☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36373
TRINET GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
95-3359658
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
One Park Place,
Suite 600
Dublin,
CA
94568
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (510) 352-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock par value $0.000025 per share
TNET
New York Stock Exchange
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. Yesx No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx No o
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.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
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 pursuant to Section 13(a) of the Exchange Act. Yes o No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
The number of shares of Registrant’s Common Stock outstanding as of April 19, 2021 was 65,881,650.
Acronyms and abbreviations are used throughout this report, particularly in Part I, Item 1. Unaudited Condensed Consolidated Financial Statements and Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
2021 Credit Program
A program that, subject to certain predefined conditions, is designed to take certain pandemic related excess health care cost savings and provide credits to certain 2021 customers.
2018 Term Loan
Our $425 million term loan A that we entered into in June 2018
AFS
Available-for-sale
CARES Act
Coronavirus Aid Relief and Economic Security Act
CEO
Chief Executive Officer
CFO
Chief Financial Officer
COBRA
Consolidated Omnibus Budget Reconciliation Act
COPS
Cost of providing services
COVID-19
Novel coronavirus
D&A
Depreciation and amortization expenses
EBITDA
Earnings before interest expense, taxes, depreciation and amortization of intangible assets
EPS
Earnings Per Share
ERISA
Employee Retirement Income Security Act
ESAC
Employer Services Assurance Corporation
ETR
Effective tax rate
FFCRA
Families First Coronavirus Response Act
G&A
General and administrative
GAAP
Generally Accepted Accounting Principles in the United States
HR
Human Resources
IRS
Internal Revenue Service
ISR
Insurance service revenues
LIBOR
London Inter-bank Offered Rate
MD&A
Management's Discussion and Analysis of Financial Condition and Results of Operations
NIM
Net Insurance Margin
NISR
Net Insurance Service Revenues
NSR
Net service revenues
OE
Operating expenses
PEO
Professional Employer Organization
PFC
Payroll funds collected
PPP
Paycheck Protection Program, a loan program administered by the U.S. Small Business Administration
PSR
Professional service revenues
Recovery Credit
Program to provide clients with one-time reductions against fees for future services
Reg FD
Regulation Fair Disclosure
ROU
Right-of-use
RSA
Restricted Stock Award
RSU
Restricted Stock Unit
SBC
Stock Based Compensation
S&M
Sales and marketing
S&P
Standard & Poor's
SD&P
Systems development and programming
SEC
U.S. Securities and Exchange Commission
SMB
Small and medium-size business
U.S.
United States
WSE
Worksite employee
YTD
Year to date
3
FORWARD LOOKING STATEMENTS AND OTHER FINANCIAL INFORMATION
For purposes of this Quarterly Report on Form 10-Q (Form 10-Q), the terms “TriNet,” “the Company,” “we,” “us” and “our” refer to TriNet Group, Inc., and its subsidiaries. This Form 10-Q contains statements that are not historical in nature, are predictive in nature, or that depend upon or refer to future events or conditions or otherwise contain forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by the use of words such as, but not limited to, "ability," “anticipate,” “believe,” “can,” “continue,” “could,” “design,” “estimate,” “expect,” “forecast,” “hope,” "impact," “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “strategy,” “target,” "value," “will,” “would” and similar expressions or variations intended to identify forward-looking statements. Examples of forward-looking statements include, among others, TriNet’s expectations regarding: our ability to support the economic recovery of our clients and SMBs; our ability to respond appropriately to the impact of COVID-19 on our business and our clients' businesses; the impact of our Connect 360 service model; the effect that our offering of $500 million of our 3.50% senior notes and of our replacement of our existing revolving facility with our new $500 million revolving facility will have on our business; the timing and strategies we employ with respect to corporate investments and capital expenditures; expectations regarding medical utilization rates by our WSEs; the impact of the COVID-19 pandemic on regulations and government programs; the impact of our Recovery Credit program and our 2021 Credit Program and their suitability for generating client loyalty and retention; our ability to modify or develop service offerings to assist clients affected by COVID-19; the impact of our vertical approach; our ability to leverage our scale and industry HR experience to deliver vertical service offerings; the growth of our client base; planned improvements to our technology platform; our ability to drive operating efficiencies and improve the client experience; the impact of our client service initiatives; the volume and severity of insurance claims and the impact of COVID-19 on those claims; metrics that may be indicators of future financial performance; the relative value of our benefit offerings versus those SMBs can independently obtain; the principal competitive drivers in our market; our plans to retain clients and manage client attrition; our investment strategy and its impact on our ability to generate future interest income, net income, and Adjusted EBITDA; seasonal trends and their impact on our business, including due to COVID-19; fluctuations in the period-to-period timing of when we incur certain operating expenses; the estimates and assumptions we use to prepare our financial statements; and other expectations, outlooks and forecasts on our future business, operational and financial performance.
Important factors that could cause actual results, level of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements are discussed above and throughout our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 16, 2021 (our 2020 Form 10-K), including those appearing under the heading “Risk Factors” in Item 1A, and under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of our 2020 Form 10-K, as well as in our other periodic filings with the SEC, and including risk factors associated with: the economic, health and business disruption caused by the COVID-19 pandemic; the impact of the COVID-19 pandemic on our clients and prospects, insurance costs and operations; the impact of the COVID-19 pandemic on the laws and regulations that impact our industry and clients; our ability to mitigate the business risks we face as a co-employer; our ability to manage unexpected changes in workers’ compensation and health insurance claims and costs by worksite employees; the effects of volatility in the financial and economic environment on the businesses that make up our client base and the concentration of our clients in certain geographies and industries; the impact of failures or limitations in the business systems we rely upon; the impact of our Recovery Credit program; adverse changes in our insurance coverage or our relationships with key insurance carriers; our ability to improve our technology to satisfy regulatory requirements and meet the expectations of our clients and manage client attrition; our ability to effectively integrate businesses we have acquired or may acquire in the future; our ability to effectively manage and improve our operational processes; our ability to attract and retain qualified personnel; the effects of increased competition and our ability to compete effectively; the impact on our business of cyber-attacks and security breaches; our ability to secure our information technology infrastructure and our confidential, sensitive and personal information; our ability to comply with constantly evolving data privacy and security laws; our ability to manage changes in, uncertainty regarding, or adverse application of the complex laws and regulations that govern our business; changing laws and regulations governing health insurance and employee benefits; our ability to be recognized as an employer of worksite employees under federal and state regulations; changes in the laws and regulations that govern what it means to be an employer, employee or independent contractor; our ability to comply with the laws and regulations that govern PEOs and other similar industries; the outcome of existing and future legal and tax proceedings; fluctuation in our results of operation and stock price due to factors outside of our control, such as the volume and severity of our workers’ compensation and health insurance claims and the amount and timing of our insurance costs, operating expenses and capital expenditure requirements; our ability to comply with the restrictions of our credit facility and meet our debt obligations; and the impact of concentrated ownership in our stock. Any of these factors could cause our actual results to differ materially from our anticipated results.
4
FORWARD LOOKING STATEMENTS AND OTHER FINANCIAL INFORMATION
Forward-looking statements are not guarantees of future performance, but are based on management’s expectations as of the date of this Form 10-Q and assumptions that are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from our current expectations and any past results, performance or achievements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
The information provided in this Form 10-Q is based upon the facts and circumstances known as of the date of this Form 10-Q, and any forward-looking statements made by us in this Form 10-Q speak only as of the date of this Form 10-Q. We undertake no obligation to revise or update any of the information provided in this Form 10-Q, except as required by law.
The MD&A of this Form 10-Q includes references to our performance measures presented in conformity with GAAP and other non-GAAP financial measures that we use to manage our business, to make planning decisions, to allocate resources and to use as performance measures in our executive compensation plans. Refer to the Non-GAAP Financial Measures within our MD&A for definitions and reconciliations from GAAP measures.
Website Disclosures
We use our website (www.trinet.com) to announce material non-public information to the public and to comply with our disclosure obligations under Regulation Fair Disclosure (Reg FD). We also use our website to communicate with the public about our Company, our services, and other matters. Our SEC filings, press releases and recent public conference calls and webcasts can also be found on our website. The information we post on our website could be deemed to be material information under Reg FD. We encourage investors and others interested in our Company to review the information we post on our website. Information contained in or accessible through our website is not a part of this report.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Overview
TriNet is a leading provider of HR expertise, payroll services, employee benefits and employment risk mitigation services for SMBs. We deliver a comprehensive suite of services that help our clients administer and manage various HR-related needs and functions, such as compensation and benefits, payroll processing, employee data, health insurance and workers' compensation programs, and other transactional HR needs using our technology platform and HR, benefits and compliance expertise. We empower SMBs to focus on what matters most - growing their business.
We leverage our scale and industry HR experience to deliver our service offerings for SMBs in specific industry verticals. We believe our vertical approach is a key differentiator for us and creates additional value for our clients driven by service offerings that are tailored to address industry-specific HR needs. We offer six industry-tailored vertical services: TriNet Financial Services, TriNet Life Sciences, TriNet Main Street, TriNet Nonprofit, TriNet Professional Services, and TriNet Technology.
Operational Highlights
Our consolidated results for the first quarter of 2021 reflect our continuing efforts to serve our existing clients throughout the COVID-19 pandemic and to support the economic recovery of SMBs. We will continue to monitor and evaluate developments relating to the COVID-19 pandemic and will work to respond appropriately to the impact of COVID-19 on our business and our clients' businesses.
During the first quarter of 2021 we:
•delivered profitable growth as a result of revenue growth and lower insurance costs,
•launched 'Connect 360', an innovative service model intended to better meet client needs,
•continued to grow our revenues, while recognizing a $12 million revenue reduction for our Recovery Credit program to support our eligible, renewing clients,
•established our 2021 Credit Program to benefit our eligible clients, resulting in a $25 million reduction in insurance service revenues recognized,
•completed a $500 million senior notes offering and repaid and terminated our outstanding term loan, and
•replaced our existing revolving credit facility with a new $500 million revolving credit facility to provide additional financial flexibility.
Our results for the first quarter of 2021 when compared to the same period of 2020 are noted below:
Q1 2021
$1.1B
$138M
$309M
Total revenues
Operating income
Net Service Revenues *
1
%
increase
15
%
increase
9
%
increase
$101M
$1.51
$111M
Net income
Diluted EPS
Adjusted Net income *
11
%
increase
15
%
increase
14
%
increase
*
Non-GAAP measure. See definitions below under the heading "Non-GAAP Financial Measures".
Our results for WSEs in the first quarter of 2021 when compared to the same period of 2020 were:
321,295
326,216
Average WSEs
Total WSEs
(4)
%
decrease
(3)
%
decrease
During the first quarter of 2021, we continued to achieve year-over-year revenue growth, reflecting our rate increases and higher health plan enrollment. This was partially offset by lower Average WSEs and a $12 million reduction recognized under our Recovery Credit program.
We also recognized a $25 million reduction to revenue under our 2021 Credit Program initiated in the first quarter of 2021. This amount reflects estimated credits that will be paid to eligible clients under this program, based on the expected performance of our health insurance costs in 2021, and is currently limited to $25 million. To the extent we experience higher than expected health insurance costs during the remainder of 2021, this estimate may be reduced.
During the first quarter of 2021, our Average WSEs declined 4% and total WSEs declined 3%, primarily as a result of the impact of COVID-19 on our clients in 2020 and seasonal attrition.
Decreases in medical services utilization, as a result of WSEs continuing to delay or avoid medical services during the COVID-19 pandemic, drove lower insurance costs, resulting in year-over-year increases in our net income, Net Service Revenue, and adjusted net income of 11%, 9% and 14%, respectively.
The following table summarizes our results of operations for the first quarter of 2021 when compared to the same period of 2020. For details of the critical accounting judgments and estimates that could affect the Results of Operations, see the Critical Accounting Judgments and Estimates section within the MD&A in Item 7 of our 2020 Form 10-K.
Three Months Ended March 31,
(in millions, except operating metrics data)
2021
2020
% Change
Income Statement Data:
Professional service revenues
$
153
$
156
(2)
%
Insurance service revenues
907
892
2
Total revenues
1,060
1,048
1
Insurance costs
751
765
(2)
Operating expenses
171
163
5
Total costs and operating expenses
922
928
(1)
Operating income
138
120
15
Other income (expense):
Interest expense, bank fees and other
(5)
(4)
25
Interest income
2
5
(60)
Income before provision for income taxes
135
121
12
Income taxes
34
30
13
Net income
$
101
$
91
11
%
Cash Flow Data:
Net cash used in operating activities
(175)
$
(282)
(38)
Net cash used in investing activities
(3)
(94)
(97)
Net cash provided by financing activities
56
185
(70)
Non-GAAP measures (1):
Net Service Revenues
$
309
$
283
9
%
Net Insurance Service Revenues
$
156
$
127
23
Net Insurance Margin
17
%
14
%
2
Adjusted EBITDA
163
145
12
Adjusted Net income
111
97
14
Corporate Operating Cash Flows
131
119
10
Operating Metrics:
Average WSEs
321,295
336,348
(4)
%
Total WSEs
326,216
336,846
(3)
(1) Refer to Non-GAAP measures definitions and reconciliations from GAAP measures under the heading "Non-GAAP Financial Measures".
The following table summarizes our balance sheet data as of March 31, 2021 compared to December 31, 2020.
In addition to financial measures presented in accordance with GAAP, we monitor other non-GAAP financial measures that we use to manage our business, to make planning decisions, to allocate resources and to use as performance measures in our executive compensation plan. These key financial measures provide an additional view of our operational performance over the long-term and provide information that we use to maintain and grow our business.
The presentation of these non-GAAP financial measures is used to enhance the understanding of certain aspects of our financial performance. It is not meant to be considered in isolation from, superior to, or as a substitute for the directly comparable financial measures prepared in accordance with GAAP.
Non-GAAP Measure
Definition
How We Use The Measure
Net Service Revenues
• Sum of professional service revenues and Net Insurance Service Revenues, or total revenues less insurance costs.
• Provides a comparable basis of revenues on a net basis. Professional service revenues are presented net of client payroll costs whereas insurance service revenues are presented gross of insurance costs for financial reporting purposes.
• Acts as the basis to allocate resources to different functions and evaluates the effectiveness of our business strategies by each business function.
• Provides a measure, among others, used in the determination of incentive compensation for management.
Net Insurance Service Revenues
• Insurance service revenues less insurance costs.
• Is a component of Net Service Revenues.
• Provides a comparable basis of revenues on a net basis. Professional service revenues are presented net of client payroll costs whereas insurance service revenues are presented gross of insurance costs for financial reporting purposes. Promotes an understanding of our insurance services business by evaluating insurance service revenues net of our WSE related costs which are substantially pass-through for the benefit of our WSEs. Under GAAP, insurance service revenues and costs are recorded gross as we have latitude in establishing the price, service and supplier specifications.
Net Insurance Margin
• Net Insurance Margin (NIM) is the ratio of Net Insurance Services Revenues to insurance service revenues.
• Provides a comparable basis of Net Insurance Service Revenues relative to insurance service revenues. Promotes an understanding of our pricing to risk performance.
Adjusted EBITDA
• Net income, excluding the effects of:
- income tax provision,
- interest expense, bank fees and other,
- depreciation,
- amortization of intangible assets, and
- stock based compensation expense.
• Provides period-to-period comparisons on a consistent basis and an understanding as to how our management evaluates the effectiveness of our business strategies by excluding certain non-cash charges such as depreciation and amortization, and stock-based compensation recognized based on the estimated fair values. We believe these charges are either not directly resulting from our core operations or not indicative of our ongoing operations.
• Enhances comparisons to prior periods and, accordingly, facilitates the development of future projections and earnings growth prospects.
• Provides a measure, among others, used in the determination of incentive compensation for management.
• We also sometimes refer to Adjusted EBITDA margin, which is the ratio of Adjusted EBITDA to Net Service Revenue.
- the income tax effect (at our effective tax rate (1) of these pre-tax adjustments.
• Provides information to our stockholders and board of directors to understand how our management evaluates our business, to monitor and evaluate our operating results, and analyze profitability of our ongoing operations and trends on a consistent basis by excluding certain non-cash charges.
Corporate Operating Cash Flows
• Net cash provided by (used in) operating activities, excluding the effects of: - Assets associated with WSEs (accounts receivable, unbilled revenue, prepaid expenses and other current assets) and - Liabilities associated with WSEs (client deposits and other client liabilities, accrued wages, payroll tax liabilities and other payroll withholdings, accrued health benefit costs, accrued workers' compensation costs, insurance premiums and other payables, and other current liabilities).
• Provides information that our stockholders and management can use to evaluate our cash flows from operations independent of the current assets and liabilities associated with our WSEs.
• Enhances comparisons to prior periods and, accordingly, used as a liquidity measure to manage liquidity between corporate and WSE related activities, and to help determine and plan our cash flow and capital strategies.
(1) Non-GAAP effective tax rate is 25.5% for 2021 and 2020, which excludes the income tax impact from stock-based compensation, changes in uncertain tax positions and nonrecurring benefits or expenses from federal legislative changes.
(2) Non-cash interest expense represents amortization and write-off of our debt issuance costs and loss on derivative.
Reconciliation of GAAP to Non-GAAP Measures
The table below presents a reconciliation of Total revenues to Net Service Revenues:
Three Months Ended March 31,
(in millions)
2021
2020
Total revenues
$
1,060
$
1,048
Less: Insurance costs
751
765
Net Service Revenues
$
309
$
283
The table below presents a reconciliation of Insurance service revenues to Net Insurance Service Revenues:
Average WSE growth is a volume measure we use to monitor the performance of our business. We have historically experienced our highest volumes of changes in new and exiting clients during the first quarter of the year, as clients generally change their payroll service providers at the beginning of the payroll tax year. Average WSEs decreased 4% when comparing the first quarter of 2021 to the same period in 2020 due to lower Total WSEs at the beginning of 2021 compared to 2020 due to COVID-19 impact, combined with seasonal attrition and lower new sales. This was partially offset by increased hiring in all verticals of our installed base, especially in our technology, life sciences and financial services verticals.
Total WSEs can be used to estimate our beginning WSEs for the next period and, as a result, can be used as an indicator of our potential future success in growing our business and retaining clients.
Anticipated revenues for future periods can diverge from the revenue expectation derived from Average WSEs or Total WSEs due to pricing differences across our HR solutions and services and the degree to which clients and WSEs elect to participate in our solutions during future periods. In addition to focusing on growing our Average WSE and Total WSE counts, we also focus on pricing strategies, benefit participation and service differentiation to expand our revenue opportunities. We report the impact of client and WSE participation differences as a change in mix.
In addition to focusing on retaining and growing our WSE base, we continue to review acquisition opportunities that would add appropriately to our scale. We continue to invest in efforts intended to enhance client experiences and manage attrition, through operational and process improvements.
Our revenues consist of professional service revenues (PSR) and insurance service revenues (ISR). PSR represents fees charged to clients for processing payroll-related transactions on behalf of our clients, access to our HR expertise, employment and benefit law compliance services, and other HR-related services. ISR consists of insurance-related billings and administrative fees collected from clients and withheld from WSEs for workers' compensation insurance and health benefit insurance plans provided by third-party insurance carriers.
In April 2020, we created our Recovery Credit program to assist in the economic recovery of our existing SMB clients and enhance our ability to retain these clients. Eligible clients will receive one-time reductions against fees for future services, accounted for as a discount, to be received over the following 12 months. We recognized a reduction in total revenues of $12 million in the first quarter of 2021 for the Recovery Credit, allocated proportionally to PSR ($5 million) and ISR ($7 million).
The reduction in revenue is estimated each period based on the timing of when eligible clients will receive the Recovery Credit and the ultimate amount of the total Recovery Credit. We will recognize a further $5 million reduction to revenues in 2021 for the remaining Recovery Credit over the period that our clients will earn the right to receive credits.
We also recognized a $25 million reduction to revenue under our 2021 Credit Program. This amount reflects estimated credits that will be paid to eligible clients under this program, based on the expected performance of our health insurance costs in 2021, and is currently limited to $25 million. These credits are recorded as a reduction to ISR and are payable within 12 months to eligible clients as of March 31, 2021. To the extent we experience higher than expected health insurance costs during the remainder of 2021, this estimate may be reduced.
Monthly total revenues per Average WSE is a measure we use to monitor the success of our pricing strategies. This measure increased 6% during the first quarter of 2021 compared to the same period in 2020.
We also use the following measures to further analyze changes in total revenue:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the combined weighted average percentage changes in service fees for each vertical service and changes in service fees associated with each insurance service offering,
•Mix - the change in composition of Average WSEs within our verticals combined with the composition of our enrolled WSEs within our insurance service offerings, and
•Credit - the weighted average amounts recognized for the Recovery Credit and 2021 Credit programs.
PSR
ISR - % represents proportion of ISR to total revenues
The growth in total revenues, was primarily driven by rate increases and higher health plan enrollment in our insurance service offerings. This was partially offset by lower Average WSEs, the $12 million reduction recognized for our Recovery Credit and the $25 million reduction under our 2021 Credit Program.
Our operating income consists of total revenues less insurance costs and OE. Our insurance costs include insurance premiums for coverage provided by insurance carriers, reimbursement of claims payments made by insurance carriers or third-party administrators, and changes in accrued costs related to contractual obligations with our workers' compensation and health benefit carriers. Our OE consists primarily of our corporate employees' compensation related expenses, which includes payroll, payroll taxes, SBC, bonuses, commissions and other payroll-and benefits-related costs.
The table below provides a view of the changes in components of operating income for the first quarter of 2021, as compared to the same period in 2020.
(in millions)
$120
First Quarter 2020 Operating Income
+12
Higher total revenues, primarily as a result of increased health plan enrollment in our insurance service offerings, together with rate increases, partially offset by lower Average WSEs, the $12 million reduction recognized under our Recovery Credit and the $25 million reduction recognized under our 2021 Credit Program.
+14
Lower insurance costs primarily as a result of lower utilization of medical services and lower Average WSEs, partially offset by higher health plan enrollments.
-8
Higher OE primarily as a result of increased compensation to support initiatives to improve client experience, enhance service offerings, and improve processes.
Our clients are billed on a fee per WSE per month per transaction. Our vertical approach provides us the flexibility to offer our clients in different industries with varied services at different prices, which we believe potentially reduces the value of solely using Average WSE and Total WSE counts as indicators of future potential revenue performance.
We also analyze changes in PSR with the following measures:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the weighted average percentage change in fees for each vertical,
•Mix - the change in composition of Average WSEs across our verticals, and
•Recovery Credit - the weighted average amounts recognized for the Recovery Credit program.
The decrease in PSR reflects the decrease in Average WSEs and the $5 million Recovery Credit recognized in 2021, partially offset by rate increases.
ISR consists of insurance services-related billings and administrative fees collected from clients and withheld from WSE payroll for health benefits and workers' compensation insurance provided by third-party insurance carriers.
We use the following measures to analyze changes in ISR:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the weighted average percentage change in fees associated with each of our insurance service offerings,
•Mix - all other changes including the composition of our enrolled WSEs within our insurance service offerings (health plan enrollment), and
•Credit - the weighted average amounts recognized for the Recovery Credit and 2021 Credit programs.
The growth in ISR reflects rate increases and higher health plan enrollment by clients. This was partially offset by lower Average WSEs and the $7 million Recovery Credit and $25 million recognized under our 2021 Credit Program in 2021.
Insurance costs include insurance premiums for coverage provided by insurance carriers, payments for claims costs and other risk management services, reimbursement of claims payments made by insurance carriers or third-party administrators below a predefined deductible limit, and changes in accrued costs related to contractual obligations with our workers' compensation and health benefit carriers.
We use the following measures to analyze changes in insurance costs:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the weighted average percentage change in cost trend associated with each of our insurance service offerings, and
•Mix - all other changes including the composition of our enrolled WSEs within our insurance service offerings (health plan enrollment).
During the first quarter of 2021, we continued to experience higher than normal volatility and variability in the amounts that we pay for group health insurance expenses incurred by WSEs within our deductible layer under our risk-based health insurance policies. Stay-at-home orders and social distancing practices impacted WSEs utilization of outpatient medical services from mid-December 2020 through January 2021, causing the decrease in rate for the first quarter of 2021. The decrease in utilization in December 2020 resulted in larger positive claims development as our accrued health costs were paid during the first quarter of 2021. This was partially offset by a return to more normal utilization by end of March 2021, combined with COVID-19 testing, treatment and vaccination costs in 2021.
The decrease in volume in the first quarter of 2021, due to lower Average WSEs for the quarter, was offset by an increase in mix from higher health plan enrollments.
NSR provides us with a comparable basis of revenues on a net basis, acts as the basis to allocate resources to different functions and helps us evaluate the effectiveness of our business strategies by each business function.
PSR
Net insurance service revenues - % represents proportion of Net Insurance Service Revenues to total Net Service Revenues
The primary drivers to the changes in our NSR are presented below:
(1) Change in NISR is comprised of an increase in ISR of $15 million, offset by an increase in insurance costs of $14 million.
NIM was 17% for the first quarter of 2021, representing an increase of 3% when compared to the same period in 2020, due to higher ISR and lower utilization of medical services, as discussed previously.
OE includes cost of providing services (COPS), sales and marketing (S&M), general and administrative (G&A), systems development and programming (SD&P), and depreciation and amortization expenses (D&A).
We manage our OE and allocate resources across different business functions based on a percentage of NSR, which has decreased to 55% in the first quarter of 2021 from 58% when compared to the same period in 2020. The lower percentage of OE to NSR in 2021 when compared to 2020 was primarily driven by the increase in NSR.
We had approximately 2,600 corporate employees as of March 31, 2021 in 15 offices across the U.S. In the first quarter of 2021, we continued to exit expiring leases due to our evolving remote work practices and policies. Our corporate employees' compensation-related expenses represent a majority of our operating expenses. Compensation costs for our corporate employees include payroll, payroll taxes, SBC, bonuses, commissions and other payroll- and benefits-related costs. Compensation-related expense represented 65% and 64% of our OE in the first quarters of 2021 and 2020, respectively.
During the first quarter of 2021, we experienced OE growth of 5% when compared to the same period in 2020. The ratio of OE to total revenues was 16% in the first quarter of 2021 and 2020.
% represents portion of compensation related expense included in operating expenses
We analyze and present our OE based upon the business functions COPS, S&M, G&A and SD&P and D&A. The charts below provide a view of the expenses of the business functions. Dollars are presented in millions and percentages represent year-over-year change.
(in millions)
$163
Q1 2020 Operating Expenses
+3
G&A increased, driven primarily by increases in compensation related expenses.
+4
SD&P increased, driven primarily by higher consulting expenses as we continue to work to improve our client experience and our systems and processes.
+1
D&A remained consistent to the first quarter of 2020.
$171
Q1 2021 Operating Expenses
The primary drivers to the changes in our OE are presented below:
Other income (expense) consists primarily of interest and dividend income from investments, interest expense under our previous credit facility and interest on our 3.50% Senior Notes due 2029 (our 2029 Notes) issued in February 2021.
Interest income decreased in the first quarter of 2021 primarily due to lower average market interest rates. Interest expense, bank fees and other increased in the first quarter of 2021, as lower interest rates on our 2018 Term Loan for the two months outstanding was offset by higher interest on our 2029 Notes and costs incurred due to the early repayment and termination of our floating rate debt.
Income Taxes
Our effective tax rate (ETR) was 25% for the first quarter of 2021 and 2020.
Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to our clients, creditors and debt holders.
Included in our balance sheets are assets and liabilities resulting from transactions directly or indirectly associated with WSEs, including payroll and related taxes and withholdings, our sponsored workers' compensation and health insurance programs, and other benefit programs. Although we are not subject to regulatory restrictions that require us to do so, we distinguish and manage our corporate assets and liabilities separately from those current assets and liabilities held by us to satisfy our employer obligations associated with our WSEs as follows:
March 31, 2021
December 31, 2020
(in millions)
Corporate
WSE
Total
Corporate
WSE
Total
Current assets:
Cash and cash equivalents
$
500
$
—
$
500
$
301
$
—
$
301
Investments
71
—
71
57
—
57
Restricted cash, cash equivalents and investments
15
1,066
1,081
15
1,373
1,388
Other current assets
68
440
508
59
355
414
Total current assets
$
654
$
1,506
$
2,160
$
432
$
1,728
$
2,160
Total current liabilities
$
134
$
1,506
$
1,640
$
142
$
1,728
$
1,870
Working capital
$
520
$
—
$
520
$
290
$
—
$
290
Working capital for WSEs related activities
We designate funds to ensure that we have adequate current assets to satisfy our current obligations associated with WSEs, the Recovery Credit liability and 2021 Credit Program liability. We expect the Recovery Credit and 2021 Credit Program liability of $102 million as of March 31, 2021 to be settled over the following 12 months. We manage our WSE payroll and benefits obligations through collections of payments from our clients which generally occurs two to three days in advance of client payroll dates. We regularly review our short-term obligations associated with our WSEs (such as payroll and related taxes, insurance premium and claim payments) and designate funds required to fulfill these short-term obligations, which we refer to as PFC. PFC is included in current assets as restricted cash, cash equivalents and investments.
We manage our sponsored benefit and workers' compensation insurance obligations by maintaining collateral funds in restricted cash, cash equivalents and investments. These collateral amounts are generally determined at the beginning of each plan year and we may be required by our insurance carriers to adjust our collateral balances when facts and circumstances change. We regularly review our collateral balances with our insurance carriers and anticipate funding further collateral in the future based upon our capital requirements. We classify our restricted cash, cash equivalents and investments as current and noncurrent assets to match against the anticipated timing of payments to carriers.
Working capital for corporate purposes
Corporate working capital as of March 31, 2021 increased $230 million from December 31, 2020, primarily driven by a $199 million increase in corporate unrestricted cash and cash equivalents.
We use our available cash and cash equivalents to satisfy our operational and regulatory requirements and to fund capital expenditures. We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments through existing liquid assets, continuing cash flows from corporate operating activities and the potential issuance of debt or equity securities. We believe our existing corporate cash and cash equivalents and positive working capital will be sufficient to meet our working capital expenditure needs for at least the next twelve months.
The following table presents our cash flow activities for the stated periods:
Three Months Ended March 31,
(in millions)
2021
2020
Corporate
WSE
Total
Corporate
WSE
Total
Net cash provided by (used in):
Operating activities
$
131
$
(306)
$
(175)
$
119
$
(401)
$
(282)
Investing activities
6
(9)
(3)
(19)
(75)
(94)
Financing activities
56
—
56
185
—
185
Net increase (decrease) in cash and cash equivalents, unrestricted and restricted
$
193
$
(315)
$
(122)
$
285
$
(476)
$
(191)
Cash and cash equivalents, unrestricted and restricted:
Beginning of period
352
1,291
1,643
291
1,165
1,456
End of period
$
545
$
976
$
1,521
$
576
$
689
$
1,265
Net increase (decrease) in cash and cash equivalents:
Unrestricted
$
199
$
—
$
199
$
308
$
—
$
308
Restricted
(6)
(315)
(321)
(23)
(476)
(499)
Operating Activities
Components of net cash provided by operating activities are as follows:
Three Months Ended March 31,
(in millions)
2021
2020
Net cash used in operating activities
$
(175)
$
(282)
Net cash used in operating activities - WSE
(306)
$
(401)
Net cash provided by operating activities - Corporate
131
119
The year-over-year change in net cash used in operating activities for WSE purposes was primarily driven by timing of client payments, payments of payroll and payroll taxes, settlement of the Recovery Credit, and insurance claim activities. We expect the changes in restricted cash and cash equivalents to correspond to WSE cash provided by (or used in) operations as we manage our obligations associated with WSEs through restricted cash.
Our corporate operating cash flows in the three months ended March 31, 2021 increased, when compared to the same period in 2020, due to the increase in our net income and the timing of our payments of corporate obligations.
Cash used in investing activities for the periods presented below primarily consisted of purchases of investments and capital expenditures, partially offset by proceeds from the sale and maturity of investments.
Three Months Ended March 31,
(in millions)
2021
2020
Investments:
Purchases of investments
(82)
(155)
Proceeds from sale and maturity of investments
84
67
Cash provided by (used in) investments
$
2
$
(88)
Capital expenditures:
Software and hardware
$
(4)
$
(6)
Office furniture, equipment and leasehold improvements
(1)
—
Cash used in capital expenditures
$
(5)
$
(6)
Cash used in investing activities
$
(3)
$
(94)
Investments
We invest a portion of available cash in investment-grade securities with effective maturities less than five years that are classified on our balance sheets as investments.
We also invest funds held as collateral to satisfy our long-term obligation towards workers' compensation liabilities. These investments are classified on our balance sheets as restricted cash, cash equivalents and investments. We review the amount and the anticipated holding period of these investments regularly in conjunction with our estimated long-term workers' compensation liabilities and anticipated claims payment trend. At March 31, 2021, our investments had a weighted average duration of less than 2 years and an average S&P credit rating of AA.
As of March 31, 2021, we held approximately $2.0 billion in restricted and unrestricted cash, cash equivalents and investments, of which $500 million was unrestricted cash and cash equivalents and $201 million was unrestricted investments. Refer to Note 2 in the condensed consolidated financial statements and related notes included in this Form 10-Q.
Capital Expenditures
During the three months ended March 31, 2021 and 2020, we continued to make investments in software and hardware and we enhanced our existing service offerings and technology platform. We expect capital investments in our software and hardware to continue in the future.
Financing Activities
Net cash provided by (used in) financing activities in the three months ended March 31, 2021 and 2020 consisted of our debt and equity-related activities.
During the three months ended March 31, 2021, we repurchased 744,001 shares of our common stock for approximately $60 million through our stock repurchase program. As of March 31, 2021, approximately $298 million remained available for repurchase under all authorizations by our board of directors. We plan to use current cash and cash generated from ongoing operating activities to fund this stock repurchase program.
In February 2021, we issued $500 million aggregate principal amount of our 2029 Notes. $370 million of the proceeds was used to repay and terminate the 2018 Term Loan A. The remaining funds will be used for general corporate purposes. Refer to Note 6 in the condensed consolidated financial statements and related notes included in this Form 10-Q for further information.
In February 2021, concurrently with the closing of the 2029 Notes offering, we entered into a new $500 million revolving credit facility under a new credit agreement (our 2021 Credit Agreement). The 2021 Credit Agreement includes a $100 million letter of credit sub-facility and a $40 million swingline sub-facility. We also have the option to incur incremental credit facilities of up to the greater of $450 million and 100% of EBITDA for the most recent period of four fiscal quarters for which financial statements have been delivered. Such incremental facilities are subject to obtaining additional commitments from lenders.
Capital Resources
Sources of Funds
Our principal source of liquidity for operations is derived from cash provided by operating activities. We rely on cash provided by operating activities to meet our short-term liquidity requirements, which primarily relate to the payment of corporate payroll and other operating costs, and capital expenditures. Our cash flow related to WSE payroll and benefits is generally matched by advance collection from our clients. To minimize the credit risk associated with remitting the payroll and associated taxes and benefits costs, we require clients to prefund the payroll and related payroll taxes and benefits costs.
We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments through existing liquid assets and continuing cash flows from corporate operating activities.
Covenants
The Indenture governing the 2029 Notes includes restrictive covenants limiting our ability to: (i) create liens on certain assets to secure debt; (ii) grant a subsidiary guarantee of certain debt without also providing a guarantee of the 2029 Notes; and (iii) consolidate or merge with or into, or sell or otherwise dispose of all or substantially all of our assets to, another person, subject, in each case, to certain customary exceptions.
The 2021 Credit Agreement includes negative covenants that limit our ability to incur indebtedness and liens, sell assets and make restricted payments, including dividends and investments, subject to certain exceptions. In addition, the 2021 Credit Agreement also contains other customary affirmative and negative covenants and customary events of default. The 2021 Credit Agreement also contains a financial covenant that requires the Company to maintain certain maximum total net leverage ratios.
We were in compliance with all financial covenants under our 2021 Credit Agreement at March 31, 2021.
Critical Accounting Policies, Estimates and Judgments
There have been no material changes to our critical accounting policies as discussed in our 2020 Form 10-K.
Recent Accounting Pronouncements
There have been no material changes to our recent accounting pronouncements as discussed in our 2020 Form 10-K.
25
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk
Our exposure to changes in interest rates relates primarily to our investment portfolio. Changes in U.S. interest rates affect the interest earned on the Company's cash, cash equivalents and the fair value of our investments.
Our cash equivalents consist primarily of money market mutual funds, which are not significantly exposed to interest rate risk. Our investments are subject to interest rate risk because these securities generally include a fixed interest rate. As a result, the market values of these securities are affected by changes in prevailing interest rates. We attempt to limit our exposure to interest rate risk and credit risk by investing in instruments that meet the minimum credit quality, liquidity, diversification and other requirements of our investment policy. Our investments consist of liquid, investment-grade securities. The risk of rate changes on investment balances was not material at March 31, 2021 and December 31, 2020.
26
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have, with the participation of our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2021, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act.
Based on the evaluation of our disclosure controls and procedures as of March 31, 2021, our CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of such date in ensuring that (i) information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the CEO and CFO, to allow timely decisions regarding required disclosure and (ii) such information is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.
We have concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Restricted cash, cash equivalents and investments, noncurrent
184
210
Investments, noncurrent
130
138
Property, equipment and software, net
75
79
Operating lease right-of-use asset
51
51
Goodwill
294
294
Other intangible assets, net
17
18
Other assets
94
93
Total assets
$
3,005
$
3,043
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and other current liabilities
$
84
$
50
Long-term debt
—
22
Client deposits and other client liabilities
151
134
Accrued wages
488
309
Accrued health insurance costs, net
165
172
Accrued workers' compensation costs, net
59
59
Payroll tax liabilities and other payroll withholdings
668
1,095
Operating lease liabilities
12
11
Insurance premiums and other payables
13
18
Total current liabilities
1,640
1,870
Long-term debt, noncurrent
494
348
Accrued workers' compensation costs, noncurrent, net
138
138
Deferred taxes
21
22
Operating lease liabilities, noncurrent
49
49
Other non-current liabilities
10
9
Total liabilities
2,352
2,436
Commitments and contingencies (see Note 7)
Stockholders' equity:
Preferred stock
—
—
($0.000025 par value per share; 20,000,000 shares authorized; no shares issued or outstanding at March 31, 2021 and December 31, 2020)
Common stock and additional paid-in capital
758
747
($0.000025 par value per share; 750,000,000 shares authorized; 65,881,233and 66,456,663 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
TriNet Group, Inc. (TriNet, or the Company, we, our and us), a professional employer organization, provides comprehensive human resources solutions for small and medium-size businesses under a co-employment model. These HR solutions include multi-state payroll processing and tax administration, employee benefits programs, including health insurance and retirement plans, workers' compensation insurance and claims management, employment and benefit law compliance, and other HR-related services. Through the co-employment relationship, we are the employer of record for certain employment-related administrative and regulatory purposes for the worksite employees (WSEs), including:
•compensation through wages and salaries,
•certain employer payroll-related tax payments,
•employee payroll-related tax withholdings and payments,
•employee benefit programs, including health and life insurance, and others, and
•workers' compensation coverage.
Our clients are responsible for the day-to-day job responsibilities of the WSEs.
We operate in one reportable segment. All of our service revenues are generated from external clients. Less than 1% of our revenue is generated outside of the U.S.
Basis of Presentation
These unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Rules and Regulations of the Securities and Exchange Commission. Certain information and note disclosures included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, that are normal and recurring in nature, necessary for fair financial statement presentation. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the operating results anticipated for the full year. These financial statements should be read in conjunction with the audited Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Data of our Annual Report on Form 10-K for the year ended December 31, 2020 (2020 Form 10-K).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect certain reported amounts and related disclosures.
These estimates are based on historical experience and on various other assumptions that we believe to be reasonable from the facts available to us. Some of the assumptions are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial statements could be materially affected.
In April 2020, we created our Recovery Credit program to assist in the economic recovery of our existing SMB clients and enhance our ability to retain these clients. Under this one-time program eligible clients will receive reductions against fees for future services, accounted for as a discount, over the following 12 months. This option to renew future services at a discount represents a material right and is accounted for as a performance obligation (Recovery Credit). This performance obligation will be satisfied when the clients have successfully renewed the services contracts and the future services are transferred.
The consideration we receive that is allocated to this performance obligation is deferred as an unsatisfied performance obligation and is included in client deposits and other client liabilities on the balance sheet. The amount of consideration we defer each period is dependent on the timing of when eligible clients will receive the Recovery Credit, which is subject to a limit on the total amount of $145 million.
The change in the balance of the Recovery Credit unsatisfied performance obligation was as follows:
Three Months Ended March 31,
(in millions)
2021
Balance at beginning of period
$
92
(+) Accruals
12
(-) Distributions to clients
(27)
Balance at end of period
$
77
Variable Consideration and Pricing Allocation
Our contracts with clients generally do not include any variable consideration. However, from time to time, we may offer credits to our clients considered to be variable consideration. Incentive credits related to contract renewals are recorded as a reduction to revenue as part of the transaction price at contract inception and are allocated among the performance obligations based on their relative standalone selling prices. Credits based on the performance of our insurance costs are recorded as a reduction to insurance services revenues and included in client deposits and other client liabilities on the balance sheet. In the three months ended March 31, 2021, we accrued $25 million under our 2021 Credit Program, payable within 12 months to eligible clients as of March 31, 2021, related to the expected performance of our health insurance costs for the year.
Accrued Health Insurance Costs
We sponsor and administer a number of employee benefit plans, including group health, dental, and vision as an employer plan sponsor under section 3(5) of the ERISA. In the three months ended March 31, 2021, a majority of our group health insurance costs related to risk-based plans. Our remaining group health insurance costs were for guaranteed-cost policies.
Accrued health insurance costs are established to provide for the estimated unpaid costs of reimbursing the carriers for paying claims within the deductible layer in accordance with risk-based health insurance policies. These accrued costs include estimates for reported losses, plus estimates for claims incurred but not paid. We assess accrued health insurance costs regularly based upon external actuarial studies that include other relevant factors such as current and historical claims payment patterns, plan enrollment and medical trend rates.
In certain carrier contracts we are required to prepay the expected claims activity for subsequent periods. These prepaid balances by agreement permit net settlement of obligations and offset the accrued health insurance costs. As of March 31, 2021 and December 31, 2020, prepayments and miscellaneous receivables offsetting accrued health insurance costs were $52 million and $49 million, respectively. When the prepaid amount is in excess of our recorded liability the net asset position is included in prepaid expenses. As of March 31, 2021 and December 31, 2020, accrued health insurance costs offsetting prepaid expenses were $70 million and $58 million, respectively.
NOTE 2. CASH, CASH EQUIVALENTS AND INVESTMENTS - UNRESTRICTED AND RESTRICTED
Under the terms of the agreements with certain of our workers' compensation and health benefit insurance carriers, we are required to maintain collateral in trust accounts for the benefit of specified insurance carriers and to reimburse the carriers’ claim payments within our deductible layer. We invest a portion of the collateral amounts in marketable securities. We report the current and noncurrent portions of these trust accounts as restricted cash, cash equivalents and investments on the consolidated balance sheets.
We require our clients to prefund their payroll and related taxes and other withholding liabilities before payroll is processed or due for payment. This prefund is included in restricted cash, cash equivalents and investments as payroll funds collected, which is designated to pay pending payrolls, payroll tax liabilities and other payroll withholdings.
We also invest available corporate funds, primarily in fixed income securities which meet the requirements of our corporate investment policy and are classified as available for sale (AFS).
Our total cash, cash equivalents and investments are summarized below:
March 31, 2021
December 31, 2020
(in millions)
Cash and cash equivalents
Available-for-sale marketable securities
Total
Cash and cash equivalents
Available-for-sale marketable securities
Total
Cash and cash equivalents
$
500
$
—
$
500
$
301
$
—
$
301
Investments
—
71
71
—
57
57
Restricted cash, cash equivalents and investments:
Payroll funds collected
906
—
906
1,228
—
1,228
Collateral for health benefits claims
22
90
112
16
82
98
Collateral for workers' compensation claims
61
—
61
60
—
60
Other security deposits
2
—
2
2
—
2
Total restricted cash, cash equivalents and investments
991
90
1,081
1,306
82
1,388
Investments, noncurrent
—
130
130
—
138
138
Restricted cash, cash equivalents and investments, noncurrent
Collateral for workers' compensation claims
30
154
184
36
174
210
Total
$
1,521
$
445
$
1,966
$
1,643
$
451
$
2,094
NOTE 3. INVESTMENTS
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of our AFS investments as of March 31, 2021 and December 31, 2020 are presented below:
March 31, 2021
December 31, 2020
(in millions)
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Asset-backed securities
$
25
$
—
$
—
$
25
$
24
$
—
$
—
$
24
Corporate bonds
121
2
—
123
126
2
—
128
U.S. government agencies and government-
sponsored agencies
23
—
—
23
27
1
—
28
U.S. treasuries
256
3
—
259
261
4
—
265
Certificate of deposit
9
—
—
9
—
—
—
—
Other debt securities
6
—
—
6
6
—
—
6
Total
$
440
$
5
$
—
$
445
$
444
$
7
$
—
$
451
Gross unrealized losses were immaterial at March 31, 2021 and December 31, 2020.
Unrealized losses on fixed income securities are principally caused by changes in interest rates and the financial condition of the issuer. In analyzing an issuer's financial condition, we consider whether the securities are issued by the federal government or its agencies, whether downgrades by credit rating agencies have occurred, and industry analysts' reports. As we have the ability to hold these investments until maturity, or for the foreseeable future, no decline was deemed to be other-than-temporary. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
The fair value of debt investments by contractual maturity are shown below:
(in millions)
March 31, 2021
One year or less
$
135
Over one year through five years
281
Over five years through ten years
5
Over ten years
24
Total fair value
$
445
The gross proceeds from sales and maturities of AFS securities for the three months ended March 31, 2021 and March 31, 2020 are presented below. We had immaterial gross realized gains and losses from sales of investments for the three months ended March 31, 2021 and 2020.
Three Months Ended March 31,
(in millions)
2021
2020
Gross proceeds from sales
$
41
$
40
Gross proceeds from maturities
43
27
Total
$
84
$
67
NOTE 4. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
We use an independent pricing source to determine the fair value of our securities. The independent pricing source utilizes various pricing models for each asset class, including the market approach. The inputs and assumptions for the pricing models are market observable inputs including trades of comparable securities, dealer quotes, credit spreads, yield curves and other market-related data.
We have not adjusted the prices obtained from the independent pricing service and we believe the prices received from the independent pricing service are representative of the prices that would be received to sell the assets at the measurement date (exit price).
The carrying value of the Company's cash equivalents and restricted cash equivalents approximate their fair values due to their short-term maturities.
We did not have any Level 3 financial instruments recognized in our balance sheet as of March 31, 2021 and December 31, 2020. There were no transfers between levels as of March 31, 2021 and December 31, 2020.
Fair Value Measurements on a Recurring Basis
The following tables summarize our financial instruments by significant categories and fair value measurement on a recurring basis as of March 31, 2021 and December 31, 2020.
As of December 31, 2020, our long-term debt was floating rate debt and the fair value approximated its carrying value (exclusive of issuance costs). The fair value of our floating rate debt was estimated based on a discounted cash flow, which incorporated credit spreads and market interest rates to estimate the fair value and was considered Level 3 in the hierarchy for fair value measurement.
The fair value of our 2029 Notes was obtained from a third-party pricing service and is based on observable market inputs. As such, the fair value of the senior notes is considered Level 2 in the hierarchy for fair value measurement. As of March 31, 2021, our 2029 Notes were carried at their cost, net of issuance costs, and had a fair value of $491 million.
Derivative Instruments
As of December 31, 2020, the fair value of the interest rate collar derivative, included in accounts payable and other current liabilities, was $1 million and was classified as Level 2 in the fair value hierarchy. In conjunction with the repayment and termination of our 2018 Term Loan, the interest rate collar derivative was terminated and settled and a realized loss of $1 million was recognized in net income for the three months ended March 31, 2021.
NOTE 5. ACCRUED WORKERS' COMPENSATION COSTS
The following table summarizes the accrued workers’ compensation cost activity for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
(in millions)
2021
2020
Total accrued costs, beginning of period
$
205
$
214
Incurred
Current year
16
20
Prior years
(4)
(3)
Total incurred
12
17
Paid
Current year
(1)
(1)
Prior years
(11)
(13)
Total paid
(12)
(14)
Total accrued costs, end of period
$
205
$
217
The following summarizes workers' compensation liabilities on the condensed consolidated balance sheets:
(in millions)
March 31, 2021
December 31, 2020
Total accrued costs, end of period
$
205
$
205
Collateral paid to carriers and offset against accrued costs
(8)
(8)
Total accrued costs, net of carrier collateral offset
$
197
$
197
Payable in less than 1 year (net of collateral paid to carriers of $2and $3at March 31, 2021 and December 31, 2020, respectively)
$
59
$
59
Payable in more than 1 year (net of collateral paid to carriers of $6 and $5 at March 31, 2021 and December 31, 2020, respectively)
138
138
Total accrued costs, net of carrier collateral offset
$
197
$
197
Incurred claims related to prior years represent changes in estimates for ultimate losses on workers' compensation claims.
As of March 31, 2021 and December 31, 2020, we had $44 million and $45 million, respectively, of collateral held by insurance carriers of which $8 million for both periods was offset against accrued workers' compensation costs as
the agreements permit and are net settled of insurance obligations against collateral held.
NOTE 6. LONG-TERM DEBT AND REVOLVING CREDIT AGREEMENTS
As of March 31, 2021 and December 31, 2020, our long-term debt consisted of the following:
(in millions)
March 31, 2021
December 31, 2020
2018 Term Loan A
$
—
$
370
2029 Notes
500
—
Principal amount
500
370
Deferred issuance costs
(6)
—
Less: current portion
—
(22)
Long-term debt, noncurrent
$
494
$
348
Annual contractual interest rate
3.50
%
1.77
%
Effective interest rate
3.67
%
1.87
%
In June 2018 we entered into a $425 million term loan A (our 2018 Term Loan) under our 2018 credit agreement (our 2018 Credit Agreement). The 2018 Credit Agreement included a $250 million revolving credit facility (our 2018 Revolver). The 2018 Credit Agreement was terminated in February 2021.
In February 2021, we issued $500 million aggregate principal of 3.50% senior unsecured notes maturing in March 2029 (our 2029 Notes). The 2029 Notes are a senior unsecured obligation of TriNet Group, Inc. and rank equally with all of its existing and future senior unsecured indebtedness. Interest payments on the 2029 Notes are due semi-annually in arrears on March 1 and September 1, beginning on September 1, 2021. The net proceeds were used to repay and terminate our 2018 Term Loan and for general corporate purposes.
We may voluntarily redeem the 2029 Notes, in whole or in part, 1) at any time prior to March 1, 2024 at (a) 100% of their principal amount, plus a “make whole” premium or (b) with the net cash proceeds received from an equity offering at a redemption price equal to 103.50% of the principal amount, provided the aggregate principal amount of all such redemptions does not exceed 40% of the original aggregate principal amount of the 2029 Notes; 2) at any time on or after March 1, 2024 at a prepayment price equal to 101.75% of the principal amount; 3) at any time on or after March 1, 2025 at a prepayment price equal to 100.875%of the principal amount; and 4) at any time on or after March 1, 2026 at a prepayment price equal to 100% of the principal amount; in each case, plus accrued and unpaid interest, if any, to but excluding, the date of redemption.
In February 2021, concurrently with the closing of the 2029 Notes offering, we entered into a new $500 million revolving facility (our 2021 Revolver) under a new credit agreement (our 2021 Credit Agreement) and the 2018 Credit Agreement was terminated. Letters of credit issued pursuant to the revolving facility reduce the amount available for borrowing under the 2021 Revolver. As of March 31, 2021, we had remaining capacity of $491 million under our 2021 Revolver.
The annual interest rate for borrowings under our 2021 Revolver is calculated based on an applicable London Interbank Offered Rate (LIBOR) tenor of our choosing, plus a margin of 1.25% to 2.00%, or, at our option, the alternative base rate (ABR), plus a margin of 0.25% to 1.00%. The applicable LIBOR or ABR margin is based on our Total Leverage Ratio, as defined in the 2021 Credit Agreement. The ABR is the highest of (a) the applicable Federal Reserve Bank of New York rate, as defined in our 2021 Credit Agreement plus 0.50% (b) the prime rate, and (c) one month LIBOR adjusted daily plus 1.00%.
In the event TriNet Group, Inc. receives a Corporate Issuer Credit Rating that is one level below investment grade rating or higher from at least two Nationally Recognized Statistical Rating Organizations, then rating based pricing applies and, for so long as rating based pricing applies, irrespective of the Total Leverage Ratio, the LIBOR margin will be 1.125% and the ABR margin will be 0.125%.
The indenture governing our 2029 Notes includes restrictive covenants limiting our ability to: (i) create liens on certain assets to secure debt; (ii) grant a subsidiary guarantee of certain debt without also providing a guarantee of the 2029 Notes; and (iii) consolidate or merge with or into, or sell or otherwise dispose of all or substantially all of our assets to, another person, subject, in each case, to certain customary exceptions.
The 2021 Credit Agreement includes negative covenants that limit our ability to incur indebtedness and liens, sell assets and make restricted payments, including dividends and investments, subject to certain exceptions. In addition, the 2021 Credit Agreement also contains other customary affirmative and negative covenants and customary events of default. The 2021 Credit Agreement also contains a financial covenant that requires the Company to maintain certain maximum total net leverage ratios. We were in compliance with all financial covenants under the 2021 Credit Agreement at March 31, 2021.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Contingencies
On September 29, 2020, a class action was filed in the United States District Court for the Middle District of Florida against the directors of certain TriNet subsidiaries and other TriNet employees on behalf of participants in two retirement plans available to TriNet’s eligible worksite employees, the TriNet 401(k) Plan and the TriNet Select 401(k) Plan. The complaint is similar to claims recently brought against a number of employers including PEOs and generally alleges that the defendants violated certain fiduciary obligations to Plan participants under the Employee Retirement Income Security Act of 1974 with respect to overseeing plan investment and recordkeeping fees. These claims are in the early stages, and we are unable to reasonably estimate any possible loss, or range of loss, with respect to this matter. We believe the claims are without merit.
We are and, from time to time, have been and may in the future become involved in various litigation matters, legal proceedings, and claims arising in the ordinary course of our business, including disputes with our clients or various class action, collective action, representative action, and other proceedings arising from the nature of our co-employment relationship with our clients and WSEs in which we are named as a defendant. In addition, due to the nature of our co-employment relationship with our clients and WSEs, we could be subject to liability for federal and state law violations, even if we do not participate in such violations. While our agreements with our clients contain indemnification provisions related to the conduct of our clients, we may not be able to avail ourselves of such provisions in every instance. We have accrued our current best estimates of probable losses with respect to these matters, which are individually and in aggregate immaterial to our consolidated financial statements.
While the outcome of the matters described above cannot be predicted with certainty, management currently does not believe that any such claims or proceedings will have a materially adverse effect on our consolidated financial position, results of operations, or cash flows. However, the unfavorable resolution of any particular matter or our reassessment of our exposure for any of the above matters based on additional information obtained in the future could have a material impact on our consolidated financial position, results of operations, or cash flows.
NOTE 8. STOCK BASED COMPENSATION
Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs)
Time-based RSUs and RSAs generally vest over a four-year term. Performance-based RSUs and RSAs are subject to vesting requirements and are earned, in part, based on certain financial performance metrics as defined in the grant notice. Actual number of shares earned may range from 0% to 200% of the target award. Performance-based awards granted in 2021 and 2020 are earned based on a single-year performance period subject to subsequent multi-year time-based vesting with 50% of the shares earned vesting in one year after the performance period and the remaining shares in the year after. RSUs and RSAs are generally forfeited if the participant terminates service prior to vesting.
The following tables summarize RSU and RSA activity for the three months ended March 31, 2021:
Stock based compensation expense for stock based awards made to our employees pursuant to our equity plans were as follows:
Three Months Ended March 31,
(in millions)
2021
2020
Cost of providing services
$
3
$
2
Sales and marketing
1
2
General and administrative
6
5
Systems development and programming costs
1
—
Total stock based compensation expense
$
11
$
9
NOTE 9. STOCKHOLDERS’ EQUITY
Common Stock
The following table shows the beginning and ending balances of our issued and outstanding common stock for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31,
2021
2020
Shares issued and outstanding, beginning balance
66,456,663
69,065,491
Issuance of common stock from vested restricted stock units
215,958
173,629
Issuance of common stock from exercise of stock options
20,841
29,473
Repurchase of common stock
(744,001)
(747,417)
Awards effectively repurchased for required employee withholding taxes
(68,228)
(51,126)
Shares issued and outstanding, ending balance
65,881,233
68,470,050
Stock Repurchases
During the three months ended March 31, 2021, we repurchased 744,001 shares of common stock for approximately $60 million. We retire shares in the period they are acquired and account for the payment as a reduction to stockholders' equity. As of March 31, 2021, approximately $298 million remained available for further repurchases of our common stock under all authorizations from our board of directors under this program. This repurchase authorization has no expiration.
Our ETR was 25% for the three months ended March 31, 2021 and 2020.
During the three months ended March 31, 2021, there was a de minimis change in our unrecognized tax benefits. The total amount of gross interest and penalties accrued was immaterial. It is reasonably possible the amount of the unrecognized benefit could increase or decrease within the next twelve months for which an estimate of the impact on net income cannot be made.
We are subject to tax in U.S. federal and various state and local jurisdictions, as well as Canada. We are open to federal and significant state income tax examinations for tax years 2016 and subsequent years.
We previously paid Notices of Proposed Assessments disallowing employment tax credits totaling $11 million, plus interest of $4 million in connection with the IRS examination of Gevity HR, Inc. and its subsidiaries, which was acquired by TriNet in June 2009. TriNet filed suit in June 2016 to recover the disallowed credits, and the issue is being resolved through the litigation process. TriNet and the U.S. filed cross motions for summary judgment in federal district court. On September 17, 2018, the district court granted our motion for summary judgment and denied the U.S.'s motion. On January 18, 2019, the district court entered judgment in favor of TriNet in the amount of $15 million, plus interest. The U.S. filed a notice of appeal of the federal district court's decision on March 18, 2019. The U.S. filed its opening brief in the court of appeals on June 10, 2019 and we filed our answering brief on July 24, 2019 to which the government filed its reply brief on September 6, 2019. Oral arguments occurred on March 11, 2020. On November 5, 2020, the court of appeals affirmed the district court’s judgement in favor of TriNet. The April 5, 2021 deadline for the IRS to petition the Supreme Court for review passed without a petition. TriNet will pursue recovery of the judgment.
NOTE 11. EARNINGS PER SHARE (EPS)
The following table presents the computation of our basic and diluted EPS attributable to our common stock:
Three Months Ended March 31,
(in millions, except per share data)
2021
2020
Net income
$
101
$
91
Weighted average shares of common stock outstanding
66
68
Basic EPS
$
1.53
$
1.32
Net income
$
101
$
91
Weighted average shares of common stock outstanding
66
68
Dilutive effect of stock options and restricted stock units
1
1
Weighted average shares of common stock outstanding
67
69
Diluted EPS
$
1.51
$
1.31
Common stock equivalents excluded from income per diluted share because of their anti-dilutive effect
For the information required in this section, refer to Note 7 in the condensed consolidated financial statements and related notes included in this Form 10-Q.
Risk Factors
There have been no material changes in our risk factors disclosed in Part 1, Item 1A, of our 2020 Form 10-K.
Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities
Not applicable.
(b) Use of Proceeds from Sales of Unregistered Securities
Not applicable.
(c) Issuer Purchases of Equity Securities
The following table provides information about our purchases of TriNet common stock during the quarter ended March 31, 2021:
Period
Total Number of Shares
Purchased (1)
Weighted Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans (2)
Approximate Dollar Value ($ millions) of Shares that May Yet be Purchased Under the Plans (3)
January 1- January 31, 2021
349,764
$
80.78
335,791
$
331
February 1 - February 28, 2021
390,545
$
80.97
338,735
$
303
March 1 - March 31, 2021
71,920
$
81.59
69,475
$
298
Total
812,229
744,001
(1) In May 2014, our board of directors approved a stock repurchase program pursuant to which we are authorized to repurchase our common stock in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934. From time to time, our board of directors authorizes increases to our stock repurchase program and approved an aggregate total of $951 million as of March 31, 2021. The total remaining authorization for future stock repurchases under our stock repurchase program was $298 million as of March 31, 2021. The program does not have an expiration date.
(2) Includes shares surrendered by employees to us to satisfy tax withholding obligations that arose upon vesting of restricted stock units granted pursuant to approved plans.
(3) We repurchased a total of approximately $60 million of our outstanding stock during the three months ended March 31, 2021.
We use our stock repurchase program to return value to our stockholders and to offset dilution from the issuance of stock under our equity-based incentive plans and employee purchase plan. We plan to use current cash and cash generated from ongoing operating activities to fund our stock repurchase program.
Incorporated herein by reference is a list of the exhibits contained in the Exhibit Index below.
EXHIBIT INDEX
Incorporated by Reference
Exhibit No.
Exhibit
Form
File No.
Exhibit
Filing Date
Filed Herewith
3.1
Amended and Restated Certificate of Incorporation of TriNet Group, Inc.
8-K
001-36373
3.1
4/1/2014
3.2
Certificate of Correction of Amended and Restated Certificate of Incorporation of TriNet Group, Inc.
10-Q
001-36373
3.1
11/2/2017
3.2
Amended and Restated Bylaws of TriNet Group, Inc.
S-1/A
333-192465
3.4
3/4/2014
4.1
Registration Rights Agreement, by and between TriNet Group, Inc. and AGI-T, L.P., dated as of February 1, 2017.
8-K
001-36373
4.1
2/2/2017
10.1
Indenture dated February 26, 2021, among the Company, the guarantors listed therein and U.S. Bank National Association, as trustees
8-K
001-36373
4.1
2/26/2021
10.2
Form of 3.500% Senior Notes due 2029 (Included in Indenture, dated February 26, 2021)
8-K
001-36373
4.2
2/26/2021
10.3
Credit Agreement, dated as of February 26, 2021, among TriNet USA, Inc. as borrower, TriNet Group, Inc. as Holdings, the lenders from time-to-time party thereto and JP Morgan Chase Bank N.A., as Administrative Agent
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Cover Page Interactive Data File (embedded with the Inline XBRL document)
*
Document has been furnished, is deemed not filed and is not to be incorporated by reference into any of TriNet Group, Inc.’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
