes in the discount rate could result in a significant increase or reduction in the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net periodic pension cost in the following years. Similarly, changes in the expected return on plan assets can result in significant changes in the net periodic pension cost in the following years.

Our failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business, financial condition, and results of operations.

We are required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of our IPO and in each year thereafter. Our auditors will also need to attest to the effectiveness of our internal control over financial reporting in the future to the extent we are no longer an emerging growth company, as defined by the JOBS Act, and are not a smaller reporting company. In 2017, we identified a material weakness related to our assessment of valuation allowance and classification of deferred tax liabilities associated with intangible assets for 2016 and prior periods. We remediated the material weakness and did not have a material weakness in connection with the 2017 audit; however, we cannot guarantee that we will not have additional material weaknesses in the future. If we are unable to maintain adequate internal control over financial reporting or if we identify additional material weaknesses in our internal control over financial reporting, we may be unable to report our financial information accurately on a timely basis, may suffer adverse regulatory consequences or violations of applicable stock exchange listing rules, may breach the covenants under our credit facilities, and incur additional costs. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements, which could have a material adverse effect on our business, financial condition, and results of operations.

We have and will continue to incur increased costs and obligations as a result of being a public company.

As a publicly traded company, we have incurred and will continue to incur additional legal, accounting and other expenses that we were not required to incur in the past, and will incur additional expenses after we cease to be an emerging growth company (to the extent that we take advantage of certain exceptions from reporting requirements that are available under the JOBS Act as an emerging growth company). We are required to file with the Securities and Exchange Commission (the “Commission”) annual and quarterly information and other reports that are specified in Section 13 of the Exchange Act. We also are subject to other reporting and corporate governance requirements,

 

45


Table of Contents

including the requirements of the NYSE, the TSX, and certain provisions of the Sarbanes-Oxley Act, and the regulations promulgated thereunder, which will impose additional compliance obligations upon us. Among other things, as a public company:

 

   

we prepare and distribute periodic public reports and other stockholder communications in compliance with our obligations under the federal securities laws and applicable stock exchange rules;

 

   

the roles and duties of our Board and committees of the Board are expanded;

 

   

we comply with more comprehensive financial reporting and disclosure compliance functions;

 

   

we manage enhanced investor relations function; and

 

   

we involve and retain to a greater degree outside counsel and accountants in the activities listed above.

These changes require a commitment of additional resources, and many of our competitors already comply with these obligations. We may not be successful in implementing these requirements, and the commitment of resources required for implementing them could have a material adverse effect on our business, financial condition, and results of operations.

The changes necessitated by becoming a public company require a significant commitment of resources and management oversight that has increased and may continue to increase our costs and could place a strain on our systems and resources. As a result, our management’s attention might be diverted from other business concerns. If we are unable to offset these costs through other savings, then it could have a material adverse effect on our business, financial condition, and results of operations.

We are an “emerging growth company” and have elected and may elect to continue to comply with certain of the reduced reporting requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.

We are an emerging growth company, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to: exemption from compliance with the auditor attestation requirements of Section 404 of Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation, and stockholder approval of any golden parachute payments not previously approved. In addition, even if we comply with the greater obligations of public companies, we may avail ourselves of the reduced requirements applicable to emerging growth companies from time to time in the future. We cannot predict if investors will find our common stock less attractive if we choose to continue to rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will remain an emerging growth company until December 31, 2023, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenue exceeds $1.07 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period, whether or not issued in a registered offering.

 

46


Table of Contents

We may not be able to utilize a significant portion of our net operating loss or research tax credit carryforwards, which could have a material adverse effect on our financial condition and results of operations.

As of December 31, 2018, we had federal and state net operating loss carryforwards due to prior period losses, which, if not utilized, will begin to expire in 2031 and 2019 for federal and state purposes, respectively. These net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could have a material adverse effect on our financial condition and results of operations.

In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), our ability to utilize net operating loss carryforwards or other tax attributes in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. Future issuances of our stock could cause an “ownership change.” It is possible that an ownership change, or any future ownership change, could have a material effect on the use of our net operating loss carryforwards or other tax attributes, which could have a material adverse effect on our results of operations and profitability.

Changes in generally accepted accounting principles in the United States could have a material adverse effect on our previously reported results of operations.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board (the “FASB”), the Commission, and various bodies formed to promulgate and to interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our previously reported results of operations and could affect the reporting of transactions completed before the announcement of a change.

In May 2014, the FASB issued new revenue recognition guidance under Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which is effective for our interim and annual periods beginning after December 31, 2017. Under this new guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue that is recognized. In order to be able to comply with the requirements of ASU 2014-09 beginning in the first quarter of 2019, we need to update and to enhance our internal accounting systems, processes, and our internal controls over financial reporting. This has required, and will continue to require, additional investments by us, and may require incremental resources and system configurations that could increase our operating costs in future periods. If we are not able to properly implement ASU 2014-09 in a timely manner, the revenue that we recognize and the related disclosures that we provide under ASU 2014-09 may not be complete or accurate, and we could fail to meet our financial reporting obligations in a timely manner. We have completed our evaluation and implementation plan for adoption of this new guidance, and will be adopting the new standard effective first quarter of 2019. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recently Issued and Adopted Accounting Pronouncements.”

Risks Related to Our Indebtedness

We are a holding company and rely on dividends, distributions, and other payments, advances, and transfers of funds from our subsidiaries to meet our obligations.

We are a holding company that does not conduct any business operations of our own. As a result, we are largely dependent upon cash transfers in the form of intercompany loans and receivables from

 

47


Table of Contents

our subsidiaries to meet our obligations. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason also could limit or impair their ability to pay dividends or other distributions to us.

Our outstanding indebtedness could have a material adverse effect on our financial condition and our ability to operate our business, and we may not be able to generate sufficient cash flows to meet our debt service obligations.

Our outstanding indebtedness as of December 31, 2018 consisted of (i) a Senior Term Loan in the original principal amount of $680.0 million and (ii) a $300.0 million committed Revolving Facility. The Senior Credit Facilities are secured substantially by all of our assets. The Senior Term Loan has a maturity date of April 30, 2025, and the Revolving Facility has a maturity date of April 30, 2023. As of December 31, 2018, we had $678.3 million outstanding principal under our Senior Term Loan and no principal outstanding under our Revolving Facility.

Our outstanding indebtedness and any additional indebtedness we incur may have important consequences for us, including, without limitation, that:

 

   

we may be required to use a substantial portion of our cash flow to pay the principal of and interest on our indebtedness;

 

   

our indebtedness and leverage may increase our vulnerability to adverse changes in general economic and industry conditions, as well as to competitive pressures;

 

   

we may be required to use a substantial portion of our cash flow to pay the principal of and interest on our indebtedness;

 

   

our indebtedness and leverage may increase our vulnerability to adverse changes in general economic and industry conditions, as well as to competitive pressures;

 

   

our ability to obtain additional financing for working capital, capital expenditures, acquisitions and for general corporate and other purposes may be limited;

 

   

our indebtedness may expose us to the risk of increased interest rates because certain of our borrowings, including and most significantly our borrowings under our Senior Credit Facilities, are at variable rates of interest;

 

   

our indebtedness may prevent us from taking advantage of business opportunities as they arise or successfully carrying out our plans to expand our business; and

 

   

our flexibility in planning for, or reacting to, changes in our business and our industry may be limited.

Under the terms of the agreements governing our Senior Credit Facilities, we are required to comply with specified operating covenants and, under certain circumstances, a financial covenant applicable to the Revolving Facility, which may limit our ability to operate our business as we otherwise might operate it. For example, the obligations under the Senior Credit Facilities may be accelerated upon the occurrence of an event of default, including, without limitation, payment defaults, cross-defaults to certain material indebtedness, covenant defaults, material inaccuracy of representations and warranties, bankruptcy events, material judgments, material defects with respect to guarantees and collateral, and change of control. If not cured, an event of default could result in any amounts outstanding, including any accrued interest and unpaid fees, becoming immediately due and payable, which would require us, among other things, to seek additional financing in the debt or equity markets, to refinance or restructure all or a portion of our indebtedness, to sell selected assets, and/or to reduce or to delay planned capital or operating expenditures. Such measures might not be sufficient to enable us to service our debt, and any such financing or refinancing might not be available on economically

 

48


Table of Contents

favorable terms or at all. If we are not able to generate sufficient cash flows to meet our debt service obligations or are forced to take additional measures to be able to service our indebtedness, it could have a material adverse effect on our business, financial condition, and results of operations.

Despite our substantial indebtedness, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage.

We may incur substantial additional indebtedness in the future. Although the agreements governing our Senior Credit Facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the indebtedness we can incur in compliance with these restrictions could be substantial. For example, pursuant to incremental facilities under the Senior Credit Facilities, we may incur up to (i) an aggregate amount equal to the greater of (x) $125.0 million and (y) 100% of EBITDA (as defined in the agreements governing the Senior Credit Facilities) of additional secured or unsecured debt plus (ii) an unlimited additional amount of secured or unsecured debt, subject to compliance with certain leverage-based tests, as described in the agreements governing our Senior Credit Facilities. If we incur additional debt, the risks associated with our substantial leverage would increase.

Restrictive covenants in the agreements governing our Senior Credit Facilities may restrict our ability to pursue our business strategies.

The agreements governing our Senior Credit Facilities contain a number of restrictive covenants that impose significant operating and financial restrictions on us, and may limit our ability to engage in acts that may be in our long-term best interests. These include covenants restricting, among other things, our (and our subsidiaries’) ability:

 

   

to incur additional indebtedness or other contingent obligations;

 

   

to grant liens;

 

   

to enter into burdensome agreements with negative pledge clauses or restrictions on subsidiary distributions;

 

   

to pay dividends or make other distributions in respect of equity;

 

   

to make payments in respect of subordinated debt;

 

   

to make investments, including acquisitions, loans, and advances;

 

   

to consolidate, to merge, to liquidate, or to dissolve;

 

   

to sell, to transfer, or to otherwise dispose of assets;

 

   

to engage in transactions with affiliates;

 

   

to materially alter the business that we conduct; and

 

   

to amend or to otherwise change the terms of the documentation governing certain restricted debt.

The agreements governing Senior Credit Facilities contains a financial covenant applicable only to the Revolving Facility, which requires that we maintain a ratio of consolidated first lien debt to EBITDA (with certain adjustments as set forth in the agreements governing our Senior Credit Facilities) below a specified level on a quarterly basis. However, such requirement is applicable at the end of a fiscal quarter only if more than 35% of the Revolving Facility (with an exclusion for certain letters of credit) is drawn at the end of such fiscal quarter. Our ability to meet that financial ratio can be affected by events

 

49


Table of Contents

beyond our control, and we cannot assure you that we will be able to meet that ratio. The covenant did not apply as of December 31, 2018, but there can be no assurance that we will be in compliance with such covenant in the future. A breach of any covenant or restriction contained in the agreements governing our Senior Credit Facilities could result in a default under those agreements. If any such default occurs, a majority of the lenders under the Senior Credit Facilities (or, in the case of the financial covenant described above, a majority of the lenders under the Revolving Facility), may elect (after the expiration of any applicable notice or grace periods) to declare all outstanding borrowings, together with accrued and unpaid interest and other amounts payable thereunder, to be immediately due and payable. The lenders under the Senior Term Loan and Revolving Facility also have the right upon an event of default thereunder to terminate any commitments they have to provide further borrowings. Further, following an event of default under the agreements governing our Senior Credit Facilities, the administrative agent, on behalf of the secured parties under the Senior Credit Facilities, will have the right to proceed against the collateral granted to them to secure that debt. If the debt under the Senior Term Loan or Revolving Facility was to be accelerated, our assets may not be sufficient to repay in full that debt or any other debt that may become due as a result of that acceleration.

In the future, we may be dependent upon our lenders for financing to execute our business strategy and to meet our liquidity needs. If our lenders are unable to fund borrowings under their credit commitments or we are unable to borrow, it could have a material adverse effect on our business, financial condition, and results of operations.

During periods of volatile credit markets, there is risk that lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including but not limited to, extending credit up to the maximum amount permitted by the Revolving Facility. If our lenders are unable to fund borrowings under their revolving credit commitments or we are unable to borrow, it could be difficult to obtain sufficient funding to execute our business strategy or to meet our liquidity needs, which could have a material adverse effect on our business, financial condition, and results of operations.

Our debt may be downgraded, which could have a material adverse effect on our business, financial condition, and results of operations.

A reduction in the ratings that rating agencies assign to our short and long-term debt may negatively impact our access to the debt capital markets and increase our cost of borrowing, which could have a material adverse effect on our business, financial condition, and results of operations.

Volatility and weakness in bank and capital markets may adversely affect credit availability and related financing costs for us.

Banking and capital markets can experience periods of volatility and disruption. If the disruption in these markets is prolonged, our ability to refinance, and the related cost of refinancing, some or all of our debt could be adversely affected. Although we currently can access the bank and capital markets, there is no assurance that such markets will continue to be a reliable source of financing for us. These factors, including the tightening of credit markets, could adversely affect our ability to obtain cost-effective financing. Increased volatility and disruptions in the financial markets also could make it more difficult and more expensive for us to refinance outstanding indebtedness and to obtain financing. In addition, the adoption of new statutes and regulations, the implementation of recently enacted laws, or new interpretations or the enforcement of older laws and regulations applicable to the financial markets or the financial services industry could result in a reduction in the amount of available credit or an increase in the cost of credit. Disruptions in the financial markets can also adversely affect our lenders, insurers, customers, and other counterparties. Any of these results could have a material adverse effect on our business, financial condition, and results of operations.

 

50


Table of Contents

The interest rates of our term loans are priced using a spread over LIBOR.

LIBOR, the London interbank offered rate, is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in the term loans and revolving loans made under our credit facilities such that the interest due to our creditors pursuant to a term loan or revolving loan extended to us under our credit facilities is calculated using the LIBOR rate plus an applicable spread above LIBOR. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear whether or not LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. If LIBOR ceases to be available, we are entitled to negotiate with the administrative agent under our credit facilities to amend the governing credit agreement to establish a successor benchmark rate that is generally accepted by the syndicated loan market for loans denominated in U.S. Dollars. If lenders holding more than a majority of the loans and commitments under our credit facilities have not objected to the proposed successor benchmark rate within five business days following the date on which the related amendment is posted for review by the lenders, the amendment will be deemed to have been approved by the lenders and may become effective. At this time, due to a lack of consensus as to what rate or rates may become accepted alternatives to LIBOR, it is impossible to predict the effect of any such alternatives on our liquidity, interest expense, or the value of the term loans or revolving loans.

Risks Related to This Offering and Ownership of Our Common Stock

The price of our common stock may be volatile and you could lose all or part of your investment.

Securities markets worldwide have experienced in the past, and are likely to experience in the future, significant price and volume fluctuations. This market volatility, as well as general economic, market, or political conditions could reduce the market price of our common stock regardless of our results of operations. The trading price of our common stock is likely to be highly volatile and could be subject to wide price fluctuations in response to various factors, including, among other things, the risk factors described herein and other factors beyond our control. Factors affecting the trading price of our common stock could include:

 

   

market conditions in the broader stock market;

 

   

actual or anticipated variations in our quarterly results of operations;

 

   

developments in our industry in general;

 

   

variations in operating results of similar companies;

 

   

introduction of new services by us, our competitors, or our customers;

 

   

issuance of new, negative, or changed securities analysts’ reports or recommendations or estimates;

 

   

investor perceptions of us and the industries in which we or our customers operate;

 

   

sales, or anticipated sales, of our stock, including sales by our officers, directors, and significant stockholders;

 

   

additions or departures of key personnel;

 

   

regulatory or political developments;

 

   

the public’s response to press releases or other public announcements by us or third parties, including our filings with the Commission;

 

51


Table of Contents
   

announcements, media reports or other public forum comments related to litigation, claims or reputational charges against us;

 

   

guidance, if any, that we provide to the public, any changes in this guidance, or our failure to meet this guidance;

 

   

the development and sustainability of an active trading market for our common stock;

 

   

investor perceptions of the investment opportunity associated with our common stock relative to other investment alternatives;

 

   

other events or factors, including those resulting from system failures and disruptions, earthquakes, hurricanes, war, acts of terrorism, other natural disasters or responses to these events;

 

   

changes in accounting principles;

 

   

share-based compensation expense under applicable accounting standards;

 

   

litigation and governmental investigations; and

 

   

changing economic conditions.

These and other factors may cause the market price and demand for shares of our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock sometimes have instituted securities class action litigation against the company that issued the stock. Securities litigation against us, regardless of the merits or outcome, could result in substantial costs and divert the time and attention of our management from our business, which could have a material adverse effect on our business, financial condition, and results of operations.

Future sales of our common stock, or the perception in the public markets that these sales may occur, could cause the market price for our common stock to decline.

Prior to and following the consummation of this offering, there will be 140,514,889 shares of our common stock outstanding, of which 11,000,000 shares are shares that the selling stockholders are selling in this offering. All shares of common stock sold in this offering will be freely transferable without restriction or further registration under the Securities Act. As of December 31, 2018, we also had 28,672,211 registered shares of common stock reserved for issuance under our equity incentive plans of which options to purchase 13,916,146 shares of common stock and 664,073 restricted stock units representing 14,580,219 shares of common stock are outstanding. We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of shares of our common stock in the public market, or the perception that those sales will occur, could cause the market price of our common stock to decline. Of the remaining shares of common stock outstanding, 85,441,093 shares will be restricted securities within the meaning of Rule 144 under the Securities Act and subject to certain restrictions on resale following the consummation of this offering. Restricted securities may be sold in the public market only if they are registered under the Securities Act, or are sold pursuant to an exemption from registration such as Rule 144 or Rule 701, as described in “Shares Eligible for Future Sale.” We have granted customary demand and piggyback registration rights to the Sponsors and certain of our other stockholders party to the registration rights agreement with us, pursuant to which the selling stockholders named in this prospectus are offering shares of our common stock. Should the Sponsors or any other stockholders further exercise their registration rights, the shares registered would no longer be restricted securities and would be freely tradable in the open market. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

 

52


Table of Contents

We have agreed that (subject to certain exceptions), for a period of 45 days from the date of this prospectus, we will not, without the prior written consent of Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC, dispose of or hedge any shares or any securities convertible into or exchangeable for our common stock. In addition, our directors and the Sponsors have agreed that (subject to certain exceptions), for a period ending on the earlier of (i) 45 days after the date of this prospectus and (ii) the first trading day after the release of our earnings for the quarter ended March 31, 2019, they will not, without the prior written consent of Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC, dispose of or hedge any shares or any securities convertible into or exchangeable for our common stock. Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC, in their sole discretion, may release any of the securities subject to these lock-up agreements at any time, which, in the case of officers and directors, shall be with notice. See “Underwriting.” In addition, the lock-up agreement entered will permit up to 0.6 million shares of our common stock to be sold by certain of our officers under any 10b5-1 plans that may be put in place as well as existing 10b5-1 plans during the lock-up period. Following the expiration of the applicable lock-up period, all of the issued and outstanding shares of our common stock will be eligible for future sale, subject to the applicable volume, manner of sale, holding period, and other limitations of Rule 144. See “Shares Eligible for Future Sale” for a discussion of the shares of common stock that may be sold into the public market in the future.

Cannae holds approximately 23.5% of our outstanding common stock as of December 31, 2018, or 23.5% following this offering (or 23.5% if the underwriters exercise their option to purchase additional shares in full). On November 7, 2018, Cannae announced that one of its subsidiaries had entered into a three-year margin loan pursuant to which it could borrow up to $300.0 million. The margin loan is guaranteed by Cannae for a period of up to one year and is further secured by a pledge of 25.0 million shares of our common stock beneficially owned by Cannae. The loan requires that a certain loan to value ratio (based on the value of the shares of our common stock pledged to secure the loan) be maintained. In the event that the ratio is not maintained, the borrower must post additional cash collateral and/or elect to repay a portion of the loan. The loan also contains provisions that, subject to their terms, effectively require prepayment in the event of certain customary events of default, including Cannae’s failure to comply with specified financial ratios or the triggering of a requirement of prepayment under any other material indebtedness. The lock-up agreement entered into by Cannae permits the pledge, hypothecation, grant and any related transfer of such shares in connection with the margin loan. In the event that Cannae borrows under the margin loan and there is an event of default, if Cannae fails to pledge additional cash collateral and/or repay a portion of the loan when it is required to do so or if Cannae otherwise fails to comply with the respective terms of the margin loan and the lender accelerates payment of all amounts outstanding under the loan as a result of this non-compliance, then the lender could foreclose on the pledged shares and sell the shares of common stock in the open market, which could cause the market price of our common stock to decline. In addition, certain lenders under the margin loan may elect at any time to hedge their exposure to the shares of common stock in transactions that could directly or indirectly impact the price of our common stock.

Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third party claims against us and may reduce the amount of money available to us.

Our third amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers, in each case, to the fullest extent permitted by Delaware law. Pursuant to our charter, our directors will not be liable to the company or any stockholders for monetary damages for any breach of fiduciary duty, except (i) for acts that breach his or her duty of loyalty to the company or its stockholders, (ii) for acts or omissions without good faith or

 

53


Table of Contents

involving intentional misconduct or knowing violation of the law, (iii) pursuant to Section 174 of the Delaware General Corporation Law (the “DGCL”) or (iv) for any transaction from which the director derived an improper personal benefit. The bylaws also require us, if so requested, to advance expenses that such director or officer incurred in defending or investigating a threatened or pending action, suit or proceeding, provided that such person will return any such advance if it is ultimately determined that such person is not entitled to indemnification by us. Any claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third party claims against us and may reduce the amount of money available to us.

We have elected to take advantage of the “controlled company” exemption to the corporate governance rules for publicly-listed companies, which could make our common stock less attractive to some investors or otherwise harm our stock price.

Because we qualify as a “controlled company” under the corporate governance rules for publicly-listed companies, we are not required to have a majority of our Board be independent under the applicable rules of the NYSE, nor are we required to have a compensation committee or a corporate governance and nominating committee comprised entirely of independent directors. In light of our status as a controlled company, our Board has established a compensation committee, and a corporate governance and nominating committee that are not comprised solely of independent members at the time of the offering. In addition, our Board is not composed of a majority of independent directors. Accordingly, should the interests of our Sponsors differ from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance rules for publicly-listed companies. Our status as a controlled company could make our common stock less attractive to some investors or otherwise harm our stock price.

We are party to a voting agreement with our Sponsors, which provides our Sponsors with rights to nominate a number of designees to our Board.

In connection with the IPO, we entered into a voting agreement with THL and Cannae. Pursuant to the voting agreement, for so long as THL and Cannae collectively hold 50% or more of the then outstanding voting power, then THL and Cannae shall have the power to designate a total of five directors to the Board. After THL and Cannae cease to collectively hold 50% or more of the then outstanding voting power, then each of THL and Cannae will be able to in their own right designate four directors, for so long as it holds at least 40% of the then outstanding voting power; three directors, for so long as it holds at least 30% of the then outstanding voting power; two directors, for so long as it holds at least 20% of the then outstanding voting power; and one director, for so long as it holds at least 10% of the then outstanding voting power. The voting agreement will terminate as to each Sponsor when the Sponsor is no longer entitled to designate a director to the Board, and will terminate upon the time when neither Sponsor is entitled to designate a director to the Board. Additionally, in the event a lender forecloses on any shares of our common stock pledged in connection with any loan, advances or extensions of credit that Cannae may enter into, it could have an effect on THL and Cannae’s ability to designate directors under the voting agreement.

The voting agreement grants the Sponsors the right to determine the total number of directors during the term of the voting agreement. The Sponsors could use this provision to maintain a majority representation even if they collectively hold less than 50% of the outstanding voting power by decreasing the size of the Board. THL and Cannae may have a right to designate a majority of our Board under the present Board composition even if they collectively or individually hold less than 50% of our then outstanding voting power. Finally, pursuant to the voting agreement, for so long as each Sponsor is entitled to designate a director to the Board, the Sponsors will be required to vote all of their shares, and take all other necessary actions, to cause the Board to include the individuals designated as directors by the Sponsors (as applicable). See “Management—Composition of our Board of

 

54


Table of Contents

Directors.” As a result, it is possible that the interests of THL and Cannae may in some circumstances conflict with our interests and the interests of our other stockholders.

Because we do not intend to pay cash dividends in the foreseeable future, you may not receive any return on investment unless you are able to sell your common stock for a price greater than your purchase price.

We have never declared nor paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or to pay any dividends in the foreseeable future. Consequently, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize

any future gains on their investment. We do not intend in the foreseeable future to pay any dividends to holders of our common stock. We currently intend to retain our future earnings, if any, for the foreseeable future to repay indebtedness and to support our general corporate purposes. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future, and the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which investors have purchased their shares. However, the payment of future dividends will be at the discretion of our Board, subject to applicable law, and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions that apply to the payment of dividends, and other considerations that our Board deems relevant. See “Dividend Policy.” As a consequence of these limitations and restrictions, we may not be able to make the payment of dividends on our common stock.

Anti-takeover protections in our third amended and restated certificate of incorporation, our amended and restated bylaws or our contractual obligations may discourage or prevent a takeover of our company, even if an acquisition would be beneficial to our stockholders.

Provisions contained in our third amended and restated certificate of incorporation and amended and restated bylaws as well as provisions of the DGCL could delay or make it more difficult to remove incumbent directors or could impede a merger, takeover or other business combination involving us or the replacement of our management, or discourage a potential investor from making a tender offer for our common stock, which, under certain circumstances, could reduce the market value of our common stock, even if it would benefit our stockholders.

In addition, our Board has the authority to cause us to issue, without any further vote or action by the stockholders, up to 10,000,000 shares of preferred stock, par value $0.01 per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges, and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price, or prices and liquidation preferences of such series. The issuance of shares of preferred stock or the adoption of a stockholder rights plan may have the effect of delaying, deferring or preventing a change in control of our company without further action by the stockholders, even where stockholders are offered a premium for their shares. See “Description of Capital Stock—Anti-takeover Provisions.”

 

55


Table of Contents

In addition, under the agreements governing our Senior Credit Facilities, a change of control would cause us to be in default. In the event of a change of control default, the administrative agent under our Senior Credit Facilities would have the right (or, at the direction of lenders holding a majority of the loans and commitments under our Senior Credit Facilities, the obligation) to accelerate the outstanding loans and to terminate the commitments under our Senior Credit Facilities, and if so accelerated, we would be required to repay all of our outstanding obligations under our Senior Credit Facilities. In addition, from time to time we may enter into contracts that contain change of control provisions that limit the value of, or even terminate, the contract upon a change of control. These change of control provisions may discourage a takeover of our company, even if an acquisition would be beneficial to our stockholders.

 

56


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, including, without limitation, statements concerning the conditions of the HCM 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,” and similar references to future periods, or by the inclusion of forecasts or projections. Examples of forward-looking statements include, but are not limited to, statements we make regarding the outlook for our future business and financial performance, such as those contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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. As a result, 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 and the following:

 

   

our inability to attain or to maintain profitability;

 

   

significant competition for our solutions;

 

   

our inability to continue to develop or to sell our existing Cloud solutions;

 

   

our inability to manage our growth effectively;

 

   

the risk that we may not be able to successfully migrate our Bureau customers to our Cloud solutions or to offset the decline in Bureau revenue with Cloud revenue;

 

   

the market for enterprise cloud computing develops slower than we expect or declines;

 

   

efforts to increase use of our Cloud solutions and our other applications may not succeed;

 

   

we fail to provide enhancements and new features and modifications to our solutions;

 

   

failure to comply with the FTC’s ongoing consent order regarding data protection;

 

   

system interruptions or failures, including cyber-security breaches, identity theft, or other disruptions that could compromise our information;

 

   

our failure to comply with applicable privacy, security and data laws, regulations and standards;

 

   

changes in regulations governing privacy concerns and laws or other domestic or foreign data protection regulations;

 

   

we are unable to successfully expand our current offerings into new markets or further penetrate existing markets;

 

   

we are unable to meet the more complex configuration and integration demands of our large customers;

 

   

our customers declining to renew their agreements with us or renewing at lower performance fee levels;

 

   

we fail to manage our technical operations infrastructure;

 

   

we are unable to maintain necessary third party licenses or errors;

 

57


Table of Contents
   

our inability to protect our intellectual property rights, proprietary technology, information, processes, and know-how;

 

   

we fail to keep pace with rapid technological changes and evolving industry standards; or

 

   

changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself.

See “Risk Factors” 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 prospectus. 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 prospectus. For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements that are included elsewhere in this prospectus. Any forward-looking statement made by us in this 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.

 

58


Table of Contents

USE OF PROCEEDS

All shares of our common stock offered by this prospectus will be sold by the selling stockholders. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. We have agreed to pay certain expenses related to this offering, which we estimate to be approximately $0.8 million.

 

59


Table of Contents

DIVIDEND POLICY

We do not currently intend to pay cash dividends on our common stock in the foreseeable future. However, in the future, subject to the factors described below and our future liquidity and capitalization, we may change this policy and choose to pay dividends.

Our ability to pay dividends is currently restricted by the terms of our Senior Credit Facilities and may be further restricted by any future indebtedness we incur.

We are a holding company that does not conduct any business operations of our own. As a result, our ability to pay cash dividends on our common stock is dependent upon cash dividends and distributions and other transfers from our subsidiaries.

In addition, under Delaware law, our Board may declare dividends only to the extent of our surplus (which is defined as total assets at fair market value minus total liabilities, minus statutory capital) or, if there is no surplus, out of our net profits for the then current and/or immediately preceding fiscal year.

Any future determination to pay dividends will be at the discretion of our Board and will take into account:

 

   

restrictions in our debt instruments, including our Senior Credit Facilities;

 

   

general economic business conditions;

 

   

our earnings, financial condition, and results of operations;

 

   

our capital requirements;

 

   

our prospects;

 

   

legal restrictions; and

 

   

such other factors as our Board may deem relevant.

See “Risk Factors—Risks Related to This Offering and Ownership of Our Common Stock—Because we do not intend to pay cash dividends in the foreseeable future, you may not receive any return on investment unless you are able to sell your common stock for a price greater than your purchase price,” “Risk Factors—Risks Related to Our Indebtedness—We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to meet our obligations,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” “Description of Material Indebtedness,” and “Description of Capital Stock.”

 

60


Table of Contents

MARKET PRICE OF OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Our common stock has traded on the NYSE and the TSX under the symbol “CDAY” since April 26, 2018. Prior to that time, there was no public market for our shares. As of December 31, 2018, there were 175 holders of record of our common stock. The actual number of stockholders is considerably greater than this number of record holders, and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.

 

61


Table of Contents

CAPITALIZATION

The following table sets forth our cash and equivalents and our capitalization as of December 31, 2018.

This table should be read in conjunction with “Use of Proceeds,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock,” and the consolidated financial statements and notes thereto appearing elsewhere in this prospectus.

 

     As of December 31,
2018
 
    

(Dollars in

millions)

 

Cash and equivalents

   $ 217.8  
  

 

 

 

Debt (1)

   $ 670.3  

Stockholders’ equity:

  

Common stock, $0.01 par value per share, 500,000,000 shares authorized, 139,453,710 shares issued and outstanding

     1.4  

Senior preferred stock, $0.01 par value per share, 0 shares authorized, 0 shares issued and outstanding

     —    

Special voting preferred stock, par value $0.01 per share, 1 share authorized and 1 share issued and outstanding

     —    

Additional paid in capital

     2,325.6  

Accumulated deficit

     (419.3

Accumulated other comprehensive loss

     (375.7
  

 

 

 

Total stockholders’ equity

     1,532.0  
  

 

 

 

Total capitalization

   $ 2,202.3  
  

 

 

 

 

(1)

For a description of our existing indebtedness, see “Description of Material Indebtedness.” For a description of our Debt Refinancing, see “Prospectus Summary—Our Initial Public Offering, Debt Refinancing and Internal Reorganization.”

 

62


Table of Contents

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables set forth selected historical consolidated financial data for the periods as of the dates indicated. We derived the consolidated statements of operations data for the years ended December 31, 2018, 2017 and 2016, and the consolidated balance sheet data as of December 31, 2018 and 2017, from our audited consolidated financial statements included elsewhere in this prospectus. We derived the consolidated statements of operations data for the year ended December 31, 2015, and the consolidated balance sheet data as of December 31, 2016 and 2015, from our audited consolidated financial statements not included in this prospectus.

In the second quarter of 2018, contemporaneously with our IPO and concurrent private placement, we distributed our controlling financial interest in LifeWorks to our stockholders of record prior to the IPO on a pro rata basis in accordance with their pro rata interests in us. As a result, the financial statements in this prospectus have been restated to reflect the LifeWorks Disposition and show the former LifeWorks business as discontinued operations for all periods presented.

Our historical results are not necessarily indicative of future results of operations. You should read the information set forth below together with “Prospectus Summary—Summary Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Capitalization” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 

    Year ended December 31,  
    2018     2017     2016     2015  
   

(Dollars in millions, except share and per share
amounts)

 

Consolidated Statements of Operations Data:

       

Total revenue

  $ 746.4     $ 670.8     $ 623.4     $ 611.6  

Cost of revenue

    425.8       407.5       396.4       364.6  

Selling, general, and administrative expenses

    270.7       223.0       225.3       235.5  

Other (income) expense, net

    (2.9     7.3       12.9       27.8  
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

    52.8       33.0       (11.2     (16.3

Interest expense, net

    83.2       87.1       87.4       87.8  
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

    (30.4     (54.1     (98.6     (104.1

Income tax expense (benefit)

    7.7       (49.6     6.7       4.3  
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

    (38.1     (4.5     (105.3     (108.4

(Loss) income from discontinued operations

    (25.8     (6.0     12.5       3.7  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (63.9     (10.5     (92.8     (104.7

Net (loss) income attributable to noncontrolling interest

    (0.5     (1.3     0.1        
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Ceridian

  $ (63.4   $ (9.2   $ (92.9   $ (104.7
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to Ceridian:

       

Basic

  $ (0.62   $ (0.46   $ (1.65   $ (1.61

Diluted

  $ (0.62   $ (0.46   $ (1.65   $ (1.61

Weighted average shares outstanding:

       

Basic

    114,049,682       65,204,960       64,988,338       64,924,845  

Diluted

    114,049,682       65,204,960       64,988,338       64,924,845  

 

63


Table of Contents
     As of December 31,  
     2018      2017      2016      2015  
    

(Dollars in millions)

 

Consolidated Balance Sheet Data:

           

Cash and equivalents

   $ 217.8      $ 94.2      $ 120.8      $ 63.2  

Total assets

     5,154.4        6,729.9        6,326.0        6,984.9  

Long-term debt (1)

     663.5        1,119.8        1,139.8        1,143.4  

Total liabilities

     3,622.4        5,600.9        5,320.1        6,042.8  

Working capital

     169.9        175.2        196.0        50.1  

Total stockholders’ equity

   $ 1,532.0      $ 1,091.2      $ 967.2      $ 942.1  

 

(1)

Excludes the current portion of our long-term debt of $6.8 million as of December 31, 2018, $0.0 million as of December 31, 2017, $2.3 million as of December 31, 2016, and $7.0 million as of December 31, 2015.

 

64


Table of Contents

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 the sections entitled “Prospectus Summary— Summary Historical Consolidated Financial and Other Data,” “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” “Selected Historical Consolidated Financial Data,” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. 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 “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.

Overview

Ceridian is a global 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 HR and payroll solution for the Canadian small business market. We also continue to support customers using our Bureau solutions, which we generally stopped actively selling to new customers following the acquisition of Dayforce in 2012. We invest in maintenance and necessary updates to support our Bureau customers and continue to migrate them to Dayforce.

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, exposing 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.

We sell Dayforce through our direct sales force on a subscription 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 more than 3,700 live Dayforce customers, representing approximately 3.1 million active global users as of December 31, 2018. In 2018, we added over 715 net new live Dayforce customers. Our customers vary across industries, and no single customer constituted more than 1% of our revenues for the year ended December 31, 2018. We have experienced significant Cloud revenue growth at scale, particularly from Dayforce, which has grown at a CAGR of more than 55% since 2012. Our annual Cloud revenue retention rate continues to exceed 95% due to our intense focus on solving complex problems and our superior customer experience.

 

65


Table of Contents

The following table presents Dayforce revenue by quarter from 2012 to 2018.

 

LOGO

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 high customer retention rates, we have a high level of visibility into our future revenues. The profitability of a customer to our business depends, in large part, on how long they have been a customer. Because in our current business model, PEPM subscription fees are not charged until the customer goes live, and because we incur costs in advance of receiving PEPM revenue that are not offset by our implementation fees, we estimate that it takes an average of 2.5 years before we are able to recover our implementation, customer acquisition, and other direct costs on a new Dayforce customer contract. As the proportion of Dayforce customers who have been live for two or more years increases, our related profitability increases. The following sets forth the number of live Dayforce customers at the end of each quarter presented:

 

    Three months ended  
    December 31,
2018
    September 30,
2018
    June 30,
2018
    March 31,
2018
    December 31,
2017
    September 30,
2017
    June 30,
2017
    March 31,
2017
    December 31,
2016
    September 30,
2016
    June 30,
2016
    March 31,
2016
 

Live Dayforce

customers

    3,718       3,465       3,308       3,154       3,001       2,855       2,690       2,480       2,339       2,148       2,014       1,872  

Dayforce customers live for two or more years

    2,339       2,148       2,014       1,872       1,770       1,628       1,524       1,377       1,276       1,116       997       816  

Proportion of Dayforce customers live for two or more years

    63     62     61     59     59     57     57     56     55     52     50     44

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 platform. 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 implement the customer.

 

66


Table of Contents

How We Assess Our Performance

In assessing our performance, we consider a variety of performance indicators in addition to revenue and net income. Set forth below is a description of our key performance measures.

 

     Year ended December 31,  
     2018     2017     2016  

Live Dayforce customers

     3,718       3,001       2,339  

Annual Cloud revenue retention rate (a)

     96.3     97.0     95.7

Cloud annualized recurring revenue (ARR) (a) (Dollars in millions)

   $ 506.2     $ 391.0     $ 289.7  

Adjusted EBITDA (b) (Dollars in millions)

   $ 157.1     $ 117.8     $ 85.5  

Adjusted EBITDA margin

     21.0     17.6     13.7

 

(a)

Annual Cloud revenue retention rate and Cloud annualized recurring revenue are calculated on an annual basis, and the disclosure reflects data as of the most recent fiscal year end. See below for further explanation.

(b)

For a reconciliation of Adjusted EBITDA to operating profit, please see “Prospectus Summary—Summary Historical Consolidated Financial and Other Data.”

Live Dayforce Customers

We use the number of customers live on Dayforce as an indicator of future revenue and the overall performance of the business and to assess the performance of our implementation services. As shown in the following table, the number of customers live on Dayforce has increased from 482 as of December 31, 2012 to 3,718 as of December 31, 2018. In addition, we had over 450 net new Dayforce customers contracted, but not yet live on Dayforce as of December 31, 2018. We expect the majority of these Dayforce customers to be taken live in 2019. For 2018, our 3,718 live Dayforce customers represented over 3.1 million active users. We market Dayforce to customers of all sizes, including small (under 500 employees), mid-sized (501 to 2,500 employees), and enterprise (over 2,500 employees). For 2018, small businesses accounted for 14% of the total number of active customer employees, mid-sized businesses accounted for 32% of the total number of active customer employees, and enterprise businesses accounted for 54% of the total number of active customer employees. As our business and go-to-market strategy continues to evolve, in 2019, we will be modifying our customer segmentation for increased relevance.

From 2017 to 2018, live Dayforce customers increased from 3,001 to 3,718, a net increase of 717. Of the customers taken live during 2018, 77% represented net new customers to Dayforce, and the remainder were migration customers from our Bureau solution. Of the net new customers to Dayforce, small businesses accounted for 9% of the total number of active customer employees, mid-sized businesses accounted for 33% of the total number of active customer employees, and enterprise businesses accounted for 58% of the total number of active customer employees. Of the migration customers, small businesses accounted for 23% of the total number of active customer employees, mid-sized businesses accounted for 41% of the total number of active customer employees, and enterprise businesses accounted for 36% of the total number of active customer employees.

From 2016 to 2017, live Dayforce customers increased from 2,339 to 3,001, a net increase of 662. Of the customers taken live during 2017, 58% represented net new customers to Dayforce and the remainder were migration customers from our Bureau solutions. Of the net new customers to Dayforce, small businesses accounted for 13% of the total number of active customer employees, mid-sized businesses accounted for 33% of the total number of active customer employees, and enterprise businesses accounted for 54% of the total number of active customer employees. Of the migration customers, small businesses accounted for 20% of the total number of active customer employees,

 

67


Table of Contents

mid-sized businesses accounted for 48% of the total number of active customer employees, and enterprise businesses accounted for 32% of the total number of active customer employees.

The following table sets forth the number of live Dayforce customers at the end of the years presented:

 

LOGO

Annual Cloud Revenue Retention Rate

Our annual Cloud revenue retention rate measures the percentage of revenues that we retain from our existing Cloud customers. We use this retention rate as an indicator of customer satisfaction and future revenues. We calculate the annual Cloud revenue retention rate as a percentage, where the numerator is the Cloud annualized recurring revenue for the prior year, less the Cloud annualized recurring revenue from lost Cloud customers during that year; and the denominator is the Cloud annualized recurring revenue for the prior year. Our annual Cloud revenue retention rate has been 95% or above for the years ended December 31, 2018, 2017, and 2016. We set annual targets for Cloud revenue retention rate and monitor progress toward those targets on a quarterly basis by reviewing known and anticipated customer losses. Our Cloud revenue retention rate may fluctuate as a result of a number of factors, including the mix of Cloud solutions used by customers, the level of customer satisfaction, and changes in the number of users live on our Cloud solutions.

Cloud Annualized Recurring Revenue (“ARR”)

We derive the majority of our Cloud revenues from recurring fees, primarily PEPM subscription charges. We also derive recurring revenue from fees related to the rental and maintenance of clocks, charges for once-a-year services, such as year-end tax statements, and investment income on our customer funds held in trust before such funds are remitted to taxing authorities, customer employees, or other third parties. To calculate Cloud ARR, we start with recurring revenue at year end, subtract the once-a-year charges, annualize the revenue for customers live for less than a full year to reflect the revenue that would have been realized if the customer had been live for a full year, and add back the once-a-year charges. We set annual targets for Cloud ARR and monitor progress toward those targets on a quarterly basis.

Adjusted EBITDA and Adjusted EBITDA Margin

We believe that 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. 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 Adjusted EBITDA as net income or loss before interest, taxes, depreciation, and amortization, as adjusted to exclude net income or loss from discontinued

 

68


Table of Contents

operations, sponsor management fees, non-cash charges for asset impairments, gains or losses on assets and liabilities held in a foreign currency other than the functional currency of a company subsidiary, share-based compensation expense, severance charges, restructuring consulting fees, transaction costs, and environmental reserve charges. Adjusted EBITDA margin is determined by calculating the percentage Adjusted EBITDA is of Total Revenue. Management believes that Adjusted EBITDA and Adjusted EBITDA margin are helpful in highlighting management performance trends because Adjusted EBITDA and Adjusted EBITDA margin exclude the results of decisions that are outside the normal course of business operations. For a reconciliation of Adjusted EBITDA to operating profit, please see “Prospectus Summary—Summary Historical Consolidated Financial and Other Data.”

Our History

Ceridian was acquired in 2007 by affiliates and co-investors of the Sponsors. In April 2012, Ceridian acquired Dayforce Corporation, which had built Dayforce, a cloud HCM solution. In the months following the acquisition, Dayforce founder, David D. Ossip, was named Chief Executive Officer of Ceridian HCM, and shortly thereafter, we generally stopped actively selling our Bureau solutions to new customers in the United States to focus our resources on expanding the Dayforce platform and growing Cloud solutions. For each quarter since September 30, 2016, our Cloud revenue has surpassed our Bureau revenue. Cloud revenue grew from 39% of total revenue during the quarter ended December 31, 2015 to 74% of total revenue during the quarter ended December 31, 2018.

As part of our strategy to focus on the growth of our Cloud solutions business, we undertook the following initiatives to simplify our business model:

(i) sold our consumer-directed benefit services business in 2013,

(ii) merged Comdata, our payment systems business unit, with FleetCor Technologies in 2014,

(iii) sold our benefits administration and post-employment compliance business in 2015,

(iv) sold our United Kingdom and Ireland Bureau businesses and a portion of our operations that supported such businesses in Mauritius in 2016, and

(v) contributed our LifeWorks employee assistance program business to a joint venture, LifeWorks, in 2016, then distributed our ownership in this joint venture to a holding company owned by our stockholders in April 2018.

As a result of these transactions, we only actively sell Dayforce and Powerpay, which we believe simplifies our business model and positions us well for continued growth.

Our benefits administration and post-employee compliance business, our United Kingdom and Ireland businesses, our divested Mauritius operations, and our LifeWorks joint venture are presented as discontinued operations in our financial statements. Our consumer-directed benefits services business and our benefits administration and post-employment compliance business are collectively referred to as our “Divested Benefits Businesses.” After the LifeWorks Disposition, management has concluded that we have one operating and reportable segment. This conclusion aligns with how management monitors operating performance, allocates resources, and deploys capital. Please refer to Note 3, “Discontinued Operations,” to our consolidated financial statements for further information regarding these transactions.

On April 30, 2018, we completed our IPO, in which we issued and sold 21,000,000 shares of common stock at a public offering price of $22.00 per share. We granted the underwriters a 30-day option to purchase an additional 3,150,000 shares of common stock at the offering price, which was exercised in full. A total of 24,150,000 shares of common stock were issued on April 30, 2018, with

 

69


Table of Contents

gross proceeds of $531.3 million from the IPO before deducting underwriting discounts, commissions, and other offering expenses. Immediately subsequent to the closing of our IPO on April 30, 2018, THL / Cannae Investors LLC, one of our existing stockholders controlled by our Sponsors, purchased from us in a private placement $100.0 million of our common stock at a price per share equal to the offering price. Based on the offering price of $22.00 per share, 4,545,455 shares were issued in this private placement. Please refer to Note 1, “Organization,” to our consolidated financial statements for further discussion of the IPO transaction.

We applied a portion of the net proceeds from the IPO to satisfy and to discharge the indenture governing our outstanding Senior Notes, and they were redeemed on May 30, 2018. Concurrently, we also refinanced our remaining debt under our (i) $702.0 million (original principal amount) Senior Term Debt and (ii) $130.0 million Revolving Credit Facility, including accrued interest and related costs and expenses, with new senior credit facilities consisting of a $680.0 million term loan debt facility and a $300.0 million revolving credit facility. Please refer to Note 9, “Debt,” for further discussion of the debt transactions.

The IPO, private placement, and debt refinancing had the following impacts to our results of operations and cash during 2018:

 

     Impacts to
Statement of
Operations
    Impact to Cash  

Gross proceeds from the IPO and private placement

     $ 631.3  

Costs capitalized within stockholders’ equity

       (36.3

Redemption of Senior Notes

       (475.0

Debt refinancing fees, reflected as a reduction to long-term debt

       (3.6

IPO and debt refinancing related expenses reflected within results of operations:

    

Cost of revenue

   $ (2.1  

Selling, general, and administrative

     (23.2  
  

 

 

   

Impact on operating profit

   $ (25.3  

Interest expense

     (25.7  
  

 

 

   

Impact on net loss

   $ (51.0     (51.0
  

 

 

   

Non-cash IPO-related share-based compensation expense

       8.1  

Non-cash interest expense adjustments

       (4.9
    

 

 

 

Cash to balance sheet from the IPO and private placement

     $ 68.6  

Proceeds from issuance of the new $680.0 million Senior Term Debt

       680.0  

Repayment of the $702.0 million Senior Term Debt

       (657.0
    

 

 

 

Cash to balance sheet from the IPO, private placement, and debt refinancing

     $ 91.6  
    

 

 

 

On November 16, 2018, we completed a secondary offering, in which certain of our stockholders sold 11,000,000 shares of common stock, in an underwritten public offering at $36.00 per share. These stockholders granted the underwriters a 30-day option to purchase an additional 1,650,000 shares of common stock at the offering price, which was exercised in full. A total of 12,650,000 shares of common stock were sold by these stockholders on November 16, 2018, with all proceeds going to these stockholders. We incurred expenses of $1.3 million during the year ended December 31, 2018, related to the secondary offering within selling, general, and administrative expense.

 

70


Table of Contents

Components of Our Results of Operations

Revenues

We generate recurring revenues primarily from recurring fees charged for the use of our Cloud solutions, Dayforce and Powerpay, as well as from our Bureau solutions. We also generate professional services and other revenue associated primarily with the work performed to assist customers with the planning, design, implementation, and staging of their cloud-based solution. Our solutions are typically provided through long-term customer relationships that result in a high level of recurring revenue. We also generate recurring services revenue from investment income on our Cloud and Bureau customer funds held in trust before such funds are remitted to taxing authorities, customer employees, or other third parties. We refer to this investment income as float revenue.

For Dayforce, we primarily charge monthly recurring fees on a PEPM basis, generally one-month in advance of service, based on the number and type of solutions provided to the customer and the number of employees and other users at the customer. Our standard Dayforce contracts are generally for a three to five-year period. The average time it takes to implement Dayforce typically ranges from three months for smaller customers to nine months for larger customers. Once Dayforce is implemented, the customer goes live, and we begin to generate recurring revenue. We also provide outsourced human resource solutions to certain of our Dayforce customers, which are tailored to meet their individual needs, and entail performing the duties of a customer’s human resources department, including payroll processing, time and labor management, performance management, and recruiting, as needed.

The Powerpay offering is our solution designed primarily for small market Canadian customers. The typical Powerpay customer has fewer than 20 employees, and the majority of the revenue is generated from recurring fees charged on a per-employee, per-process basis. Typical processes include the customer’s payroll runs, year-end tax packages, and delivery of customers’ remittance advices or checks. Powerpay can typically be implemented on a remote basis within one to three days, at which point we start receiving recurring fees.

For our Bureau solutions, we typically charge recurring fees on a per-process basis. Typical processes include the customer’s payroll runs, year-end tax packages, and delivery of customers’ remittance advices or checks. In addition to customers who use our payroll services, certain customers use our tax filing services on a stand-alone basis. Our outsourced human resource solutions are tailored to meet the needs of individual customers, and entail our contracting to perform many of the duties of a customer’s human resources department, including payroll processing, time and labor management, performance management, and recruiting. We also perform individual services for customers, such as check printing, wage attachment and disbursement, and ACA management.

Cost of Revenue

Cost of revenue consists of costs to deliver our solutions. Most of these costs are recognized as incurred. Some costs of revenue are recognized in the period that a service is sold and delivered. Other costs of revenue are recognized over the period of use or in proportion to the related revenue.

The costs recognized as incurred consist primarily of customer service staff costs, customer technical support costs, implementation personnel costs, costs of hosting applications, consulting and purchased services, delivery services, and royalties. The costs of revenue recognized over the period of use are depreciation and amortization, rentals of facilities and equipment, and direct and incremental costs associated with deferred implementation service revenue.

Cost of recurring services revenues primarily consists of costs to provide maintenance and technical support to our customers and the costs of hosting our applications. The cost of recurring

 

71


Table of Contents

services revenues also includes compensation and other employee-related expenses for data center staff, payments to outside service providers, data center expenses, and networking expenses.

Cost of professional services and other revenues primarily consists of costs to provide implementation consulting services and training to our customers, as well as the cost of time clocks. Costs to provide implementation consulting services include compensation and other employee-related expenses for professional services staff, costs of subcontractors, and travel. Implementation consulting services are expected to continue to be primarily associated with the implementation of our Cloud solutions.

Product development and management expense, included in cost of revenue, consists of costs related to software development activities that do not qualify for capitalization, such as development, quality assurance, testing of new technologies, and enhancements to our existing solutions that do not result in additional functionality. Product development and management expense also includes costs related to the management of our solutions.

Depreciation and amortization related to cost of revenue primarily consists of amortization of capitalized software.

Selling, General, and Administrative Expense

Selling expense includes costs related to maintaining a direct marketing infrastructure and sales force and other direct marketing efforts, such as marketing events, advertising, telemarketing, direct mail, and trade shows. Advertising costs are expensed as incurred. Our sales and marketing expenses are expected to continue to be primarily associated with selling and marketing our Cloud solutions.

General and administrative expense includes costs that are not directly related to delivery of services, selling efforts, or product development and management, primarily consisting of corporate-level costs, such as administration, finance, legal, and human resources, as well as management fees payable to affiliates of our Sponsors, FNF and THLM, until termination of the management agreements upon the IPO in April 2018. Also included in this category are depreciation and amortization of other intangible assets not reflected in cost of revenue, the provision for doubtful accounts receivable, and net periodic pension costs.

Other Expense, net

Other expense, net includes the results of transactions that are not appropriately classified in another category. These items include certain foreign currency translation gains and losses, resulting mainly from intercompany receivables and payables denominated in currencies other than the subsidiary’s functional currency, environmental reserve charges, and charges related to the impairment of asset values.

Income Tax Provision

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 as adjusted for the expected benefits of utilizing net operating loss carryforwards. 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

 

72


Table of Contents

evidence, both positive and negative, including historical levels of pre-tax book income, expiration of net operating losses, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies, as well as current tax laws. As of December 31, 2018, we continue to record a full valuation allowance against our domestic deferred tax assets that are not offset by the reversal of deferred tax liabilities. In the future, if it is determined that we no longer have a requirement to record a valuation allowance against all or a portion of our deferred tax assets, the release of the valuation allowance would have a positive impact on our income tax provision.

On December 22, 2017, the Tax Cut and Jobs Act legislation (the “Tax Act”) was enacted. The Tax Act amended the Code to reduce tax rates and to modify policies, credits, and deductions for businesses. For businesses, the Tax Act reduced the corporate federal tax rate from a maximum of 35% to a flat 21% rate.

 

73


Table of Contents

Results of Operations

Year Ended December 31, 2018 Compared with Year Ended December 31, 2017

The following table sets forth our results of operations for the periods presented.

 

     Year ended
December 31,
    Increase/
(Decrease)
    % of Revenue  
       2018         2017       Amount       %         2018         2017    
     (Dollars in millions)  

Revenue:

            

Recurring services

            

Cloud

   $   443.1     $   336.2     $   106.9       31.8     59.4     50.1

Bureau

     209.4       262.3       (52.9     (20.2 )%      28.1     39.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recurring services

     652.5       598.5       54.0       9.0     87.4     89.2

Professional services and other

     93.9       72.3       21.6       29.9     12.6     10.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     746.4       670.8       75.6       11.3     100.0     100.0

Cost of revenue:

            

Recurring services

            

Cloud

     141.1       125.1       16.0             12.8         18.9         18.6

Bureau

     59.2       71.7       (12.5     (17.4 )%      7.9     10.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recurring services

     200.3       196.8       3.5       1.8     26.8     29.3

Professional services and other

     132.2       135.8       (3.6     (2.7 )%      17.7     20.2

Product development and management

     59.0       43.6       15.4       35.3     7.9     6.5

Depreciation and amortization

     34.3       31.3       3.0       9.6     4.6     4.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     425.8       407.5       18.3       4.5     57.0     60.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     320.6       263.3       57.3       21.8     43.0     39.3

Costs and expenses:

            

Selling, general, and administrative

     270.7       223.0       47.7       21.4     36.3     33.2

Other (income) expense, net

     (2.9     7.3       (10.2     (139.7 )%      (0.4 )%      1.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     52.8       33.0       19.8       60.0     7.1     4.9

Interest expense, net

     83.2       87.1       (3.9     (4.5 )%      11.1     13.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (30.4     (54.1     23.7       43.8     (4.1 )%      (8.1 )% 

Income tax expense (benefit)

     7.7       (49.6     57.3       115.5     1.0     (7.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (38.1     (4.5     (33.6     (746.7 )%      (5.1 )%      (0.7 )% 

Loss from discontinued operations

     (25.8     (6.0     (19.8     (330.0 )%      (3.5 )%      (0.9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (63.9     (10.5     (53.4     (508.6 )%      (8.6 )%      (1.6 )% 

Net loss attributable to noncontrolling interest

     (0.5     (1.3     0.8       61.5     (0.1 )%      (0.2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Ceridian

   $ (63.4   $ (9.2   $ (54.2     (589.1 )%      (8.5 )%      (1.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (a)

   $ 157.1     $ 117.8     $ 39.3       33.4     21.0     17.6

 

(a)

For a reconciliation of Adjusted EBITDA to operating profit, please see “Prospectus Summary—Summary Historical Consolidated Financial and Other Data.”

 

74


Table of Contents

Revenue. The following table sets forth certain information regarding our consolidated revenues for the year ended December 31, 2018, compared with the year ended December 31, 2017.

 

     Year ended
December 31,
    Growth rate
year-over-year
    Impact of
changes in

foreign currency (a)
    Growth rate on a
constant
currency basis (a)
 
     2018      2017     2018 vs. 2017     2018 vs. 2017  
     (Dollars in millions)                    

Revenue

           

Cloud

           

Recurring services

   $ 443.1      $ 336.2       31.8     (0.2 )%      32.0

Professional services and other

     91.2        68.1       33.9     0.5     33.4
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Cloud revenue

     534.3        404.3       32.2     (0.1 )%      32.3

Bureau

           

Recurring services

     209.4        262.3       (20.2 )%      0.1     (20.3 )% 

Professional services and other

     2.7        4.2       (35.7 )%      (2.4 )%      (33.3 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Bureau revenue

     212.1        266.5       (20.4 )%      0.1     (20.5 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 746.4      $ 670.8       11.3           11.3

 

(a)

We present revenue growth in a constant currency to assess how our underlying businesses performed, excluding the effect of foreign currency rate fluctuations. We calculate percentage change in revenue on a constant currency basis by applying a fixed $1.30 Canadian dollar to $1.00 U.S. dollar foreign exchange rate to revenues originally booked in Canadian dollars for all applicable periods.

Total revenue increased $75.6 million, or 11.3%, to $746.4 million for the year ended December 31, 2018, compared to $670.8 million for the year ended December 31, 2017. This increase was primarily driven by an increase in Cloud revenue of $130.0 million, or 32.2% from $404.3 million for the year ended December 31, 2017 to $534.3 million for the year ended December 31, 2018. The Cloud revenue increase was primarily due to an increase of $106.9 million, or 31.8%, in Cloud recurring services revenue, and $23.1 million, or 33.9%, in Cloud professional services and other revenue. The increase in Cloud recurring services revenue of $106.9 million was attributable to increases of $76.0 million from new customers, add-ons, and revenue uplift from migrations of Bureau customers; $22.9 million from the migration of Bureau customers; and $20.0 million from increased float revenue related to Cloud recurring services revenue, partially offset by customer attrition of $12.0 million. The increase in Cloud revenue was partially offset by a decline in Bureau revenue of $54.4 million, or 20.4%. There was an immaterial impact on revenue due to changes in foreign currency rate fluctuations. Please refer to the table above for our revenue growth rates on a constant currency basis.

Of the decline in Bureau revenue, approximately 58% was driven by customer attrition and approximately 42% was attributable to customer migrations to Dayforce. Excluding the impact of migrations, our annual Bureau revenue retention rate was 86.9% in 2018 and 89.7% in 2017. For the year ended December 31, 2018, recurring services revenue from payroll Bureau customers accounted for $161.2 million, and tax-only Bureau recurring services revenue accounted for $48.2 million. The payroll Bureau customers consist of approximately 1.5 million active users, of which approximately 1.4 million are customers that we believe could be candidates for migration to Dayforce. Some of our customers are not candidates to migrate to Dayforce due to a variety of factors, including the type of functionality that they require and their system configuration. Of the approximately 1.4 million active users that we believe could be candidates for migration to Dayforce, small businesses accounted for 21% of the total number of active users, mid-sized businesses accounted for 28% of the total number of active users, and enterprise businesses accounted for 51% of the total number of active users.

 

75


Table of Contents

Cloud revenue by solution. The following table presents our Cloud revenue for both recurring and professional services and other, for both our Dayforce and Powerpay solution for the periods presented.

 

     Year ended
December 31,
     Growth rate
year-over-year
    Growth rate on a
constant

currency basis
 
     2018      2017      2018 vs. 2017     2018 vs. 2017  
     (Dollars in millions)               

Dayforce

   $ 443.0      $ 319.9        38.5     38.5

Powerpay

     91.3        84.4        8.2     8.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Cloud Revenue

   $ 534.3      $ 404.3        32.2     32.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Cloud revenue was $534.3 million for 2018, an increase of 32.2% when compared to 2017. Dayforce revenue grew 38.5%, and Powerpay revenue grew 8.2% in 2018 as compared to 2017. There was an immaterial impact on revenue due to changes in foreign currency rate fluctuations. Please refer to the table above for our revenue growth rates on a constant currency basis. Our new business sales to Dayforce and Powerpay customers comprised 82% of our increase in Cloud revenue for the year ended December 31, 2018, and the remaining 18% consisted primarily of customer migration to Dayforce from our Bureau solutions. As we migrate our Bureau customers to Dayforce, we typically experience a revenue increase from such customers driven by increased product density on the Dayforce platform. This revenue increase can vary by customer, but has been 22% on average since 2016, as measured at the time of initial migration.

Float revenue. Investment income from invested customer trust funds included in revenue was $67.0 million and $46.5 million for the years ended December 31, 2018 and 2017, respectively. The average float balance for our customer trust funds for the year ended December 31, 2018 was $3,361.5 million, compared to $3,228.2 million for the year ended December 31, 2017. The average yield was 2.00% during the year ended December 31, 2018, an increase of 55 basis points compared to the average yield for the year ended December 31, 2017. Based on current investment practices, an increase in market investment rates of 100 basis points would increase float revenue by approximately $17 million over the twelve months following a rate increase. In addition to interest rate risks, we also 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 trust fund balances and float revenue. There are no incremental costs of revenue associated with increases or declines in float revenue.

Cost of revenue. Total cost of revenue for the year ended December 31, 2018, was $425.8 million, an increase of $18.3 million, or 4.5%, compared to the year ended December 31, 2017. Of the total $18.3 million increase, $2.1 million was attributable to IPO-related share-based compensation expense. Excluding IPO-related items, cost of revenue increased $16.2 million.

Recurring services cost of revenue increased by $3.5 million for the year ended December 31, 2018, compared to the year ended December 31, 2017, due to additional costs incurred to support the growing Dayforce customer base, partially offset by reductions in costs to support our Bureau customers.

The reduction in cost of revenue for professional services and other of $3.6 million for the year ended December 31, 2018, compared to the year ended December 31, 2017, was primarily due to productivity improvements in implementing new customers.

In accordance with Accounting Standards Codification (“ASC”) 350, we are required to capitalize certain software development costs. Please refer to Note 2, “Summary of Significant Accounting

 

76


Table of Contents

Policies,” for further discussion of our accounting policy for internally developed software costs. Costs related to software development activities that do not qualify for capitalization, such as development, quality assurance, testing of new technologies, enhancements to our existing solutions that do not result in additional functionality, and costs related to the management of our solutions are presented as product development and management expense. The increase in product development and management expense of $15.4 million for the year ended December 31, 2018, compared to the year ended December 31, 2017, reflects increases in Dayforce product development efforts. For the years ended December 31, 2018, and 2017, our investment in software development was $54.9 million and $45.0 million, respectively, consisting of $29.6 million and $19.0 million of research and development expense, which is included within product development and management expense, and $25.3 million and $26.0 million of capitalized software development, respectively.

Depreciation and amortization expense associated with cost of revenue increased by $3.0 million for the year ended December 31, 2018, compared to the year ended December 31, 2017, as we continue to capitalize Dayforce related and other development costs and subsequently amortize those costs.

The table below presents total gross margin and solution gross margins for the periods presented:

 

     Year ended
December 31,
 
     2018     2017  

Total gross margin

     43.0     39.3

Gross margin by solution:

    

Cloud recurring services

     68.2     62.8

Bureau recurring services

     71.7     72.7

Professional services and other

     (40.8 )%      (87.8 )% 

 

  

Total gross margin is defined as total gross profit as a percentage of total revenue, 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, exclusive of any product development and management or depreciation and amortization cost allocations.

The overall 11.3% increase in revenue outpaced the 4.5% increase in cost of revenue, and gross profit increased by $57.3 million, or 21.8%, as we continued to leverage our investment in people and processes to realize economies of scale.

Cloud recurring services gross margin was 68.2% for the year ended December 31, 2018, compared to 62.8% for the year ended December 31, 2017. The increase in Cloud recurring services gross margin reflects an increase in the proportion of Dayforce customers live for more than two years, which increased from 59% as of December 31, 2017 to 63% as of December 31, 2018, and was also attributable to consistent configuration of new customers, which enabled us to realize economies of scale in customer support and hosting costs. Professional services and other gross margin was (40.8)% for the year ended December 31, 2018, improving from (87.8)% for the year ended December 31, 2018, reflecting an increase in profitable post go-live professional services and productivity improvements in implementing new customers.

Selling, general, and administrative expense. Selling, general, and administrative expense increased $47.7 million for the year ended December 31, 2018, compared to the year ended December 31, 2017. Of the total $47.7 million increase, $24.5 million was attributable to transaction expenses associated with our IPO, debt refinancing, and secondary offering, including $11.3 million in sponsor management termination fees, $6.0 million in IPO-related share-based compensation

 

77


Table of Contents

expense, $3.7 million in other IPO transactions costs, and $3.5 million in restructuring consulting expenses. Excluding transaction-related items, selling, general, and administrative expense increased $23.2 million, primarily due to sales and marketing expense, which increased by $13.4 million. We continue to invest in our sales and marketing efforts, as we drive growth in our Cloud solutions, particularly in Dayforce. The increase in selling, general, and administrative expenses also reflected increases in employee related costs and increased costs associated with being a public company.

Other (income) expense, net. For the year ended December 31, 2018, we incurred $2.9 million of other income, net, compared to $7.3 million of other expense, net, for the year ended December 31, 2017. The other (income) expense, net, for the years ended December 31, 2018, and 2017, was primarily related to remeasurement gains and losses an intercompany payable denominated in a foreign currency, which was repaid in the second quarter of 2018.

Operating profit. We realized operating profit of $52.8 million for the year ended December 31, 2018, compared to an operating profit of $33.0 million for the year ended December 31, 2017. Excluding the impact of $24.5 million in transaction costs within selling, general, and administrative expense, and $2.1 million in other increased share-based compensation expense related to the IPO within cost of revenue, operating profit would have been $79.4 million for the year ended December 31, 2018. This $46.4 million increase was primarily due to a $75.6 million increase in revenue and gross margin improvement.

Interest expense, net. Interest expense for the year ended December 31, 2018, was $83.2 million, compared to $87.1 million for the year ended December 31, 2017. This reduction was primarily due to the refinancing of our debt, which resulted in a reduction in interest expense of $30.6 million upon the extinguishment of the Senior Notes in April 2018, representing seven fewer months of interest on the Senior Notes as compared to the prior year, partially offset by a loss on extinguishment of debt of $25.7 million. As of December 31, 2018, a 100 point basis increase in the London Inter-bank Offered Rate (“LIBOR”) rates would result in an approximately $7 million increase in our interest expense over the ensuring twelve-month period. Please refer to Note 9, “Debt,” for additional information.

Income tax expense. For the year ended December 31, 2018, we had income tax expense of $7.7 million, compared to income tax benefit of $49.6 million for the year ended December 31, 2017. The $57.3 million increase in tax expense is primarily attributable to the $59.4 million tax benefit recorded during the year ended December 31, 2017, reflecting the revaluation of our deferred tax assets and liabilities upon the initial implementation of the Tax Act.

Loss from discontinued operations. As a result of the LifeWorks Disposition, the financial results of the LifeWorks business have been included within discontinued operations for all periods presented. For the year ended December 31, 2018, we had a loss from discontinued operations of $25.8 million, compared to $6.0 million for the year ended December 31, 2017. The loss from discontinued operations for the year ended December 31, 2018, is primarily related to income tax expense incurred as a result of the LifeWorks Disposition.

Net loss attributable to Ceridian. Net loss attributable to Ceridian was $63.4 for the year ended December 31, 2018, primarily due to $52.3 million of expenses incurred related to our IPO, debt refinancing, and secondary offering transactions, partially offset by an increase in gross profit. Net loss attributable to Ceridian was $9.2 for the year ended December 31, 2017, primarily due to a tax benefit of approximately $59.4 million related to the 2017 tax reform legislation. Please refer to the “Our History” section above for additional information on the financial statement impacts of our IPO, debt refinancing, and secondary offering transactions.

Adjusted EBITDA. Adjusted EBITDA increased by $39.3 million for the year ended December 31, 2018, compared to the year ended December 31, 2017, and Adjusted EBITDA margin increased to 21.0% in 2018 from 17.6% in 2017.

 

78


Table of Contents

Year Ended December 31, 2017 Compared with Year Ended December 31, 2016

The following table sets forth our results of operations for the periods presented.

 

     Year ended
December 31,
    Increase/
(Decrease)
    % of Revenue  
       2017         2016       Amount       %         2017         2016    
     (Dollars in millions)  

Revenue:

            

Recurring services

            

Cloud

   $   336.2     $   239.5     $   96.7       40.4     50.1     38.4

Bureau

     262.3       319.0       (56.7     (17.8 )%      39.1     51.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recurring services

     598.5       558.5       40.0       7.2     89.2     89.6

Professional services and other

     72.3       64.9       7.4       11.4     10.8     10.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     670.8       623.4       47.4       7.6     100.0     100.0

Cost of revenue:

            

Recurring services

            

Cloud

     125.1       86.2       38.9             45.1         18.6         13.8

Bureau

     71.7       128.2       (56.5     (44.1 )%      10.7     20.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recurring services

     196.8       214.4       (17.6     (8.2 )%      29.3     34.4

Professional services and other

     135.8       115.6       20.2       17.5     20.2     18.5

Product development and management

     43.6       43.3       0.3       0.7     6.5     6.9

Depreciation and amortization

     31.3       23.1       8.2       35.5     4.7     3.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     407.5       396.4       11.1       2.8     60.7     63.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     263.3       227.0       36.3       16.0     39.3     36.4

Costs and expenses:

            

Selling, general, and administrative

     223.0       225.3       (2.3     (1.0 )%      33.2     36.1

Other expense, net

     7.3       12.9       (5.6     (43.4 )%      1.1     2.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

     33.0       (11.2     44.2       394.6     4.9     (1.8 )% 

Interest expense, net

     87.1       87.4       (0.3     (0.3 )%      13.0     14.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (54.1     (98.6     44.5       45.1     (8.1 )%      (15.8 )% 

Income tax (benefit) expense

     (49.6     6.7       (56.3     (840.3 )%      (7.4 )%      1.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (4.5     (105.3     100.8       95.7     (0.7 )%      (16.9 )% 

(Loss) income from discontinued operations

     (6.0     12.5       (18.5     (148.0 )%      (0.9 )%      2.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (10.5     (92.8     82.3       88.7     (1.6 )%      (14.9 )% 

Net (loss) income attributable to

noncontrolling interest

     (1.3     0.1       (1.4     (1400.0 )%      (0.2 )%      0.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Ceridian

   $ (9.2   $ (92.9   $ 83.7       90.1     (1.4 )%      (14.9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (a)

   $ 117.8     $ 85.5     $ 32.3       37.8     17.6     13.7

 

(a)

For a reconciliation of Adjusted EBITDA to operating profit, please see “Prospectus Summary—Summary Historical Consolidated Financial and Other Data.”

 

79


Table of Contents

Revenue. The following table sets forth certain information regarding our consolidated revenues for the year ended December 31, 2017, compared with the year ended December 31, 2016.

 

    Year ended
December 31,
    Growth rate
year-over-year
    Impact of
changes in
foreign currency (a)
    Growth rate on a
constant
currency basis (a)
 
    2017     2016     2017 vs. 2016     2017 vs. 2016  
    (Dollars in millions)                    

Revenue

         

Cloud

         

Recurring services

  $ 336.2     $ 239.5       40.4     1.4     39.0

Professional services and other

    68.1       58.3       16.8     0.9     15.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Cloud revenue

    404.3       297.8       35.8     1.3     34.5

Bureau

         

Recurring services

    262.3       319.0       (17.8 )%      0.4     (18.2 )% 

Professional services and other

    4.2       6.6       (36.4 )%            (36.4 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Bureau revenue

    266.5       325.6       (18.2 )%      0.4     (18.6 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $     670.8     $     623.4       7.6     0.8     6.8

 

(a)

We present revenue growth in a constant currency to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations. We calculate percentage change in revenue on a constant currency basis by applying a fixed $1.30 Canadian dollar to $1.00 U.S. dollar foreign exchange rate to revenues originally booked in Canadian dollars for all applicable periods.

Total revenue increased $47.4 million, or 7.6%, to $670.8 million for the year ended December 31, 2017, compared to $623.4 million for the year ended December 31, 2016. This increase was primarily driven by an increase in Cloud revenue of $106.5 million, or 35.8%, from $297.8 million for the year ended December 31, 2016 to $404.3 million for the year ended December 31, 2017. The Cloud revenue increase was driven by an increase of $96.7 million, or 40.4%, in Cloud recurring services revenue, and $9.8 million, or 16.8%, in Cloud professional services and other revenue. The increase in Cloud recurring services revenue of $96.7 million was due to $68.0 million from new customers, add-ons, and revenue uplift from migrations of Bureau customers; $28.1 million from the migration of Bureau customers; $10.0 million from increased float revenue related to Cloud recurring services revenue; partially offset by customer losses of $9.4 million. The increase in Cloud revenue was partially offset by a decline in Bureau recurring services revenue of $56.7 million, or 17.8%. On a constant currency basis, total revenue grew 6.8%. This adjusted revenue growth was driven by an increase of 34.5% in Cloud revenue, partially offset by a decline of 18.6% in Bureau revenue. On a constant currency basis, Cloud revenue growth for the year ended December 31, 2017, compared to the year ended December 31, 2016, was driven by Cloud recurring services revenue, which increased by 39.0%, and professional services and other revenue, which increased by 15.9%, as we continued to sign and to activate new customers.

Of the decline in Bureau revenue, approximately 50% was driven by customer attrition and approximately 50% was driven by customer migrations to Dayforce. Excluding the impact of migrations, our annual Bureau revenue retention rate was 89.7% in 2017 and 87.4% in 2016. For the

 

80


Table of Contents

year ended December 31, 2017, recurring services revenue from payroll Bureau customers accounted for $210.2 million and tax-only Bureau recurring services revenue accounted for $52.1 million. The payroll Bureau customers consist of approximately 1.9 million active users, of which approximately 1.7 million of these active users are with customers that we believe could be candidates for migration to Dayforce. Some of our customers are not candidates to migrate to Dayforce due to a variety of factors, including the type of functionality that they require and their system configuration. Of the approximately 1.7 million active users, small businesses accounted for 20% of the total number of active users, mid-sized businesses accounted for 30% of the total number of active users, and enterprise businesses accounted for 50% of the total number of active users.

Cloud revenue by solution. The following table presents our Cloud revenue for both recurring and professional services and other, for both our Dayforce and Powerpay solution for the periods presented.

 

     Year ended
December 31,
     Growth rate
year-over-year
    Growth rate
on a constant
currency basis
 
     2017      2016      2017 vs. 2016  
     (Dollars in millions)               

Dayforce

   $ 319.9      $ 219.0        46.1     45.5

Powerpay

     84.4        78.8        7.1     4.6
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Cloud Revenue

   $ 404.3      $ 297.8        35.8     34.5
  

 

 

    

 

 

    

 

 

   

 

 

 

Cloud revenue was $404.3 million during 2017 an increase of 35.8% when compared to 2016. Dayforce revenue grew 46.1%, and Powerpay revenue grew 7.1% during 2017 as compared to 2016. Our new business sales to Dayforce customers comprised 74% of our increase in Cloud revenue for the year ended December 31, 2017, and the remaining 26% consisted primarily of customer migration to Dayforce from our Bureau solutions.

Float revenue. Investment income from invested customer trust funds included in revenue was $46.5 million and $39.1 million for the years ended December 31, 2017 and 2016, respectively. The average float balance for our customer trust funds for the year ended December 31, 2017, was $3,228.2 million, compared to $3,260.4 million for the year ended December 31, 2016. The yield was 1.44% during the year ended December 31, 2017, an increase of 24 basis points compared to the year ended December 31, 2016. In addition to interest rate risks, we also 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 trust fund balances and float revenue. There are no incremental costs of revenue associated with increases or declines in float revenue.

Cost of revenue. Total cost of revenue for the year ended December 31, 2017, was $407.5 million, an increase of $11.1 million, or 2.8%, compared to the year ended December 31, 2016.

During 2017, we changed the presentation and classification of certain expenses within our statements of operations to better facilitate comparisons with revenue and expenses of similar businesses, to better align our income statement presentation with the way management and reporting of our business has evolved internally, and to enhance our overall disclosure and understanding of the business for external users. We reallocated certain expenses between cost of recurring services revenue, cost of professional services and other revenue, and selling, general, and administrative expense. The net impact of these reallocations was to increase total cost of revenue by $3.4 million and to reduce selling, general, and administrative expense by $3.4 million. These changes in presentation and classification represent a change in estimate and have been accounted for on a

 

81


Table of Contents

prospective basis. Therefore, to facilitate the discussion in this section, the following table presents the actual reported costs and expenses as well as the costs and expenses on a pro forma basis as if the changes to allocation methodologies in 2017 had been in effect in 2016:

 

     Year ended December 31,      Pro Forma
Increase (Decrease)
 
     2017      2016      2016
Pro Forma
     Amount      %  
     (Dollars in millions)  

Cost of revenue:

              

Recurring services

   $ 196.8      $ 214.4      $ 182.9      $ 13.9        7.6

Professional services and other

     135.8        115.6        138.7        (2.9      (2.1 )% 

Product development and management

     43.6        43.3        46.9        (3.3      (7.0 )% 

Depreciation and amortization

     31.3        23.1        31.3        0.0        0.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of revenue

   $ 407.5      $ 396.4      $ 399.8      $ 7.7        1.9
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Selling, general, and administrative

   $ 223.0      $ 225.3      $ 221.9      $ 1.1        0.5

The increase in total cost of revenue for year ended December 31, 2017, compared to the year ended December 31, 2016, included a net reallocation of $3.4 million from selling, general, and administrative expense due to a change in estimate of expense allocations. Excluding the effect of these reallocations, total cost of revenue would have increased by $7.7 million, or 1.9%.

Recurring services cost of revenue was reduced by $17.6 million for the year ended December 31, 2017, compared to the year ended December 31, 2016. This reduction included a reallocation of $31.5 million of costs from recurring services cost of revenue, consisting primarily of $13.4 million in technology and facilities expenses, $10.9 million in finance related expenses, and $9.3 million in corporate function expenses. Excluding the effect of these reallocations, recurring services cost of revenue would have increased by $13.9 million due to additional costs incurred to support the growing Dayforce customer base, partially offset by reductions in Bureau costs.

The increase in cost of revenue for professional services and other of $20.2 million for the year ended December 31, 2017, compared to the year ended December 31, 2016, included a net reallocation of $23.1 million of costs to professional services and other cost of revenue, primarily $23.2 million of technology and facilities expenses. Excluding the effect of these reallocations, professional services and other cost of revenue would have been reduced by $2.9 million, as we achieved productivity improvements in implementing new customers.

The increase in product development and management expense of $0.3 million for the year ended December 31, 2017, compared to the year ended December 31, 2016, included the reallocation of $3.6 million of costs to product development and management, primarily $7.9 million in technology and facilities expenses, offset by $2.8 million in corporate function expenses. Excluding the effect of these reallocations, product development and management expense would have been reduced by $3.3 million, due to reductions in product management costs associated with our Bureau solution and technology expenses, partially offset by higher headcount to support the continued development of the Dayforce platform.

Depreciation and amortization expense associated with cost of revenue increased by $8.2 million for the year ended December 31, 2017, compared to the year ended December 31, 2016. Excluding the effect of these reallocations of $8.2 million, depreciation and amortization expense would have been consistent with 2016.

 

82


Table of Contents

The table below presents total gross margin and solution gross margins for the periods presented, both as presented and on a pro forma basis as if the changes to allocation methodologies of certain costs in 2017 discussed above had been in effect in 2016.

 

     Year ended December 31,  
     2017     2016     2016
Pro Forma
 

Total gross margin

     39.3     36.4     35.9

Gross margin by solution:

      

Cloud recurring services

     62.8     64.0     60.2

Bureau recurring services

     72.7     59.8     72.5

Professional services and other

     (87.8 )%      (78.1 )%      (113.7 )% 

Selling, general, and administrative expense. Selling, general, and administrative expense was reduced by $2.3 million for the year ended December 31, 2017, compared to the year ended December 31, 2016. This reduction included the reallocation of $3.4 million of costs. Excluding the effect of these reallocations, selling, general, and administrative expense would have increased by $1.1 million, reflecting increases in sales and marketing expenses, and share-based compensation expense, partially offset by reductions in restructuring consulting fees, severance expense, sponsor management fees and other cost reduction measures related to our declining Bureau solutions.

Other expense. For the year ended December 31, 2017, we incurred $7.3 million of other expense, net, compared to $12.9 million, for the year ended December 31, 2016. The other expense, net, for the year ended December 31, 2017, was primarily related to foreign currency remeasurement losses on intercompany receivables or payables denominated in foreign currencies. The other expense, net, for the year ended December 31, 2016, was primarily related to an impairment of $10.2 million to our trade name intangible asset and an increase of $5.9 million to our environmental reserve liability to reflect more stringent remediation requirements, partially offset by foreign currency remeasurement gains on intercompany receivables or payables denominated in foreign currencies. Please refer to Note 12, ”Supplementary Data to Statement of Operations,” for further discussion.

Operating profit (loss). We realized operating profit of $33.0 million for the year ended December 31, 2017, compared to an operating loss of $11.2 million for the year ended December 31, 2016. This $44.2 million increase was primarily due to a $47.4 million increase in revenue and gross margin improvement.

Interest expense, net. Interest expense, net, for the year ended December 31, 2017, was $87.1 million, compared to $87.4 million for the year ended December 31, 2016.

Income tax (benefit) expense. For the year ended December 31, 2017, we had an income tax benefit of $49.6 million, compared to income tax expense of $6.7 million for the year ended December 31, 2016. Income tax benefit for the year ended December 31, 2017, was primarily related to a tax benefit of approximately $59.4 million related to the 2017 tax reform legislation, of which $26.4 million was attributable to the revaluation of our deferred tax assets and liabilities and $33.0 million was attributable to the reduction in our valuation allowance.

(Loss) income from discontinued operations. For the year ended December 31, 2017, we had a loss from discontinued operations of $6.0 million, compared to income from discontinued operation of $12.5 million for the year ended December 31, 2016. The loss from discontinued operations for the year ended December 31, 2017, was primarily related to our LifeWorks business. Income from discontinued operations for the year ended December 31, 2016, was primarily attributable to proceeds of $10.7 million from our Divested Benefits Businesses, net of tax, which were sold in a series of transactions in the third quarter of 2015, and our United Kingdom business, which was sold in the second quarter of 2016, resulting in a gain on sale of $5.9 million.

 

83


Table of Contents

Net loss attributable to Ceridian. Net loss attributable to Ceridian improved by $83.7 million to $9.2 million for the year ended December 31, 2017, compared to $92.9 million for the year ended December 31, 2016.

Adjusted EBITDA. Adjusted EBITDA increased by $32.3 million for the year ended December 31, 2017, compared to the year ended December 31, 2016, and Adjusted EBITDA margin increased to 17.6% in 2017 from 13.7% in 2016.

Quarterly Results of Operations

The following table sets forth statements of operations data for each of the quarters presented. We have prepared the quarterly statements of operations data on a basis consistent with the audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the financial information reflects all adjustments, consisting of normal recurring adjustments, which we consider necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results for any future period.

 

    Three months ended    

 

 
    December 31,
2018
    September 30,
2018
    June 30,
2018
    March 31,
2018
    December 31,
2017
    September 30,
2017
    June 30,
2017
    March 31,
2017
 
    (Dollars in millions)  

Revenue:

               

Recurring services

  $ 171.7     $ 157.2     $ 156.6     $ 167.0     $ 160.3     $ 145.6     $ 140.8     $ 151.8  

Professional services and other

    28.6       22.4       22.7       20.2       22.1       17.9       16.7       15.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    200.3       179.6       179.3       187.2       182.4       163.5       157.5       167.4  

Cost of revenue:

               

Recurring services

    51.0       49.1       49.5       50.7       51.0       48.4       48.1       49.3  

Professional services and other

    33.5       32.5       33.4       32.8       33.0       34.8       34.1       33.9  

Product development and management

    15.7       14.5       15.1       13.7       11.8       11.0       10.0       10.8  

Depreciation and amortization

    8.6       8.5       8.5       8.7       8.1       8.0       7.6       7.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    108.8       104.6       106.5       105.9       103.9       102.2       99.8       101.6  

Gross profit

    91.5       75.0       72.8       81.3       78.5       61.3       57.7       65.8  

Costs and expenses:

               

Selling, general, and administrative

    70.4       59.4       84.1       56.8       62.0       52.4       54.8       53.8  

Other (income) expense net

    (0.4     0.3       —         (2.8     0.4       3.8       2.0       1.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

    21.5       15.3       (11.3     27.3       16.1       5.1       0.9       10.9  

Interest expense, net

    8.8       8.8       43.4       22.2       21.8       21.9       22.0       21.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    12.7       6.5       (54.7     5.1       (5.7     (16.8     (21.1     (10.5

Income tax expense (benefit)

    1.9       (0.9     1.1       5.6       (53.4     0.9       1.9       1.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    10.8       7.4       (55.8     (0.5     47.7       (17.7     (23.0     (11.5

(Loss) income from discontinued operations

    (11.0     (3.0     (9.7     (2.1     (3.6     (2.9     0.2       0.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (0.2     4.4       (65.5     (2.6     44.1       (20.6     (22.8     (11.2

Net (loss) income attributable to noncontrolling interest

    —         —         —         (0.5     (0.9     (0.5     0.1       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Ceridian

  $ (0.2   $ 4.4     $ (65.5   $ (2.1   $ 45.0     $ (20.1   $ (22.9   $ (11.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

Our primary sources of liquidity are our existing cash and equivalents, cash provided by operating activities, borrowings under our credit facilities, and proceeds from equity offerings. As of December 31, 2018, we had cash and equivalents of $217.8 million and availability under our revolving credit facility of $300.0 million. No cash amounts were drawn on the revolving credit facility during 2018. Our total indebtedness was $678.3 million as of December 31, 2018. See “Description of Material Indebtedness.”

 

84


Table of Contents

Our primary liquidity needs are related to funding of general business requirements, including the payment of interest and principal on our indebtedness, capital expenditures, pension contributions, and product development.

Our customer trust 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 46% of customer trust 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 54% of customer trust 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 in the trust to meet payment obligations, we also have financing arrangements and may pledge fixed income securities for short-term financing. The assets held in trust are intended for the specific purpose of satisfying client fund obligations and therefore are not freely available for our general business use.

We believe that our cash flow from operations, availability under our revolving credit facility, and available cash and equivalents will be sufficient to meet our liquidity needs for the foreseeable future. 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 assure you 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 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 assure you 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. Although we have no specific current plans to do so, 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.

Statements of Cash Flows

Changes in cash flows due to purchases of customer trust fund marketable securities, proceeds from the sale or maturity of customer trust fund marketable securities, and the net increase (decrease) of restricted cash held to satisfy customer trust fund obligations, as well as the carrying value of customer trust 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. For example, December 31, 2018 was a Monday, when trust fund balances are generally lower; whereas, the last business day of 2017 was a Friday, when trust fund balances are generally higher. The customer trust funds are fully segregated from our operating cash accounts and are evaluated and tracked separately by management. Therefore, to provide meaningful information to the readers, the following discussion is regarding the net cash flows excluding customer trust funds.

Operating Activities

Net cash provided by operating activities from continuing operations of $10.7 million during the year ended December 31, 2018, was primarily attributable to operating profit of $52.8 million, partially offset by a $45.0 million reduction in cash as a result of net changes in working capital. The $45.0 million reduction in net working capital was primarily attributable to a reduction of $22.1 million in

 

85


Table of Contents

liabilities for employee compensation and benefits, primarily due to payments of accrued incentive compensation and pension contributions, and a $15.7 million reduction in liabilities for accrued interest, associated with our debt refinancing. Included within net cash flows provided by operating activities for the year ended December 31, 2018, was $74.5 million in cash interest payments on our long-term debt, $18.5 million in pension payments, and $16.7 million in cash taxes, net of refunds received.

Net cash used in operating activities from continuing operations of $29.4 million during the year ended December 31, 2017, was primarily attributable to operating losses of $4.5 million, net changes in working capital of $37.2 million, and a deferred tax benefit of $62.3 million, partially offset by certain non-cash items, primarily $53.8 million of depreciation and amortization and $16.1 million of share-based compensation expense. Net changes in working capital were driven by employee compensation and benefits, primarily pension contributions, accrued taxes, and prepaid expenses.

Net cash used in operating activities from continuing operations of $73.2 million during the year ended December 31, 2016 was primarily attributable to operating losses of $105.3 million with offsetting adjustments for certain non-cash items and net changes in working capital. The adjustments for non-cash items included $53.2 million of depreciation and amortization, $12.5 million of share-based compensation expense, a $10.4 million asset impairment, and a $5.9 million adjustment to our environmental reserve liability, partially offset by $8.3 million of deferred income tax benefit. Net changes in working capital of $49.3 million were primarily driven by pension contributions exceeding pension expense.

Investing Activities

During the year ended December 31, 2018, net cash used in investing activities from continuing operations, excluding customer trust fund activity, was $40.2 million, including $32.2 million in capital expenditures for software and technology and $8.0 million in capital expenditures for property and equipment.

During the year ended December 31, 2017, net cash used in investing activities from continuing operations excluding customer trust fund activity was $51.1 million, primarily related to capital expenditures, partially offset by proceeds from divestitures. Our capital expenditures included $33.1 million for software and technology and $17.5 million for property and equipment.

During the year ended December 31, 2016, net cash provided by investing activities from continuing operations excluding customer trust fund activity was $68.7 million, primarily related to the net proceeds from divestitures of $101.6 million, offset by capital expenditures. Our capital expenditures included $25.5 million for software and technology and $7.4 million for property and equipment.

Financing Activities

Net cash provided by financing activities from continuing operations, excluding the change in customer trust fund obligations, was $163.5 million during the year ended December 31, 2018. This cash inflow is primarily attributable to the net proceeds received from our IPO and concurrent private placement of $595.0 million, a net increase in the principal of our term loan of $23.0 million, and proceeds from the issuance of common stock upon exercise of stock options of $45.8 million, partially offset by a $475.0 million payment to redeem our Senior Notes and debt refinancing costs of $23.3 million.

Net cash provided by financing activities from continuing operations excluding the change in customer trust fund obligations was $50.7 million during the year ended December 31, 2017, primarily

 

86


Table of Contents

related to the funding of the remaining $75.2 million from the issuance of Senior Preferred Stock, partially offset by a $25.9 million payment made on our term debt.

Net cash provided by financing activities from continuing operations excluding the change in customer trust fund obligation was $63.2 million during the year ended December 31, 2016, related to proceeds received from the issuance of Senior Preferred Stock, partially offset by payments made on our term debt.

Cash Flows from Discontinued Operations

During the year ended December 31, 2018, net cash used in discontinued operations was $1.2 million. During the year ended December 31, 2017, net cash used in discontinued operations was $10.6 million. During the year ended December 31, 2016, net cash used in discontinued operations was $1.9 million. The cash flows from discontinued operations for all periods primarily relate to changes in working capital.

Backlog

We do not believe that any measure of backlog is a meaningful indicator of revenues that can be expected for a particular future period as the amount and timing can be influenced by multiple factors, including the timing of the completion of implementation, the accuracy and success of implementation services provided by us and by third parties, the timing in which new customers go-live, and our ability to meet service level commitments.

Seasonality

We have in the past and expect in the future to experience seasonal fluctuations in our revenues and new customer contracts with the fourth quarter historically being our strongest quarter for new customer contracts, renewals, and customer go-lives. Although the growth of our Cloud solutions and the ratable nature of our fees makes this seasonality less apparent in our overall results of operations, we expect our revenue to fluctuate quarterly and to be higher in the fourth and first quarters of each year. Fourth quarter revenue is driven by year-end processing fees and Dayforce customer go-lives; and first quarter revenue is driven by revenue earned for printing of year-end tax packages.

Off-Balance Sheet Arrangements

As of December 31, 2018, we did not have any “off-balance sheet arrangements” (as such term is defined in Item 303 of Regulation S-K).

Our Indebtedness

On April 30, 2018, Ceridian entered into a credit agreement pursuant to which the lenders agreed to provide Senior Credit Facilities, consisting of the Senior Term Loan in the original principal amount of $680.0 million and a $300.0 million Revolving Facility. The Revolving Facility may, at our option, be made available in United States Dollars, Canadian Dollars, Euros and/or Pounds Sterling; up to $70.0 million may, at our option, be made available for letters of credit and $100.0 million may, at our option, be made available for swingline loans (denominated in Canadian Dollars and/or United States Dollars).

The Senior Term Loan will mature on April 30, 2025. We are required to make annual amortization payments in respect of the Senior Term Loan in an amount equal to 1.00% of the original principal

 

87


Table of Contents

amount thereof, payable in equal quarterly installments of 0.25% of the original principal amount of the first lien term loan. The Revolving Facility matures on April 30, 2023 and does not require amortization payments.

The obligations of Ceridian under the Senior Credit Facilities are secured by first priority security interests in substantially all of the assets of Ceridian and the guarantors, subject to permitted liens and other exceptions. All of our subsidiaries are guarantors under the Senior Credit Facilities, subject to certain exceptions. The Senior Credit Facilities contain financial covenants and certain business covenants, including restrictions on dividend payments, which Ceridian must comply with during the term of the agreement. As of December 31, 2018, Ceridian was in full compliance with the terms of the Senior Credit Facilities.

Borrowings under the Senior Credit Facilities bear interest at a rate per annum equal to:

 

  1.

in the case of borrowings denominated in U.S. dollars on any day (a) at Ceridian’s election, either (i) an amount (not less than 1.00%) equal to the greater of (A) a base rate determined by reference to the rate of interest per annum announced by Deutsche Bank AG New York Branch (“DBNY”) as its prime rate on such day, (B) the federal funds effective rate on such date plus 1/2 of 1.00% and (C) the London interbank offered rate (“LIBOR”) plus 1.00% or (ii) if available, LIBOR for U.S. dollars determined by reference to the applicable Reuters screen page two business days prior to the commencement of the interest period relevant to the subject borrowing, adjusted for certain additional costs, which may not be less than 0.00% plus (b) an applicable margin;

 

  2.

in the case of borrowings under the Revolving Facility denominated in Canadian Dollars on any day (a) at Ceridian’s election, either (i) the rate of interest per annum quoted or established as the “prime rate” of Deutsche Bank AG Canada Branch plus an applicable margin or (ii) CDOR for Canadian dollars determined by reference to the applicable Reuters screen page on date of the commencement of the interest period relevant to the subject borrowing, adjusted for certain additional costs, which may not be less than 0.00% plus (b) an applicable margin;

  3.

in the case of borrowings under the Revolving Facility denominated in Euros on any day, (a) The London interbank offered rate in Euros (“EURIBOR”) determined by reference to the applicable Reuters screen page two business days prior to the commencement of the interest period relevant to the subject borrowing, which may not be less than 0.00% plus (b) an applicable margin; or

 

  4.

in the case of borrowings under the Revolving Facility denominated in Pounds Sterling, (a) Sterling LIBOR determined by reference to the applicable Reuters screen page one business day prior to the commencement of the interest period relevant to the subject borrowing, which may not be less than 0.00% plus (b) an applicable margin.

The applicable margin for the Senior Term Loan is (i) 3.25% per annum, in the case of LIBOR loans and (ii) 2.25% per annum, in the case of base rate loans. Such applicable margin will be reduced by 0.25% per annum if the corporate family rating of Ceridian from Moody’s is B2 or better, each such reduction being effective during the period commencing on the date of such change in rating becomes effective and ending on the date immediately preceding the effective date of next change in rating.

 

88


Table of Contents

The applicable margin for loans under the Revolving Facility is determined in accordance with the table set forth below:

 

Consolidated First Lien Leverage Ratio

   Applicable Margin for
LIBOR, CDOR, EURIBOR and
Sterling LIBOR Rate
Loans
    Applicable Margin
for Base Rate and
Canadian
Prime Rate Loans
 

Category 1

    

Greater than 4.50:1.00

     2.75     1.75

Category 2

    

Less than or equal to 4.50:1.00 and greater than 4.00:1.00

     2.50     1.50

Category 3

    

Less than or equal to 4.00:1.00

     2.25     1.25

We are also required to pay a customary annual administration fee to the administrative agent under the Senior Credit Facilities.

For an additional description of the Senior Credit Facilities, see “Description of Material Indebtedness—Senior Credit Facilities.”

Contractual Obligations

The following table sets forth our contractual obligations and other commercial commitments as of December 31, 2018, whether or not they appear on our consolidated balance sheet. Variable interest payments are projected based on an interest rate forecast in effect at the end of 2018. All amounts in the table may reflect rounding.

 

     Payments due by period  
     (Dollars in millions)  
     Less
than one
year
     1-3
Years
     3-5
Years
     More than
5 Years
     Total  

Long-term debt

   $ 6.8      $ 13.6      $ 13.6      $ 644.3      $ 678.3  

Interest payable on long-term debt

     40.6        79.9        78.1        51.1        249.7  

Operating leases

     9.1        14.7        11.6        7.6        43.0  

Postretirement plan obligations (a)

     2.3        3.9        3.5        6.3        16.0  

Retirement plan obligations (a)

     7.7        54.0        37.6        33.4        132.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 66.5      $ 166.1      $ 144.4      $ 742.7      $ 1,119.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

We have not estimated our pension funding obligations beyond 2027, and thus, any potential future contributions have been excluded from the table.

Our long-term debt obligations are described in “Description of Material Indebtedness” and in Note 9, “Debt,” to our consolidated financial statements included elsewhere in this prospectus.

The lease payments represent scheduled payments under the terms of the lease agreements. We conduct substantially all of our operations in leased facilities. Most of these leases contain renewal options and require payments for taxes, insurance, and maintenance. We also lease equipment for use in our business.

Payments of retirement plan obligations include employer commitments to fund our defined benefit and postretirement plans and do not include estimated future benefit payments to participants expected to be made from liquidation of the assets in our defined benefit plan trusts. At December 31,

 

89


Table of Contents

2018, our defined benefit pension plans had a projected benefit obligation that exceeded the fair value of the plans’ assets by $145.8 million and our postretirement benefit plan had an accumulated benefit obligation that exceeded the fair value of the plans’ assets by $16.8 million. We expect to satisfy these remaining obligations through investment income from and appreciation in the fair value of plan assets held in trust and from future employer contributions.

The amount of our obligation to vendors for capital expenditures at December 31, 2018 was not material, and no such amount is included in the table above.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements and related notes included elsewhere in this prospectus, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements and related notes requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our evaluation of trends in the industry, information provided by our customers, and information available from other outside sources, as appropriate. We evaluate our estimates and judgments on an on-going basis. Our actual results may differ from these estimates. For a description of our significant accounting policies, please see Note 2, “Summary of Significant Accounting Policies,” to our consolidated financial statements included elsewhere in this prospectus. The accounting policies that we believe to be the most critical to an understanding of our financial condition and results of operations and that require the most complex and subjective management judgments are discussed below.

Revenue Recognition

We recognize revenue from the sale of our services, net of applicable sales taxes, when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. We rely on a signed contract with the customer as the persuasive evidence of a sales arrangement.

We enter into revenue arrangements that may consist of multiple deliverables based on the needs of our customers. For example, our services address a broad range of employment process needs, such as payroll, payroll-related tax filing, human resource information, employee self-service capabilities, time and labor management, and recruitment and applicant screening. A customer arrangement may contain any of these elements with different elements delivered across multiple reporting periods.

We have a single unit of accounting for each deliverable in a contract based on the use of estimated selling price (“ESP”) in those cases where vendor-specific objective evidence of selling price (“VSOE”) or third party evidence (“TPE”) cannot be established. Our determination of ESP involves the consideration of several factors based on the specific facts and circumstances of each contract. Specifically, we consider the cost to produce or to provide the deliverable, the anticipated margin on that deliverable, the selling price and profit margin for similar services, the value of any enhancements that have been built into the deliverable, and the characteristics of the varying markets in which the deliverable will be sold.

When we are unable to establish a selling price using VSOE or TPE, we use ESP in the allocation of arrangement consideration. The objective of ESP is to determine the price at which we would transact a sale if the service were sold on a standalone basis.

 

90


Table of Contents

We regularly review VSOE, TPE, and ESP and maintain internal controls over the establishment and updates of these estimates. There were no material impacts during the period, nor do we currently expect a material impact in the near term from changes in VSOE, TPE, or ESP.

Deferred revenue consists primarily of customer billings in advance of revenues being recognized from our contracts. Deferred revenue also includes certain deferred professional services fees that are accounted for as a single unit of accounting with subscription fees and are recognized as revenues over the same period as the related customer contract. Deferred revenue that is anticipated to be recognized during the succeeding twelve-month period is recorded as current deferred revenue, and the remaining portion is recorded as noncurrent.

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 manage these market risks through normal operating and financing activities. 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. 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 connection with our U.S. and Canadian payroll and tax filing services, we collect funds for payment of payroll and taxes; temporarily hold such funds in trust 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 U.S. customer trust funds primarily in high- quality bank deposits, money market mutual funds, or collateralized short-term investments. We may also invest these funds in U.S. Treasury and agency securities, as well as highly rated asset-backed, mortgage-backed, municipal, and corporate securities. Our Canadian customer trust funds are invested in securities issued by the government and provinces of Canada, highly rated Canadian banks and corporations, asset-backed trusts, and mortgages.

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 other-than-temporary.

We do not believe that an increase or decrease 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.

Pension Obligation Risk. We provide a pension plan for a number of former employees. 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

 

91


Table of Contents

care cost trends. The cost of pension benefits in future periods will depend on actual returns on plan assets, assumptions for future periods, contributions, and benefit experience. In 2018, we contributed $18.5 million to our pension plan.

The effective discount rate used in accounting for pension and other benefit obligations in 2018 ranged from 3.70% to 3.92%. The expected rate of return on plan assets for qualified pension benefits in 2018 was 6.30%. The following table reflects the estimated sensitivity associated with a change in certain significant actuarial assumptions (each assumption change is presented mutually exclusive of other assumption changes):

 

            Impact on 2018 Pension Expense
Increase (Decrease)
 
     Change in Assumption      Pension
Benefits
     Post
Retirement
 
            (Dollars in millions)  

Increase in discount rate

     50 basis points      $ 0.2        —    

Decrease in discount rate

     50 basis points      $ (0.2      —    

Increase in return on plan asset

     50 basis points      $ (2.0      —    

Decrease in return on plan asset

     50 basis points      $ 2.0        —    

Recently Issued and Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which replaced all existing revenue guidance created by Accounting Standards Codification (“ASC”) Topic 605, including prescriptive industry-specific guidance, and created ASC Topic 606 for revenue and ASC Subtopic 340-40 for incremental costs of obtaining a contract with customers. This standard’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities will need to apply more judgment and make more estimates than under the previous guidance. In July 2015, the FASB deferred the effective date for all entities by one year, making the guidance for non-public companies effective for annual reporting periods beginning after December 15, 2018. As an emerging growth company, we have elected to follow the non-public company timeline for adopting this guidance. The standard permits the use of either the retrospective transition method or modified retrospective approach with a cumulative effect recognized at the date of initial application. Management has decided to adopt the new standard effective in the first quarter of 2019, using the retrospective transition method for adoption.

In preparation for this adoption, we have evaluated the impact of the new standard to our financial statements and accompanying disclosures in the notes to our consolidated financial statements. Our assessment of the impact included an evaluation of the five-step process set forth in the new standard along with the enhancement of disclosures that will be required. We executed a plan for implementing the standard, which included identifying customer contracts within the scope of the new standard, identifying performance obligations within those customer contracts, and evaluating the impact of incremental variable consideration paid to obtain those customer contracts. We also undertook a comprehensive review of all contracts that fall under the scope of the new standard; and, as of the date of this prospectus, we have completed our review of in-scope contracts.

Based on our analysis, the adoption of the new standard will result in changes to the classification and timing of our revenue recognition. Specifically, revenue classified as professional services and other revenue will increase and revenue classified as recurring services revenue will be reduced under the new standard, compared to current GAAP. Further, the new standard will result in changes to the timing of our revenue recognition compared to current GAAP. In compliance with the new standard, a contract asset will be reflected on the consolidated balance sheets and will be amortized over the

 

92


Table of Contents

contract period, which is generally three years. We also will have changes to the timing of certain selling, general, and administrative expenses, as the new standard requires capitalizing and amortizing certain selling expenses, such as commissions and bonuses paid to the sales force. These sales expenses will be amortized over the period of benefit, generally five years. Additionally, the adoption of the new standard will have an immaterial impact on cost of revenue for the year ended December 31, 2017, as a small number of customer contracts had previously been recognized under revenue guidance prior to ASC Topic 605.

In periods of revenue growth, the changes above will result in higher overall earnings before income taxes and net income when compared to current GAAP.

The following tables present the impacts that the adoption of ASC 606 would have on the years ended December 31, 2018 and 2017:

 

     Year ended December 31, 2018  
     As Reported      Under ASC 606      Impact  

Revenue:

        

Recurring services

   $ 652.5      $ 625.0      $ (27.5

Professional services and other

     93.9        115.7        21.8  
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 746.4      $ 740.7      $ (5.7

Operating profit

   $ 52.8      $ 56.3      $ 3.5  

 

     Year ended December 31, 2017  
     As Reported      Under ASC 606      Impact  

Revenue:

        

Recurring services

   $ 598.5      $ 573.9      $ (24.6

Professional services and other

     72.3        102.3        30.0  
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 670.8      $ 676.2      $ 5.4  

Operating profit

   $ 33.0      $ 46.6      $ 13.6  

In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which created ASC Topic 842 and is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. This standard requires balance sheet recognition for both finance leases and operating leases. This guidance is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. Management will adopt this guidance beginning in the first quarter of 2019, and has chosen to take advantage of the additional transition method in ASU No. 2018-11 discussed below, in which a cumulative-effect adjustment will be made to the opening balance of retained earnings in the period of adoption. Currently, based on management’s implementation efforts, we will recognize a right-of-use asset and a lease liability on the consolidated balance sheets as of January 1, 2019, resulting in an impact of approximately $35.0 to $45.0.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows—Classification of Certain Cash Receipts and Cash Payments,” which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice of certain cash receipts and cash payments. This guidance is effective for non-public companies for fiscal years beginning after December 15, 2018, and

 

93


Table of Contents

interim periods within fiscal years beginning after December 15, 2019. We have chosen to early adopt this guidance as of January 1, 2018, and have applied this guidance to the presentation of our debt refinancing transactions that occurred during 2018.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income,” which is in response to a narrow-scope financial reporting issue that arose because of the Tax Cuts and Jobs Act. The amendment in this update allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This amendment is intended to improve the usefulness of information reported to financial statement users by requiring certain disclosures about stranded tax effects. The amendment in this update is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Management will adopt this guidance beginning in the first quarter of 2019. We anticipate the adoption of this guidance will not have a significant impact on our consolidated balance sheets.

In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” and 2018-11, “Leases (Topic 842): Targeted Improvements.” The amendments in ASU No. 2018-10 affect narrow aspects of the guidance issued in ASU No. 2016-02. For non-early adopters, this amendment is effective under the same timelines as ASU No. 2016-02. The amendments in ASU No. 2018-11 provide entities with an additional (and optional) transition method to adopt the new lease requirements. Under the additional transition method, entities may initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments in this update also provide lessors with a practical alternative to separate non-lease components from the associated lease component. Under this alternative, lessors may account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606) and certain other criteria are met. For entities that have not adopted Topic 842 before the issuance of this update, the effective date and transition requirements are the same as the effective date and transition requirements in ASU No. 2016-02. As discussed above, management has chosen to take advantage of the additional transition method created by this guidance and will record a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, which will be the first quarter of 2019.

 

94


Table of Contents

BUSINESS

Overview

Ceridian is a global HCM software company. Dayforce, our flagship cloud HCM platform, provides HR, payroll, benefits, workforce management, and talent management functionality. In addition to Dayforce, we sell Powerpay, a cloud HR and payroll solution for the Canadian small business market, through both direct sales and established partner channels. We also continue to support customers using our Bureau solutions, which we generally stopped actively selling to new customers in 2012, following the acquisition of Dayforce. We invest in maintenance and necessary updates to support our Bureau customers and continue to migrate them to Dayforce.

Dayforce

Dayforce, our principle cloud HCM platform, is a single application that 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. Dayforce offers a comprehensive range of functionality, including global HR, payroll, benefits, workforce management, and talent management on web