UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

ý  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

or

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from                                    to                                   

Commission file number:     1-15168

CERIDIAN CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:      (952) 853-8100

Former name, former address and former fiscal year if changed from last report:  Not Applicable

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 ý   NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES ý  NO o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o   NO ý

The number of shares of registrant’s common stock, par value $.01 per share, outstanding as of October 31, 2005, was 145,266,709.

CERIDIAN CORPORATION AND SUBSIDIARIES

FORM 10-Q

September 30, 2005

INDEX

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Part I.  Financial Information

Item 1.  Financial Statements

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in millions, except per share data)

See notes to consolidated financial statements.

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CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in millions)

See notes to consolidated financial statements.

4

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in millions)

See notes to consolidated financial statements.

5

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in millions)

See notes to consolidated financial statements.

6

Notes to Consolidated Financial Statements

September 30, 2005

(Unaudited)

(Dollars in millions, except per share data)

NOTE 1 – GENERAL

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the Securities and Exchange Commission’s regulations for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements.  The accounting policies we follow are set forth in Note A, Accounting Policies, to the Company’s financial statements in our Annual Report on Form 10-K for the year ended December 31, 2004.  The following notes should be read in conjunction with such policies and other disclosures in the Form 10-K.  Interim results are not necessarily indicative of results for a full year.

In the opinion of management, the unaudited consolidated financial statements contained herein reflect all adjustments (consisting only of normal recurring adjustments, except as set forth in these notes to consolidated financial statements) necessary to present fairly our financial position as of September 30, 2005, and results of operations for the three and nine month periods and cash flows for the nine month periods ended September 30, 2005 and 2004.  We have reclassified certain prior year amounts to conform to the current year’s presentation.

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued a Statement of Financial Accounting Standards (“SFAS”) entitled “Share-Based Payment” (“SFAS 123R”).  The principal effect of SFAS 123R will be to require the inclusion in our earnings of a compensation expense for stock option grants and employee stock plan purchases that previously was only reported as a disclosure in a note to our consolidated financial statements.  We will adopt SFAS 123R on January 1, 2006, using the modified prospective transition method.  SFAS 123R will require us to measure the cost of employee services received in exchange for an award of equity investments based on the fair value of the award on the grant date.  That compensation expense must be recognized in the income statement over the vesting period of the award.  Under the “modified prospective” transition method, awards that are granted, modified or settled beginning at the date of adoption will be measured and accounted for in accordance with SFAS 123R.  In addition, expense must be recognized in the statement of operations for unvested awards that were granted prior to the date of adoption.  The expense will be based on the fair value determined at the grant date.  We currently estimate that the adoption of SFAS 123R will reduce earnings by approximately $0.05 per diluted share in 2006.  We are continuing to evaluate the impact of adoption on our financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets” that became effective for transactions occurring in fiscal periods beginning after June 15, 2005.  The adoption of this standard did not have a material effect on our investing activities.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” that replaces Accounting Principles Board Opinion (“APB”) No. 20.  The new standard generally requires retrospective treatment (restatement of comparable prior period information) rather than a cumulative effect adjustment for the effect of a change in accounting principle or method of application.  The new standard is effective for years beginning after December 15, 2005 and is not expected to have a material effect on the presentation of our consolidated financial statements.

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NOTE 2 – ACCRUED EXIT COSTS

On December 31, 2004, we sold certain customer relationships and other assets associated with our SourceWeb payroll platform (the “SourceWeb Assets”) to RSM McGladrey Employer Services, Inc. (“RSM”) for $4.0 pursuant to the terms and conditions of an asset purchase agreement (“Asset Purchase Agreement”).  In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we recorded a $9.1 pre-tax impairment charge on assets associated with this platform representing the excess of net book value of the SourceWeb Assets over sale proceeds.  The impaired assets primarily consisted of a purchased software license from The Ultimate Software Group, Inc. (“Ultimate”) and capitalized software development costs.  In addition to this asset impairment, we also recorded a $19.4 pre-tax loss on disposal which comprised the fair value of the future minimum royalty obligation to Ultimate of $19.2 and $0.2 of employee severance costs.

SourceWeb was a payroll platform within the small business division of our Human Resource Solutions (“HRS”) business segment.  Pursuant to the terms of the Asset Purchase Agreement, we provided certain transitional services to RSM which we substantially completed by October 31, 2005.

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NOTE 3 – COMPREHENSIVE INCOME (LOSS)

NOTE 4 – OTHER EXPENSE (INCOME)

During the third quarter of 2005, asset write-downs included an abandonment related to a payroll software application in HRS that amounted to $4.3.  In January 2004, we committed to the internal development of a replacement for our HRS LifeWorks customer management system as a result of the failure of an external contractor to meet our requirements for such a project.  We recorded an asset write-down of $2.3 in the first quarter of 2004 representing the carrying value of the capitalized software related to work performed by the external contractor that was abandoned and determined to have no future value to us.  Sales of marketable securities are described in Note 6, “Investing Activity.”

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NOTE 5 – EMPLOYEE PLANS

Stock Plans

We account for our stock-based compensation plans under the intrinsic method of APB No. 25 and related interpretations.  We are also required on an interim basis to disclose the pro forma effects on reported net earnings and earnings per share that would have resulted if we elected to use the fair value method of accounting for stock-based compensation.  This disclosure is presented in the accompanying table.  We employ the Black-Scholes-Merton option pricing model to determine the fair value of stock option grants and employee stock purchase plan purchases.

Pro Forma Effect of Fair Value Accounting

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Retirement Plans

The components of net periodic cost for our defined benefit pension plans and for our postretirement benefit plans are included in the following tables.

Net Periodic Pension Cost

Net Periodic Postretirement Benefit Cost

NOTE 6 – INVESTING ACTIVITY

Derivative Instruments

Interest Rate Derivative Instruments.  At December 31, 2004, we held interest rate derivative instruments with an aggregate notional amount of $800.0. These interest rate derivative instruments had remaining terms of 6 to 35 months, floor strike levels ranging from 3.85% to 6.00% (averaging 4.99%) and cap strike levels ranging from 3.85% to 7.08% (averaging 5.69%).  These derivative instruments did not qualify for hedge accounting treatment so cash settlements and changes in fair value are included in results of operations as (gain) loss on derivative instruments.  The fair market value of our interest rate derivative instruments was $26.8 at December 31, 2004.

On February 4, 2005, we disposed of our interest rate derivative instruments and received cash proceeds of $21.0, which represented the fair market value of the contracts on the disposal date.  From December 31, 2004 to the disposal date, we received $3.5 in cash for settlements on these derivative instruments.  The $2.3 difference between the December 31, 2004 carrying value of $26.8 and the $24.5 total cash received was recorded as a loss on interest rate derivative instruments in the first quarter of 2005.

Fuel Price Derivative Instruments.  The revenue and net income of Comdata’s transportation services business is exposed to variability based on changes in fuel (both diesel fuel and gasoline) prices.  For a portion of its transportation services customers, Comdata earns fee revenue for card transactions based on a percentage of the total amount of each fuel purchase.  An increase or decrease in the price of fuel increases or decreases the total dollar amount of fuel purchases and Comdata revenue.  Accordingly, we estimate that for each 10¢ change in the average price per gallon of diesel fuel per year, Comdata revenue and pre-tax

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earnings are impacted by $1.8, absent the effect of any diesel fuel price derivative contracts.  In addition, we estimate that for each 10¢ change in the average price per gallon of gasoline per year, Comdata revenue and pre-tax earnings are impacted by $0.7, absent the effect of any gasoline price derivative contracts.

Our fuel price risk management objective is to protect Comdata net income from the effects of falling fuel prices by entering into derivative contracts that convert the floating price of fuel used in revenue calculations to a fixed price.  In March 2004, Comdata entered into a diesel fuel price derivative contract with a strike price of $1.51 per gallon that was effective until December 31, 2004.  In the fourth quarter of 2004, we entered into additional diesel fuel price derivative contracts with similar terms and an average strike price of $1.92 per gallon effective until December 31, 2005.  During the third quarter of 2005, we made payments of $2.2 against these contracts and recorded a net loss on diesel fuel price derivative instruments of $3.1.  We made payments of $4.0 against these contracts and recorded a net loss on diesel fuel price derivative instruments of $10.2 during the first nine months of 2005.  During 2004, we made payments of $0.6 during the third quarter and recorded a net loss on diesel fuel derivative contracts of $1.5 and $2.4 for the quarter and year-to-date periods ended September 30, 2004.  Our diesel fuel price derivative instruments are carried at fair market value and were reported as a liability of $5.3 at September 30, 2005.

We continuously monitor diesel fuel price volatility and the cost of derivative contracts.  In October 2005, we entered into additional diesel fuel price derivative contracts with a strike price of $2.61 per gallon on approximately 20% of our estimated diesel fuel price exposure effective from January 1 until December 31, 2006.  We expect to carry these diesel fuel price derivative instruments at fair market value at December 31, 2005.

Investments and Acquisitions/Divestitures of Businesses

Publicly Held Investments.  At December 31, 2004, we held 556,711 shares of Ultimate common stock and a warrant to purchase an additional 75,000 Ultimate common shares at a price of $4.00 per share, which we acquired for $3.0 in March 2003.  During the third quarter of 2005, we sold 70,000 shares of Ultimate for proceeds of $1.3 and a net gain of $1.0 and, for the first nine months of 2005, we sold 178,289 shares of Ultimate for proceeds of $2.7 and a net gain of $2.0 reported in other expense (income).  These transactions reduced our holding to 378,422 Ultimate shares and the warrant at September 30, 2005.  The carrying values of our holdings of Ultimate amounted to $8.1 at September 30, 2005 and $7.7 at December 31, 2004.  In addition, we held 199,311 common shares of U.S.I. Holdings Corporation (“USIH”) at September 30, 2005 and December 31, 2004.  The carrying values of our holdings of USIH amounted to $2.6 at September 30, 2005 and $2.3 at December 31, 2004.  At September 30, 2005, the net unrealized gain on marketable securities amounted to $4.5, after reduction for deferred income taxes of $2.6, and is reported in accumulated other comprehensive income.  This compares to a net unrealized gain on marketable securities of $3.6, after reduction for deferred income taxes of $2.2, at December 31, 2004.

Acquisitions/Divestitures of Businesses.  In the first quarter of 2005, Comdata acquired Tranvia, Inc. (“Tranvia”), a merchant processor for credit, debit, prepaid and e-commerce activities for $8.2 and preliminarily recorded goodwill of $6.1, other intangible assets totaling $3.4 and net liabilities of $1.3.  Tranvia revenue for its year ended December 31, 2004 was $3.3.  The results of operations for Tranvia have been included in our consolidated reports of operations since the date of acquisition.  Pro forma results of operations have not been presented because the effect of the acquisition is not material.  During the first nine months of 2004, we acquired Recruiting Solutions International, Inc. for $11.0, a minority interest in ProfitPoint, Inc. for $1.5, ITS Information Technology Systems Ltd (Ireland) for $0.7 and a customer base for COBRA services from a major insurance company for $0.9.

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NOTE 7 – FINANCING

Debt Instruments

In June 2005, Comdata renewed its existing $150.0 receivables securitization program by amending the agreements to extend the facility to June 15, 2008 with similar terms.  The interest rate on this facility is based on the lender’s commercial paper rate plus program fees, which approximates LIBOR plus 0.5% per annum.  The amount outstanding under this facility was $75.0 at December 31, 2004, which we reduced by $20.0 in March 2005, with a remaining amount outstanding of $55.0 at September 30, 2005.  The aggregate amount of receivables serving as collateral amounted to $273.2 at September 30, 2005, and $191.9 at December 31, 2004.  The amounts outstanding as debt and the collateralized receivables remain on our consolidated balance sheet since the terms of the facility permit us to repurchase the receivables.

The domestic revolving credit facility that we initiated in January 2001 provides up to $350.0 for a combination of advances and up to $50.0 of letters of credit at an interest rate of 1% per annum over LIBOR.  We utilized $2.5 of the facility at September 30, 2005 and $2.3 at December 31, 2004 for letters of credit.  Unused borrowing capacity under this facility amounted to $347.5 at September 30, 2005 and $347.7 at December 31, 2004 of which $55.0 serves as backup to the Comdata receivables securitization facility as of September 30, 2005.  Liabilities issued under the domestic revolving credit facility and liabilities backed up by the facility, including the $55.0 borrowing under the Comdata receivables securitization facility, are categorized as current portion of long-term obligations since the domestic revolving credit facility expires on March 30, 2006.  We expect to enter into a new revolving credit facility to replace the existing facility during the fourth quarter of 2005.

Ceridian Centrefile has available through February 28, 2006 a £6.5 million ($11.4 at September 30, 2005) overdraft facility at an interest rate of 1% per annum over the bank’s base rate totaling 5.75% per annum at September 30, 2005.  The amount outstanding under Ceridian Centrefile’s borrowing arrangements amounted to $3.5 at September 30, 2005, and $9.0 at December 31, 2004.

We remained in compliance with covenants under our credit facilities at September 30, 2005.  In 2004 and 2005, we amended our domestic revolving credit facility and the Comdata receivables securitization facility to allow additional time to deliver our Quarterly Reports on Form 10-Q for the second and third quarters of 2004, our 2004 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the first quarter of 2005 without the delayed delivery constituting a default under these agreements.

Our capital lease obligations for equipment amounted to $12.5 at September 30, 2005 and $16.7 at December 31, 2004.

Equity Instruments

During the third quarter of 2005, we paid $51.9 to repurchase 2,513,200 shares of our common stock on the open market at an average net price of $20.67 per share.  During the first nine months of 2005, we repurchased 7,237,650 shares of our common stock on the open market for $142.8 at an average net price of $19.72 per share.  We recorded accounts payable of $4.0 for late September 2005 open market trades that were settled in early October 2005 and will report these financing cash outflows in the fourth quarter of 2005.  On July 27, 2005, our Board of Directors authorized the repurchase of up to 20,000,000 additional shares, from time to time, in the open market or in privately negotiated transactions, bringing the total authorization to 21,626,050 at that date.  As of September 30, 2005, we had 19,112,850 additional shares of our common stock available for repurchase under that authorization.  We generally use our treasury stock to address our obligations under our stock compensation and employee stock purchase plans.

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NOTE 8 – CUSTOMER FUNDS

Customer funds are invested in high quality collateralized short-term investments or money market mutual funds as well as long-term debt securities issued by U.S. or Canadian governments and agencies, AAA-rated asset-backed securities and corporate securities rated A3/A- or better.

Investments of customer funds are reported at fair value.  The after-tax impact of unrealized gains and losses resulting from periodic revaluation of these securities are reported as accumulated other comprehensive income in stockholders’ equity.

At September 30, 2005, the fair value of investments of customer funds exceeded the related amortized cost by $16.6.  This resulted in a net of tax unrealized gain of $10.8 in accumulated other comprehensive income.

Investment income from investments of customer funds includes the yield on these securities as well as realized gains and losses upon disposition and constitutes a component of our compensation for providing services under agreements with our customers.  Investment income from investment of customer funds included in revenue for the periods ended September 30, 2005 and 2004 amounted to $24.5 and $19.0 for the quarterly periods and $78.6 and $54.7 for the year-to-date periods.  Sale of customer funds investments resulted in net realized gains of $0.8 and $0.1 for the nine months ended September 30, 2005 and 2004 on a specific identification basis.  The average cost basis of invested customer funds amounted to $2,481.1 and $2,868.8 for the three and nine month periods ended September 30, 2005 and $2,191.9 and $2,504.7 for the comparative periods of 2004.

The following tables provide information on amortized cost and fair value for selected classifications of investments of customer funds and amounts by maturity date.  None of the securities that constituted the unrealized loss have been in an unrealized loss position continuously for twelve months or longer.

(Available-for-sale)

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(Available-for-sale)

NOTE 9 – INCOME TAXES

At December 31, 2004, our income tax returns remained subject to income tax audits in various jurisdictions for 1989 and subsequent years, as a result of tax sharing agreements related to the disposition of certain operations.  In the second quarter of 2005, we reversed $5.8 of income tax reserves as a result of a favorable tax settlement related to the tax returns of those operations for which Ceridian had remained liable under tax sharing agreements.  During the third quarter of 2005, we reversed $2.0 of income tax reserves as a result of the statute of limitations expiring on certain tax contingency issues.

We currently have undistributed earnings in our international subsidiaries that may allow us to take advantage of the American Jobs Creation Act of 2004.  We are still examining the impact of this Act and have determined that it is possible to remit between $50 and $101, with the respective additional tax liability ranging from $3 to $5.

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NOTE 10 – CAPITAL ASSETS