Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The New York Stock Exchange on June 30, 2017,2019, was $1.4$3.0 billion.
TRINET GROUP, INC.
Form 10-K - Annual Report
For the Year EndEnded December 31, 20172019
TABLE OF CONTENTS
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| Form 10-K Cross Reference | Page |
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| Part I, Item 1. | |
| Part I, Item 1A. | |
| Part I, Item 1B. | |
| Part I, Item 2. | |
| Part I, Item 3. | |
| Part I, Item 4. | |
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5. | |
| Part II, Item 7. 6. | |
| Part II, Item 7. | |
| Part II, Item 7A. | |
| Part II, Item 8. | |
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| Part II, Item 9A. | |
| Part II, Item 9B. | |
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| Part III, Item 10. | |
| Part III, Item 11. Executive Compensation | |
| Part III, Item 12. | |
| Part III, Item 13. | |
| Part III, Item 14. | |
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| Part IV, Item 15. | |
| Part IV, Item 16. | |
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Glossary of Acronyms and Abbreviations
Acronyms and abbreviations are used throughout this report, particularly in Part I, Item 1. Business; Part 1, Item 1A. Risk Factors; Part II, Item 7. MD&A; Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk and Part II, Item 8. Financial Statements and Supplementary Data.
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AB5 | Assembly Bill 5 |
ACA | The Patient Protection and Affordable Care Act |
ACH | Automated Clearinghouse Transaction |
AFS | Available-for-sale |
ASC | Accounting standards codification |
ASU | Accounting standards update |
CCPA | California Consumer Privacy Act of 2018 |
COBRA | Consolidated Omnibus Budget Reconciliation Act |
COPS | Cost of providing services |
COSO | Committee of Sponsoring Organizations of Treadway Commission |
D&A | Depreciation and amortization expenses |
DOL | U.S. Department of Labor |
EBITDA | Earnings before interest expense, taxes, depreciation and amortization of intangible assets |
EPLI | Employment Practices Liability Insurance |
EPS | Earnings Per Share |
ERISA | Employee Retirement Income Security Act of 1974 |
ESAC | Employer Services Assurance Corporation |
ESPP | Employee stock purchase plan |
ETR | Effective tax rate |
FASB | Financial Accounting Standards Board |
FLSA | Fair Labor Standards Act |
G&A | General and administrative |
GAAP | Generally Accepted Accounting Principles in the United States |
HIPAA | Health Insurance Portability and Accountability Act of 1996 |
HITECH Act | Health Information Technology for Economic and Clinical Health Act of 2009 |
HR | Human Resources |
IBNP | Incurred but not yet paid |
IBNR | Incurred but not yet reported |
IGP | Indemnity Guarantee Payment |
IRS | Internal Revenue Service |
ISR | Insurance service revenues |
LDF | Loss development factor |
LIBOR | London Inter-bank Offered Rate |
MCT | Medical cost trend |
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 |
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PCAOB | Public Company Accounting Oversight Board |
PEO | Professional Employer Organization |
PFC | Payroll funds collected |
PHI | Protected Health Information |
PSR | Professional service revenues |
ROU | Right-of-use |
RSA | Restricted Stock Award |
RSU | Restricted Stock Unit |
SBC | Stock Based Compensation |
S&M | Sales and marketing |
S&P 500 | Standard and Poor's 500 Stock Index |
SD&P | Systems development and programming |
SEC | Securities and Exchange Commission |
SMB | Small to midsize business |
TCJA | Tax Cuts and Jobs Act of 2017 |
U.S. | United States |
WSE | Worksite employee |
Cautionary Note Regarding Forward-Looking Statements
For purposes of this Annual Report, the terms “TriNet," "the” “the Company,"” “we,” “us” and “our"“our” refer to TriNet Group, Inc., and its subsidiaries. This Annual Report on Form 10-K (Form 10-K) 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: the impact of our vertical approach, our ability to leverage our scale and industry HR experience to deliver vertical product and service offerings; the growth of our customer base,base; planned improvements to our technology platform; our ability to roll out additional productdrive operating efficiencies and improve the customer experience; the impact of our customer service initiatives; the volume and severity of insurance claims; metrics that may be indicators of future financial performance; the relative value of our benefit offerings as and when planned, our ability to make enhancements to our technology platform, our ability to remediateversus those SMBs can independently obtain; the material weaknessprincipal competitive drivers in our internal controls over financial reporting,market; our ability to execute on our vertical market strategy, our abilityplans to retain clients and penetratemanage 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; fluctuations in the market for human resources (HR) solutions for smallperiod-to-period timing of when we incur certain operating expenses; the estimates and assumptions we use to midsize businesses,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 this Form 10-K, including under Part I, Item 1A. Risk Factors, and Part II, Item 7. MD&A, and in the other periodic filings we make with the SEC, and including risk factors associated with: 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; the impact of the concentration of our clients in certain geographies and industries; the impact of failures or limitations in the business systems we rely upon; adverse changes in our insurance coverage or our relationships with key insurance carriers; our ability to manage our client attrition; our ability to improve our technology to satisfy regulatory requirements and meet the expectations of our clients; 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 from cyber-attacks and security breaches; 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.
Forward-looking statements are not guarantees of future performance, but are based on management’s expectations as of the date of this Form 10-K 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.
Important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements are discussed throughout this 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” (MD&A) in Item 7, as well as in our periodic filings with the Securities and Exchange Commission (SEC). Those factors could cause our actual results to differ materially from our anticipated results.
The information provided in this Form 10-K is based upon the facts and circumstances known at this time, and any forward-looking statements made by us in this Form 10-K speak only as of the date of this Form 10-K. We undertake no obligation to revise or update any of the information provided in this Form 10-K, except as required by law.
Part II, Item 6. Selected Financial Data and Part II, Item 7. MD&A of this Form 10-K include 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 in Part II, Item 6. Selected Financial Data for definitions and reconciliations from GAAP measures.
PART I
Item 1. Business
General
TriNet is a leading provider of human resources (HR) solutions for small to midsize businesses (SMBs). Under our co-employment model, we assume certain of the responsibilities of being an employer and help our clients mitigate certain employer-related risks and manage many of the complex and burdensome administrative and compliance responsibilities associated with employment.
Our solutions includeHR expertise, payroll processing, tax administration,services, employee benefits and an HR technology platform with online and mobile tools that allowemployment risk mitigation services for SMBs. Since our clients and worksite employees (WSEs) to store, view and manage their core HR-related information and efficiently conduct a variety of HR-related transactions anytime and anywhere.
Leveraging our scale for the benefit of our clients is a key component of our business model. For example, we utilize our size and scale to provide our clients and WSEs access to a broad range of cost-effective employee benefit and insurance programs generally not available to individual SMBs. In addition, our service teams help with talent management, recruiting and training, performance management, employee onboarding and terminations, benefits enrollment and support, claims administration and employment practices risk management. We also monitor employer-related developments and assist clients in complying with applicable local, state and federal regulations.
Our strategy is to provide industry-specific products and services to help clients address their HR needs and allow them to focus on operating and growing their businesses. We believe our industry-oriented (vertical) approach is a key differentiator for us and delivers significant benefits to our clients. This allows our sales force, product development and service teams to tailor product and service offerings to the specific industry needs of our clients. As of December 31, 2017, we have introduced five verticals TriNet Financial Services, TriNet Life Sciences, TriNet Nonprofit, TriNet Technology, and TriNet Main Street and we intend to continue to develop and offer new industry vertical products in the future.
TriNet was foundedfounding in 1988, TriNet has served, and has significantly grown the numbercontinues to serve, thousands of clients we serve, both organically and through strategic acquisitions.SMBs. For the year ended December 31, 2017,2019, we processed $37.1$41.7 billion in payroll paymentsand payroll taxes for our clients and ended 2019 with approximately 14,80018,900 clients with about 325,000and 340,000 WSEs, primarily in all 50 states, the District of Columbia and Canada.U.S.
Our Products and Services
We deliver a comprehensive suite of products and services, which allows our clients to administerthat facilitates the administration and managemanagement of various HR-related functions for our clients, including 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 also leverage our scale and industry HR experience to deliver product and service offerings for SMBs in specific industries. We believe our approach, which we call our vertical approach, is a key differentiator for us and creates additional value for our clients by allowing our product and service offerings to address HR needs in different client industries. We offer six industry-tailored vertical products, TriNet Financial Services, TriNet Life Sciences, TriNet Main Street, TriNet Nonprofit, TriNet Professional Services, and TriNet Technology.
Our comprehensive HR products and solutions include the following common capabilities:
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TECHNOLOGY
PLATFORM | | |
HR CONSULTING EXPERTISE | | BENEFITSBENEFIT OPTIONS | | COMPLIANCEPAYROLL SERVICES | | RISK MITIGATION | | TECHNOLOGY PLATFORM |
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Technology PlatformOur technology platform includes online and mobile tools that allow our clients and WSEs to store, view, and manage core HR information and administer a variety of HR transactions, such as payroll processing, tax administration, employee onboarding and termination, compensation reporting, expense management, and benefits enrollment and administration. In 2017, we made significant investments in our technology platform to provide our users with improved functionality, including online and mobile productivity tools, and to allow our platform to integrate more effectively with third-party software applications.
Our strategy is to continue to invest in product development and improve the functionality, experience and ease of use of our products and services for our clients and WSEs. We will continue to design additional functionality into our core platform, retire legacy software systems inherited from acquisitions, and migrate clients on those legacy systems to our TriNet platform. We believe the continued improvement of our technology platform and the consolidation of legacy systems allows us to drive operating efficiencies and improve client user experience by providing a single, streamlined experience for accessing HR information and conducting HR transactions.
We invested approximately $74 million, $53 million and $39 million, during 2017, 2016 and 2015, respectively, developing our technology solutions.
HRConsulting ExpertiseWe use the collective insightsknowledge and experience of our teams of HR, benefits, risk management and compliance professionals to help clients mitigatemanage many of the administrative, regulatory and practical risksrequirements associated with their responsibilities asbeing employers. We assist ourOur HR professionals and services help clients in running their business by providingaddress a variety of HR services, from widely used services like employee onboardingissues, including consulting on talent management, retention and terminations, benefits enrollment, immigration and support, employment practices risk managementvisas, payroll tax credits, labor law and administration, talent management, recruitingregulatory developments and training,many other industry-specific and performance management to more specialized services like immigration services. Each ofgeneral HR topics. Depending on their needs, our clients and WSEs have access to varying levels of service and support from our HR expertsprofessionals ranging from call center support for basic questions, to pooled specializedHR resources, and to onsite consulting and services, depending on the needs of the client and WSEs. In addition, our teams of in-houseservices. Our HR professionals can also provide additional incrementalspecialized HR consulting and other services upon request.
UnderBenefit OptionsWe utilize our vertical strategy, we seek to design our product and service offerings for specific industries by identifying common needs and leveraging scale and shared experience to provide more efficientour clients and relevant offerings. For example, our fifth vertical product, TriNet Main Street, supports hospitality, retail, property management, and other similar industries. These industries are labor intensive and often operate from many disparate taxing and geographic locations. Based on the common needs of these industries, we have created time and attendance expertise, hiring and termination expertise, workers’ compensation safety consultants, and a compelling suite of benefit plans that are attractive to both our clients' executives and hourly workers.
BenefitsWe offer our WSEs access to a broad range of cost-effective, TriNet-sponsored employee benefit and insurance programs at a valuecost that we believe most of our clients would be unable to obtain on their own. We utilizebelieve that our scale to decrease costs associated with ourTriNet-sponsored programs and lookhelp clients compete for ways to leverage our scale to provide additional benefits to our WSEs.talent against larger businesses. Our benefit and insurance programs are compliantdesigned to comply with federal, state local, and federallocal regulations, and our benefit and insurance service offerings include plan designselection and administration, enrollment management, leave management, plan document distribution and WSE and client communications.
Under our benefit and insurance programs, we pay premiums to third-party insurance carriers for WSE insurance benefits and reimburse the insurance carriers andor third-party administrators for claims payments made on our behalf within our insurance deductible layer, where applicable.
Employee Benefit Plans:
We sponsor and administer several fully insured risk-based employee benefit plans through a broad range of carriers, including group health, dental, vision, short- and long-term disability, and life insurance as an employer plan sponsor under Section 3(5) of the Employee Retirement Income Security Act (ERISA).ERISA. We also offer other benefit programs to our WSEs, including flexible spending accounts, health savings accounts, retirement plans, Consolidated Omnibus Budget Reconciliation Act (COBRA) benefits, COBRA benefits, individual life supplemental insurance, a legal services plan, commuter benefits, home insurance, critical illness insurance, accident insurance, hospital indemnity, pet insurance, and auto insurance. For further discussion of our fully insured programs including policies where we reimburse our carriers for certain amounts relating to claims, refer to Note 1 in Part II, Item 88. Financial Statements and Supplementary Data, of this Form 10-K.
Payroll Services
We help clients manage all aspects of their employee compensation by providing multi-state payroll processing, tax administration services and other payroll-related services, such as time and attendance management, time off and overtime tracking, and expense management solutions. Our clients and WSEs can access payroll and tax information using our online and mobile tools. Our tax administration services include calculating, withholding, remitting and reporting certain federal, state and local payroll and unemployment taxes on behalf of clients and WSEs.
Risk Mitigation
We monitor employment-related legal and regulatory developments at the federal, state, and levels to help our clients comply with employment laws and mitigate many of the risks associated with being an employer. We provide guidance on employment laws and regulations, including those relating to minimum wage, unemployment insurance, family and medical leave and anti-discrimination. We also ensure that our TriNet-sponsored benefit plans comply with applicable laws and regulations, like the ACA, reducing this compliance burden to our clients.
Workers' Compensation: We provide fully insured workers' compensation insurance coverage for our clients and WSEs through insurance policies that we negotiate with our third-party insurance carriers. Additionally, we help clients manage their risk by providing risk management services, including performing workplace assessment, safety consultation, accident investigation and other risk management services at our client locations to help prevent workplace accidents that could lead to claims. We also provide services to help remediate such claims when they occur.
We manage the deductible risk that we assume in connection with these policies by being selective in the types of businesses that we take on as new clients, and by monitoring claims data and the performance of our carriers and third-party claims management servicesservice providers. In addition, we advise clients on workers’ compensation best practices, including by performing workplace assessment consultations and vendors and by providing risk management services for existing clients.assisting with client efforts to identify conditions or practices that might lead to employee injuries.
Employment Practices Liability Insurance (EPLI): We also provide EPLI coverage for our clients through insurance policies that we obtain from oura third-party EPLI insurance carrier. These policies provide coverage for certain claims that arise in the course of the employment relationship, such as discrimination, harassment, and certain other employee claims, with a per-claim retention amount. The retention amount is split between the client and TriNet, with the client generally paying its portion of the retention amount first.
While we do not provide legal representation to our clients, our clients can benefit from the extensive experience of our employment law specialists andTriNet. Our HR professionals who assist our clients in implementing HR best practices to help avoid employment practices liability claims and in managing, processing and responding to such claims. For claims covered by our EPLI insurance, actual litigationreduce the cost of employment-related liabilities. Litigation defense is conducted by our preferred outside employment law firms with whom we and our EPLI carriers have previously negotiated rates, established billing guidelines and invoice review processes. We have also developed a case management protocol to efficiently and effectively defend such claims.firms.
ComplianceTechnology PlatformOur productstechnology platform includes online and services are designed to helpmobile tools that allow our clients comply with local, state and federal employmentWSEs to store, view, and benefit laws. We monitor employment-related developmentsmanage HR information and assist clients in complying with changing regulations and requirements at all levels, from changes in state and local employment laws, such as minimum wage and family leave ordinances, to sweeping federal reforms such as the 2017 Tax Cuts and Jobs Act (TCJA) and the Patient Protection and Affordable Care Act (ACA). Often these changes are staggered and require additional guidance fromadminister a variety of local, state or federal agencies, or resultHR transactions, such as payroll processing, tax administration, employee onboarding and termination, compensation reporting, expense management, and benefits enrollment and administration. Our online tools also incorporate workforce analytics, allowing clients to generate HR data, payroll, total compensation and other custom reports.
In 2019, we continued to make significant investments in complementary or responsive changes, making compliance a continuous challenge. Each componentour technology platform on projects intended to provide our users with improved functionality, HR management options, and security. We intend to continue to invest in our technology platform to improve its functionality, ease of use, security and the overall user experience for our clients and WSEs. We believe the continued investment in and improvement of our HR solutions is designed with compliance in mind, whether it is payroll processingtechnology platform will drive operating efficiencies and tax administration, HR services focused on creating a compliant workplace, or offering ACA-compliant benefit plans.improve the client experience.
We invested approximately $74 million, $81 million and $74 million, during 2019, 2018 and 2017, respectively, developing our technology platform.
Our Co-Employment Model
We operate underusing a co-employment business model, under which employment-related responsibilities are contractually allocated by contract between us and our clients. This model allows WSEs to receive the full benefit of our services, including ouraccess to TriNet-sponsored employee benefit plan offerings. Each of our clients enters into a client service agreement with us that defines the suite of professional and insurance services and benefits to be provided by us, the fees payable to us, and the division of responsibilities between us and our clients as co-employers. WSEs also separately acknowledge the co-employment relationship and the allocation of employment-related responsibilities between TriNet and our clients. The division of responsibilities under our client service agreements is typically as follows:
TriNet Responsibilities
We generally assume responsibility for, and manage certain risks associated with:
remittance to WSEspayments of salaries, wages and certain other compensation as reportedto WSEs from our own bank accounts (based on client reports and paid to us bypayments), including the client, related tax reporting and remittance to tax authorities and processing of garnishment and wage deduction orders. Unlike a payroll service provider, we issue each WSE a payroll check drawn on our bank accounts,orders,
report thereporting of wages, withholdwithholding and deposit theof associated payroll taxes as the employer for regulatory reporting and payroll tax returns,of record,
provision and maintenance of workers' compensation insurance and workers' compensation claims processing,
provisionaccess to, and administration of, group health, welfare, and retirement benefits to WSEs under TriNet-sponsored insurancebenefit plans,
compliance with applicable law for certain employee benefits offered to WSEs,
processingadministration of unemployment claims, and
provision of certainvarious HR policies and agreements, including an employee handbookhandbooks and worksite employee agreements describing the co-employment relationship.
Client Responsibilities
Our clients are responsible for employment-related responsibilities that we do not specifically assume, generally including:
day-to-day management of their worksites and WSEs,
compliance with laws associated with the classification of employees as exempt or non-exempt, such as overtime pay and minimum wage law compliance,
accurate and timely reporting to TriNet of compensation and deduction information, including information relating to hours worked, rates of pay, salaries, wages and certain other compensation, and work locations,
accurate and timely reporting to TriNet of information relating to workplace injuries, employee hires and termination, and certain other information relevant to TriNet’s services,
provision and administration of any employee benefits not provided by TriNet (e.g.,such as equity incentive plans),plans,
compliance with all laws and regulations applicable to the clients' workplace and business, including work eligibility laws, laws relating to workplace safety or the environment, laws relating to family and medical leave, laws pertaining to employee organizing efforts and collective bargaining and employee termination notice requirements,
payment of TriNet invoices, which include salary, wages and other relevant compensation to WSEs and applicable employment taxes and service fees, and
all other matters for which TriNet does not assume responsibility under the client service agreement, such as intellectual property ownership and protection and liability for products produced and/orand services provided.provided by the client company to its own customers.
As a result of our co-employment relationship with each of our WSEs,relationships, we are liable for payment of salary, wages and certain other compensation to the WSEs as reported and paid to us by the client, and are responsible for providing specified employee benefits to such persons to the extent provided in each client service agreement and under federal and state law. In most instances, clients are required to remit payment prior to the applicable payroll date by wire transfer or automated clearinghouse transaction (ACH).ACH.
We also assume responsibility for payment and liability for the withholding and remittance of federal and state income and employment taxes with respect to salaries, wages and certain other compensation paid to WSEs, although we reserve the right to seek recourse against our clients for any liabilities arising out of their conduct. We perform these functions as the statutory employer for federal employment tax purposes, since our clients transfer legal control over these payroll functions to us. The laws that govern the payment of salaries, wages and related payroll taxes for our WSEs are very complex and the various federal, state and local laws that govern such payments can have significant differences. For example, except to the extentvary significantly. Based on applicable federal and state laws otherwise provide, thelaw in any jurisdiction, we or our client may be held ultimately liable for those obligations if we fail to remit taxes and the bonding security provided by the Employer Services Assurance Corporation (ESAC) or other surety is not sufficient to satisfy the obligation.taxes.
Sales and Marketing
Our Sales Organization
We sell our solutions primarily through our direct sales organization. We have aligned our sales organization by industry vertical with the goal of growing profitable market share in our targeted industries. This vertical approach deepens our network of relationships and gives us an understanding of the unique HR needs facing SMBs in those industries.
Our Vertical Approach
We believe that our vertical approach allows our sales force, product development and service teams to tailor product and service offerings to the specific industry needs of our clients. In addition to sales and marketing, our client services and product development teams are focused on specific industry verticals. We believe this vertical approach is an important competitive differentiator for TriNet and believe that it will deliver significant benefits to our clients.
Our Sales Organization
Our sales representatives are supported by marketing, inside sales, lead generation efforts, and referral sources and networks.
We sponsor and participate in associations and events around the country and utilize these forums to target specific vertical and geographic markets. We also generate sales opportunities within key industry verticals, through marketing alliances and other indirect channels, such as accounting firms, venture capital firms, incubators, insurance brokers, and other vertical market industry associations. Additionally, we utilize digital marketing programs, including digital advertising, search and email marketing, to create awareness and interest in our products.
We have expandedOur Marketing Organization
Our marketing organization is charged with driving overall brand awareness, managing lead generation, creating and managing our focus on various channel relationshipswebsite and alliances that drive referrals toother online properties, creating content for our direct sales force. Finally,outbound and inbound marketing efforts, media relations, and managing our sales representatives benefit from building strong relationships with prospects during the salessponsorships, major marketing events, and client service processes, resultingcommunications. In 2019 our marketing team focused on strategic marketing, communications and branding initiatives, in referrals to new prospects as well as direct support through providing reference calls in regard topart by augmenting our productscomprehensive company re-branding campaign, Incredible Starts Here, with our marketing campaign, People Matter, that included social media and services.advertising across digital, television, radio and out-of-home media.
Legal and Regulatory
Our business operates in a complex legal and regulatory environment created by the numerousdue to a myriad of federal, state and local laws and regulations relating to labor and employment matters, benefit plans and income and employment taxes. The following summarizesthat impact our business. Below is a summary of what we believe are the most important legal and regulatory aspectsissues for our business. For additional information on the impact of these and other laws and regulations on our business:
Federal Regulationsbusiness and results of operations, refer to Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading - Legal and Compliance Risks.
Employer Status
We sponsor our employee benefit plan offerings as the “employer”employer of our WSEs under the Internal Revenue Code of 1986, as amended (the Code), ERISA and ERISA.applicable state law. The multiple definitions of “employer” under both the Code and ERISA are not clear and most are defined in part by complex multi-factor tests under common law. We believe that we qualify as an “employer” of our WSEs in the U.S. under both the Code and ERISA, as well as various state regulations,laws, but this status could be subject to challenge by various regulators. For additional information on our employer status and its impact on our business and results of operations, refer to Part I, Item 1A1A. Risk Factors, of this Form 10-K, under the heading - If we are not recognized as an employer of worksite employees under federal and state regulations, or are deemed to be an insurance agent or third-party administrator, we and our clients could be adversely impacted.impacted.
Affordable Care Act
Health Insurance and Health Care Reform
Our sponsored employee health plan offerings are an important component of the products and services that we provide. The Patient Protection and Affordable Care Act (ACA) was signed into lawfuture of health care reform continues to evolve in March 2010. Thethe U.S. For example, the passage of the ACA in 2010 implemented sweeping health care reforms with staggered effective dates from 2010 through 2020,2022, and many provisions in the ActACA still require the issuance of additional guidance from the U.S. Department of Labor (DOL),DOL, the Internal Revenue Service (IRS),IRS, the U.S. Department of Health and Human Services and thevarious U.S. states. Passage of the 2017 TCJA in December 2017 eliminateseliminated the individual mandate tax penalty under the ACA beginning in 2019, while retaining employer ACA obligations. States have developed, and will continue to develop, varying approaches to state-based health exchanges. Further significant changes to health care statutes, regulations and policy at the federal, state and local levels could occur in 20182020 and beyond, including the potential further modification, amendment or repeal of the ACA.ACA, and we may need to adapt the manner in which we conduct our business as a result of any such changes. For additional information on the ACA and its impact on our business and results of operations, refer to Part I, Item 1A1A. Risk Factors, of this Form 10-K, under the heading - Our business isChanging laws and regulations governing health insurance and other traditional employee benefits at the federal, state and local level could negatively affect our business.
Data Privacy and Security Regulations
We collect , store, use, retain, disclose, transfer and otherwise process a significant amount of confidential, sensitive and personal information from and about our actual and potential clients, WSEs and corporate employees, and we are subject to numerous complexa variety of federal, state and federalforeign laws, rules, and changesregulations in uncertainty regarding, or adverse applicationconnection with such activities. As a sponsor of these laws could adversely affect our business.
Health Insurance Portability and Accountability Act
Maintaining the security of our WSEs information is important to TriNet as we sponsor employee benefit plans, and maywe also have access to personal health information of our WSEs. The manner in which we managecertain protected health information (PHI) of our WSEs and corporate employees. Management of PHI is subject to several regulations at the Health Insurance Portability and Accountability Act of 1996 (HIPAA),federal level, including HIPAA and the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH Act).HITECH Act. HIPAA contains substantial restrictions and health data privacy, security and breach notification requirements with respect to the use and disclosure of PHI. Further, under the HITECH Act there are steep penalties and fines for HIPAA violations. OurBecause TriNet sponsored health plans are covered entities under HIPAA, and we are therefore required to comply with HIPAA's portability, privacy, and security requirements. We are also subject, among other applicable federal laws, rules and regulations, to the rules and regulations promulgated under the authority of the Federal Trade Commission. The U.S. Congress has considered, but not yet passed, several comprehensive federal data privacy bills over the past few years, such as the CONSENT Act, which was intended to be similar to the landmark 2018 European Union General Data Protection Regulations. We expect federal data privacy laws to continue to evolve.
At the state and local level, there is increased focus on regulating the collection, storage, use, retention, security, disclosure, transfer and other processing of confidential, sensitive and personal information. In recent years, we have seen significant changes to data privacy regulations across the U.S., including the enactment of the California Consumer Privacy Act of 2018 (CCPA), which went into effect in January 2020. The CCPA increases privacy rights for California residents and imposes obligations on companies that process their personal information, including an obligation to provide certain new disclosures to such residents. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. The CCPA was amended in September 2018 and October 2019, and further amendments may be enacted.
New legislation proposed or enacted in Illinois, Massachusetts, New Jersey, New York, Rhode Island, Washington and other states, including a proposed right to privacy amendment to the Vermont Constitution, impose, or has the potential to impose, additional obligations on companies that collect , store, use, retain, disclose, transfer and otherwise process confidential, sensitive and personal information, and will continue to shape the data privacy environment nationally. In addition, all 50 U.S. states, the District of Columbia and Canada have enacted data breach notification laws that may require us to notify WSEs, clients, employees, third parties or regulators in the event of unauthorized access to or disclosure of personal or confidential information. Complying with existing and new data privacy and security regulations could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. Any failure to comply with existing and new data privacy and security regulations could result in significant penalties, damage our reputation and otherwise have a material adverse effect on our business. For additional information on the privacy and security of the confidential, sensitive and personal information and PHI we possess and the potential impact to our business if we fail to protect such information, refer to each of the risk factors included in Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading - Data Privacy and Security Risks.
ToPEO Licensing Laws
Nearly all states have adopted laws and regulations for licensing, registration, certification or recognition of PEOs and the extent possible,IRS has implemented a federal licensing program for PEOs. We expect states without such laws and regulations to adopt them in the future. While these laws and regulations can vary widely, most regulators monitor the financial health and other relevant business information of PEOs on an annual or quarterly basis. In some cases, these laws and regulations codify and clarify the co-employment relationship for certain payroll, unemployment, workers' compensation and other employment-related purposes or require specific client contractual terms and/or WSE disclosures. We believe we possess is anonymizedcomply in all material respects with the applicable PEO laws and accessed through a secured third-party database.regulations in each state and jurisdiction in which we operate. For additional information, on the security of our clients' and WSEs' personal data and PHI and the potential impact to our business if we fail to protect our WSEs' PHI, refer to Part I, Item 1A1A. Risk Factors, of this Form 10-K, under the heading - Cyber-attacksIf we fail to qualify as a co-employer of WSEs under applicable federal and state licensing rules, or security breaches could result in reduced revenue, increased costs, liability claims or damage to our reputation.
Certified Professional Employer Organization (CPEO) Certification
With passage of the Small Business Efficiency Act in 2014, the U.S. Congress created a federal framework for professional employer organizations (PEOs) who voluntarily become certified under this law. The IRS is accepting applications for PEOs to become certified under the Code. Even though final regulations for the certification program have not yet been issued, we have applied for certification.
State Regulations
Forty-two states have adopted provisions for licensing, registration, certification or recognition of co-employers, and others are considering such regulation. Such laws vary from state to state but generally provide for monitoring or ensuring the fiscal responsibility of PEOs, and in some cases codify and clarify the co-employment relationship for unemployment, workers' compensation and other purposes under state laws. We believeif we are deemed to be operating in compliance in all material respects with the requirements in those 42 states.certain insurance-related industries, we and our clients could be adversely impacted.
Payroll and Unemployment Taxes
We must also comply with the federal and state payroll tax and unemployment tax requirements that apply where our clients are located. Tax reform efforts, and other payroll tax changes, at the federal, state and local level can impact our payroll tax reporting obligations for our clients and the products and services we can provide. State unemployment taxes are based on taxable wages and tax rates assigned by each state. The tax rates vary by state and are determined,based, in part, based on our prior years’ compensation and unemployment claims experience in each state. Certain ratesand may also vary based on the overall claims experience of a PEO. As a result, depending on where clients are located, the fees we charge for unemployment taxes can be higher or lower than a client could obtain alone. In some cases, the unemployment taxes we pay can also determined, in part, by each client’s own compensation and unemployment claims experience. In addition, states have the ability under law to increase unemployment tax rates, includingbe retroactively increased to cover deficiencies in the unemployment tax funds.
Other Employment Regulations
We must also comply with generallabor and employment laws, which can change frequently at the federal, state tax laws, including payroll tax laws. As noted above, tax reform mayand local level. In particular, regulatory focus on the classification of employers, employees and independent contractors has the potential to significantly change how we and other PEOs operate and the products and services that we and other PEOs can provide to our clients and WSEs. For example, in September 2019 California passed AB5, a law that could potentially reclassify client independent contractors as employees. Similarly, in January 2020, the DOL issued a new rule broadening the definition of joint employer used under the Fair Labor Standards Act (FLSA). We do not believe that we are a joint employer under the new DOL rule, but the impact of new regulations like these could lead to increased legal claims against us or our clients, increase our compliance costs, or require changes to how we operate our business and the products and services we provide to our clients and WSEs. For additional information, refer to Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading - The definition of employers, employees and independent contractors is evolving. Changes to the laws and regulations that govern what it means to be an employer or an employee may require us to make significant state tax law changes in 2018our operations and beyond.may negatively affect our business.
Strategic Acquisitions
Historically, we have pursued strategic acquisitions to both expand our product capabilities and supplement our growth across geographies and certain industry verticals. Our acquisition targets have included PEOs and other HR solution providers as well as technology companies or technology product offerings to supplement or enhance our existing HR solutions. We intend to continue to pursue strategic acquisitions, where appropriate, that will enable us to add new clients and WSEs, expand our presence in certain geographies or industry verticals and offer our clients and WSEs more attractive products and services.
Client Industries and Geographies
Our clients are distributed across a variety of industries, including technology, life sciences, not-for-profit, professional services, financial services, life sciences, not-for-profit, property management, retail, manufacturing, and hospitality. Our clients execute annual service contracts with us that automatically renew. Generally, our clients may cancel these contracts with thirty days' notice to us and we may cancel these contracts with thirty days' notice.
We conductNearly all of our business primarily inrevenues are generated within the United States of America (U.S.), with more than 99% of our total revenues being attributable to WSEs in the U.S. and the remainder being attributable to WSEs in Canada. Substantiallyits territories and substantially all our long-lived assets are located in the U.S.United States.
Seasonality
Our business is affected by seasonality in client business activity and WSE product selection, during benefits open enrollment. health claims costs and payroll taxes:
Clients generally change their payroll service providers at the beginning of the payroll tax year andyear; as a result, we have historically experienced our highest volumes of new and exiting clients in the month of January. Other
WSEs select our benefit products during their respective open enrollment periods, which occur throughout the year. We have historically experienced the largest proportion of significant client turn-over coincide withWSE benefit changes in the timingfirst and fourth quarters.
Health claims cost tend to increase throughout the year as the utilization of benefit program renewals.medical services above each WSE's deductible causes our insurance costs to increase. In addition, the overall use of medical services by WSEs, including elective procedures, tends to increase later in the calendar year.
Certain payroll tax related billings are based on the WSE's annual taxable wage base up to a set cap. WSEs frequently meet these wage base caps in the first two quarters of the year, depending on the WSE's compensation level, resulting in lower related billing contributions to PSR in the latter half of the year.
Competition
We face significant competition in the form of companies serving their HR needs in both traditional and non-traditional manners. These forms of competition include:from:
Other PEOs that compete directly with us,
HR and information systems departments and personnel of companies that perform their own administration ofadminister employee benefits, payroll and HR
for their companies in-house,
providers of certain endpoint HR services, including payroll, employee benefits, and business process outsourcers with high-volume transaction and administrative capabilities, such as Automatic Data Processing, Inc., Paychex, Inc. and other third-party administrators,
employee benefit exchanges that provide benefits administration services over the Internet to companies that otherwise maintain their own employee benefit plans,
alternative and non-traditional benefit providers, and
insurance brokers who allow third partythird-party HR systems to integrate with their platform, andtechnology platform.
Our competitors include large PEOs such as the TotalSource unit of Automatic Data Processing, Inc., the PEO operations of Paychex, Inc. and Insperity, Inc., as well as specialized and smaller PEOs and similar HR service providers with PEO operations. If, and toTo the extent that we and other companies providing these services are successful in growing our businesses, we anticipate that future competitors will enter this industry.
We believe that our services are attractive to many SMBs in part because of our ability to provide access to a broad range of TriNet-sponsored workers' compensation, health insurance and other benefits programs on a cost-effective basis. We compete with insurance brokers and other providers of thisinsurance and benefits coverage, in this regard, and our offerings must be priced competitively with those provided by these competitors in order for us to attract and retain our clients.
We believe that we compete based upon the principal competitive factors in our market include client satisfaction, ease of client setup and on-boarding, breadth and depth of our benefit plans, vertical market expertise, total cost of service, brand awareness and reputation, ability to innovate and respond to client needs rapidly, access to online and mobile solutions, and subject matter expertise. We believe that we compete favorably onare competitive across these factors. For additional information about our competition, please refer to Part I, Item 1A. Risk Factors, of this Form 10-K, under the basisheading - To succeed, we must work to improve our products and services to meet the expectations of each of these factors.our clients and applicable regulations. If we fail to meet those expectations and regulations, we may lose clients and harm our business.
Intellectual Property
We own or license from third parties various computer software, as well as other intellectual property rights, used in our business. Generally, we protect our intellectual property rights through the use of confidentiality and non-disclosure agreements and policies with our employees and third-party partners and vendors, although we currently have one pending U.S. patent application covering our technology.vendors. We also own registered trademarks in the U.S.,United States, Canada and the European Union covering our name and other trademarks and logos that we believe are materially important to our operations.
Corporate Employees
We refer to our employees that are not co-employed with our clients as our corporate employees. We had approximately 2,7002,900 corporate employees as of December 31, 2017. None of our2019. Our corporate employees are not covered by a collective bargaining agreement.
Corporate and Other Available Information
We were incorporated in 1988 as TriNet Employer Group, Inc., a California corporation. We reincorporated as TriNet Merger Corporation, a Delaware corporation, in 2000 and during that year changed our name to TriNet Group, Inc. Our principal executive offices areoffice is located at 1100 San Leandro Blvd.,One Park Place, Suite 400, San Leandro,600, Dublin, CA 9457794568 and our telephone number is (510) 352-5000. Our website address is www.trinet.com. Information contained in or accessible through our website is not a part of this report.
On the Investor Relations page of our Internet website at http://www.trinet.com, we make available, free of charge, ourOur Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge at investor.trinet.com as soon as reasonably practicable after we file such material is electronically filed with, or furnishedfurnish it to, the SEC.
The Alternatively, the public may read and copy any materials that we file with the SECaccess these reports at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SECSEC's website at www.sec.gov. The contents of these websites are not incorporated into this report and are not part of this report.
Item 1A. Risk Factors
Below is a discussion of the risks that we believe are significant to our business. These risks are not the only ones we face. We may face additional risks that we do not currently consider to be significant or of which we are not currently aware, and any of these risks could cause our actual results to differ materially from historical or anticipated results. You should carefully consider these risks along with the other information provided in this Annual Report, including the information in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our accompanying consolidated financial statements, as well as the information under the heading "Cautionary Note Regarding Forward-Looking Statements" before investing in any of our securities. We may amend, supplement or add to the risk factors described below from time to time in future reports filed with the SEC.
Operational Risks
Our co-employment relationship with our worksite employees exposes us to business risks.
We are the co-employer of our WSEs. As the co-employer of our WSEs, we assume certain risks and obligations of an employer. For instance, we face the risk of providing access to health benefits to our WSEs even if the cost of providing benefits exceeds the fees received from our clients. The extent of our responsibility for other aspects of our co-employer relationship with our WSEs remains subject to regulatory uncertainty at the federal, state and local levels. For example, under certain circumstances, we may be found to be responsible for paying salaries, wages and related payroll taxes of our WSEs, even if our clients have not timely remitted payments to us.
Our WSEs work in our clients' workplaces. Our ability to control the workplace environment of our clients is limited. As a co-employer of WSEs, we may be subject to liability for violations of labor and employment laws, workers' compensation laws, industry-specific laws that apply to the businesses our clients operate, and other laws that apply to our clients or to employers generally. We may also be liable for acts and omissions by our clients or WSEs, even if we do not violate such laws or participate in such acts or omissions. Federal and state positions regarding co-employment relationships can change, and have frequently changed in the past, with varying degrees of impact on our operations. We cannot predict when changes will occur or forecast whether any particular future changes will be favorable or unfavorable to our operations. Any such changes could reduce or eliminate the attractiveness of using a PEO and/or significantly increase our compliance costs and the cost to provide our products or services, which could result in a material adverse effect on our financial condition and results of operations.
We seek to mitigate these risks through agreements and insurance coverage and by requiring certain clients to pre-fund certain obligations. Our agreements with our clients divide responsibilities between us and our clients and provide that our clients will indemnify us for any liability attributable to their own or our WSEs' conduct. However, we may not be able to effectively enforce or collect on these obligations. In addition, we maintain insurance coverage, including workers’ compensation and EPLI coverage, to limit our and our clients' exposure to various WSE-related claims, but subject to split by contract, we are still responsible for any deductible layer under such insurance and such insurance generally excludes coverage for claims relating to the classification of employees as exempt or non-exempt, other wage and hour issues, and employment contract disputes. We cannot assure you that our insurance will be sufficient in amount or scope to cover all claims that may be asserted against us and for which we are unable to obtain indemnification from our clients.
Negative publicity relating to events or activities attributed to us or our corporate employees as a result of the actions of our customers and WSEs, or others associated with them, whether or not justified, may tarnish our reputation and reduce the value of our brand. In addition, if our brand is negatively impacted, it may have a material adverse effect on our business, including creating challenges in retaining clients or attracting new clients and hiring and retaining employees.
Unexpected changes in workers' compensation and health insurance costs and claims by worksite employees could harm our business.
Our insurance costs, which make up a significant portion of our overall costs, are significantly affected by our WSEs’ health and workers' compensation insurance claims experience. Our fully insured insurance plans are provided by third-party insurance carriers under risk-based or under guaranteed-cost insurance policies. Refer to Note 1 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K for further discussion of these policies.
Under our risk-based health insurance policies, we assume the risk of variability in future health claims costs for our enrollees. We have experienced variability, and may experience variability in the future, in the amounts that we are required to pay for group health insurance expenses incurred by WSEs within our deductible layer under these risk-based policies, based on changing trends in the volume and severity of medical and pharmaceutical claims. This variability arises from changes to the components of medical cost trend (MCT), defined as changes in participant use of services, the introduction of new treatment options, changes in treatment guidelines and mandates, and changes in the mix and unit cost of services provided to plan participants. These trends change, and other seasonal trends and variability may develop, which makes it difficult for us to predict this aspect of our business and which may have a material adverse effect on our business.
Under our fully insured workers' compensation insurance policies, we assume the risk for losses up to $1 million per claim occurrence (deductible layer). Refer to Note 1 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K for further discussion of these policies. The ultimate cost of the workers’ compensation services provided will not be known until all the claims are settled. If we do not accurately predict the risks that we assume, we may not charge adequate fees to cover our costs, which could reduce our net income and result in a material adverse effect on our business. Our ability to predict these costs is limited by unexpected increases in frequency or severity of claims, which can vary due to changes in the cost of treatments or claim settlements.
We accrue for the estimated future costs of reimbursing our workers' compensation and health insurance carriers under our insurance policies, using external actuaries and our own experience to develop the estimates, but the volume and severity of claims activity is inherently unpredictable. Estimating these accrued costs requires us to consider a number of factors and requires significant judgment.
In addition, we accrue for estimated future costs of reimbursing our workers' compensation and health insurance carriers under our insurance policies, using external actuaries and our own experience to develop the estimates. Estimating these accrued costs requires us to consider a number of factors and requires significant judgment.
If we subsequently receive updated information indicating that the volume and severity of insurance claims were higher or lower than previously estimated and reported, our insurance costs could be higher or lower, respectively, in that period or subsequent periods as we adjust our accrued costs accordingly, which could have a material adverse effect on our business. We have experienced both favorable and unfavorable insurance cost variability due to claims activity in the past and could have similar or worse experiences in the future. Refer to Critical Accounting Judgments and Estimates in Part II, Item 7. MD&A, of this Form 10-K for further discussion of these estimates.
Our SMB clients are particularly affected by volatility in the financial and economic environment, which could harm our business.
Our clients are small and mid-sized businesses that we believe can be susceptible to changes in the level of overall economic activity in the markets in which we operate. These businesses are often exposed to credit and cash liquidity risks that larger businesses may be able to avoid and during periods of weak economic conditions, small business failures tend to increase and employment levels tend to decrease. During these periods, our clients have in the past and may in the future reduce employee headcount, compensation and/or benefits levels, which could negatively affect our revenues and margins if we are unable to reduce our operating expenses sufficiently or quickly enough.
Weak economic forecasts or conditions have in the past and may in the future also affect the willingness of our clients and potential clients to pay outside vendors for services like ours, and may impact their ability to pay their obligations to us on time, or at all. During such periods, we are also likely to see an increase in unemployment and related COBRA claims and employment-related costs from our clients and WSEs and we may be legally or practically unable to recover these costs or increase the fees we charge our customers in these situations.
In addition, most of our clients are concentrated in certain geographic regions and operate in a relatively small number of industries, including the technology, life sciences, not-for-profit, professional services and financial services industries. As a result, if any of those geographic regions or specific industries suffers a downturn, even if the economy at the national level remains strong, the portion of our business attributable to clients in that region or industry could be adversely affected, which could have a material adverse effect on our financial condition or results of operations.
Any failure in our business systems, or in any third-party business systems or service provider that we rely upon, could reduce the quality of our business services, harm our reputation and expose us to liability.
Our business is highly dependent on in-house and third-party data processing centers and systems that rely on the complex integration of numerous hardware and software subsystems to manage, on a daily basis, a large volume of client and WSE transactions, including the processing of employee, payroll and benefits data. In addition, we rely on third-party systems to provide services for our clients and WSEs, including insurance carrier networks and databases that manage the benefits provided to, and claims made by, our clients and WSEs and electronic banking systems and payroll tax systems that transmit payments and data to clients, WSEs and taxing agencies. These centers and systems have been, and could be disrupted by, among other things, equipment failures, computer server or systems failures, network outages, malicious acts, software errors or defects, vendor performance problems, power failures, natural disasters, terrorist actions or similar events. We have also experienced office closures on the East Coast on multiple occasions over the past few years due to hurricane threats, and in California due to increased wildfire threats in the state. Our offices and data processing centers in these and other locations will continue to face the risk of closure or damage in the future due to climate change.
Any delay or failure in our business continuity response to these events, or in the response of our third-party service providers, even if only for a short period of time, can have a significant impact on our clients and WSEs. This could cause clients to leave us, result in reduced revenues, increase our liability to our clients and WSEs, any of which could result in a materially adverse effect on our reputation and business.
We also rely on enterprise software applications licensed from third parties that are updated from time to time. Any failure of these systems for any reason could delay or prevent us from providing services to our clients, which would have a material adverse effect on our business and results of operations.
Adverse changes in our insurance coverage, or in our relationships with key insurance carriers, could harm our business.
Our success depends in part on our ability to maintain competitive health and workers' compensation coverage options and insurance rates through well-known insurance carriers. If we are unable to maintain competitive insurance rates or obtain popular and desirable coverage plans through well-known insurance carriers, it could affect our ability to attract and retain clients, which could have a material adverse effect on our business. Where we sponsor insurance coverage and we are not responsible for any deductibles, our carriers set the fixed cost of the plan, which may lead to uncompetitive fees. Even where we sponsor insurance under which we are responsible for deductibles, we may not be able to control our costs in a way that would make our fees competitive.
In addition, broad adoption of our services in certain geographic regions or industries may make it more difficult for us to obtain competitive health and/or workers' compensation insurance rates due to concentration of clients within a particular region or industry. The loss of any one or more of our key insurance vendors in these areas, or our inability to partner with certain vendors that are better-known or more desirable to our clients or potential clients, could have a material adverse effect on our financial condition and results of operations.
Clients may terminate our services based on a variety of factors, many of which are difficult for us to control, which can negatively impact our business.
We regularly experience client attrition due to a variety of factors that are difficult for us to control or predict, including cost pressures, client merger and acquisition activity, reactions to any proposed increases in administrative and insurance service fees by us, client business failure, effects of competition, and client decisions to bring their HR administration in-house. Our standard client service agreement can generally be canceled by us or by the client without penalty with 30 days’ prior written notice. If we were to experience client attrition in excess of our historic annual attrition rate, it could have a material adverse effect on our business, financial condition and results of operations.
To succeed, we must work to improve our products and services to meet the expectations of our clients and applicable regulations. If we fail to meet those expectations and regulations, we may lose clients and harm our business.
In order to attract and retain clients, we believe that we must compete in our industry effectively on the basis of the value proposition that we deliver to our clients including customer experience and satisfaction, relevance and price of our benefit plans, vertical market expertise, total price of service, brand awareness and reputation, ability to innovate and respond to customer needs rapidly, access to online and mobile solutions, and subject matter expertise. The expectations of our clients and prospective clients in these areas change over time as a result of many factors outside of our control, such as competition, regulatory and technical changes, and changing trends in the demands employees place on SMB employers. If we are unable to satisfy the evolving product and service delivery expectations of our clients and WSEs, then we could experience lower client satisfaction, lower rates for on-boarding new clients and higher client attrition, which could have a material adverse effect on our business.
To satisfy the product and service delivery expectations of our clients and regulators, we must also timely and effectively identify, develop, or license the technologies we need, and implement those technologies into the solutions that we provide. New products or upgrades may not be released according to schedule, or may contain defects when released. Difficulties with the performance of our new technologies could result in adverse publicity, loss of sales, delay in market acceptance of our services, or client claims against us, any of which could materially harm our business. Even if we are capable of satisfying client expectations in these areas, we may not be able to do so on a cost-effective basis, which could have a material adverse effect on our financial condition and our results of operations. In addition, we could lose market share if our competitors develop superior products and services or satisfy client or regulatory demands before we are able to do so.
We have acquired, and may in the future acquire, other businesses and technologies, which can divert management's attention and create integration risks and other risks for our business.
We have completed numerous acquisitions of other businesses and technologies, and we expect that we will continue to pursue future acquisitions. Acquisitions involve numerous other risks, some of which we have experienced in the past and which we may experience in the future, including:
over-valuing and over-paying for businesses and technologies,
increased operating costs and unanticipated costs to successfully integrate the clients, WSEs, operations, systems, technologies, services and personnel of the acquired business,
establishing or maintaining required internal controls, procedures and policies for the acquired business,
diversion of management’s attention from other business concerns,
litigation resulting from the activities of the acquired business,
insufficient revenues, insurance or seller indemnification to offset increased expenses associated with the acquisitions and unanticipated liabilities of the acquired businesses,
entering markets in which we have no prior experience and may not succeed,
potential loss of key employees or key clients of the acquired business as a result of the acquisition or integration of the acquired business.
We have experienced increased operating costs to resolve the challenges of prior acquisitions. If we fail to appropriately integrate any acquired business, we may fail to achieve our growth, service enhancement or operational efficiency objectives, and our business, results of operations and financial condition could be harmed.
Our business and operations have undergone and will continue to undergo significant change as we seek to improve our operational effectiveness. If we are unable to effectively manage this change, our business and results of operations may suffer.
We have changed our operations and internal processes in recent periods in order to improve our operational effectiveness, and to provide improved client support and services. Managing these changes will continue to require further refinement to our operational, financial and management controls and reporting systems and procedures while we simultaneously seek to effectively recruit, integrate, train and motivate new corporate employees, retain our existing corporate employees, maintain the beneficial aspects of our corporate culture, effectively execute our business plan, satisfy the requirements of our existing clients, acquire new clients, and enhance the quality and scope of our services. These activities will require significant operating and capital expenditures and allocation of valuable management and employee resources, which we expect will continue to place significant demands on our management and on our operational and financial infrastructure. If we fail to manage these changes effectively, our costs and expenses may increase more than we expect and our business, financial condition and results of operations may be harmed.
If we are unable to attract, maintain and manage qualified personnel, including our sales force, our business may be harmed.
Our ability to provide the products and services that our clients need, satisfy our strategic objectives and grow depends in part on our ability to attract and retain highly motivated and qualified personnel. Competition for skilled employees is intense and, if we are unable to attract and retain such personnel, our business may suffer. In addition, we have invested significant time and resources into developing a corporate culture that we believe will help us provide improved products and services and increase client satisfaction with our services. If we are unable to attract and retain the personnel needed to support and further develop our corporate culture, our business may not grow at the rate that we anticipate, which could have a material adverse effect on our financial condition and results of operations. For example, we have experienced in the past, and may in the future experience, elevated sales force attrition as a result of our change in industry focus, compensation structure changes, third-party competition for sales talent and other factors. Newly hired sales personnel are typically not productive for some period of time following their hiring, which results in increased near-term costs to us relative to their actual sales contributions during this period. If we are unable to effectively train and maintain an adequately seasoned sales force, our revenues likely will not increase at the rate that we anticipate, which could have a material adverse effect on our business, financial condition and results of operations.
Similarly, we rely on qualified personnel to properly manage and maintain our internal control processes, including internal control over financial reporting. Our internal control environment involves a significant number of manual procedures. If we are unable to effectively train and maintain qualified personnel to manage and operate these procedures, it is possible that our internal controls may not remain effective, which could negatively affect the market price and trading liquidity of our common stock, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition.
Our industry is competitive, which may limit our ability to maintain or increase our market share or improve our results of operations.
We face significant competition on a national and regional level from other PEOs, as well as other existing, and potential, companies and industries that service, or may in the future service, client HR needs. Refer to the heading “Competition” under Part I, Item 1. Business, above for more details. Our competitors, regardless of industry, may have greater marketing and financial resources than we have, and may be better positioned than we are in certain markets. Increased competition in our industry could result in price reductions or loss of market share, any of which could harm our business. We expect that we will continue to experience competitive pricing pressure.
Moreover, we may not be successful in convincing potential clients that the use of our services is a superior, cost-effective means of satisfying their HR obligations relative to the way in which they currently satisfy these obligations either by themselves or by using the services of our competitors. If we cannot compete effectively against other PEOs or against the alternative means by which companies meet their HR obligations, or if we are unable to convince clients or potential clients of the advantages of our offerings, our market share and business may suffer, resulting in a material, adverse effect on our financial condition and results of operations.
Data Privacy and Security Risks
Cyber-attacks or other security-related incidents could result in reduced revenue, increased costs, liability claims, regulatory penalties, and damage to our reputation.
We collect, store, use, retain, disclose, transfer and otherwise process a significant amount of confidential, sensitive and personal information from and about our actual and potential clients, WSEs and corporate employees, including bank account and social security numbers, tax information, certain medical information, certain health claim information, PHI, retirement account information and payroll data. Maintaining the security of our infrastructure and the confidentiality of the confidential, sensitive and personal information of our clients, WSEs and corporate employees is critical as the clients, WSEs and corporate employees using our technology platform and services rely on our security infrastructure to protect their confidential, sensitive and personal information. In providing our services, we also rely on third-party service providers, such as insurance carriers and banks, who also have access to confidential, sensitive and personal information about our clients, WSEs and corporate employees. Some of those service providers in turn subcontract with other service providers.
Due to the size and complexity of our technology platform and services, the amount of confidential, sensitive and personal information that we store and the number of clients, WSEs, corporate employees and service providers with access to confidential, sensitive and personal information, we and our service providers are potentially vulnerable to a variety of intentional and inadvertent cyber-attacks and other security-related incidents and threats, which could result in a disclosure of information and a material adverse effect on our business. The occurrence of any actual or attempted cyber-attack or other security-related incident, the reporting of such an incident, whether accurate or not, or our failure to make adequate or timely disclosures to the public or law enforcement agencies following any such event, whether due to delayed discovery or a failure to follow existing protocols, could result in significant fines, penalties, orders, sanctions and proceedings or actions against us or our service providers by governmental bodies and other regulatory authorities, clients or third parties, which could in turn result in a material adverse effect on our financial condition and results of operations. Any such fines, penalties, order, sanctions, proceedings or actions, and any related indemnification obligation, could damage our reputation, force us to incur significant expenses in defense of these proceedings or to pay fines and penalties, distract our management, increase our costs of doing business or result in the imposition of financial liability.
Threats to our information technology systems and data security can take a variety of forms. Hackers may develop and deploy viruses, worms and other malicious software programs that attack our networks and data centers or those of our service providers. Other malicious actors may direct social engineering, phishing, credential stuffing, ransomware, denial or degradation of service attacks and similar types of attacks against any or all of us, our clients and our service providers. Other threats include inadvertent security breaches or theft, misuse or unauthorized access or other improper actions by our employees, clients, WSEs, service providers and other business partners. Cyber-attacks and other security-related incidents are increasing in frequency and evolving in nature. Given the unpredictability of the timing, nature and scope of cyber-attacks and other security-related incidents, there can be no assurance that any security procedures and controls that we or our service providers have implemented will be sufficient to prevent such incidents from occurring. Furthermore, because the methods of attack and deception change frequently, are increasingly complex and sophisticated, and can originate from a wide variety of sources, including third parties such as service providers and even nation-state actors, it is possible that we may not be able to anticipate, detect, appropriately react and respond to, or implement effective preventative measures against, all cyber-attacks and other security-related incidents. As a result, disclosure of confidential, sensitive and personal information could occur due to the occurrence of such attacks of incidents, which could materially and adversely affect our financial condition or results of operations.
We, our clients and our service providers have been the victims of these types of threats, attacks and security breaches in the past. No security measures, procedures, technology or amount of preparation can provide guaranteed protection from these threats, and we, our clients and our service providers expect to be victims again in the future. Cyber-attacks have disrupted, or resulted in unauthorized access to, our networks, applications, bank accounts, and confidential, sensitive and personal information, or those of our clients or WSEs or service providers, in the past and successful attacks may occur again in the future. We, our service providers and our clients have experienced security incidents in the past that led to disclosure of the confidential, sensitive or personal information we possess and we and they could experience such incidents in the future. In addition, we have in the past been, and may in the future be, required to report data breaches to regulators, affected individuals, clients and other third parties. While we do not believe that any such past events resulted in material expenditures or a material loss of confidential, sensitive or personal information, we cannot guarantee that any future events will not have a material impact on our operations.
Any cyber-attack, unauthorized intrusion, insider theft, malicious software infiltration, network disruption, denial of service or other data security incident could result in disruption to our clients' or service providers' systems and services, product development delays, compliance breaches, and the disclosure or misuse of confidential, sensitive and personal information. This could have a material adverse effect on our business operations, result in liability, fines and penalties or other regulatory sanctions, a loss of confidence in our ability to provide our services, and/or harm our reputation and relationships with current or potential clients. We may be required to expend significant capital and other resources to protect against, respond to, and recover from any potential, attempted, or existing cyber-attacks or other security-related incidents and their consequences. The costs of identifying and remediating any threat, attack, breach, or disclosure, and the costs associated with responding to litigation or regulatory investigations, could have a material adverse effect on our business and reduce our operating margins. Although we maintain insurance coverage, the amount of our insurance may not cover the costs associated with any security incident, and we cannot be certain that cyber insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. Any publicized security incident, or even public rumors about a security incident, affecting our businesses and/or those of our service providers may also have a similarly material adverse effect on our business or reputation. Moreover, there could be public announcements regarding any security-related incidents and any steps we take to respond to or remediate such incidents, if securities analysts or investors perceive these announcements to be negative, could have a material adverse effect on the price of our common stock.
Our efforts to protect against and to remediate cyber-attacks, other security-related incidents, and data breaches may not succeed and any such event, whether intentional or inadvertent and whether attributable to us or our service providers, could have a material adverse effect on our business, reputation and the price of our common stock.
We have implemented policy, procedural, technical, physical, and administrative controls with the aim of protecting our networks, applications, bank accounts, and the confidential, sensitive and personal information entrusted to us, including bank account and social security numbers, tax information, certain medical information, certain health claim information, PHI, retirement account information and payroll data, from cyber-attacks and other security-related incidents. While we, and our service providers, have security measures and programs in place to prevent, detect, and respond to cyber-attacks, security-related incidents, data breaches and other similar threats, these security measures and programs and our collective efforts may not always succeed. Despite our efforts and those of our service providers, we cannot fully eliminate the possibility of such cyber-attacks, security-related incidents and other threats, whether intentional or inadvertent and whether internal or external and we, our clients or our service providers may not discover a security incident for a significant period of time after the incident occurs.
In some cases, we perform risk assessments of our service providers or require them to undertake security measures through contract provisions. However, we do not control our service providers and our ability to monitor their data security is limited, so we cannot ensure the security measures they take will be sufficient to protect our confidential, sensitive and personal information. Due to applicable laws and regulations or contractual obligations, we may be held responsible for any cyber-attack or other security-related incident attributed to our service providers regarding the information we share with them and any contractual protections we may have from our service providers may not be sufficient to adequately protect us from any such liabilities and losses.
We have invested, and plan to continue investing, in resources to protect our information security ecosystem against cyber-attacks, other security-related incidents, and data breaches and to investigate and remediate any information security vulnerabilities. However, the security protections and strategies that we implement, and the investigation and remediation efforts we undertake, may not be successful. Any security breach, whether intentional or inadvertent, could result in the access, public disclosure, loss or theft of our clients', WSEs' and corporate employees’ confidential, sensitive and personal information, which could negatively affect our ability to attract new clients, cause existing clients to terminate their agreements with us, result in significant reputational damage and subject us to significant lawsuits, regulatory fines, or other actions or liabilities, any of which could materially and adversely affect our business and operating results.
We must comply with constantly evolving, data privacy and security laws and regulations, which may require substantial costs or changes to our business, and any actual or perceived compliance failure could result in reduced revenue, increased costs, liability claims, regulatory penalties, and damage to our reputation.
We are subject to various federal, state and local laws, rules, and regulations, as well as contractual obligations, relating to the collection, storage, use, retention, security, disclosure, transfer and other processing of confidential, sensitive and personal information. Existing laws and regulations are constantly evolving, and new laws and regulations that apply to our business are being introduced at every level of government inside and outside of the United States. For example, all 50 U.S. states, the District of Columbia and Canada have enacted breach notification laws that may require us to notify WSEs, clients, corporate employees, or other third parties regulators in the event of unauthorized access to or disclosure of confidential, sensitive or personal information experienced by us or our service providers.
In addition to breach notification laws, we have seen increased focus at every level of government inside and outside of the United States on regulating the collection, store, use, retention, security, disclosure, transfer and other processing of confidential, sensitive and personal information. For example, in recent years, many states have proposed or enacted new laws or amended existing laws. Certain state laws, including the CCPA, may be more stringent or broader in scope, or offer greater individual rights, with respect to confidential, sensitive and personal information than federal, international or other state laws, and such laws may differ from each other, which may complicate compliance efforts, requiring attention to changing regulatory requirements. We believe that we currently comply with the requirements of the CCPA, but additional provisions of the CCPA will become effective in 2021. While we are working to comply with these provisions, we cannot guarantee that we will not incur significant costs or that our efforts will be successful. As a sponsor of employee benefit plans with access to certain PHI, we are subject to regulation at the federal level, including under the HIPAA and the HITECH Act. HIPAA contains restrictions and health data privacy, security and breach notification requirements with respect to the use and disclosure of PHI and there are penalties and fines for HIPAA violations.
For details regarding these data privacy and security laws and regulations discussed above and that apply to our operations, refer to Part I, Item 1. Business, of this Form 10-K, under the heading Legal and Regulatory: Data Privacy and Security Regulations. Complying with these and any other data privacy and security laws, rules and regulations, and with any new laws or regulations or changes to existing laws, could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business, divert resources from other initiatives and projects, and restrict the way products and services involving data are offered, all of which may have a material adverse effect on our business. For example, we have incurred and expect to continue to incur additional costs to comply with the CCPA and other similar regulations. Despite our efforts, in the future we may be unable to make required changes and modifications to our business practices in a commercially reasonable manner, or at all. Given the rapid development of cybersecurity and data privacy laws, we expect to encounter inconsistent interpretation and enforcement of these laws and regulations, as well as frequent changes to these laws and regulation. As a result, we may be required to incur significant, unexpected compliance costs and we may be exposed to significant penalties or liability for non-compliance, the possibility of fines, lawsuits (including class action privacy litigation), regulatory investigations, criminal or civil sanctions, audits, adverse media coverage, public censure, other claims, significant costs for remediation and damage to our reputation, all of which could have a material adverse effect on our business and operations. Any inability, or the perception of any inability, to adequately address data privacy or security-related concerns, even if unfounded, or to comply with applicable laws, regulations, standards and other obligations relating to data privacy and security, could result in additional cost and liability to us, damage our relationships with clients and have a material adverse effect on our business.
Legal and Compliance Risks
Our business is subject to numerous complex laws, and changes in, uncertainty regarding, or adverse application of these laws could negatively affect our business.
The products and services we provide to our clients are subject to numerous complex federal, state and local laws and regulations, including those described under the heading "Legal and Regulatory" in Part I, Item 11. Business, of this Form10-K. Many of these laws (such as ERISA, the ACA and state healthcareForm 10-K. These laws and other federalregulations cover a diverse range of topics, including employer, employee and stateindependent contractor classifications, employee benefit, health and retirement plan laws, workers' compensation laws, employment and payroll tax laws, such asworksite safety laws, insurance and banking laws, wage and hour laws, anti-discrimination laws, etc.) mayand many laws specific to the industries of our clients. Many of these laws do not result in a consistent approachspecifically address PEOs or co-employment relationships, and regulators are often unfamiliar with the PEO industry and co-employment relationships, which can lead to unpredictable application, interpretation and enforcement of these laws and regulations at the federal, state and local level, may not specifically address PEOs and co-employment relationships or may allow significant regulatory interpretation and discretionlevels in enforcement. As a result, there is uncertainty in how they might be appliedrelation to our operations and those of our clients and WSEs.business.
NewAny new laws, changes in existing laws, or any adverse application, interpretation or interpretationenforcement of new or existing laws, regardingincluding those described in Part I, Item 1. Business, of this Form 10-K, whether they apply to employers generally or specifically to PEOs or to our co-employment relationship with our clients and WSEs (in courts, agencies or otherwise) could relationships could:
reduce or eliminate the need for,value and benefits that customers realize by using our products and services,
change or benefit provided by, some or alleliminate the types of theproducts and services we provide, or
require us to make significant changes in our methods of doingto how we do business and providing services. Regulatory changes could also provide products and services,
affect the extent and type of employee benefits that employers and co-employers can or must provide employees,
alter the amount, timing and type of taxes employers, co-employers and employees are required to pay and that we are able to manage for our clients
increase the cost and complexity of the licensing requirements for our business operations,
create or the time within which employers must remit taxesincrease our liability and responsibilities to applicable tax authorities. our clients and WSEs, and/or
mandate new compliance requirements, disclosures or services.
Any such new laws,of these changes in laws or adverse application or interpretation of laws could have a material adverse effect on our financial condition and results of operations. Changes
The laws that apply in our industry and to employers and co-employers have in the past, and could in the future, be changed, replaced or uncertainty regarding, the TCJA, ACA and other health care reforms or tax reforms could materially impactinterpreted in a manner adverse to our businessoperations and we are not able to predict the occurrence, direction or ultimate impact of these events. Any such reforms onnew laws, change in laws or adverse application or interpretation of laws could reduce or eliminate the attractiveness of our business operations.
For example,products and services, provide customers with new and attractive alternatives to our products and services, significantly increase our compliance costs and the newly passed TCJA will result in sweepingcost to provide our products and services, or require us to make substantial changes to the taxation of individuals and businesses in 2018 and beyond. Federal implementation of these tax reforms, and the changes to state tax laws that may result from federal tax reforms, may materially change the way in which we provide payroll tax services for our clients, as well as the business incentives that matter to our clients. Our ability to timely comply with the numerous changes under the TCJA and to continue to provide services that take advantageoperate, any one of new business incentives created by the TCJAwhich could haveresult in a materiallymaterial adverse effect on our ability to attractfinancial condition and retain clients.results of operations.
Changing laws and regulations governing health insurance and other traditional employee benefits at the federal, state and local level could negatively affect our business.
Similarly, changesChanges to and continued uncertainty regarding the implementation and future of health care reform in the United States, underat the ACA, any successor to the ACA, or related or similarfederal, state laws,and local level, has the potential to substantially change the health insurance market for SMBs and how such employers provide health insurance to their employees, which could have a materially adverse effect on how we provide our sponsored health benefits to our WSEs, and our ability to attract and retain our clients. For example,In addition, changes at the TCJA's elimination offederal, state and local level to the ACA individual mandate tax penalty beginning in 2019 may reducelaws and regulations regarding other traditional employee benefits, such as retirement and workers’ compensation benefits, also have the number of WSEs who participate in our insurance programs, and proposed rule changes bypotential to substantially change the DOL may increase the availability of "association health plans," which may compete with the health plans we provide, or impact the operation of other types of health plans, including the plansbenefit programs that are available to SMBs and that we sponsor. Thereand other PEOs may also be significant additional changesrequired to the ACA in 2018 and beyond, including the potential modification, amendment or repeal of the ACA. Tax reform changes brought about by the TCJA and changes to federal health care laws, including to the ACA, could also result in new or amended laws being introduced at the state or local level. In addition, state tax regulators may engage in their own tax reforms as a result of the passage of the TCJA.offer. Our ability to comply with, and adapt our product offerings to take advantage of, any such changes could require significant additional costs, andprove cost prohibitive and/or otherwise divert management attention, which could result in a material adverse effect on our financial condition and results of operations.
If we are not recognized as an employer of worksite employees under federal and state regulations, or are deemed to be an insurance agent or third-party administrator, we and our clients could be adversely impacted.
In order to sponsor our employee benefit plan offerings for WSEs, we must qualify as an employer of WSEs for certain purposes under the Code and ERISA. In addition, our status as an employer is important for purposes of ERISA’s preemption of certain state laws. The definition of employer under various laws is not uniform, and under both the Code and ERISA, the term is defined in part by complex multi-factor tests.
Generally, these tests are designed to evaluate whether an individual is an independent contractor or employee and they provide substantial weight to whether a purported employer has the right to direct and control the details of an individual's work. Some factors that the IRS has considered important in the past in evaluating this issue have included the employer’s degree of behavioral control (the(for example the extent of instructions, training and the natureevaluation of the work), financial control and the economic aspects of the work relationship, the intenttype of the parties,relationship, as evidenced by the specific benefit,
contract, terminationif any, whether employee benefits are provided, whether the work is indefinite in duration or project-based, and other similar arrangements between the parties and the on-going versus project-oriented naturewhether it is a regular part of the work to be performed.employer’s business. However, a definitive judicial interpretation of “employer” in the context of PEOs has not been established. For ERISA purposes, for example, courts have held that test factors relating to the ability to control and supervise an individual are less important, while the U.S. Department of LaborDOL has issued guidance that certain entities in the HR outsourcing industry do not qualify as common law employers for ERISA purposes. Although we believe that we qualify as an employer of WSEs under ERISA and the U.S. Department of LaborDOL has not provided guidance otherwise, we are not able to predict the outcome of any future regulatory challenge.
If we were found not to be an employer for ERISA purposes, it could adversely affect the manner in which we are able to provide employee benefits to WSEs. Similarly, to qualify for favorable tax treatment under the Code, certain employee benefit plans, such as 401(k) retirement plans and cafeteria plans must be established and maintained by an employer for the exclusive benefit of its employees. All of our 401(k) retirement plans are operated pursuant to guidance provided by the IRS and we have received favorable determination letters from the IRS confirming the qualified status of thethese plans. However, the IRS uses its own complex, multi-factor test to ascertain whether an employment relationship exists between a worker and a purported employer. Although we believe that we qualify as an employer of WSEs under the Code, we cannot assure you that the IRS will not challenge thisour position or continue to provide favorable determination letters. Moreover, the IRS' 401(k) guidance and qualification requirements are not applicable to the operation of our cafeteria plans.
If we are not recognized as an employer under the Code or ERISA, we may be required to change the method by which we report and remit payroll taxes to the tax authorities and the method by which we provide, or discontinue providing, certain employee benefits to WSEs, whichWSEs. Such changes could have a material adverse effect on our business and results of operations.
The definition of employers, employees and independent contractors is evolving. Changes to the laws and regulations that govern what it means to be an employer or an employee may require us to make significant changes in our operations and may negatively affect our business.
National views on employers, employees and independent contractors are changing at a rapid rate, as evidenced by recent federal and state rule changes. In September 2019 California passed AB5, a law that could potentially reclassify client independent contractors as employees. AB5 and similar changes in rules defining when a worker is an employee or independent contractor can increase or decrease the pool of WSEs that we are allowed to include in our TriNet sponsored benefit plans, which may negatively impact client demand for the products and services we provide, require us to modify or change how we operate our business and have a material adverse effect on our business and results of operations.
In addition, in January 2020, the DOL issued a new rule broadening the definition of joint employer that has been used under the Fair Labor Standards Act (FLSA) for more than sixty years. Joint employment is not the same as co-employment, and we do not believe that we are a joint employer under the new DOL rule or that this rule change impacts our status as a co-employer. However, these changes could potentially result in increased FLSA jointemployment claims, which could divert management attention and cause us to incur additional and potentially material costs to defend.
The examples above highlight the impact to our business when regulations regarding the definitions or classification of employers, employees, independent contractors and other groups of workers change. Any such regulatory changes could affect the way in which we provide TriNet-sponsored benefits to our WSEs, the way in which we report and remit payroll taxes to tax authorities, and our legal liability for the actions and inactions of our clients. Any of such regulatory changes could also require us to change the manner in which we operate our business, or provide our products and services, and could have an adverse effect on our business and results of operations.
If we fail to qualify as a co-employer of WSEs under applicable federal and state licensing rules, or if we are deemed to be operating in certain industries, we and our clients could be adversely impacted.
We must also qualify as co-employers of WSEs and comply with state licensing, certification and registration requirements for the regulation of PEOs. Forty-twoPEOs at the federal level and in nearly every state. We expect states have passed such laws and other states may implement suchwithout these regulations to adopt similar requirements in the future.future and states without these regulations today often still have laws and regulations applicable to PEOs. While we believe that we satisfy theseapplicable state regulations, these requirements vary from state to state, they have changed frequently in the past, and could change frequently and ifagain in the future, with potentially material impact on our operations. If we are not able to satisfy existing or future licensing requirements or other applicable regulations in any state, we may be prohibited from doing business in that state, including having any clients within that state.
In addition, stateState regulatory authorities generally impose licensing requirements on companies acting as insurance agents or third-party administrators, such as those that handle health or retirement plan funding and claim processing. Other state regulatory authorities impose licensing requirements on companies involved in the transmission of cash, such as banks, and other money transmitters. We do not believe that our current activities require any such licensing,licenses, but ifwe and others in our industry have received inquiries from regulatory authorities in the past and could receive them in the future. If regulatory authorities in any state determine that we are acting as an insurance agent, third-party administrator, money transmitter, or as any other regulated industry other than a third-party administrator,PEO, we may need to hire additional personnel to manage regulatory compliance and become obligated to pay annual regulatory fees, which could have a material adverse effect on our financial condition and results of operations.
Our co-employment relationship with our worksite employees exposes usWe are subject to business risks.legal and tax proceedings that may result in adverse outcomes.
We are subject to claims, suits, government investigations, and proceedings arising from the co-employerordinary course of our WSEs. Asbusiness. Refer to Note 10 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K for additional information about the co-employer of our WSEs, we assume certain obligations and responsibilities of an employer. For instance,legal proceedings we are responsiblecurrently involved in and future proceedings that we may face. Current and future legal proceedings may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, results of operations, financial condition and liquidity.
In addition, the tax authorities in the U.S. regularly examine our income and other tax returns. Refer to Note 13 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K for providing health benefits toadditional details regarding our WSEs regardlesson-going tax examinations and disputes. The ultimate outcome of whethertax examinations and disputes cannot be predicted with certainty. Should the costIRS or other tax authorities assess additional taxes as a result of providing benefits exceeds the fees received from our clients. However, the extent of our responsibility forthese or other aspects of our co-employer relationship with our WSEs remains subject to regulatory uncertainty at the state and federal level. For example, under certain circumstances,examinations, we may be foundrequired to be responsible for paying salaries, wages and related payroll taxesrecord charges to operations that could have a material impact on our results of our WSEs, even if our clients have not timely remitted payments to us.operations, financial position or cash flows.
We co-employ people in our clients' workplaces. Our ability to control the workplace environment of our clients is limited. As a co-employer of WSEs, there is a possibility that we may be subject to liability for violations of employment or other laws and other acts and omissions by our clients or WSEs even if we do not participate in any such acts or omissions. State and federal regulations interpreting co-employment relationships are in a constant state of flux and we cannot predict when changes will occur or forecast whether any particular future changes will be favorable to our operations or not.
We seek to mitigate these risks through our client agreements and insurance coverage. Our agreements with our clients establish the contractual division of responsibilities between us and our clients and that they will indemnify us for any liability attributable to their own or our WSEs' conduct, however, we may not be able to effectively enforce or collect on these contractual obligations. In addition, we maintain insurance coverage, including workers’ compensation, directors and officers and employment practices liability insurance coverage, to limit our and our clients' exposure to various WSE related claims, but we are still responsible for any deductible layer under such insurance and such insurance generally excludes coverage for claims relating to the classification of employees as exempt or non-exempt,
other wageFinancial and hour issues, and employment contract disputes, among other things. We cannot assure you that our insurance will be sufficient in amount or scope to cover all claims that may be asserted against us and for which we are unable to obtain indemnification from our clients.
Negative publicity relating to events or activities attributed to us, our corporate employees, WSEs, or others associated with any of these parties, whether or not justified, may tarnish our reputation and reduce the value of our brand. In addition, if our brand is negatively impacted, it may have a material adverse effect on our business, including creating challenges in retaining clients or attracting new clients and hiring and retaining employees.
Cyber-attacks or security breaches could result in reduced revenue, increased costs, liability claims or damage to our reputation.
Maintaining the security of our IT infrastructure and the confidentiality of our clients' and WSEs' personal data and information is paramount for us and our clients. Clients using our technology platform rely on the security of our IT infrastructure to ensure the reliability of our products and services and the protection of sensitive client and WSE data. We use and store a large amount of personal and confidential information about our clients, WSEs and colleagues, including bank account and social security numbers, tax return data, certain medical information, retirement account information and payroll data. Threats to security can take a variety of forms. Hackers may develop and deploy viruses, worms and other malicious software programs that attack our networks and data centers. Sophisticated organizations or individuals may launch targeted attacks to gain access to our networks, applications and confidential data, such as phishing attacks.
We have implemented technical, physical, and administrative controls in order to protect personal and confidential information entrusted to us. In providing our services, we also rely on third-party service providers, such as insurance carriers, to process personal and confidential information about our clients, WSEs and employees. Through contractual provisions, we take steps to require that our service providers protect such information. However, we cannot guarantee the performance of our service providers and, ultimately, despite all of our efforts, threats to our IT infrastructure and our clients’ and WSEs’ data as these threats continue to grow in frequency, complexity and sophistication. While we, and our service providers, have programs in place to prevent, detect, and respond to data security incidents, these programs and our collective efforts may not always succeed. As a result, we may be required to invest significant additional resources to modify and enhance our information security to protect against such incidents.
Any cyber attack, unauthorized intrusion, insider theft, malicious software infiltration, network disruption or denial of service could result in disruption to our systems and services, product development delays, and the disclosure or misuse of personal and confidential information. This could have a material adverse effect on our business operations, result in liability or regulatory sanction or a loss of confidence in our ability to provide our services, or harm relationships with current or potential clients. Further, the cost of remediating any attack, breach or disclosure and costs associated with responding to litigation or regulatory investigations could have a material adverse effect on our business or reduce our operating margins. Maintaining the security of confidential WSE information is particularly important to us as a sponsor of employee benefit plans with access to certain personal health information. The manner in which we manage protected health information (PHI) is subject to HIPAA and the HITECH Act. To the extent possible, the health information we possess is anonymized and accessed through a secured third-party database. Although we maintain, and actively seek to improve, security measures and infrastructure designed to protect against unauthorized access to this sensitive data, cyber attacks and security breaches remain a significant threat to our business. Any security breach could result in the access, public disclosure, loss or theft of the confidential and personal data, including PHI, of our clients and WSEs, which could negatively affect our ability to attract new clients, cause existing clients to terminate their agreements with us, result in reputational damage and subject us to lawsuits, regulatory fines, or other actions or liabilities which could materially and adversely affect our business and operating results.
We are subject to various federal and state laws, rules, and regulations relating to the collection, use, and security of personal and confidential information. For example, most states and the District of Columbia have enacted breach notification laws that may require us to notify WSEs, clients, employees, or regulators in the event of unauthorized access to or disclosure of personal or confidential information. Complying with these various laws, and any new laws or regulations that may be promulgated, could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. Changes or inconsistencies in interpretations of these laws and regulations and/or changes in enforcement priorities may result in significant penalties or liability for non-compliance.
Unexpected changes in workers' compensation and health insurance claims by worksite employees could harm our business.
Our insurance costs, which make up a significant portion of our overall costs, are impacted significantly by our WSEs’ health and workers' compensation insurance claims experience. We establish reserves to provide for the estimated costs of reimbursing our workers' compensation and health insurance carriers under our insurance policies, relying on third-party actuaries and our own experience, but the volume and severity of claims activity is inherently unpredictable. If we experience a sudden or unexpected increase or decrease in claim activity, our costs could increase or decrease, respectively. An increase in claim activity could make it more difficult to secure replacement insurance policies on competitive terms once our current policies expire. Estimating these reserves involves our consideration of a number of factors and requires significant judgment. If there is an unexpected increase or decrease in the severity or frequency of claims activity of our WSEs (including activity arising from any of a number of factors that affect claim activity levels, such as changes in general economic conditions, claims differing significantly from expectations, and terrorism, disease outbreaks or other catastrophic events), or if we subsequently receive updated information indicating insurance claims were higher or lower than previously estimated and reported, our insurance costs could be higher or lower, respectively, in that period or subsequent periods as we adjust our reserves accordingly, which could have a material adverse effect on our business. We have experienced both favorable and unfavorable insurance cost variability due to claims activity in the past and could have similar or worse experience in the future.
Some of our health insurance policies include risk-based policies that can limit our exposure for individual claims and our maximum aggregate claims exposure in each policy year. Refer to Note 1 in Part II, Item 8 of this Form 10-K for further discussion of these policies. We have experienced variability, and may experience variability in the future, in the amounts that we are required to pay for group health insurance expenses incurred by WSEs within our deductible layer under these risk-based policies, based on continually changing trends in the frequency and severity of claims. These historical trends may change, and other seasonal trends and variability may develop, which may make it more difficult for us to manage this aspect of our business and which may have a material adverse effect on our business.Stock Ownership Risks
Our results of operations and stock price may fluctuate as a result of numerous factors, many of which are outside of our control.
Our future operating results and stock price are subject to fluctuations and quarterly variations based upon a variety of factors, many of which are not within our control, including, without limitation:
the volume and severity of health and workers' compensation insurance claims made by our WSEs, recorded as part of our insurance costs, and the timing of related claims information provided by our insurance carriers,
the amount and timing of our insurance premiums and other insurance costs, operating expenses and capital expenditures,
the number of our new clients initiating service and the number of WSEs employed by each new client,
the retention loss or mergerloss of existing clients, for any reason, including third-party acquisition,
a reduction in the number of WSEs employed by existing clients,
the timing of client payments and payment defaults by clients,
the costs associated with our acquisitions of companies, assets and technologies,
any payments or drawdownsdraw downs on our credit facility,
any unanticipated expenses, such as litigation or other dispute-related settlement payments and compliance expenses arising from changes in regulations or regulatory enforcement,
any expenses we incur for geographic and service expansion and product and service enhancements,
any changes in laws or adverse interpretation or enforcement of laws, increasingwhich may require us to change the manner in which we operate and/or increase our regulatory compliance costs,
any changes in our effective tax rate,
the issuance of common stock or debt to pay for future acquisitions, which could dilute our stockholders or subject us to significant debt service obligations,
amortization expense, or the impairment of intangible assets and goodwill, associated with past or future acquisitions, and
the impact of new accounting pronouncements.
In addition, the trading price of our common stock is subject to fluctuation in response to a variety of factors, including the factors above and below, many of which are not within our control, including, without limitation:
the overall performance of the equity markets,
any trading activity, or a market expectation regarding such activity, by our directors, executive officers and significant stockholders,
the economy as a whole, and its impact on SMBs and our clients,
the performance and market perception of companies that investors believe are similar to us, and
any significant changes in the liquidity of our common stock.
Many of the above factors are discussed in more detail elsewhere in this “Risk Factors”Risk Factors section and in Part II, Item 77. MD&A, of this Form 10-K. Many of these factors are outside our control, and the variability and unpredictability of these factors have in the past and could in the future cause us to fail to meet our expectations and the expectations of investors and any industry analysts who cover our shares, which could result in a decline in our share price and reduced liquidity in our shares. In addition, the occurrence of one or more of these factors might cause our results of operations to vary widely, which could lead to negative impacts on our margins, short-term liquidity, orand our ability to retain or attract key personnel, and could cause other unanticipated issues, including a downgrade of our shares by or change in opinion of industry analysts and a related decline in our share price. Accordingly, we believe that quarter-to-quarter and annual comparisons of our revenues, results of operations and cash flows may not be meaningful and should not be relied upon as an indication of our future performance.
Any failure in our business systems could reduce the quality of our business services, which could harm our reputation and expose us to liability.
Our business systems rely on the complex integration of numerous hardware and software subsystems to manage client transactions including the processing of employee, payroll and benefits data. These systems can be disrupted by, among other things, equipment failures, computer server or systems failures, network outages, malicious acts, software errors or defects, vendor performance problems, power failures, natural disasters, terrorist actions or similar events. Any delay or failure in our systems that impairs our ability to communicate electronically with our clients, employees, vendors or the government agencies to which we make tax and other filings on behalf of WSEs, or our ability to store or process data could harm our reputation and our business. For example, errors in our products and services, such as the erroneous denial of healthcare benefits or delays in making payroll, could expose our clients to liability claims from improperly serviced WSEs, for which we may be contractually obligated to provide indemnification.
In addition, the software, hardware and networking technologies we use must be frequently and rapidly upgraded in response to technological advances, competitive pressures consumer expectations and new and changing laws. To succeed, we need to effectively develop, or license from third parties, and integrate these new technologies as they become available to improve our services. We rely on enterprise software applications licensed from third parties that are upgraded from time to time. Any difficulties we encounter in adapting application upgrades to our systems could harm our performance, delay or prevent the successful development, introduction or marketing of new services.
New products or upgrades may not be released according to schedule, or may contain defects when released. Difficulties in integrating new technologies could result in adverse publicity, loss of sales, delay in market acceptance of our services, or client claims against us, any of which could harm our business. We could also incur substantial costs in modifying our services or infrastructure to adapt to these changes. In addition, we could lose market share if our competitors develop technologically superior products and services.
We have identified a material weakness in our internal control over financial reporting that could, if not remediated, result in a material misstatement in our financial statements.
In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2017, we have identified and concluded that we continue to have a material weakness relating to our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Refer to Part II, Item 9A in this Form 10-K for more details. While the material weakness described in that section creates a reasonable possibility that an error in financial reporting may go undetected, after extensive review and the performance of additional analysis and other procedures, no material adjustments, restatement or other revisions to our previously issued financial statements were required.
As further described in Part II, Item 9A of this form 10-K below, we are taking specific steps to remediate a material weakness that we identified by implementing and enhancing our control procedures. This material weakness will not be remediated until all necessary internal controls have been implemented, repeatably tested and determined to be operating effectively. In addition, we may need to take additional measures, including system migration and automation, to address the material weakness or modify the remediation steps, and we cannot be certain that the measures we have taken, and expect to take, to improve our internal controls will be sufficient to address the issues identified, to ensure that our internal controls are effective or to ensure that the identified material weakness will not result in a material misstatement of our annual or interim consolidated financial statements. Implementing any appropriate changes to our internal controls may distract our officers and employees and require material cost to implement new
process or modify our existing processes. Moreover, other material weaknesses or deficiencies may develop or be identified in the future. If we are unable to correct material weaknesses or deficiencies in internal controls in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission, will be adversely affected. This failure could negatively affect the market price and trading liquidity of our common stock, lead to delisting, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition.
We have acquired, and may in the future acquire, other businesses and technologies, which can divert management's attention and create integration risks and other risks for our business.
We have completed numerous acquisitions of other businesses and technologies, and we expect that we will continue to grow through similar future acquisitions. Such acquisitions involve numerous other risks, including:
identifying attractive acquisition candidates,
over-valuing and over-paying for acquisition candidates,
integrating the operations, systems, technologies, services and personnel of the acquired companies, including the migration of WSEs from an acquired company’s technology platform and legal service providers to ours,
establishing or maintaining internal controls, procedures and policies relating to the acquired systems and processes, including the potential for actual or perceived control weaknesses associated with or arising from the acquisitions and integration of acquired systems,
diversion of management’s attention from other business concerns,
litigation resulting from activities of the acquired company, including claims from terminated employees, clients, former stockholders and other third parties,
insufficient revenues to offset increased expenses associated with the acquisitions and unanticipated liabilities of the acquired companies,
insufficient indemnification or security from the selling parties for legal liabilities that we may assume in connection with our acquisitions,
entering markets in which we have no prior experience and may not succeed,
potential loss of key employees of the acquired companies, and
impairment of relationships with clients and employees of the acquired companies or our clients and employees as a result of the integration of acquired operations and new management personnel.
If we fail to integrate newly acquired businesses effectively, we might not achieve the growth, service enhancement or operational efficiency objectives of the acquisitions, and our business, results of operations and financial condition could be harmed.
We may pay for acquisitions by issuing additional shares of our common stock, which would dilute our stockholders, or by issuing debt, which could include terms that restrict our ability to operate our business or pursue other opportunities and subject us to significant debt service obligations. We may also use significant amounts of cash to complete acquisitions. To the extent that we complete acquisitions in the future, we likely will incur future amortization expenses associated with the acquired assets. We may also record significant amounts of intangible assets, including goodwill, which could become impaired in the future. Any such impairment charges would adversely affect our results of operations.
Our SMB clients are particularly affected by volatility in the financial and economic environment, which could harm our business.
Our clients are small and mid-sized businesses that we believe can be particularly susceptible to changes in the level of overall economic activity in the markets in which we operate. During periods of weak economic conditions, small business failures tend to increase and employment levels tend to decrease. Current or potential clients may react to weak or forecasted weak economic conditions by reducing employee headcount or wages, bonuses or benefits levels, any of which would affect our revenues, and may affect our margins, because we may be unable to reduce our operating expenses sufficiently enough or quickly enough to offset the drop in revenues. It is difficult for us to forecast future demand for our services due to the inherent difficulty in forecasting the direction, strength and length of economic cycles. These conditions may affect the willingness of our clients and potential clients to pay outside vendors for services like ours, and may impact their ability to pay their obligations to us on time, or at all.
For example, as a result of macroeconomic factors, interest rates may become more volatile. Increased interest rate volatility could also negatively impact our clients' and prospects' access to credit. If businesses have difficulty obtaining credit, business growth and new business formation may be impaired, which could also harm our business. Even modest downturns in economic activity on a regional or national level could have a material adverse effect on our financial condition or results of operations.
In addition, it can be difficult to predict the impact of developments that are perceived as positive for SMBs. For example, the passage of the TCJA in December 2017, may create unexpected challenges or business incentives for our clients and fail to translate into increased demand for our services.
Our business and operations have experienced rapid growth in the past, and if we are unable to effectively manage future growth, our business and results of operations may suffer.
We have experienced rapid growth and have significantly expanded our operations in recent periods, which has placed a strain on our management and our administrative, operational and financial infrastructure. Managing this growth will continue to require further refinement to our operational, financial and management controls and reporting systems and procedures while we simultaneously seek to effectively recruit, integrate, train and motivate new corporate employees, retain our existing corporate employees, maintain the beneficial aspects of our corporate culture, effectively execute our business plan, satisfy the requirements of our existing clients, acquire new clients, and enhance the quality and scope of our services. These activities will require significant operating and capital expenditures and allocation of valuable management and employee resources, and we expect that our growth will continue to place significant demands on our management and on our operational and financial infrastructure, all of which could have a material adverse effect on our business. If we fail to manage our growth effectively, our costs and expenses may increase more than we expect them to, which in turn could harm our business, financial condition and results of operations.
If our vertical strategy is unsuccessful, or if we are unable to manage our sales force effectively, we may not be able to grow our business at the rate that we anticipate.
We have developed an industry vertical business strategy and we plan to continue to devote significant resources and time in pursuit of this strategy. Under our industry vertical strategy, our sales force, product development, and service teams are focused on specific business sectors. We cannot assure you that our industry vertical approach will resonate with our existing and prospective clients, that we will target the right industries, that our vertical products will have all of the features most valuable to existing and prospective clients in those industries, or that we will implement our strategy in a timely and effective manner. If our vertical strategy is unsuccessful, our business may not grow at the rate that we anticipate, which could have a material adverse effect on our financial condition and results of operations.
We have experienced sales force attrition in the past and we rely on a well-trained sales force to promote our industry vertical strategy and sell our solutions. Competition for skilled sales personnel is intense, and we cannot assure you that we will be successful in attracting, training and retaining qualified sales personnel, or that our newly hired sales personnel, including our new sales leader, will function effectively, either individually or as a group. In addition, our newly hired sales personnel are typically not productive for some period of time following their hiring. This results in increased near-term costs to us relative to the sales contributions of these newly hired sales personnel. If we are unable to effectively train our sales force and benefit from greater productivity of our sales representatives, or if our sales force is otherwise unable to sell our solutions as we anticipate, our revenues likely will not increase at the rate that we anticipate, which could have a material adverse effect on our business, financial condition and results of operations.
Most of our clients are concentrated in certain geographies and a relatively small number of industries, making us vulnerable to downturns in those geographies and industries.
Most of our clients are concentrated in certain geographies and operate in a relatively small number of industries, including the technology, life sciences, not-for-profit, professional services and financial services industries. As a result, if any of those geographic regions or specific industries suffers a downturn, the portion of our business attributable to clients in that region or industry could be adversely affected, which could have a material adverse effect on our financial condition or results of operations.
We are subject to legal proceedings that may result in adverse outcomes.
We are subject to claims, suits, government investigations, and proceedings arising from the ordinary course of our business. Refer to Note 13 in Part II, Item 8 of this Form 10-K for additional information about the legal proceedings we are currently involved in and future proceedings that we may face. Current and future legal proceedings may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, results of operations, financial condition and liquidity.
Changes in our income tax positions or adverse outcomes resulting from on-going or future tax audits, which could harm our business, operating results, financial condition and prospects.
Significant judgments and estimates are required in determining our provision for income taxes and other tax liabilities. Our provision for income taxes, results of operations and cash flows may be impacted if any of our tax positions are challenged and successfully disputed by the tax authorities. In determining the adequacy of our tax provision, we assess the likelihood of adverse outcomes that could result if our tax positions were challenged by the IRS and other tax authorities. The tax authorities in the U.S. regularly examine our income and other tax returns. Refer to Note 12 in Part II, Item 8 of this Form 10-K for additional details regarding our on-going tax examinations and disputes. The ultimate outcome of tax examinations and disputes cannot be predicted with certainty. Should the IRS or other tax authorities assess additional taxes as a result of these or other examinations, we may be required to record charges to operations that could have a material impact on our results of operations, financial position or cash flows.
Adverse changes in our insurance coverage, or in our relationships with key insurance carriers, could harm our business.
Our success depends in part on our ability to maintain competitive health and workers' compensation coverage options and insurance rates through well-known insurance carriers. If we are unable to maintain competitive insurance rates or obtain popular and desirable coverage plans through well-known insurance carriers, it could affect our ability to attract and retain clients, which would have a material adverse effect on our business. Where we sponsor insurance coverage and we are not responsible for any deductibles, our carriers set the premiums and the rates set by our carriers on these policies may not be competitive. Even where we sponsor insurance under which we are responsible for deductibles, we may not be able to control costs through the deductible layer in a way that would make our rates competitive.
In addition, broad adoption of our services in certain geographies or industries may make it more difficult for us to obtain competitive health and/or workers' compensation insurance rates due to concentration of clients within a particular geography or industry. The loss of any one or more of our key insurance vendors in these areas, or our inability to partner with certain vendors that are better-known or more desirable to our clients or potential clients, could have a material adverse effect on our financial condition and results of operations.
There is significant competition for our clients and clients may terminate our services based on a variety of factors that are difficult for us to control, which can negatively impact our business.
We regularly experience client attrition due to a variety of factors, including cost, client merger and acquisition activity, increases in administrative and insurance service fees, client business failure, effects of competition and clients deciding to bring their HR administration in-house. Our standard client service agreement can be cancelled by us or by the client without penalty with 30 days’ prior written notice. Clients who intend to cease doing business with us often elect to do so effective as of the beginning of a calendar year. As a result, we have historically experienced our largest concentration of client attrition in the first quarter of each year. In addition, we experience higher levels of client attrition in connection with renewals of the health insurance coverage we sponsor for WSEs in the event that such renewals result in increased costs. If we were to experience client attrition in excess of our historic annual attrition rate, it could have a material adverse effect on our business, financial condition and results of operations.
We believe the principal competitive factors in our market include client satisfaction, ease of client setup and on-boarding, breadth and depth of benefit plans, vertical market expertise, total cost of service, brand awareness and reputation, ability to innovate and respond to client needs rapidly, online and mobile solutions, and subject matter expertise. If we are unable to develop products that appeal to our clients, and that respond to the specific needs of our clients, on a cost-effective basis, our overall client satisfaction may decline and our reputation may suffer, which could lead us to experience greater rates of attrition and lower rates for on-boarding new clients, which could have a material adverse effect on our business.
The terms of our credit facility may restrict our current and future operations, which would impair our ability to respond to changes in our business and to manage our business.
Our credit facility contains, and any future indebtedness of ours would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us subject to customary exceptions, including restricting our ability to:
incur, assume or guarantee additionalprepay debt or incur or assume liens,
pay dividends or distributions or redeem or repurchase capital stock,
incur or assume liens,
make loans, investments andor acquisitions,
engage in sales of assets and subsidiary stock,
enter into sale-leaseback transactions,
enter into certain transactions with affiliates,
enter into certain hedging agreements,
enter into new lines of business,
prepay certain indebtedness,
transfer allcomplete a significant corporate transaction, such as a merger or substantially allsale of our assetscompany or enter into merger or consolidation transactions with another person,its assets, and
enter into agreements that prohibit the incurrence of liens or the payment by our subsidiaries of dividends and distributions.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced plans to phase out the use of LIBOR by the end of 2021. Our credit facility includes a LIBOR-indexed component and our lenders are not obligated to accept any LIBOR alternative that we may propose. However, we do not believe that the phase out of LIBOR will have a material effect on our operational or borrowing costs under our credit facility or any of our other business arrangements.
Our failure to comply with these restrictions and the other terms and conditions under our credit facility could result in a default, which in turn could result in the termination of the lenders’ commitments to extend further credit to us under our credit facility and acceleration of a substantial portion of our indebtedness then outstanding under our credit facility. If that were to happen, we may not be able to repay all of the amounts that would become due under our indebtedness or refinance our debt, which could materially harm our business and force us to seek bankruptcy protection.
Atairos, our largest stockholder, may have significant influence over our Company, and the existing ownership of capital stock, and thus the voting control, of our Company remains concentrated in our executive officers, directors and their affiliates, which limits your ability to influence corporate matters.
On February 1, 2017, an entity affiliated with Atairos Group, Inc. (together with its affiliates, “Atairos”) became our largest stockholder when it acquired the shares of TriNet common stock previously held by General Atlantic. In connection with this transaction, we appointed Michael J. Angelakis, the Chairman and CEO of Atairos, to our board of directors and agreed to nominate Mr. Angelakis or another designee of Atairos reasonably acceptable to our Nominating and Corporate Governance Committee for election at future annual meetings until Atairos’ beneficial ownership falls below 15% of our common stock. As of February 20, 2018,January 31, 2020, Atairos beneficially owned approximately 28% of our outstanding common stock, and all of our directors, executive officers and their affiliates, including Atairos, beneficially own, in the aggregate, approximately 38%37% of our outstanding common stock. As a result of the foregoing, Atairos, particularly when acting with our executive officers, directors and their affiliates, who beneficially owned in the aggregate, approximately 38% of our outstanding common stock, will beis able to exert substantial influence on all matters requiring
stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit the ability of other stockholders to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.
Our industry is highly competitive, which may limit our ability to maintain or increase our market share or improve our results of operations.
We face significant competition on a national and regional level from other professional employer organizations, as well as other existing, and potential, companies and industries that service, or may in the future service, client HR needs. Refer to the heading “Competition” under Item 1, Business, above for more details. Our competitors, regardless of industry, may have greater marketing and financial resources than we have, and may be better positioned than we are in certain markets. Increased competition in our industry could result in price reductions or loss of market share, any of which could harm our business. We expect that we will continue to experience competitive pricing pressure.Moreover, we may not be successful in convincing potential clients that the use of our services is a superior, cost-effective means of satisfying their HR obligations relative to the way in which they currently satisfy these obligations either by themselves or by using the services of our competitors. If we cannot compete effectively against other professional employer organizations or against the alternative means by which companies meet their HR obligations, or if we are unable to convince clients or potential clients of the advantages of our offerings, our market share and business may suffer, resulting in a material, adverse effect on our financial condition and results of operations.24
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PROPERTIES, LEGAL PROCEEDINGS AND MINE SAFETY DISCLOSURES |
Item 1B. Unresolved Staff Comments
None.
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PROPERTIES, LEGAL PROCEEDINGS AND MINE SAFETY DISCLOSURES |
Item 2. Properties
We lease space for 4954 offices in various U.S. states, in the U.S., including the following:
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Corporate: | Principal Client Service Centers: |
• San Leandro,Dublin, California | • Pleasanton, California |
| • Bradenton, Florida |
Technology Center: | • Reno, Nevada |
• Austin, Texas | • Fort Mill,Indian Land, South Carolina |
| • New York, New York |
All of these leases expire at various times up through 2028. We believe that our leases are sufficient for our current purposes and long-term growth and expansion goals.
Item 3. Legal Proceedings
For the information required in this section, refer to Note 1310 in Part II, Item 88. Financial Statements and Supplementary Data, of this Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders of Record
Our common stock has been listedis traded on the New York Stock Exchange under the symbol “TNET” since March 2014. The following table sets forth for the periods indicated the high and low sales prices per share of our common stock as reported on the New York Stock Exchange for the quarters indicated below:.
On February 20, 2018, the last reported sales price of our common stock on the New York Stock Exchange was $41.02 per share. As of February 20, 2018,6, 2020, we had 3439 holders of record of our common stock per Computershare Trust Company N.A., our transfer agent. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in a trust by other entities.
For information regarding our equity-based incentive plans, please refer to Part III, Item 1212. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this Form 10-K.
Dividend Policy
We did not declare or pay cash dividends in 20172019 or 2016.2018. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions under our credit facility (refer to Note 89 in Part II, Item 88. Financial Statements and Supplementary Data, of this Form 10-K), capital requirements, business prospects and other factors our board of directors may deem relevant.
Performance Graph
The graph on the following graphpage compares the cumulative return on our common stock since the initial public offering in MarchDecember 31, 2014 with the cumulative return on the S&P 500 Index and a Peer Group Index (1).Index. The cumulative return is based on the assumption that $100 had been invested in TriNet Group, Inc. common stock, the Standard & Poor's 500 Stock Index (S&P 500) and common stock of members of thea Peer Group Index, all on the date of TriNet's initial public offering in MarchDecember 31, 2014 and that all quarterly dividends were reinvested. The cumulative dollar returns shown on the graph represent the value that such investments would have had at each quarteryear end.
COMPARISON OF 45 MONTH5-YEAR CUMULATIVE TOTAL RETURN
Among TriNet Group, Inc., the S&P 500 Index, and a Peer Group(1)
(1) The Peer Group Index used in the chart above consists of the following companies:
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Automatic Data Processing, Inc. | Insperity, Inc. | Paychex, Inc.
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Barrett Business Services, Inc. | Intuit, Inc. | |
Issuer Purchases of Equity Securities
Our ongoing stock repurchase program was originally approved by our board of directors in 2014 and has been subsequently amended. As of December 31, 2019, our board of directors had authorized us to repurchase up to an aggregate $615 million under this program of which approximately $236 million remained available as of December 31, 2019 for repurchases under all authorizations approved by the board of directors. We repurchased approximately $140 million of our common stock in 2019 using existing cash and cash equivalents through our Rule 10b5-1 plan. Under the program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934. This repurchase authorization has no expiration. We plan to use current cash and cash generated from ongoing operating activities to fund this share repurchase program. We use this 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.
Issuer Purchases of Equity Securities
We repurchased a total of approximately $44 million of our outstanding common stock in 2017 using existing cash and cash equivalents balances through our Rule 10b5-1 plan. In December 2017, our board of directors approved a $120 million incremental increase to our ongoing stock repurchase program, resulting in approximately $136 million remaining available for repurchases under all authorizations approved by the board of directors as of December 31, 2017. Stock repurchases under the program are primarily intended to offset the dilutive effect of share-based employee incentive compensation.
The following table provides information about our purchases of TriNet common stock during the fourth quarter of 2017:2019:
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Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans (2) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans (in millions) (2) |
October 1 - October 31, 2017 | 90,793 |
| $ | 34.41 |
| 89,407 |
| $ | 18 |
|
November 1 - November 30, 2017 | 112,208 |
| $ | 41.02 |
| 31,070 |
| $ | 16 |
|
December 1 - December 31, 2017 | 410 |
| $ | 43.13 |
| — |
| $ | 136 |
|
Total | 203,411 |
| | 120,477 |
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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 of Shares that May Yet Be Purchased Under the Plans (in millions) (2) |
October 1- October 31, 2019 | 156,425 |
| $ | 55.89 |
| 156,285 |
| $ | 283 |
|
November 1 - November 30, 2019 | 554,910 |
| $ | 53.79 |
| 488,765 |
| $ | 257 |
|
December 1 - December 31, 2019 | 513,349 |
| $ | 55.55 |
| 382,671 |
| $ | 236 |
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Total | 1,224,684 |
| | 1,027,721 |
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(1) 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.
(2) We repurchased a total of approximately $4$56 million of our outstanding stock during the three months ended December 31, 2017.2019.
In February 2020, our board of directors authorized a $300 million incremental increase to our ongoing stock repurchase program initiated in May 2014. We use this program to return value to our stockholders and to offset dilution from the issuance of stock under our equity-based incentive plan and employee purchase plan.
Our stock repurchases and dividends are subject to certain restrictions under the terms of our credit facility. For more information about our stock repurchases and dividendthe restrictions imposed by our credit facility, refer to Note 812 in Part II, Item 8. Financial Statements and Note 9 in Item 8Supplementary Data, of this Form 10-K.
Item 6. Selected Financial Data
The following selected consolidated financial and other data should be read in conjunction with Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsMD&A, as well as our audited consolidated financial statements and related notes included in Part II, Item 88. Financial Statements and Supplementary Data, of this Form 10-K.
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| Year Ended December 31, |
(in millions, except per share data) | 2017 | 2016 | 2015 | 2014 | 2013 |
Income Statement Data: | | | | | |
Total revenues | $ | 3,275 |
| $ | 3,060 |
| $ | 2,659 |
| $ | 2,194 |
| $ | 1,644 |
|
Operating income | 217 |
| 124 |
| 78 |
| 87 |
| 66 |
|
Net income | 178 |
| 61 |
| 32 |
| 15 |
| 13 |
|
Diluted net income per share of common stock | 2.49 |
| 0.85 |
| 0.44 |
| 0.22 |
| 0.24 |
|
Non-GAAP measures (1): | | | | | |
Net Service Revenues (1) | 809 |
| 646 |
| 547 |
| 508 |
| 417 |
|
Net Insurance Service Revenues (1) | 351 |
| 199 |
| 146 |
| 166 |
| 145 |
|
Adjusted EBITDA (1) | 285 |
| 185 |
| 151 |
| 165 |
| 136 |
|
Adjusted Net income (1) | 142 |
| 87 |
| 71 |
| 74 |
| 57 |
|
| | | | | |
Balance Sheet Data: | | | | | |
Cash and cash equivalents | $ | 336 |
| $ | 184 |
| $ | 166 |
| $ | 134 |
| $ | 94 |
|
Working capital | 234 |
| 156 |
| 112 |
| 121 |
| 82 |
|
Total assets | 2,593 |
| 2,095 |
| 2,092 |
| 2,341 |
| 1,435 |
|
Notes payable | 423 |
| 459 |
| 494 |
| 545 |
| 819 |
|
Total liabilities | 2,387 |
| 2,060 |
| 2,084 |
| 2,366 |
| 1,705 |
|
Convertible preferred stock | — |
| — |
| — |
| — |
| 123 |
|
Total stockholders’ equity (deficit) | 206 |
| 35 |
| 8 |
| (25 | ) | (393 | ) |
| | | | | |
Cash Flow Data: | | | | | |
Net cash provided by operating activities (2) | $ | 253 |
| $ | 149 |
| $ | 151 |
| $ | 162 |
| $ | 116 |
|
Net cash used in investing activities | (24 | ) | (27 | ) | (38 | ) | (45 | ) | (212 | ) |
Net cash provided by (used in) financing activities (2) | (77 | ) | (104 | ) | (81 | ) | (76 | ) | 127 |
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| Year Ended December 31, |
(in millions, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 |
Income Statement Data: | | | | | |
Total revenues | $ | 3,856 |
| $ | 3,503 |
| $ | 3,275 |
| $ | 3,060 |
| $ | 2,659 |
|
Net income | 212 |
| 192 |
| 178 |
| 61 |
| 32 |
|
Diluted net income per share of common stock | 2.99 |
| 2.65 |
| 2.49 |
| 0.85 |
| 0.44 |
|
Non-GAAP measures (1): | | | | | |
Net Service Revenues | 929 |
| 893 |
| 809 |
| 646 |
| 547 |
|
Net Insurance Service Revenues | 399 |
| 406 |
| 351 |
| 199 |
| 146 |
|
Adjusted EBITDA | 378 |
| 347 |
| 285 |
| 185 |
| 151 |
|
Adjusted Net Income | 236 |
| 218 |
| 142 |
| 87 |
| 71 |
|
| | | | | |
Balance Sheet Data: | | | | | |
Working capital | 228 |
| 221 |
| 234 |
| 156 |
| 112 |
|
Total assets | 2,748 |
| 2,435 |
| 2,593 |
| 2,095 |
| 2,092 |
|
Long-term debt | 391 |
| 413 |
| 423 |
| 459 |
| 494 |
|
Total stockholders’ equity | 475 |
| 375 |
| 206 |
| 35 |
| 8 |
|
| | | | | |
Cash Flow Data: | | | | | |
Net cash (used in) provided by operating activities | $ | 471 |
| $ | (104 | ) | $ | 606 |
| $ | 192 |
| $ | (281 | ) |
Net cash (used in) investing activities | (188 | ) | (200 | ) | (24 | ) | (27 | ) | (38 | ) |
Net cash (used in) financing activities | (176 | ) | (85 | ) | (77 | ) | (104 | ) | (81 | ) |
Non-GAAP measures (1): | | | | | |
Corporate operating cash flows | 233 |
| 234 |
| 299 |
| 189 |
| 169 |
|
| |
(1) | Refer to Non-GAAP Financial Measures section on the following pages for definitions and reconciliations from GAAP measures. |
| |
(2) | Prior years' balances have been retrospectively adjusted for Accounting Standards Update (ASU) 2016-09. Refer to Note 1 in Item 8 of this Form 10-K for details. |
Significant Transactions Affecting Comparability Between Periods
|
| | | |
| | Business Acquisitions | Equity and Debt Activities |
| | | |
2014 | | None | • In March, we completed our initial public offering (IPO) by issuing
15,000,000 shares of common stock and received $217 million net
proceeds.
• As a result of the IPO, all our shares of preferred stock were converted
into common stock.
• With the IPO proceeds, the outstanding second lien term loan of
$190 million was fully paid off.
|
| | | |
| | | |
2013 | | • We acquired Ambrose for a total of $195 million. | • The board of directors declared and paid total special dividends of
$358 million.
• In August, the outstanding credit facility was amended and restated with:
- A $750 million first lien credit facility including a $175 million three-
year term loan (B-1 term loan), a $455 million seven-year term loan
(B-2 term loan) and a $75 million revolving facility, and
- A $190 million second lien seven-year-six-month term loan.
|
| | | |
Non-GAAP Financial Measures
In addition to financial measures presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP),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 useful information that we use in order 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, 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 represented 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 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 represented 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. • We also sometimes refer to Net Insurance Margin (NIM), which is the ratio of Net Insurance Revenue to Insurance Service Revenue.
|
Adjusted EBITDA | • Net income, excluding the effects of: - income tax provision, - interest expense, - depreciation, - amortization of intangible assets, - stock-based compensation expense and
- in 2014, secondary offering costs related to offering of shares from existing stockholders.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, that have fluctuated significantly over the past five years, and stock-basedstock 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.
|
|
| | |
Adjusted Net Income | • Net income, excluding the effects of: - effective income tax rate (1), - stock-basedstock based compensation, - amortization of intangible assets, - non-cash interest expense (2), and - debt prepayment premium,
- in 2014, secondary offering costs related to offering of shares from existing stockholders, and
- 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 as described above, debt paymentcharges. |
Corporate Operating Cash Flows | • Net cash (used in) provided by 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, 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 secondary offering costsstockholders 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 these are not directly resulting froma liquidity measure to manage liquidity between corporate and WSE related activities, and to help determine and plan our core operations or indicative of our ongoing operations.
cash flow and capital strategies.
|
| |
(1) | AsWe have adjusted our non-GAAP effective tax rate to 25.5%, 26%, 41%, 43% and 42% for 2019, 2018, 2017, 2016 and 2015, respectively. The change in 2018 is due primarily to a decrease in the statutory tax rate from 35% to 21%. The changes in 2017, 2016 and 2015 are a result of result changes in state income taxes from an increase in excludable income for state income tax purposes or state legislative changes, we have adjusted our non-GAAP effective tax rate to 41%, 43%, 42%, 40% and 40% for 2017, 2016, 2015, 2014 and 2013, respectively.changes. These non-GAAP effective tax rates exclude the income tax impact from stock-basedstock 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. |
Reconciliation of GAAP to Non-GAAP Measures
The table below presents a reconciliation of Total revenues to Net Service Revenues: |
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2019 | 2018 | 2017 | 2016 | 2015 |
Total revenues | $ | 3,856 |
| $ | 3,503 |
| $ | 3,275 |
| $ | 3,060 |
| $ | 2,659 |
|
Less: Insurance costs | 2,927 |
| 2,610 |
| 2,466 |
| 2,414 |
| 2,112 |
|
Net Service Revenues | $ | 929 |
| $ | 893 |
| $ | 809 |
| $ | 646 |
| $ | 547 |
|
The table below presents a reconciliation of Insurance service revenues to Net Insurance Service Revenues:
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2019 | 2018 | 2017 | 2016 | 2015 |
Insurance service revenues | $ | 3,326 |
| $ | 3,016 |
| $ | 2,817 |
| $ | 2,613 |
| $ | 2,258 |
|
Less: Insurance costs | 2,927 |
| 2,610 |
| 2,466 |
| 2,414 |
| 2,112 |
|
Net Insurance Service Revenues | $ | 399 |
| $ | 406 |
| $ | 351 |
| $ | 199 |
| $ | 146 |
|
NIM | 12 | % | 13 | % | 12 | % | 8 | % | 6 | % |
The table below presents a reconciliation of Net income to Adjusted EBITDA: |
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2019 | 2018 | 2017 | 2016 | 2015 |
Net income | $ | 212 |
| $ | 192 |
| $ | 178 |
| $ | 61 |
| $ | 32 |
|
Provision for income taxes | 58 |
| 49 |
| 22 |
| 43 |
| 28 |
|
Stock based compensation | 41 |
| 44 |
| 32 |
| 26 |
| 18 |
|
Interest expense and bank fees | 21 |
| 22 |
| 20 |
| 20 |
| 19 |
|
Depreciation and amortization of intangible assets | 46 |
| 40 |
| 33 |
| 35 |
| 54 |
|
Adjusted EBITDA | $ | 378 |
| $ | 347 |
| $ | 285 |
| $ | 185 |
| $ | 151 |
|
Adjusted EBITDA Margin | 41 | % | 39 | % | 35 | % | 29 | % | 28 | % |
Reconciliation of GAAP to Non-GAAP Measures
The table below presents a reconciliation of total revenues to Net Service Revenues: |
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2017 | 2016 | 2015 | 2014 | 2013 |
Total revenues | $ | 3,275 |
| $ | 3,060 |
| $ | 2,659 |
| $ | 2,194 |
| $ | 1,644 |
|
Less: Insurance costs | 2,466 |
| 2,414 |
| 2,112 |
| 1,686 |
| 1,227 |
|
Net Service Revenues | $ | 809 |
| $ | 646 |
| $ | 547 |
| $ | 508 |
| $ | 417 |
|
The table below presents a reconciliation of insurance service revenuesNet income to Adjusted Net Insurance Service Revenues:Income:
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2017 | 2016 | 2015 | 2014 | 2013 |
Insurance service revenues | $ | 2,817 |
| $ | 2,613 |
| $ | 2,258 |
| $ | 1,852 |
| $ | 1,372 |
|
Less: Insurance costs | 2,466 |
| 2,414 |
| 2,112 |
| 1,686 |
| 1,227 |
|
Net Insurance Service Revenues | $ | 351 |
| $ | 199 |
| $ | 146 |
| $ | 166 |
| $ | 145 |
|
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2019 | 2018 | 2017 | 2016 | 2015 |
Net income | $ | 212 |
| $ | 192 |
| $ | 178 |
| $ | 61 |
| $ | 32 |
|
Effective income tax rate adjustment | (11 | ) | (13 | ) | (59 | ) | (1 | ) | 3 |
|
Stock based compensation | 41 |
| 44 |
| 32 |
| 26 |
| 18 |
|
Amortization of intangible assets | 5 |
| 5 |
| 5 |
| 16 |
| 39 |
|
Non-cash interest expense | 1 |
| 4 |
| 2 |
| 4 |
| 4 |
|
Income tax impact of pre-tax adjustments | (12 | ) | (14 | ) | (16 | ) | (19 | ) | (25 | ) |
Adjusted Net Income | $ | 236 |
| $ | 218 |
| $ | 142 |
| $ | 87 |
| $ | 71 |
|
The table below presents a reconciliation of net incomecash (used in) provided by operating activities to Adjusted EBITDA and Adjusted EBITDA Margin:corporate operating cash flows:
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2017 | 2016 | 2015 | 2014 | 2013 |
Net income | $ | 178 |
| $ | 61 |
| $ | 32 |
| $ | 15 |
| $ | 13 |
|
Provision for income taxes | 22 |
| 43 |
| 28 |
| 18 |
| 8 |
|
Stock-based compensation | 32 |
| 26 |
| 18 |
| 11 |
| 6 |
|
Interest expense and bank fees | 20 |
| 20 |
| 19 |
| 54 |
| 46 |
|
Depreciation | 28 |
| 19 |
| 15 |
| 14 |
| 12 |
|
Amortization of intangible assets | 5 |
| 16 |
| 39 |
| 52 |
| 51 |
|
Secondary offering costs | — |
| — |
| — |
| 1 |
| — |
|
Adjusted EBITDA | $ | 285 |
| $ | 185 |
| $ | 151 |
| $ | 165 |
| $ | 136 |
|
Adjusted EBITDA Margin (1) | 35 | % | 29 | % | 28 | % | 33 | % | 33 | % |
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2019 | 2018 | 2017 | 2016 | 2015 |
Net cash (used in) provided by operating activities | $ | 471 |
| $ | (104 | ) | $ | 606 |
| $ | 192 |
| $ | (281 | ) |
Change in WSE related other current assets | (15 | ) | 33 |
| 35 |
| (96 | ) | 188 |
|
Change in WSE related liabilities | (223 | ) | 305 |
| (342 | ) | 93 |
| 262 |
|
Corporate Operating Cash Flows | $ | 233 |
| $ | 234 |
| $ | 299 |
| $ | 189 |
| $ | 169 |
|
(1) Adjusted EBITDA Margin is calculated as the ratio of Adjusted EBITDA to Net Service Revenues
The table below presents a reconciliation of net income to Adjusted Net Income:
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2017 | 2016 | 2015 | 2014 | 2013 |
Net income | $ | 178 |
| $ | 61 |
| $ | 32 |
| $ | 15 |
| $ | 13 |
|
Effective income tax rate adjustment | (59 | ) | (1 | ) | 3 |
| 5 |
| — |
|
Stock-based compensation | 32 |
| 26 |
| 18 |
| 11 |
| 6 |
|
Amortization of intangible assets | 5 |
| 16 |
| 39 |
| 52 |
| 51 |
|
Non-cash interest expense | 2 |
| 4 |
| 4 |
| 22 |
| 14 |
|
Debt prepayment premium | — |
| — |
| — |
| 4 |
| — |
|
Secondary offering costs | — |
| — |
| — |
| 1 |
| — |
|
Income tax impact of pre-tax adjustments | (16 | ) | (19 | ) | (25 | ) | (36 | ) | (27 | ) |
Adjusted Net Income | $ | 142 |
| $ | 87 |
| $ | 71 |
| $ | 74 |
| $ | 57 |
|
|
| |
MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Significant Developments in 2017Operational Highlights
Our consolidated results for 2019 reflect our 2017 fiscal year reflect continued progress in attracting new customers to our industry-oriented (vertical) products, serving our existing customers and improving our brand awareness through marketing.
Our customers are our focus, and we are investing in our processes to ensure a stronger customer experience. We expect this investment will further enhance our value to our customers, support retention and provide further efficiency and scale for our vertical productsoperations. We started this work in 2018 and insurance service offerings combined with higher WSE enrollment growth within our medical plans and slower growth in insurance costs, which were primarily attributableexpect this to reduced health and workers' compensation costs.
In summary, we:
Made significant investments in our technology platform to provide our users with improved functionality, including online and mobile productivity tools, and to allow our platform to integrate more effectively with third party software applications. This improves our client experience and permits further operational scalecontinue in the future.near-term.
Launched and began on-boarding clients to TriNet Main Street, our vertical offering designed for clientsDuring 2019 we:
experienced an improvement in the hospitality, retail and manufacturing industries. During the third quarter, we started migrating existing clients from our legacy (SOI) platform onto our common TriNet platform.
Leveraged our scale by decreasing administrative costs associated with our insurance programs. Asretention as a result of theseour customer service initiatives,
benefited from our clients growing their WSEs,
saw an increase in new sales, which delivered additional revenue growth,
continued to experience our WSEs increasing their participation, or enrollment, in our insurance offerings,
experienced increased severity of health costs per enrollee overall, but particularly within a national carrier, and
delivered profitable growth.
Our efforts to build a successful and enduring company include building and leveraging a strong national brand presence. Our branding strategy, Incredible Starts Here, is being augmented with our 2017 favorable insurance experience,current campaign: People Matter. We place our customers at the center of what we launched a fee credit initiative that was designed to reward certain clients. The total amount of credit was less than 0.5% of total 2017 revenue. Eligible clients will receivedo, including placing our customers at the fee credit in the first quarter of 2018.
Changed the contract terms with onecenter of our health insurance carriers from a guaranteed-cost arrangement to an arrangement that continues to be fully insured, but where we will be responsible for reimbursement of claim payments within our deductible layer as further discussed below.
Invested significantly in improving our internal control environment to support the compliance requirements of Sarbanes-Oxley Act of 2002 (SOX).marketing.
Performance Highlights
OurThese operational achievements drove the financial revenue and earnings performance exceeded our expectations, which was primarily attributableimprovements noted below in 2019 when compared to slower than expected growth in insurance costs. The insurance cost savings were driven by reduced administrative costs and lower than forecast per enrollee medical costs. Our per enrollee aggregate trailing twelve month medical cost trend (medical cost trend) was in the range of 3.5% to 4%. We attribute the lower medical cost trend to both lower medical utilization and reduced prescription drug price increases.2018:
|
| | | | | | | | | | | |
| $3.9B | | $268M | | $929M |
| Total revenues | | Operating income | | Net Service Revenue * |
| 10 | % | increase | | 7 | % | increase | | 4 | % | increase |
| | | | | | | | |
| $212M | | $2.99 | | $236M |
| Net income | | Diluted EPS | | Adjusted Net income * |
| 10 | % | increase | | 13 | % | increase | | 8 | % | increase |
| | | | | | | | |
* | Non-GAAP measure | | | | | | |
Our insurance service revenues benefited from 5% additional enrollment in our health insurance offerings. Insurance service revenue also benefited from our workers' compensation service revenue repricing effortsresults for certain clients based on their long term claim experience.
We experienced a decline in Average WSEs compared to 2016 due to our continued migration from legacy platforms to our common TriNet platform and due to moderated new customer growth as we launched and expanded the functionality of TriNet Main Street.
Our other operating expenses reflect our continued focus on developing new vertical products and platform integrations, and additional expenses associated with our internal control remediation efforts.
In 2017, we:
served approximately 14,800 clients, co-employed approximately 325,000 WSEs and our Total WSEs decreased 4% over 2016
processed over $37.1 billion in payroll and payroll tax payments forin 2019 when compared to the prior year were:
|
| | | | | | | | | | |
| 324,927 | | 340,017 | | $41.7B |
| Average WSE | | Total WSE | | Payroll and payroll tax payments |
| 2 | % | increase | | 4% | increase | | 11 | % | increase |
| | | | | | | | |
During 2019, our average WSEs and total WSEs grew primarily as a result of new clients, continued hiring in 2017 withthe installed base and lower client attrition. In addition, our WSE growth and increased participation in our health services resulted in a 10% increase in total revenues. We also experienced higher insurance costs, due to an increase in medical cost trend, that resulted in reduced NSR growth of 4%. Net income increased 10% and adjusted net income increased 8% over 2016,
.
|
| |
MANAGEMENT'S DISCUSSION AND ANALYSIS | |
33
Our financial highlights for the 2017 year include:
Total revenues increased 7% to $3.3 billion, while Net Service Revenues increased 25% to $809 million,
Operating income increased 75% to $217 million,
our effective tax rate decreased to 11%,
Net income increased 190% to $178 million, or $2.49 per diluted share, while Adjusted Net Income increased 62% to $142 million,
Adjusted EBITDA increased 53% to $285 million, and
Cash provided by operating activities increased 70% to $253 million.
Our Technology
We made significant investments in our technology platform to provide our users with improved functionality, including online and mobile productivity tools, and to allow our platform to integrate more effectively with third party software applications. In addition, we invested in a common technology platform as it allows us to offer industry–specific solutions in a scalable manner while delivering frequent enhancements that benefit all clients. We continued to consolidate our remaining legacy acquired platform (SOI) onto our common TriNet platform.
For 2017, our systems development and programming costs were $45 million, representing 1% of our total revenues and 6% of our Net Service Revenues. Combined with our technology related capital expenditures, our total technology investment was $74 million, representing 2% of our total revenues and 9% of our Net Service Revenues.
We plan to continue to invest to upgrade and improve technology offerings, including enhancements of our online interface and mobile applications to provide better client and individual WSE experience.
Insurance
We are committed to utilizing our scale to improve the cost and service offerings in our competitive insurance services.
We leverage the size and scale of our installed WSE-base to negotiate with both incumbent and new insurance providers in our major medical programs as well as property and casualty lines. Our negotiations with insurance providers and a one year suspension of a tax on health insurance premiums resulted in our reduction in our administrative costs.
While we continue to leverage our size with insurance carriers to negotiate further reductions in our administrative costs, we expect our medical cost trends to revert to long term averages in 2018. We will also expect the re-introduction of the healthcare tax on premiums we pay our insurance providers.
Our fully insured insurance plans are provided by third-party insurance carriers under risk-based or guaranteed-cost insurance policies. Under risk-based policies, we agree to reimburse our carriers for any claims paid within an agreed-upon per-person deductible layer up to a maximum aggregate exposure limit per policy. These deductible dollar limits and maximum limits vary by carrier and year. Under guaranteed-cost policies, our carriers establish the premiums and we are not responsible for any deductible.
Approximately 70% of our group health insurance costs related to risk-based plans. The remaining 30% of our group health insurance costs related to guaranteed-cost plans.
In October, we changed the contract terms with one of our health insurance carriers from a guaranteed-cost to a risk-based plan. In 2018, with this new arrangement in effect, we expect that risk-based policies will represent approximately 85% of our health insurance costs and guaranteed cost policies will represent approximately 15% of our health insurance costs.
We also introduced additional service and benefit offerings including a premier medical second opinion program as well as a new suite of complementary voluntary benefits. These voluntary benefits are intended to provide our WSEs with additional protections for unexpected life events.
|
| |
MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Our Vertical Approach
We introduced our fifth TriNet vertical product, TriNet Main Street, to service the needs of industries such as hospitality, retail, and manufacturing. TriNet Main Street is designed to accommodate organizations with employee bases which include salaried, hourly, part time and seasonal workers, and typically operate in multiple states, locations, and facility types. TriNet Main Street delivers time and attendance expertise, hiring and termination expertise, workers’ compensation safety consultants, and attractive benefit plans.
We believe our vertical approach is an important competitive differentiator for TriNet and delivers significant benefits to our clients.
Revenues diverge by industry vertical due to pricing differences across our HR solutions and services and the degree to which clients and WSEs elect to participate in our solutions. We also focus on pricing strategies and product differentiation to maximize our revenue opportunities.
Our People
As we grow, we continue to invest in our corporate employees and their capabilities.
We increased headcount in our technology and client service functions to support product delivery and platform integration and support our migration of clients from legacy platforms to the TriNet platform. We also continued to invest in growing our sales functions, hiring and retaining sales representatives with industry experience. From 2016 to 2017, we incurred additional compensation costs of $41 million.
We will continue to search, select and hire people to serve our current clients and find new clients as our business grows and add to our skills and capabilities in order to provide innovative HR solutions for our clients.
|
| |
MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Results of Operations
The following table summarizes our results of operations for the three years ended December 31, 2017, 20162019, 2018 and 2015.2017. 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 Management's Discussion and Analysis (MD&A).MD&A.
| | | Year Ended December 31, | % Change | Year Ended December 31, | % Change |
(in millions, except operating metrics data) | 2017 | 2016 | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 |
Income Statement Data: | | | | |
Professional service revenues | $ | 458 |
| $ | 447 |
| $ | 401 |
| 3 | % | 11 | % | $ | 530 |
| $ | 487 |
| $ | 458 |
| 9 | % | 6 | % |
Insurance service revenues | 2,817 |
| 2,613 |
| 2,258 |
| 8 |
| 16 |
| 3,326 |
| 3,016 |
| 2,817 |
| 10 |
| 7 |
|
Total revenues | 3,275 |
| 3,060 |
| 2,659 |
| 7 |
| 15 |
| 3,856 |
| 3,503 |
| 3,275 |
| 10 |
| 7 |
|
Insurance costs | 2,466 |
| 2,414 |
| 2,112 |
| 2 |
| 14 |
| 2,927 |
| 2,610 |
| 2,466 |
| 12 |
| 6 |
|
Other Operating Expenses | 559 |
| 487 |
| 415 |
| 15 |
| 18 |
| |
Depreciation | 28 |
| 19 |
| 15 |
| 45 |
| 32 |
| |
Amortization of intangible assets | 5 |
| 16 |
| 39 |
| (67 | ) | (59 | ) | |
Operating expenses | | 661 |
| 642 |
| 592 |
| 3 |
| 8 |
|
Total costs and operating expenses | 3,058 |
| 2,936 |
| 2,581 |
| 4 |
| 14 |
| 3,588 |
| 3,252 |
| 3,058 |
| 10 |
| 6 |
|
Operating income | 217 |
| 124 |
| 78 |
| 75 |
| 58 |
| 268 |
| 251 |
| 217 |
| 7 |
| 15 |
|
Other income (expense) | (17 | ) | (20 | ) | (18 | ) | (10 | ) | 7 |
| |
Other income (expense): | | | |
|
Interest expense, bank fees and other | | (21 | ) | (22 | ) | (20 | ) | (5 | ) | 10 |
|
Interest income | | 23 |
| 12 |
| 3 |
| 92 |
| 300 |
|
Income before provision for income taxes | 200 |
| 104 |
| 60 |
| 91 |
| 74 |
| 270 |
| 241 |
| 200 |
| 12 |
| 21 |
|
Income tax expense | 22 |
| 43 |
| 28 |
| (50 | ) | 52 |
| |
Income taxes | | 58 |
| 49 |
| 22 |
| 18 |
| 128 |
|
Net income | $ | 178 |
| $ | 61 |
| $ | 32 |
| 190 | % | 94 | % | $ | 212 |
| $ | 192 |
| $ | 178 |
| 10 | % | 8 | % |
| | | |
|
| | | | | |
|
Non-GAAP measures (1): | | | | |
|
Net Service Revenues | $ | 809 |
| $ | 646 |
| $ | 547 |
| 25 | % | 18 | % | $ | 929 |
| $ | 893 |
| $ | 809 |
| 4 | % | 10 | % |
Net Insurance Service Revenues | 351 |
| 199 |
| 146 |
| 76 |
| 37 |
| 399 |
| 406 |
| 351 |
| (2 | ) | 16 |
|
Adjusted EBITDA | 285 |
| 185 |
| 151 |
| 53 |
| 23 |
| 378 |
| 347 |
| 285 |
| 9 |
| 22 |
|
Adjusted Net income | 142 |
| 87 |
| 71 |
| 62 |
| 24 |
| 236 |
| 218 |
| 142 |
| 8 |
| 53 |
|
| | | | |
|
Operating Metrics: | | | | |
|
Average WSEs | | 324,927 |
| 317,104 |
| 324,679 |
| 2 | % | (2 | )% |
Total WSEs | | 340,017 |
| 325,616 |
| 325,370 |
| 4 |
| — |
|
Total WSEs payroll and payroll taxes processed (in millions) | $ | 37,115 |
| $ | 34,281 |
| $ | 30,559 |
| 8 | % | 12 | % | $ | 41,682 |
| $ | 37,666 |
| $ | 37,115 |
| 11 |
| 1 |
|
Total WSEs | 325,370 |
| 337,885 |
| 324,399 |
| (4 | ) | 4 |
| |
Average WSEs | 324,679 |
| 326,850 |
| 303,917 |
| (1 | ) | 8 |
| |
Our revenues consist of professional service revenues (PSR) and insurance service revenues (ISR). Professional service revenues representPSR 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 relatedHR-related services. Insurance service revenues consistISR 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.
The following table summarizes our significant contractual obligations as of December 31, 2017:2019: