<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
Commission file number 1-1969
CERIDIAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-0278528
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8100 34th Avenue South, Minneapolis, Minnesota 55425
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612)853-8100
(Former name, former address and former fiscal year if changed from last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
The number of shares of registrant's Common Stock, par value $.50 per
share, outstanding as of October 31, 1995, was 46,599,696.
<PAGE>
CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
Pages
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations
for the three and nine month periods ended
September 30, 1995 and 1994 .............................. 3
Consolidated Balance Sheets as of
September 30, 1995 and December 31, 1994 ................. 4
Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 1995 and 1994 .......... 5
Notes to Consolidated Financial Statements ............... 6-7
In the opinion of the Company, the unaudited consolidated
financial statements reflect all adjustments (consisting only of
normal recurring accruals, except as set forth in the notes to
consolidated financial statements) necessary to present fairly
the financial position as of September 30, 1995, and results of
operations for the three and nine month periods and cash flows
for the nine month periods ended September 30, 1995 and 1994.
The results of operations for the nine month period ended
September 30, 1995, are not necessarily indicative of the
results to be expected for the full year.
The consolidated financial statements should be read in
conjunction with the notes to consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 8-19
Part II. Other Information
Item 1. Legal Proceedings .................................... 20
Item 6. Exhibits and Reports on Form 8-K ..................... 20
Signature .......................................................... 21
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<PAGE>
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS Ceridian Corporation
(Unaudited) and Subsidiaries
For Periods Ended September 30,
Three Months Nine Months
1995 1994 1995 1994
(Dollars in millions, except per share data)
<S> <C> <C> <C> <C>
Revenue
Product sales $ 128.8 $ 151.5 $ 408.7 $ 393.6
Services 116.3 95.6 358.5 301.4
Total 245.1 247.1 767.2 695.0
Cost of revenue
Product sales 91.5 115.9 300.7 306.6
Services 57.6 46.0 170.4 141.1
Total 149.1 161.9 471.1 447.7
Gross profit 96.0 85.2 296.1 247.3
Operating expenses
Selling, general and
administrative 56.0 53.8 171.2 155.0
Technical expense 16.0 14.4 50.0 38.5
Other expense (income) 0.6 (1.2) 0.8 (0.7)
Earnings before interest
and taxes 23.4 18.2 74.1 54.5
Interest income 3.9 2.8 9.4 7.9
Interest expense (0.3) (0.4) (1.0) (1.2)
Earnings before income taxes 27.0 20.6 82.5 61.2
Income tax provision 1.8 1.7 6.6 5.0
Net earnings $ 25.2 $ 18.9 $ 75.9 $ 56.2
Primary earnings per share $ 0.45 $ 0.33 $ 1.37 $ 1.00
Fully diluted earnings
per share $ 0.43 $ 0.33 $ 1.30 $ 0.98
Weighted average common shares
and equivalents (000's)
Primary 48,439 47,094 48,137 46,771
Fully diluted 58,823 57,478 58,521 57,155
See notes to consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
FORM 10-Q
CONSOLIDATED Ceridian Corporation
BALANCE SHEETS (Unaudited) and Subsidiaries
September 30, December 31,
Assets 1995 1994
(In Millions)
<S> <C> <C>
Cash and equivalents $ 168.4 $ 119.5
Short-term investments 23.6 54.6
Trade and other receivables, net 177.1 147.3
Inventories 32.8 26.2
Other current assets 24.3 7.7
Total current assets 426.2 355.3
Investments and advances 5.8 14.5
Property, plant and equipment, net 108.7 100.0
Prepaid pension cost 88.9 78.0
Goodwill and other intangibles 122.4 128.0
Capitalized software and other
noncurrent assets 54.8 26.2
Total assets $ 806.8 $ 702.0
Liabilities And Stockholders' Equity
Short-term debt and current
portion of long-term obligations 1.5 1.3
Accounts payable 30.0 31.5
Customer advances 63.5 17.1
Deferred income 88.8 71.8
Accrued taxes 59.3 57.2
Employee compensation and benefits 51.3 55.2
Restructure reserves, current portion 21.3 18.8
Other accrued expenses 54.0 67.6
Total current liabilities 369.7 320.5
Long-term obligations, less current portion 12.6 17.5
Deferred income taxes 9.2 7.7
Restructure reserves, less current portion 51.0 69.5
Employee benefit plans 80.5 80.5
Deferred income and other
noncurrent liabilities 23.0 22.2
Stockholders' equity 260.8 184.1
Total liabilities and stockholders'
equity $ 806.8 $ 702.0
See notes to consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
FORM 10-Q
CONSOLIDATED STATEMENTS OF Ceridian Corporation
CASH FLOWS (Unaudited) and Subsidiaries
For Periods Ended September 30,
Nine Months
1995 1994
(In Millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 75.9 $ 56.2
Adjustments to reconcile net earnings
to net cash provided by (used for)
operating activities:
Depreciation 24.6 20.0
Amortization of deferred assets 10.1 4.2
Restructure reserves utilized (16.3) (44.1)
Net change in working capital items:
Trade and other receivables (30.2) (12.9)
Inventories (6.6) 9.4
Other current assets (6.6) 1.8
Accounts payable 6.3 (14.3)
Customer advances 46.3 (22.9)
Deferred income 9.8 29.0
Other current liabilities (8.2) 13.0
Other (0.5) (9.6)
Net cash provided by (used for)
operating activities 104.6 29.8
CASH FLOWS FROM INVESTING ACTIVITIES
Expended for capital assets and software (66.7) (37.8)
Expended for business acquisitions (9.8) (56.3)
Short-term investments 31.1 52.9
Proceeds from sales of businesses,
investments and capital assets 0.1 33.5
Other 0.4 0.4
Net cash provided by (used for)
investing activities (44.9) (7.3)
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term debt, net -- 2.6
Repayment of other debt (4.5) (3.2)
Proceeds from sale of 5-1/2% Preferred Stock -- 15.5
Preferred stock dividends (9.7) (9.7)
Exercise of stock options and other 3.2 4.1
Net cash provided by (used for)
financing activities (11.0) 9.3
Effect of exchange rate changes on cash 0.2 (0.3)
NET CASH PROVIDED (USED) 48.9 31.5
Cash and equivalents at beginning of period 119.5 116.6
Cash and equivalents at end of period $ 168.4 $ 148.1
See notes to consolidated financial statements.
</TABLE>
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<PAGE>
FORM 10-Q
CERIDIAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995
(Dollars in millions)
(Unaudited)
INVESTING ACTIVITY
On August 31, 1995, Ceridian completed the acquisition of Resumix, Inc., a
privately held California-based company that provides skills management
software and services. The transaction involved the issuance of 849,010
shares of Ceridian common stock to effect the acquisition and the
reservation for issuance of an additional 104,642 such shares in connection
with the assumption of all outstanding Resumix stock options. The
transaction is being accounted for as a pooling-of-interests. Therefore,
the issuance of Ceridian shares and options and the combining of the
accounts of the two companies are treated as if the acquisition took place
on the earliest date of each period reported. The financial statements for
prior periods have been restated accordingly. The impact of the
restatement on the 1994 financial statements in this report includes
additional revenue of $4.7 and $12.8 and losses of $0.2 and $1.5 for the
three and nine month periods, respectively, and additional assets at
December 31, 1994 of $11.7.
<TABLE>
<CAPTION>
RECEIVABLES
September December 31,
30,
1995 1994
<S> <C> <C>
Trade and Other Receivables, Net:
Trade, less allowance of $6.5 and $6.5 88.5
$ 79.2
$
Unbilled
81.7 57.3
Other 6.9 10.8
Total 177.1
$ $ 147.3
</TABLE>
FOREIGN CURRENCY FORWARD CONTRACTS
In March 1995, the Company's subsidiary in the United Kingdom ("CDCL UK")
entered into an agreement with its principal bank to purchase U.S. dollars,
for an aggregate amount of 5,150,256 pounds sterling, at specified dates,
generally on a monthly basis, between November 1995 and September 1998. The
U.S. dollar value of these contracts at September 30, 1995 was $8.0 which
was not materially different from the value at inception, and no amount of
deferred gain or loss had been amortized to operations. The forward
contracts will serve as a hedge of an identifiable foreign currency
commitment; namely, the delivery of goods manufactured in a U.S. facility
of the Company to satisfy a customer contract of CDCL UK. The forward
contracts are intended to eliminate economic and accounting risks arising
from fluctuations in the exchange rate between the two currencies by
matching forward contract maturities to customer contract performance. Any
gain or loss on the forward contracts, measured by the difference between
the contract rate and the spot rate at the current balance sheet date, will
be deferred (unless the deferral is expected to lead to recognizing losses
in future periods) and included in cost of sales along with the related
inventoried costs, effectively converting the dollar costs to pounds.
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<PAGE>
FORM 10-Q
CERIDIAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
September December 31,
30,
1995 1994
<S> <C> <C>
5-1/2% Cumulative Convertible Exchangeable
Preferred Stock, $100 par value
(liquidation preference of $236.0)
Shares issued and outstanding 47,200 $ 4.7 $ 4.7
Common Stock
Par value - $.50
Shares authorized - 100,000,000
Shares issued - 46,627,820 and 46,364,133 23.3 23.2
Shares outstanding - 46,588,260 and
46,250,603
Additional paid-in capital 876.3 858.9
Accumulated deficit (610.1) (676.3)
Foreign currency translation adjustments (2.1) (2.2)
Restricted stock awards (26.1) (17.6)
Pension liability adjustment (4.2) (4.2)
Treasury stock, at cost (39,560 and 113,530
common shares) (1.0) (2.4)
Total stockholders' equity $ 260.8 $ 184.1
</TABLE>
INTEREST RATE COLLARS AND SWAPS
During second quarter 1995, Ceridian executed a series of six interest rate
collar transactions of $100.0 each for the purpose of hedging interest rate
risk on invested customer deposits held in its tax filing trust. In early
October 1995, the Company established another $100.0 interest rate collar
for the same purpose. The counterparties to these arrangements are
domestic commercial banks with debt ratings of A or better. Under current
accounting standards, neither the collar arrangements nor the related trust
investments and offsetting liability to customers are reflected in the
Company's balance sheet. These arrangements, which do not require
collateral, provide for the bank to pay Ceridian the amount by which a
certain index of short-term interest rates falls below a floor strike level
(5% or 5.5%). Alternatively, when that index exceeds a cap strike level
(ranging from 6.15% to 8.47% and averaging 7.41%), Ceridian pays out the
excess above the cap strike level. The remaining terms of the collars
range from 8 to 42 months. In addition to the collar arrangements, the
Company continued to hold at September 30, 1995, three interest rate swap
agreements, maturing in the first half of 1996, with an A-rated financial
institution for an aggregate notional amount of $75.0 with no collateral
required. The risk of accounting loss through non-performance by the
counterparties under any of these arrangements is considered negligible.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
For the quarter ended September 30, 1995, Ceridian Corporation (the
"Company") reported net earnings of $25.2 million, or $.43 per fully
diluted share of common stock, on revenue of $245.1 million, compared to
net earnings of $18.9 million, or $.33 per fully diluted common share, on
revenue of $247.1 million for the third quarter 1994. For the nine months
ended September 30, 1995, the Company reported net earnings of $75.9
million, or $1.30 per fully diluted share of common stock, on revenue of
$767.2 million, compared to net earnings of $56.2 million, or $.98 per
fully diluted common share, on revenue of $695.0 million for the first nine
months of 1994. Amounts for both the 1994 and 1995 periods include the
historical results of Resumix, Inc. ("Resumix"), which was acquired by the
Company on August 31, 1995, and the effect of the issuance of shares of
Ceridian common stock in that acquisition transaction, which is being
accounted for as a pooling-of-interests.
On August 23, 1995, the Company, a newly formed wholly-owned
subsidiary of the Company ("Sub") and Comdata Holdings Corporation
("Comdata") signed an Agreement and Plan of Merger, dated as of the same
date (the "Merger Agreement"), pursuant to which Comdata would be acquired
by the Company by means of the merger of the Sub with and into Comdata,
with Comdata being the surviving corporation and becoming a wholly-owned
subsidiary of the Company (the "Merger"). Comdata, through its wholly-
owned subsidiary Comdata Network, Inc. ("Network"), is a leading provider
of transaction processing services to the trucking and gaming industries.
Comdata and its subsidiaries had consolidated revenue of $204.3 million and
243.3 million for the first nine months of 1995 and for fiscal 1994,
respectively, and net earnings of $21.5 million and $28.1 million for those
respective periods.
Upon consummation of the Merger, each outstanding share of Comdata
common stock will be converted into 0.57 (the "Exchange Ratio") of a share
of the Company's common stock, and each outstanding option to purchase
Comdata common stock will be assumed by the Company and converted into an
option to acquire a proportionate number of shares of the Company's common
stock at a proportionatedly adjusted exercise price per share. Based on
data as of October 27, 1995, approximately 20,439,532 new shares of Company
common stock would be issued to Comdata stockholders in connection with the
Merger, representing approximately 30.5% of the outstanding Company common
stock after giving effect to such issuance, and an additional 1,112,179
shares of Company common stock would be reserved for issuance to holders of
Comdata options.
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<PAGE>
CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations (cont.)
The Merger Agreement and the issuance of the Company's shares in
connection with the Merger are subject to the approval of the holders of
the common stock of the respective companies. Special meetings of the
Comdata and Ceridian stockholders have been scheduled for December 12,
1995. If the requisite stockholder approvals are obtained and other
conditions precedent to the Merger are satisfied or waived, the transaction
is expected to close on or shortly after December 12, 1995. The Company
has filed a registration statement on Form S-4 with the Securities and
Exchange Commission (File No. 33-64089) pertaining to this transaction.
The company expects that in connection with the Merger, in the quarter in
which it is consummated, the Company will record charges of approximately
$70 million related to costs associated with the anticipated refinancing of
Comdata's indebtedness (including the write-off of existing deferred debt
expense) and costs associated with the Merger.
The following table sets forth revenue for the Company, its two
industry segments and the businesses that comprise those segments for the
three and nine month periods ended September 30, 1995 and September 30,
1994, respectively:
For Periods Ended September 30,
Three Months Nine Months
1995 1994 1995 1994
(Dollars in millions)
Information Services Segment
Arbitron $ 34.7 $ 29.8 $ 99.3 $ 89.4
Human Resources Group (1) 93.1 80.8 294.4 232.3
Other Services (2) -- -- -- 5.4
Total Information Services 127.8 110.6 393.7 327.1
Defense Electronics Segment
Computing Devices International 117.3 136.5 373.5 367.9
Total Revenue $ 245.1 $ 247.1 $ 767.2 $ 695.0
(1) The Human Resources Group, the formation of which was announced by
the Company on October 23, 1995, consists of the Company's Employer
Services business (which includes the Company's Centre-file, User
Technology and MiniData subsidiaries), the Company's Tesseract and Resumix
subsidiaries, and its employee assistance business.
(2) Primarily consists of revenue from TeleMoney Services and the
Company's related network and computer center operations, which were sold
in May 1994.
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<PAGE>
CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations (cont.)
The following table sets forth the percentage of the Company's total
revenue by industry segment, the gross profit of each of the Company's
industry segments as a percentage of that segment's revenue, and certain
items in the consolidated statements of operations as a percentage of total
revenue, for the periods indicated.
For Periods Ended September 30,
Three Months Nine Months
1995 1994 1995 1994
Revenue:
Information Services 52.1% 44.7% 51.3% 47.1%
Defense Electronics 47.9% 55.3% 48.7% 52.9%
Total revenue 100.0% 100.0% 100.0% 100.0%
Gross profit:
Information Services 53.0% 55.1% 54.8% 54.4%
Defense Electronics 24.1% 17.8% 21.5% 18.9%
Total gross profit 39.2% 34.5% 38.6% 35.6%
Operating expenses:
Selling, general and
administrative 22.8% 21.8% 22.3% 22.3%
Technical expense 6.5% 5.8% 6.5% 5.5%
Other expense (income) 0.2% (0.5)% 0.1% (0.1)%
Total operating expenses 29.6% 27.1% 28.9% 27.7%
Earnings before interest
and taxes 9.6% 7.4% 9.7% 7.9%
Interest income (expense) 1.4% 1.0% 1.1% 1.0%
Earnings before taxes 11.0% 8.3% 10.8% 8.8%
Income tax provision 0.7% 0.7% 0.9% 0.7%
Net earnings 10.3% 7.7% 9.9% 8.1%
Revenue. Although the Company's revenue increased 10.4% in the nine
month comparison, it decreased 0.8% in the quarterly comparison. This
reflected revenue growth in Information Services of 15.6% in the quarterly
comparison and 20.4% in the nine month comparison, and a revenue decrease
in Computing Devices of 14.1% in the quarterly comparison, which limited
Computing Devices' revenue growth in the nine month comparison to 1.5%. In
Information Services, the Human Resources Group reported revenue growth of
15.2% and 26.7% in the respective quarterly and year-to-date comparisons.
About one-third of the revenue growth in the Human Resources Group in the
year-to-date comparison was due to acquisitions made during 1994,
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<PAGE>
CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations (cont.)
principally Tesseract and User Technology. Apart from acquisitions, the
Human Resources Group's revenue increased about 18% in the year-to-date
comparison, which included an increase in the average annual yield on the
investment of payroll tax filing deposits of 175 basis points. Excluding
additional revenue derived from increased investment yields, the Human
Resources Group's revenue increased about 12% in the year-to-date
comparison. The majority of this internal revenue growth was in Employer
Services, reflecting new customer installations for payroll processing
services and a 16.5% increase in average invested tax filing balances to
$926 million, reflecting growth in the tax filing customer base. Although
the annualized revenue value of orders received by Employer Services during
the first nine months of 1995 increased by about 20% compared to the year
earlier period, Employer Services has experienced some lengthening of the
average time required to install new customers (and to begin realizing
revenue from such customers), largely reflecting an increased concentration
of sales and marketing efforts on larger customers and a corresponding
increase in installation complexity.
Because of the significance to Employer Services' revenue of
investment income from tax filing deposits, and the interest rate
sensitivity of that income, the Company has entered into a series of seven
interest rate collar transactions, each with a notional amount of $100
million, during 1995. These transactions, along with three interest rate
swap transactions with an aggregate notional amount of $75 million, are
described more fully in the financial statement note entitled "Interest
Rate Swaps and Collars."
Two recent acquisitions were made by the Company to supplement the
Human Resources Group. On August 31, 1995, the Company concluded the
acquisition of Resumix, which provides skills management software and
services to enable an organization to manage large volumes of resume data
to identify qualified candidates for hire and match them with available
staffing needs, and to manage the skills of its existing work force by
placing current employees in new jobs or projects. Resumix's revenue,
which is included in the Company's results of operations under pooling-of-
interests accounting, was $16.7 million and $12.8 million in the first nine
months of 1995 and 1994, respectively. The Company issued 849,010 shares
of its common stock to effect the acquisition and reserved for issuance an
additional 104,642 such shares in connection with the assumption of
outstanding Resumix stock options. On October 2, 1995, Ceridian concluded
the acquisition of the assets of the Personnel and Payroll Services
business ("Centre-file") conducted by NatWest Group's Centre-file
subsidiary for $52.1 million in cash. Centre-file provides payroll
processing services and human resource management software, and is the
largest outsourced payroll processing business in the United Kingdom in
terms of revenue. Centre-file's revenue, which is not included in the
Company's results of operations under purchase accounting, was $24.9
million in the first nine months of 1995 and $31.5 million in fiscal 1994.
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<PAGE>
CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations (cont.)
Arbitron's third quarter 1995 revenue increased 16.6% in the quarterly
comparison and 11% in the nine month comparison. Revenue from radio
audience measurement services and analytical software, which comprises
approximately 85% of Arbitron's revenue, increased 8.4% and 9.2% in the
quarterly and year-to-date comparisons, respectively, due to an increased
rate of customer renewals, a higher percentage of syndicated ratings
customers also subscribing for analytical software applications, and price
increases related to increases in the sample size for radio surveys. The
revenue increase from radio was complemented by a revenue increase in the
quarterly and year-to-date periods resulting from the Company's year-end
1994 exchange of its interest in the Competitive Media Reporting ("CMR")
joint venture for an interest in the Scarborough Research Partnership
("SRP"). As a result of this transaction, Arbitron no longer derives
revenue from the sale of commercial monitoring services provided by CMR,
but SRP's results are consolidated with Arbitron's. SRP's revenue is
heavily weighted toward the second through fourth quarters of each year,
coinciding with deliveries of the Scarborough Report.
The majority of Computing Devices' revenue decrease in the quarterly
comparison was attributable to the timing of subcontractor activity related
to the Iris contract, with the third quarter 1994 representing the highest
level that year and the third quarter 1995 expected to be the lowest level
this year. Although revenue year-to-date from the Iris contract is up
4.4%, performance under that contract has progressed to the point that the
Company does not expect it to be the source of revenue increases in future
periods. Revenue from the balance of Computing Devices' international
operations increased in both the quarterly and year-to-date comparisons,
primarily due to ground systems products of the Canadian operations,
particularly a multi-year contract to develop and produce a light armored
vehicle reconnaissance system, and to reconnaissance and avionics contracts
in the United Kingdom operations. Revenue from Computing Devices' U.S.
operations declined in the quarterly and year-to-date comparisons.
Gross Margin. The Company's gross margin improvement in the quarterly
and year-to-date comparisons primarily reflected margin improvement in
Computing Devices and the relatively greater revenue growth in the
Information Services segment, which has higher gross margins than Computing
Devices. The improvement in Computing Devices' gross margin in the
quarterly and year-to-date comparisons was primarily due to improved gross
margins in Computing Devices' U.S. operations in both comparative periods,
an increase in the gross margin on the Iris contract and provisions
established by Computing Devices' U.K. operations in the third quarter 1994
for costs to complete certain contracts. The margin improvement in the
U.S. operations reflected the completion of certain contracts, the movement
of other contracts from the development phase into the production phase,
and the benefits of reduced employment levels.
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<PAGE>
CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations (cont.)
Information Services' gross margin improved somewhat in the nine month
comparison, but decreased in the quarterly comparison. The year-to-date
improvement primarily reflected the very low gross margin for TeleMoney
prior to its sale in May 1994, and an increase in the gross margin in
Arbitron. Arbitron's improvement was primarily a function of revenue mix,
as low margin revenue from the sale of commercial monitoring services
provided by CMR did not continue in 1995 as a result of the CMR/SRP
transaction, and higher margin revenue from radio audience measurement
services and analytical software increased. The gross margin for the Human
Resources Group decreased in the quarterly comparison, and to a lesser
degree in the nine month comparison, principally due to increased costs in
Employer Services' tax filing and payroll processing operations. The
increased costs in the tax filing operation were generally associated with
increased staffing to deal with the rapid growth in business volume and an
increased level of inquiries from taxing authorities.
The increased costs in the payroll processing operation primarily
relate to incremental costs associated with Employer Services' ongoing
project to upgrade its payroll processing software and to consolidate
processing utilizing the upgraded software in centralized facilities
operated by Integrated Systems Solutions Corporation ("ISSC"). The
transition of existing payroll customers to centralized processing on the
upgraded software in the ISSC center and the phased reduction of processing
capabilities in Employer Services' district offices is expected to occur
over a 30 to 36 month period, largely because of the system conversion and
customer training efforts required of Employer Services to assure a
satisfactory transition process for customers electing the software
upgrade. Ceridian expects that the transition process will entail
incremental costs that principally reflect the costs of systems and data
conversion, maintaining duplicate processing systems during the transition
period, and providing necessary training. Although a portion of these
incremental costs (relating to the discontinuance of processing and
consequent excess capacity in the district offices) will be charged to
existing restructure reserves, the majority of the incremental costs,
estimated to be between $50 million and $60 million over about a three year
period, will be accounted for outside of restructuring and will be incurred
relatively evenly over the transition period. The impact of these
incremental costs is, however, expected to be substantially offset over the
course of the transition period by upgrade fees to be paid by customers
electing to take advantage of the added features of the enhanced system and
by various efficiencies, such as reduced installation, operating and
maintenance costs, resulting from increasing utilization of the enhanced
system. Because the benefits of these additional fees and efficiencies
should be greater in the latter portion of the transition period when a
sizeable percentage of customers will have completed the transition, the
burden of the incremental costs is expected to be relatively greater early
in the transition period, particularly during 1996, putting pressure on
Employer Services' margins.
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<PAGE>
CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations (cont.)
The time when the consolidation of payroll processing can begin is
principally a function of the timing of Ceridian's introduction of its
upgraded payroll processing software. Beta testing of the first version of
this software began in July 1995, and Ceridian expects that these beta test
customers will be utilizing this version of the software exclusively
beginning in January 1996. Beta testing of the "production" version of the
software will begin in the fourth quarter of 1995 and be completed during
the first half of 1996. By the second quarter of 1996, Ceridian expects
that existing customers who participated in the beta testing of the
production version will be utilizing this software exclusively, and that
Employer Services will be installing new payroll processing customers on
the enhanced system utilizing the upgraded software. While the transition
of existing customers to the enhanced system is expected to begin in the
second half of 1996, Employer Services will continue, for the foreseeable
future, to make payroll processing utilizing its existing software
available to customers who do not wish to upgrade.
Operating Expenses. The Company's operating expenses (selling,
general and administrative ("SG&A") expenses, technical expense and other
expense) increased as a percentage of revenue in both the three and nine
month comparisons, primarily reflecting increases in Computing Devices and
the relatively greater revenue growth in the Information Services segment,
which has higher operating expenses as a percentage of revenue than
Computing Devices. SG&A expenses as a percentage of revenue for Computing
Devices increased from 7.1% to 9.1% in the quarterly comparison, and from
7.4% to 8.2% in the nine month comparison. This primarily reflects
increased selling expense and the third quarter 1995 revenue decrease.
SG&A expenses as a percentage of revenue for Information Services decreased
from 36.5% to 33.3% in the quarterly comparison and from 35.8% to 33.6% in
the nine month comparison. Information Services' selling expense decreased
as a percentage of revenue, primarily reflecting increased concentration of
sales and marketing efforts on medium and large employers in Employer
Services and increased revenue with which there is associated a lesser
percentage of selling expense, such as revenue attributable to increased
interest rates on tax filing deposits. General expense also decreased as a
percentage of revenue for Information Services despite the amortization of
goodwill and other intangible assets associated with acquisitions made
during 1994, in large measure due to provisions established in the 1994
periods for certain claims and litigation involving Arbitron. The
comparative general and administrative expenses for the Company as a whole
were also affected by the increase in compensation expense of $3.6 million
during the first nine months of 1995 associated with the Company's
performance restricted stock plan, primarily as a result of the Company's
favorable stock price performance during 1995.
An increase in research and development expenses in Computing Devices
caused its technical expense to increase from 4.9% and 5.3% of revenue in
the third quarter and first nine months of 1994, respectively, to 6.8% and
6.3% of revenue in the comparable 1995 periods. Information Services'
technical expense decreased as a percentage of revenue from 7.0% to 6.3% in
- 14 -
<PAGE>
CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations (cont.)
the quarterly comparison, but increased from 5.8% to 6.7% of revenue in the
nine month comparison. Virtually all of this segment's increase in
technical expense in the nine month comparison was in the Human Resources
Group, primarily reflecting the June 1994 acquisition of Tesseract.
Other expense in the 1995 periods primarily consisted of the other
partner's share of SRP's income, and other income in the 1994 periods
primarily consisted of the Company's share of CMR's earnings.
Earnings Before Interest and Taxes. The Company's earnings before
interest and taxes ("EBIT") increased $5.2 million, or 28.5%, in the
quarterly comparison and $19.5 million, or 35.8%, in the year-to-date
comparison. The cumulative EBIT increases for the Company's two industry
segments are not as large as for the Company as a whole primarily because
of compensation expense associated with the Company's restricted stock plan
that was not allocated to the industry segments in the first half of 1994.
Information Services' EBIT increased $3.4 million, or 25.7%, in the
quarterly comparison, and $11.6 million, or 26.2%, in the year-to-date
comparison. As a percentage of revenue, Information Services' EBIT
increased from 11.9% to 12.9% in the quarterly comparison, and from 13.5%
to 14.2% in the year-to-date comparison. Computing Devices' EBIT increased
$1.7 million, or 21.1%, in the quarterly comparison, and $3.0 million, or
13.4%, in the year-to-date comparison. As a percentage of revenue,
Computing Devices' EBIT increased from 5.8% to 8.2% in the three month
comparison, and from 6.2% to 6.9% in the nine month comparison.
Interest Income and Expense and Taxes. The increase in interest
income in the 1995 periods primarily reflected higher interest rates. The
provisions for income taxes in the 1994 and 1995 periods primarily
represent tax charges related to the Company's international operations.
Financial Condition
The Company's cash and short-term investments increased from $174.1
million at December 31, 1994 to $192.0 million at September 30, 1995.
Approximately $86.9 million of the Company's cash and short-term
investments at September 30, 1995 were the U.S. dollar equivalent of
unhedged Canadian dollar cash and short-term investments held by the
Company's Canadian subsidiary. The Company does not expect that this
balance in Canada will decrease appreciably during the remainder of 1995.
On October 2, 1995, Ceridian utilized $52.1 million in cash to acquire the
assets of Centre-file.
- 15 -
<PAGE>
CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition (cont.)
During the first nine months of 1995, operating cash flows provided
$104.6 million of cash, after having provided $29.8 million of cash in the
first nine months of 1994. Net earnings adjusted to a cash basis provided
cash of $110.1 million in the first nine months of 1995 and $70.8 million
in the first nine months of 1994. A decrease in working capital provided
$10.8 million of cash in the first nine months of 1995 and $3.1 million of
cash in the 1994 period. Reflected in the 1995 cash provided in connection
with working capital items was a $56.1 million increase in customer
advances and deferred income, primarily reflecting the June 1995 receipt of
a customer advance as a result of Computing Devices achieving a significant
milestone under the Iris contract. Partially offsetting the 1995 cash
provided by working capital items was a $30.2 million increase in trade and
other receivables, primarily reflecting increases in Computing Devices'
unbilled receivables, principally related to the Iris contract.
Payments of restructure liabilities were $16.3 million and $44.1
million in the first nine months of 1995 and 1994, respectively. These
payments were primarily for vacant space related to the sale or
discontinuance of businesses in prior years, for duplicate processing and
support costs related to the sale of TeleMoney in 1994, and for the
consolidation of activities within Employer Services. The following table
summarizes estimated restructure payments during 1995, restructure payments
during the first nine months of 1995, and restructure payments expected
during the remainder of 1995:
Payments Expected
Estimated First Nine Payments
Payments Months Fourth
Category 1995 1995 Qtr. 1995
Severance and Related Costs $ 4.0 $ 1.9 $2.1
Equipment Lease Termination 0.9 0.7 0.2
Vacant Space 9.1 7.6 1.5
Costs to Dispose of Businesses 0.5 0.5 --
Legal Costs 1.5 1.1 0.4
Environmental Costs 1.5 1.1 0.4
Duplicate Processing/Support 3.9 3.4 0.5
Total $21.4 $16.3 $5.1
At September 30, 1995, the Company reported accrued restructure liabilities
of $72.3 million, of which $21.3 million is expected to be paid during the
next twelve months. The 1995 estimated payments shown in the table
represent a $2.6 million increase over the comparable estimate at year end
1994, with the increase representing accelerated restructuring payments
rather than adjustments to the amount of existing reserves.
Investing activities utilized $44.9 million of cash during the first
nine months of 1995 and utilized $7.3 million of cash during the first nine
- 16 -
<PAGE>
CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations (cont.)
months of 1994. The net use of cash during the 1995 period reflected
expenditures of $66.7 million for capital assets and software and $9.8
million paid to acquire businesses, primarily as a result of transactions
that occurred near the end of 1994. Offsetting a portion of these
expenditures was $31.1 million of cash received from the liquidation of
short-term investments. Cash utilized for investing activities during the
first nine months of 1994 included $56.3 million expended for business
acquisitions, principally the acquisition of Tesseract, and $37.8 million
expended for capital assets and software. Offsetting most of these
expenditures was $52.9 million of cash received from the liquidation of
short-term investments and $33.5 million of cash received from the sale of
businesses and investments, primarily TeleMoney.
The largest portion of the expenditures for capital assets and
software in the first nine months of 1995 involved Employer Services, and
included equipment to expand and improve communications and service
delivery capabilities, the addition of Tesseract, and the ongoing project
to upgrade Employer Services' existing payroll processing software in order
to create an enhanced payroll processing system that is more highly
automated, easier and less costly to install and maintain and provides
greatly increased functionality and flexibility to customers. The Company
anticipates that a substantial majority of its existing payroll processing
customers will elect to eventually upgrade to this software. The costs of
this internal development effort, which are incremental to normal
operations, are being capitalized as incurred and will be amortized over a
period of 3 to 10 years beginning generally when the production version of
the upgraded software is placed in service. At September 30, 1995, the
capitalized costs related to this project were $32.8 million.
Financing activities utilized $11.0 million of cash during the first
nine months of 1995, reflecting the $3.2 million prepayment of a mortgage
and $9.7 million of preferred stock dividends. During the first half of
1994, financing activities provided $9.3 million of cash, primarily
reflecting the receipt of an additional $15.5 million in net cash proceeds
from the sale by the Company of additional shares of preferred stock as a
result of the underwriters' exercise of their over-allotment option.
In connection with the pending acquisition of Comdata, the Company has
requested that Network commence, prior to the effective time of the Merger,
a tender offer (the "Debt Tender Offer") to purchase for cash all $130
million in principal amount of Network's outstanding 12.5% Senior Notes due
1999 (the "Senior Notes") and $75 million in principal amount of Network's
outstanding 13.25% Senior Subordinated Debentures due 2002 (the
"Debentures"). In connection therewith, Network will solicit consents for
certain proposed amendments and waivers to the related Indentures to
eliminate substantially all of the restrictive covenants in such
Indentures. The Debt Tender Offer is conditioned upon, among other things,
the consummation of the Merger, receipt of the requisite consents with
respect to the proposed amendments and waivers and execution of the
- 17 -
<PAGE>
CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition (cont.)
resulting Supplemental Indentures, and the receipt by Network, pursuant to
an inter-company loan from the Company, of sufficient funds to pay the
aggregate consideration for all securities validly tendered pursuant to the
Debt Tender Offer as well as related fees and expenses. The Company also
expects that, immediately after the effective time of the Merger, it will
cause Network to call for redemption the remaining $6.2 million in
principal amount of its 11% Junior Subordinated Extendible Notes due 1997
(the "Junior Notes"), such redemption to be financed by an inter-company
loan from the Company.
The Company expects to borrow the funds necessary to complete the Debt
Tender Offer and the redemption of the Junior Notes pursuant to a $325
million revolving credit facility (the "Credit Facility") that it expects
to establish with a syndicate of commercial banks immediately following the
effective time of the Merger. The terms of the Credit Facility have been
set out in a term sheet, but the final terms of the Credit Facility will
not be established until the definitive agreement is executed. The
following discussion assumes that the terms of the Credit Facility would be
substantially the same as the term sheet.
Under the Credit Facility, which would be unsecured but guaranteed by
Comdata and Network and is expected to have a final maturity of November
30, 1998, the Company would be able to obtain revolving credit advances and
up to $75 million of standby letters of credit. Concurrently with the
establishment of the Credit Facility, the existing revolving credit
facilities maintained by the Company and Comdata would be canceled. At
September 30, 1995, the Company had $1.6 million of letters of credit and
no revolving loans outstanding under its existing credit facility, while
Comdata had $6.3 million of letters of credit and no revolving loans
outstanding under its existing credit facility. Interest rates on
revolving loans under the Credit Facility would be determined based on the
Company's post-Merger senior unsecured debt rating, which currently would
enable the Company to obtain revolving loans either at prime rate or at 65
basis points above 1, 2, 3 or 6 month LIBOR. The Company expects that
funds necessary for the Debt Tender Offer and to redeem the Junior Notes
would initially be available at an annual interest rate of approximately
6.5%.
Credit availability under the Credit Facility in excess of $75 million
would initially be limited to retirement of Senior Notes, Debentures,
Junior Notes and debt outstanding (if any) under Comdata's existing
revolving credit facility (collectively, the "Comdata Debt"). Once the
Comdata Debt is retired, the full amount of the Credit Facility would be
available for working capital and general corporate purposes. Under the
expected terms of the Credit Facility, the Company must maintain a minimum
consolidated net worth which would be subject to increase based on the
Company's consolidated net earnings after December 31, 1995 and certain
equity contributions to the Company after the same date. The Company would
also be required to maintain a fixed charge coverage ratio of 2.25 to 1 on
- 18 -
<PAGE>
CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition (cont.)
a rolling four quarters basis, and to limit consolidated debt to three
times earnings before interest, taxes, depreciation and amortization
("EBITDA") minus capital expenditures and dividends on Ceridian's 5 1/2%
Preferred Stock on a rolling four quarters basis. The Company estimates
that as of December 31, 1995 when these financial covenants would become
effective, and assuming the completion of the Merger and the refinancing of
the Comdata Debt, the combined entity would be in compliance with the net
worth test by approximately $41.4 million, its fixed charge coverage ratio
will be approximately 2.6 to 1, and its permitted debt ratio will be
approximately 2.1 to 1. The Credit Facility would also limit liens,
contingent obligations, operating leases, minority equity investments and
divestitures.
As a result of the Merger, the Debt Tender Offer and the estimated $70
million charges to be recorded in connection therewith, the Company's
stockholders' equity is expected to decrease significantly from the
September 30, 1995 figure of $260.8 million. Although the external
indebtedness of the combined entity following the Merger and the Debt
Tender Offer is not expected to be significantly different than the sum of
the actual Company and Comdata debt outstanding as of September 30, 1995,
the annual debt service on the combined entity's indebtedness at current
interest rates is estimated to be approximately $12 million less than the
annual debt service on the existing Comdata and Company debt.
The post-Merger liquidity needs of the combined entity (including
accrued restructure liabilities) are expected to be met from existing cash
balances, cash flow from operations and borrowings under the Credit
Facility. Given the expected negative arbitrage between the interest rates
applicable to the combined entity's cash balances and interest rates under
the Credit Facility, the Company expects that it will commonly utilize
excess cash to reduce amounts outstanding under the Credit Facility. The
combined entity may also utilize cash from these sources to make
acquisitions. The Company expects to remain active in this regard and to
concentrate its acquisitions in areas related to or which complement the
Information Services segment. In structuring any such acquisitions, the
Company would seek to emphasize the use of its common stock as acquisition
consideration in order to make pooling-of-interests accounting treatment
available.
- 19 -
<PAGE>
CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
September 30, 1995
Part II. Other Information
Item 1. Legal Proceedings
On August 29, 1995, Ceridian and the Ceridian Corporation Retirement
Plan (the "Retirement Plan"), a defined benefit pension plan
maintained for certain U.S. employees of Ceridian, were named as co-
defendants in a lawsuit filed in U.S. District Court for the District
of Minnesota, The two plaintiffs, who left the employ of Ceridian in
1989 and elected at that time to receive their vested benefit under
the Retirement Plan in the form of a single enhanced lump sum payment,
purport to act on behalf of a class of all persons who elected to
receive a lump sum benefit under the Retirement Plan. The plaintiffs
allege that Ceridian and the Retirement Plan utilized an incorrect
methodology in calculating the amount of enhanced lump sum benefits
payable to the plaintiffs and the other class members. Specifically,
the plaintiffs allege that an improperly high interest (discount) rate
was utilized to calculate the enhanced lump sum benefit amounts,
thereby lowering the benefit amounts, in contravention of the Employee
Retirement Income Security Act of 1974, the Retirement Plan and the
defendants' fiduciary duties. Ceridian believes that the proper
methodology was consistently utilized in calculating lump sum benefit
payments since that feature was introduced into the Retirement Plan in
1989, and denies the plaintiffs' allegations. Any finding in favor of
the plaintiffs would result in an increase in Retirement Plan
liabilities that is not currently estimable. Such an increase in
liabilities would, in turn, become one of many factors affecting the
funded status of the Retirement Plan. The funded status of the
Retirement Plan, in turn, is one of many factors affecting the
determination of Ceridian's obligation (if any) to make an annual
contribution to the Retirement Plan and the determination of its
annual pension expense (if any) attributable to the Retirement Plan.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit Description
11 Statement re computation of per share
earnings
(b) Reports on Form 8-K.
Fiancial Statement
Report Date Items Reported and Exhibits
August 24, 1995 Item 5: Merger Item 7: Press Release
Agreement with dated August 24, 1995
Comdata
- 20 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Quarterly Report on Form 10-Q for the
period ended September 30, 1995, to be signed on its behalf by the
undersigned thereunto duly authorized.
CERIDIAN CORPORATION
Registrant
Date: November 14, 1995 /s/L. D. Gross
L. D. Gross
Vice President and
Corporate Controller
(Principal Accounting Officer)
- 21 -
<PAGE>
EXHIBIT INDEX
Exhibit Description Code
11 Statement re computation of per share
earnings E
Legend: (E) Electronic Filing
(IBR) Incorporated by reference from previous filing
<PAGE>
<TABLE>
Exhibit 11
CERIDIAN CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(Amounts in millions, except per share data)
For Periods Ended September 30,
Three Months Nine Months
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net earnings for common
stockholders - primary $ 22.0 $ 15.7 $ 66.2 $ 46.5
Restore dividends on
convertible preferred
stock 3.2 3.2 9.7 9.7
Net earnings for fully
diluted earnings
per share $ 25.2 $ 18.9 $ 75.9 $ 56.2
Weighted average common
shares outstanding 45,706 45,560 45,622 45,368
Common share equivalents
from stock options and
restricted stock awards 2,733 1,534 2,515 1,403
Weighted average common
shares and equivalents
outstanding - primary 48,439 47,094 48,137 46,771
Shares issuable assuming
conversion of preferred
stock 10,384 10,384 10,384 10,384
Weighted average common
shares and equivalents
outstanding - adjusted
for full dilution 58,823 57,478 58,521 57,155
Net earnings for common
stockholders - primary $ 22.0 $ 15.7 $ 66.2 $ 46.5
Weighted average common
shares and equivalents
outstanding - primary 48,439 47,094 48,137 46,771
Primary earnings per share $ 0.45 $ 0.33 $ 1.37 $ 1.00
Net earnings for fully
diluted earnings
per share $ 25.2 $ 18.9 $ 75.9 $ 56.2
Weighted average common
shares and equivalents
outstanding - adjusted
for full dilution 58,823 57,478 58,521 57,155
Fully diluted earnings
per share $ 0.43 $ 0.33 $ 1.30 $ 0.98
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-END> Sep-30-1995
<PERIOD-TYPE> 9-MOS
<CASH> 168,400
<SECURITIES> 23,600
<RECEIVABLES> 183,600
<ALLOWANCES> 6,500
<INVENTORY> 32,800
<CURRENT-ASSETS> 426,200
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 806,800
<CURRENT-LIABILITIES> 369,700
<BONDS> 12,600
<COMMON> 23,300
0
4,700
<OTHER-SE> 232,800
<TOTAL-LIABILITY-AND-EQUITY> 806,800
<SALES> 408,700
<TOTAL-REVENUES> 767,200
<CGS> 300,700
<TOTAL-COSTS> 471,100
<OTHER-EXPENSES> 800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,000
<INCOME-PRETAX> 82,500
<INCOME-TAX> 6,600
<INCOME-CONTINUING> 75,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,900
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.30
</TABLE>
