We operate using a co-employment model, under which employment-related responsibilities are allocated by contract between us and our clients. This model allows WSEs to receive the full benefit of our services, including access to our sponsoredTriNet-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:
We generally assume responsibility for, and manage certain risks associated with:
Our clients are responsible for employment-related responsibilities that we do not specifically assume, generally including:
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 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 taxestaxes.
Market Trends and Developments Affecting Our Business in 2021
Despite the continuation of the COVID-19 pandemic, the U.S. economy saw substantial recovery in 2021 due to the easing of COVID-19 restrictions, consumer demand and continued federal and state legislative efforts to help businesses and employees. We observed the following PEO industry trends in 2021:
•SMB Economic Recovery. The U.S. economy saw substantial recovery from the pandemic driven economic downturn in 2020, however the extent of the recovery for SMBs differed based on their industry and geographic region. For example, SMBs in the financial services, technology and professional services industries generally experienced shallower headcount declines in 2020 and have recovered headcount more quickly in 2020 and 2021 as their workforces were better able to transition to remote work. Meanwhile, SMBs in the retail, leisure and hospitality industries generally experienced significant headcount freezes, furloughs and terminations in 2020, and these headcount declines have been slow to recover in 2020 and 2021. Similarly, SMBs in geographic regions that saw significant increases in COVID-19 cases in 2021 from the Delta and Omicron variants have generally experienced more significant economic headwinds.
•Continued Insurance Cost Variability and Volatility. The volume of medical claims, including COVID-19 testing, treatment and vaccination costs, increased in 2021, however medical claim volume remained below pre-pandemic levels. Access to medical services and systems remained constrained in 2021, particularly in regions that saw increases in COVID-19 hospitalizations that reduced preventative and elective procedures.
•Laws and Regulations. Numerous laws and regulations were created or modified in 2021 that had an impact on our business and the bondingbusinesses of our clients and SMBs across the country. For example, the PPPFA and ARPA, were passed in 2021 to augment and extend 2020 programs intended to assist SMB’s and their employees to recover from the impacts of COVID-19. The paid leave and corresponding employer tax credit under the FFCRA was modified and extended through the third quarter of 2021, and the employee retention credit program under the CARES Act was also extended and modified before being retroactively terminated effective at end of the third quarter of 2021. Additional provisions of the CCPA became effective in 2021, and the DOL issued regulatory guidance regarding cybersecurity measures applicable to retirement plans. Federal and state views on employees and independent contractors remained in flux during 2021 as we saw a California state court find that Proposition 22, which was a modification of an earlier law that reclassified certain independent contractors as employees, was unconstitutional and unenforceable. The National Labor Relations Board (NLRB) also announced plans to create a new rule for determining whether two business are joint employers or co-employers and is expected to announce this new rule in 2022. We do not believe we are a joint employer, but changes in regulations determining joint employer status 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 services we provide to our clients and WSEs.
For more information regarding the developments above, including the impact of COVID-19 on our business and operations, refer to Part II, Item 7. MD&A in this Form 10-K, and Part I, Item 1A. Risk Factors under the subheading "Risks Related to the COVID-19 Pandemic". Our Service Development Efforts
We continued to make significant investments in our technology platform with 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 improving our technology platform will drive operating efficiencies over the long term and improve our client experience.
In 2021, we distributed $86 million to customers under our 2020 Recovery Credit program under which eligible clients received one-time reductions against fees for services. Our Recovery Credit program is designed to promote
client loyalty, incentivize client retention, and to differentiate TriNet from its peers in the PEO industry and in other competing HR services industries. Similarly, in March 2021, we created our 2021 Credit program, which was designed to return $25 million to eligible customers based on the performance of our health insurance costs for the year.
Throughout 2021 we continued to modify the programs we created in 2020 to support several important funding and payroll tax incentive programs for SMBs created under the FFCRA, CARES Act and PPFA, including PPP, mandatory employee leave requirements, payroll tax deferral and tax credit programs and other employment- and employment tax-related incentives. Changes to these programs in 2021, including guidance from the state and federal agencies managing these programs, required us to create new services, or redesign our existing services, to support these programs for our SMB clients and we expect to continue to make changes to these programs as laws and regulatory guidance change over time.
To engage with our clients and SMBs, we hosted the 2nd annual TriNet PeopleForce conference in the third quarter of 2021, our showcase customer and prospect conference focused on business transformation, agility and innovation for SMBs.
In December 2021, we entered into a definitive agreement to acquire Zenefits, a leading cloud HR platform which provides innovative and intuitive HR, benefits, payroll and employee engagement software purpose-built for SMBs. We believe the acquisition of Zenefits, once completed, will allow us to diversify our product offering to include an Administrative Services Organization (ASO), enabling us to dynamically service SMBs throughout their lifecycle and expand the customers we serve.
Our Clients and Geographies
Our clients are distributed across a variety of industries, including technology, professional services, financial services, life sciences, not-for-profit, property management, retail, manufacturing, and hospitality. We generally support these different clients using our industry-tailored vertical approach. Our clients generally execute annual service contracts with us that automatically renew. In most cases, our clients may cancel these contracts with 30 days' notice to us and we may cancel these contracts with 30 days' notice.
Nearly all of our revenues are generated within the United States and its territories and substantially all our long-lived assets are located in the United States.
Our Competitors
We face competition from:
•PEOs that compete directly with us,
•HR and information systems departments and personnel of companies that administer employee benefits, payroll and HR for their companies in-house,
•providers of certain endpoint HR services, including payroll, employee benefits, business process outsourcers with high-volume transaction and administrative capabilities, and other third-party administrators, and
•insurance brokers who allow third-party HR systems to integrate with their technology 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 numerous specialized and smaller PEOs and similar HR service providers with PEO operations.
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 insurance and benefits coverage, 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 also compete based upon the ESACbreadth 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 are 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 heading – "We must continue to work to improve our services to meet the expectations of our clients and regulators, or other surety is not sufficient to satisfy the obligation.
Saleswe may lose our clients and Marketingmaterially harm our business".
Our Sales Organizationand Marketing Organizations
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 sales representatives are supported by marketing, inside sales, lead generation efforts, and referral sources and networks. While the COVID-19 pandemic made it difficult to engage with prospects face-to-face, the use of technology and communication tools created new opportunities for us to engage with customers and prospects virtually.
We typically sponsor and participate in associations and events around the country and utilize these forums to target specific vertical and geographic markets. We responded to the unique challenges posed by the COVID-19 pandemic by shifting between virtual and in-person events. Events include our 2nd Annual TriNet PeopleForce conference, and informational webinars periodically throughout the year on a wide variety of COVID-19 and business topics relevant to our SMB prospects and clients. 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.
Our Marketing Organizationservices.
Our marketing and corporate communications organization is charged with driving overall brand awareness, managing lead generation, creating and managing our website and other online properties, creating content for all ofmarketing and communication channels including our outbound and inbound marketing efforts, media relations, and managing our sponsorships, major marketing events, and clientinternal and external communications. Prospects changed the way they engaged with us during COVID-19 by using more digital tools like tele-presence and web engagements. In 20182021, we launched numerous digital channels for engagement, including conversational marketing enhancements on our website in response to customers' changing preferences. In 2021, our marketing team also focused on strategic marketing, communications andsocial media, branding initiatives, and crisis communication plans, in part by launching aaugmenting our comprehensive company re-branding andbrand campaign, Incredible Starts Here, with our marketing campaign, People Matter, that included omni channel initiatives using social media, and advertising across digital, television, radio and out-of-home media.
LegalThe Laws and RegulatoryRegulations that Affect Our Business
Our business operates in a complex legal and regulatory environment due to a myriad of numerous federal, state and local laws and regulations relating tothat impact our solutions. The following summarizesbusiness. 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 of our WSEs under the Internal Revenue Code of 1986, as amended (the Code), ERISA and ERISA.applicable state law. The multipleterm “employer” has different definitions of “employer”for different purposes under both the Code and ERISA, and for most purposes are not clear and most are defined in part byinterpreted under complex multi-factor tests under common law. We believe that we qualify asare an “employer” of our WSEs in the U.S. under both the Code and the employer of our WSEs in the U.S. for the purposes of ERISA, as well as qualifying as an employer under 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 1A. 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 impactedimpacted".
The ACAHealth Insurance and Health Care Reform
Our sponsored employee health and welfare offerings are an important component of the services that we provide. The future of health care reform continues to evolve in the U.S. For example, the passage of the ACA was signed into law in March 2010. The ACA2010 implemented sweeping health care reforms with staggered effective dates from 2010 through 2020,2022, and many provisions in the ACA are still requiresubject to the issuance of additional guidance from the DOL, the IRS, the U.S. Department of Health and Human Services and various U.S. states. Passage of the TCJA in December 2017 eliminated the individual mandate tax penalty under the ACA beginning in 2019, while retaining employer ACA mandate obligations. States have developed, and will continue to develop, varying approaches to state-based health exchanges and mandates. Further significant changes to health care statutes, regulations and policy at the federal, state and local levels could occur in 20192022 and beyond, including the potential further modification amendment or repealamendment 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 1A. Risk Factors, of this Form 10-K, under the heading - Our business is"Changing 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.
HIPPA
Maintaining the security of our WSEs information is important to TriNet as we sponsor employee benefit plans, and maywe also have access to personalcertain protected health information (PHI) of our WSEs. The manner in which we manageWSEs and corporate employees. Management of PHI is subject to several regulations at the federal level, including 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. Further, under the HITECH Act there are 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. Additionally, several federal agencies have issued rules, regulations or other forms of guidance that may impact the privacy and security obligations that apply to our operations. We expect that the federal government’s approach to data privacy and security will continue to evolve in the coming years.
ToAt the extent possible,state and local level, there is increased focus on regulating the health claimcollection, 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. In November 2020, California approved the California Privacy Rights Act (CPRA), which creates a new privacy oversight agency and further amends the CCPA to provide additional rights to consumers to access, edit and control the sale and sharing of personal information. The provisions of the CPRA go into effect in January 2023.
In 2021, two additional states—Virginia and Colorado—enacted comprehensive data privacy laws that will go into effect in 2023, while legislatures in several additional states considered data privacy laws. These laws impose, or have 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. Although there are similarities between the data privacy laws enacted in California, Virginia and Colorado (along with the laws that have been proposed in other states), there are also substantive aspects of the laws that differ markedly. This lack of uniformity, which we possess is anonymizedexpect to continue as other states enact data privacy laws, creates significant legal complexities for companies (such as TriNet) that operate nationwide and accessed throughare required to comply with a secured third-party database.patchwork of privacy laws. Moreover, all 50 U.S. states, the District of Columbia, Guam, Puerto Rico, the Virgin Islands 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 our clients'the confidential, sensitive and WSEs' personal datainformation and PHI we possess and the potential impact to our business if we fail to protect such personal data and PHI,information, refer to each of the risk factors included in Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading - Cyber-attacks or security breaches could result in reduced revenue, increased costs, liability claims, regulatory penalties,"Data Privacy and damage to our reputationSecurity Risks". U.S. State RegulationsPEO Licensing Laws
Forty-fourNearly all states have adopted provisionslaws and regulations for licensing, registration, certification or recognition of co-employers,PEOs and others are consideringthe IRS has implemented a voluntary federal certification program for PEOs. We expect states without such regulation. Such laws and regulations to adopt them in the future. While these laws and regulations can vary from state to state but generally provide for monitoring or ensuringwidely, most regulators monitor the fiscal responsibilityfinancial health and other relevant business information of PEOs and inon 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 under state laws.or require specific client contractual terms and/or WSE disclosures. We believe we are in compliancecomply in all material respects with the requirementsapplicable PEO laws and regulations in those forty-four states.each state and jurisdiction in which we operate.
Payroll Taxes, Unemployment Taxes and Payroll Tax Credits
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 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 also determined, in part, by each client’s own compensation andlocated, the fees we charge for unemployment claims experience.taxes can be higher or lower than a client could obtain alone. In addition, states havesome cases, taxing authorities can retroactively increase the ability under law to increase unemployment tax rates, including retroactively,taxes we pay to cover deficiencies in the unemployment tax funds. We also rely on our clients to accurately report their WSEs' work locations and inaccurate reporting, due to work from home policies during the COVID-19 pandemic or otherwise, can impact our payroll tax obligations and the obligations of our clients and WSEs.
We have seen a growing trend, particularly at the federal level, of using payroll tax credits, deferrals and other related payroll tax programs as a mechanism for incentivizing SMB development and/or economic recovery. These programs are popular because they allow SMBs, which often have income tax losses, to realize benefits via payroll tax reductions, rather than income tax reductions. As a result, many of our SMB clients demand that we support these programs. Examples of these programs include the 2015 PATH Act, which allows SMBs to use research and development tax credits submitted on the SMB’s income tax return to reduce payroll taxes, and the CARES Act and FFCRA Act payroll tax credit and payroll tax deferral programs enacted in 2020 and 2021, which allow SMBs to defer certain payroll tax obligations to a later date or to receive payroll tax reductions and refunds based on SMB employment practices that are beyond a PEO’s control. These programs have generally not been designed with the PEO industry in mind and these programs are subject to broad agency interpretations given their complexity. For additional information tax credit programs, and the risks they post to our operations, refer to Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading - "Our business is subject to numerous complex laws, and changes in, uncertainty regarding, or adverse application of these laws could negatively affect our business." 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. Continued tax reform efforts 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 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 by establishing the ABC test to determine if a worker is an employee or independent contractor for most occupations. On September 30, 2021, and effective January 1, 2022, California expanded the number of occupations exempt from the ABC test. In November 2020, California voters passed Proposition 22, which supersedes AB5 for certain types of contractors. On August 20, 2021, a California state court found that portions of Proposition 22 were unconstitutional and further held that the entirety of Proposition 22 was unenforceable. Effective July 1, 2021, Alabama adopted the IRS’s 20-factor test to determine whether a worker is an employee or an independent contractor, while on August 1, 2021, Louisiana started using an 11-factor test under its unemployment law to determine worker classification.
The legal landscape is also in flux at the federal level. In 2020, the DOL issued a rule changing the definition of joint employer used under the Fair Labor Standards Act (FLSA) which was later rescinded in 2021. The National Labor Relations Board (NLRB) announced plans to create a new rule in 2022 for determining whether two businesses are joint employers under the National Labor Relations Act (NLRA), while the DOL plans to start on a new rule to raise the salary required for the executive, administrative and professional exemptions under the FLSA. We do not believe that we are, or will be, a joint employer under the FLSA rules, 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 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 2019our operations and beyond.may negatively affect our business". Strategic
Our Human Capital Resources
As of December 31, 2021, we had approximately 364,900 WSEs and 2,800 corporate employees, or colleagues.
Oversight and Management
At TriNet, we rally around a shared vision of improving humanity through business growth and innovation. We recognize the incredible opportunity that can only be realized by working together, with a shared view of how we support our clients and WSEs. This is illustrated in our core values:
•Lead with the customer - We are accessible, responsive and empowered to serve our customers. We are successful when our customers are successful.
•Stand together - We bring together diverse backgrounds, experiences and ideas to create better outcomes. We collaborate across boundaries, communicate openly and respect each other.
•Act with integrity - We are honest, transparent, ethical and fair. We take pride in always doing what’s right for our customers and colleagues.
•Make an impact - We act with purpose, are deliberate in our planning and quick in execution. We are accountable to each other and empowered to make decisions.
•Be incredible - We invest in the development of our colleagues. We push the boundaries of what's possible, lead the way and innovate to accomplish the extraordinary.
We regularly conduct surveys to seek feedback from our colleagues on a variety of topics, including confidence in company leadership, competitiveness of our compensation and benefits package, career growth opportunities and opportunities to improve the attractiveness of our company with existing and potential colleagues. The results are shared with our colleagues and reviewed by senior leadership, who analyze areas of progress or deterioration and prioritize actions and activities in response to this feedback to drive meaningful improvements in colleague engagement. None of our corporate colleagues are covered by a collective bargaining agreement.
Attracting and Retaining Our Colleagues
We must attract, develop and retain highly motivated and qualified colleagues to continue to provide the services that our clients need, to achieve our strategic objectives, and to grow our business. We do this by:
•offering competitive compensation and benefits packages, including comprehensive health benefits and our 401(k) retirement savings plan, with an immediately vested employer match of up to 4% of cash compensation,
•supporting a pay for performance culture through the use of cash and equity incentives tied to the performance of our company and individual performance,
•offering an employee stock purchase plan that allows our colleagues to purchase our shares at a discount to market value, which fosters a stronger sense of ownership and aligns the interests of our colleagues with our stockholders,
•investing in the professional growth of our colleagues with tuition and continuing education reimbursement, wellbeing programs, and comprehensive training and development activities and opportunities both inside and outside of our company,
•creating and maintaining a diverse and inclusive colleague base by, for example, the use of colleague-led resource groups and by launching a new diversity and inclusion training curriculum for our colleagues in 2020, and
•supporting our colleagues during the COVID-19 pandemic by adopting work-from-home policies, halting non-critical travel, and providing additional paid time off, employee assistance plans, and access to telemedicine services.
We refer to our employees that are co-employed with our clients as our worksite employees (WSE). For more information about how we help our clients manage their own human capital resources and satisfy their own HR-related needs, see the section above titled “Our Services”.
Our Approach to Acquisitions
Historically, we have pursued strategic acquisitions to both expand our productservice 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. In December 2021, we entered into a definitive agreement to acquire Zenefits, a leading cloud HR platform which provides innovative and intuitive HR, benefits, payroll and employee engagement software purpose-built for SMBs. 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
The Impact of Seasonality on Our clients are distributed across a variety of industries, including technology, life sciences, not-for-profit, professional services, financial services, 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 and we may cancel these contracts with thirty days' notice.
We conduct our business primarily in the United States, with more than 99% of our total revenues being attributable to WSEs in the United States and its territories with the remainder being attributable to WSEs in Canada. Substantially all our long-lived assets are located in the United States.
SeasonalityBusiness
Our business is affected by seasonality in client business activity and WSE product selection. In addition, the timing of benefits open enrollment periodsbenefit selection, health claims costs and utilization of medical services above each WSE's deductible causes variation in our quarterly results. Finally, clientspayroll taxes:
•Clients generally change their payroll service providers at the beginning of the payroll tax year; as a result, we have historically experienced our highest volumes of new clients and exitingterminating clients in the month of January.
Competition
We face competition from:
PEOs that compete directly with us,
HR and information systems departments and personnel of companies that administer employee benefits, payroll and HR for their companies in-house,
providers of certain endpoint HR services, including payroll, employee benefits, business process outsourcers with high-volume transaction and administrative capabilities, 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, and
insurance brokers who allow third-party HR systems to integrate with their technology 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. To 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 this 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 breadth and depth of•WSEs select our benefit plans vertical market expertise, total costduring their respective open enrollment periods, which occur throughout the year. We have historically experienced the largest proportion of service, brand awarenessWSE benefit changes in the first quarter and reputation, abilityfourth quarter.
•Health claims costs tend to innovate and respondincrease throughout the year as the utilization of medical services above each WSE's deductible causes our insurance costs to customer needs rapidly, accessincrease. In addition, the overall use of medical services by WSEs, including elective procedures, tends to online and mobile solutions, and subject matter expertise. We believe thatincrease later in the calendar year. During the COVID-19 pandemic, we are competitive across these factors. For additional information about our competition, please refer to Part I, Item 1A. Risk Factors,observed significant fluctuations in the typical seasonal use of this Form 10-K, under the heading - Our reputation could suffer and our business could be adversely affected if our products do not perform, and ourmedical services are not delivered, as expected by our clientsWSEs. The COVID-19 pandemic and WSEs.emerging variants may continue to cause variability in our WSE's medical services utilization that may result in changes in this seasonal trend in our business.
•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.
Our Owned and Licensed 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. We also own registered trademarks in the United States, Australia, Canada, the United Kingdom, and the European Union covering our name and other trademarks and logos that we believe are materially important to our operations.
Corporate Employees
We refergenerally protect our trademarks through federal registration or through the commercial use of our trademarks. Trademark registrations must generally be renewed every five to ten years and we renew the registration of trademarks that we deem to have continuing value to our employees that are not co-employed with our clients as our corporate employees. We had approximately 3,100 corporate employees as of December 31, 2018. Our corporate employees are not covered by a collective bargaining agreement.
business.
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 office is located at One Park Place, Suite 600, Dublin, CA 94568 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. Alternatively, the public may access these reports at the SEC's internet sitewebsite 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 Form 10-K, 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.
Risks Related to the COVID-19 Pandemic
The economic, health and business disruption caused by the COVID-19 pandemic continues to impact our business and could result in a material adverse effect on our business, results of operation and financial condition.
The COVID-19 pandemic has resulted in an economic slowdown and, while there have been signs of economic recovery in 2021, the pandemic continues to disrupt our business and the businesses of our SMB clients. We cannot predict or control all of these disruptions, and any such disruptions may have a material adverse effect on our financial condition and results of operations.
Any of the COVID-19 related risks below could have a material adverse effect on our business, results of operations or financial condition. We cannot predict the duration and scope of the pandemic (including the emergence of new variants), the impact of the pandemic on the national and global economy, the duration of the economic downturn, government response to the pandemic and our ability to support laws and programs intended to help SMBs, and whether our clients' businesses will contract or fail due to the pandemic. Any of these factors could exacerbate the risks and uncertainties identified below.
Actual and potential impact on clients and prospects
The change in the economic environment due to the COVID-19 pandemic has had, and may continue to have, an adverse economic impact on our clients and potential clients. We have seen, and expect to continue to see, affected businesses freeze headcount, furlough and terminate employees, and partially or completely shut down business operations. Impacted businesses have faced and we expect many will continue to face liquidity issues, reduced budgets, or an inability to pay for our services or the same level of our services. For example, in the second quarter of 2020, our new sales growth declined and we experienced higher WSE attrition than prior periods. See the risk factor titled “Our clients are particularly affected by volatility in the financial and economic environment, which could harm our business” below for more details.
Actual and potential impact on insurance costs
The COVID-19 pandemic has changed how and when our WSEs incur health expenses. We have experienced and expect to continue to experience higher than normal volatility and variability in the amounts that we pay for group health insurance expenses incurred by WSEs within our deductible layer under our risk-based health insurance policies.
For example, during the third quarter of 2021, we saw increased constraints on access to medical services and systems, particularly in regions that saw increases in COVID-19 hospitalizations. These constraints reduced preventative and elective procedures, resulting in a decrease in our MCT, defined as changes in participant use of services, including the introduction of new treatment options, changes in treatment guidelines and mandates, and changes in the mix, unit cost and timing of services provided to plan participants. This decrease resulted in a lower than normal Insurance Cost Ratio during that period.
It is difficult to predict the rate at which the use of medical services will change as new variants emerge and individual, provider network and government reactions to those variants change. COVID-19 testing, treatment and vaccination costs also make it more difficult to predict future health claims costs, and actual claims patterns and cost trends may differ significantly from our historical experience. Because we assume the risk of variability in future health claims costs for our enrollees under our risk-based health insurance policies, this unpredictability could result in higher-than-expected insurance costs, which could have a material adverse effect on our business, results of operations and financial condition.
As we set our benefit services fees for health and welfare benefits in advance for a fixed benefit period, if actual MCT exceeds our projections, this would result in a higher Insurance Cost Ratio, which could have a material adverse effect on our business, results of operations and financial condition. For details on how the volume and
severity of insurance claims and MCT impact our insurance costs, refer to Critical Accounting Judgments and Estimates in Part II, Item 7. MD&A and the risk factor titled “Unexpected changes in workers’ compensation and health insurance costs and claims by worksite employees could harm our business” below. In response to COVID-19, many states have adopted standards intended to extend workers’ compensation coverage to claims based on a diagnosis of COVID-19. Most states have focused on providing coverage for first responders, frontline healthcare workers and other essential workers. We are responsible for the deductible layer under our workers’ compensation policies, and our insurance costs are affected by our WSEs' workers’ compensation insurance claims experience. Any law or legal standard that increases the number of covered workers’ compensation claims under our insurance policies could have a material adverse effect on our insurance costs and financial condition. See the risk factor titled “Unexpected changes in workers’ compensation and health insurance costs and claims by worksite employees could harm our business” below for more details.
Actual and potential impact of the laws affecting our industry and clients
New laws and programs have been enacted, and may continue to be enacted, at every level of government to help the economy, employers and employees. For example, the 2020 FFCRA and CARES Act and the 2021 PPPFA and ARPA, and subsequent agency guidance related to those acts, created the paycheck protection program (PPP), mandatory employee leave requirements, payroll tax deferral and tax credit programs, COBRA premium assistance facilitated via employer payroll tax credits, and other employment- and employment tax-related incentives. SMBs must rely on PEOs to help take advantage of these programs, and new and amended laws adding programs or changing existing programs may be passed at the federal, state, and local level at any time.
Most of these laws and programs have not been, and we do not anticipate will be, enacted with the PEO industry in mind. As a result, we cannot guarantee we will be able to support any of these laws and programs in a timely and cost effective manner or at all, which could reduce or eliminate the attractiveness of our services and/or affect the ability of our clients and WSEs to fully realize the benefits of these laws and programs, which would have a material adverse effect on our business, financial condition and results of operations. See the risk factor titled “Our business is subject to numerous complex laws, and changes in, uncertainty regarding, or adverse application of these laws could negatively affect our business” below for more details.
Operational Risks
Unexpected changes in workers' compensation and health insurance costs and claims by worksite employees could harm our business.
Our insurance costs, which comprise a significant portion of our overall costs, are significantly affected by our WSEs’ health and workers' compensation insurance claims experience. Our 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 MCT. 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 our failure to accurately predict these trends could have a material adverse effect on our business, financial condition and results of operations.
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 and if our estimates are wrong, that could result in a material adverse effect on our business, financial condition and results of operations.
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, financial condition and results of operations. 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 co-employment relationship with our worksite employees exposes us to unique business risks.
We are the co-employer of our WSEs. As the co-employer of our WSEs, we assume some of the risks and obligations of an employer. For instance, we may need to provide access to health benefits to our WSEs even if the cost of providing benefits exceeds the service 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 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. Yet, 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, omissions or violations by our clients or WSEs, even if we do not participate in such acts, omissions or violations.
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. 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 clients 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.
In addition, 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 increase our potential liability for the risks outlined above, or otherwise reduce or eliminate the attractiveness of using a PEO, or significantly increase our compliance costs and the cost to provide our services, which could result in a material adverse effect on our financial condition and results of operations.
Our SMB clients are particularly affected by volatility in the economic environment.
Our clients are small and medium-size businesses that we believe are particularly susceptible to changes in the level of overall economic activity in the markets in which they 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. During these periods, we have also seen in the past and expect to see during such periods in the future, clients terminating our services and/or fewer new clients.When our clients leave us or reduce their headcount, we see increases in unemployment and related COBRA claims costs that we may be unable to recover based on the fees established in our client service agreements.
We lose clients for many reasons that we cannot control or easily predict and, generally, our clients sign service agreements that they can cancel on short notice.
Our standard client service agreement can generally be canceled by our clients (or us) with 30 days’ prior written notice. We regularly experience client attrition and decreases in new client sales due to a variety of factors that are difficult for us to control or predict, including the overall national economic conditions, client mergers and acquisitions, increases in our administrative and benefit services fees, client business failure and liquidity issues, the effects of competition, and client decisions to administer HR in-house or via a non-PEO solution. If we were to experience WSE or client attrition for any of the above reasons in excess of historic or expected rates, or if we incorrectly estimate the impact of the above factors on WSE or client attrition rates, it could have a material adverse effect on our business, financial condition and results of operations.
Geographic and industry market concentration makes our results of operations vulnerable to regional and industry-specific economic and health factors.
Our top five markets, California, New York, Florida, Texas and Georgia, accounted for approximately 60% in aggregate of our paid WSEs for the year ended December 31, 2021. If any of those geographic regions suffers a downturn, even if the economy at the national level remains strong, or experience higher than expected medical services utilization, due to regional health issues, including as a result of the COVID-19 pandemic, the portion of our business attributable to clients in that region could be adversely affected, which could have a material adverse effect on our financial condition or results of operations.
In addition, most of our clients operate in a relatively small number of industries, including the technology, professional services, financial services, life sciences and not-for-profit industries. As a result, if any of those 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 industry could be adversely affected, which could have a material adverse effect on our business, 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 a large volume of daily client and WSE transactions, including the processing of employee, payroll and benefits data. We also 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 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.
Our client recovery programs have significant costs. These costs will not be recovered if these programs fail to achieve the business goals for which they are designed, which could result in a material adverse effect on our business, results of operation and/or financial condition.
In response to the COVID-19 pandemic, we created several programs to assist in the economic recovery of our existing SMB clients and enhance our ability to retain these clients. These programs are designed to promote client loyalty, incentivize client retention, and to differentiate TriNet from its peers in the PEO industry and in other competing HR services industries. However, these programs are also associated with significant costs, and we cannot guarantee that we will recover these costs, or achieve our intended client loyalty, retention and product differentiation goals from these programs.
In April 2020, we created our Recovery Credit program. Eligible clients received one-time reductions against fees for future services, accounted for as a discount, to be received over the following 12 months. As a result of the Recovery Credit, we reduced our total revenues by $128 million in 2020 and $17 million in 2021.
If any of these programs, or any of our future client recovery programs, fails to generate the business impact for which they are designed, for any reason, our financial performance will be negatively affected, which could result in a material adverse effect on our business, financial condition and results of operations. For more details on our Recovery Credit program and 2021 Credit Program, refer to Note 1 in Part II, Item 8. Financial Statements and Supplemental Data, in this Form 10-K. 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. For example, we have significant concentrations of clients in California, New York, Florida, Texas and Georgia, which account for approximately 60% in aggregate of our paid WSEs for the year ended December 31, 2021. 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.
We must continue to work to improve our services to meet the expectations of our clients and regulators, or we may lose our clients and materially 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 client experience and satisfaction, relevance and cost-effectiveness of our benefit plans, vertical market expertise, total price of service, brand awareness and reputation, ability to innovate and respond to client needs rapidly, access to online and mobile solutions, and human resources 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. Regulatory changes may also mandate that we make changes to our services or benefit offerings.
To satisfy client expectations and regulatory requirements, we must timely and effectively identify, develop, or license appropriate technologies, and incorporate them into the solutions that we provide. New services or upgrades may not be released according to schedule, or may contain defects when released. Difficulties with the performance of our new technologies, or our ability to satisfy changes in regulatory requirements, 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. 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. If we are unable to satisfy the evolving product and service expectations and regulatory requirements, then we would experience lower client satisfaction, fewer new clients and higher client attrition, which could have a material adverse effect on our business.
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. On December 23, 2021, we entered into a definitive agreement to acquire YourPeople, Inc. dba Zenefits. Acquisitions, including the potential acquisition of Zenefits, 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, and
•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 and the support, services and products that we provide to our clients. If our clients and prospects do not accept these changes, or if we are unable to effectively manage this change, our business and results of operations may suffer.
We have changed our operations and client service processes in recent periods in order to improve our operational effectiveness, and to provide improved client support, services and product options, and we will continue to do so in the future. For example, in 2020, we adopted a new client service engagement support model, called Connect 360, that we believe will benefit our clients and WSEs by providing them with improved support.. Similarly, in 2021, we launched Financial Services Preferred, and a new product, called IOM, that offers clients the option to receive PEO services from TriNet while also obtaining client-sponsored health benefits from a third-party broker that partners with TriNet. We have adopted robust remote work policies and practices during the COVID-19 pandemic. These policies and practices may make it more difficult to manage and implement certain program, service and product initiatives for our clients and their WSEs. If our clients and prospects do not accept or value these support programs, services and products, and other similar changes we make in the future, we may lose clients, experience reduced onboarding rates, and see increased operational costs, any one of which could have a material adverse effect on our business, financial condition and results of operations.
In addition, managing these operational and process changes typically requires changes our internal 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 our corporate culture, effectively execute our business plan, satisfy our existing clients, acquire new clients, and enhance the quality and scope of our services. These activities also require significant operating and capital expenditures and allocation of valuable management and employee resources. If we fail to manage these operational and process 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.
To succeed, we must be able to attract and retain highly motivated and qualified personnel. Competition for skilled employees is intense and, if we are unable to attract and retain the personnel we need, our business may suffer. For example, like many businesses we have experienced higher than normal rates of employee turn-over during the COVID-19 pandemic and related "great resignation".
We have also experienced elevated sales force attrition in the past and may experience it in the future, for a variety of reasons, including due to changes in industry or client focus, compensation structure, 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.
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 and our third-party service providers and subcontractors 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 PHI, certain health claim information, retirement account information, and payroll data. Maintaining the security and confidentiality of this information is critically important to our clients, WSEs and corporate employees.
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 this 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.
Cybersecurity threats 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.
Any actual or attempted cyber-attack or other security-related incident could have a material adverse effect on our business, reputation, financial condition or results of operation. Any actual or attempted breach or disclosure of the confidential, sensitive and personal information that we possess about our clients and WSE could have a material adverse effect on our business, reputation, financial condition or results of operations. Public perception of, or even inaccurate or unfounded rumors of, any such attacks, incidents, breaches or disclosures, could have a material adverse effect on our business, reputation, financial condition or results of operation.
Any such attacks, incidents, breaches or disclosures could result in material financial liability by
•resulting in material fines, penalties, orders, sanctions and proceedings or actions against us or our service providers by regulatory authorities, clients and other third parties,
•requiring us to indemnify clients and other third parties,
•damaging our reputation,
•forcing us to incur significant expenses to defend our actions and practices,
•delaying product and service development plans,
•resulting in unrelated compliance breaches as a result of system failures or management distraction, and
•increasing our costs of doing business.
TriNet does not need to be the target of such attacks, incidents, breaches and disclosures for them to have a material adverse effect on our operations. For example, a cybersecurity attack on a key third-party software service provider could disrupt our services or compromise client data entrusted to that service provider. In December 2021, a third party reported a security vulnerability in a commonly used Java-based application that TriNet also uses called “Log4j”. After review, our security team determine that no security compromise had occurred within TriNet’s systems, but this is no guarantee that a vulnerability identified in any other third-party software would not result in a security compromise. Similarly, a security incident involving a client could result in access to TriNet’s systems. Any of these incidents, even if not initially directed at TriNet, could also 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, our clients and our service providers have been the victims of these types of threats, attacks and security breaches in the past, 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 other 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. As a result of these incidents, we have in the past reported, and expect to report in the future, 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.
We 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 also 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. 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, retirement account information, payroll data and other PHI, 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, Guam, Puerto Rico, the Virgin Islands and Canada have enacted data breach notification laws that may require us to notify WSEs, clients, corporate employees, or other third parties and 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, storage, 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 and CPRA, 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 became effective in 2021 and will become effective in 2023. In 2021 the CCPA went into effect and imposed certain obligations on businesses, such as a requirement to respond to consumer data access requests. We evaluated our obligations under CCPA and ensured necessary compliance. The CPRA, which goes into effect in 2023, may impose additional obligations on us. 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. Additionally, in 2021 the U.S. Department of Labor issued cybersecurity best-practices guidance for sponsors, administrators, service providers and participants of defined contribution retirement plans, which guidance is relevant to the retirement plans we maintain for our corporate employees and worksite employees.
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 "The Laws and Regulations that affect Our Business: 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 regulations. 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 in Part I, Item 1. Business, of this Form 10-K. ManyThese laws and regulations cover a diverse range of these laws (such as ERISA, the ACA, other federaltopics, including employer status, employee and stateindependent contractor classifications, employee benefit laws,benefits, health and retirement plans, workers' compensation, laws, employment and payroll tax, laws, worksite safety, laws, insurance and banking, laws, wage and hour, laws, anti-discrimination, laws, and lawsmany topics specific to the industries of our clients)clients. Many of these laws do not specifically 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, regulatory interpretation and discretion in enforcement of these laws and regulations at the federal, state and local levels in relation to our business.
In addition,Any new laws, changes in existing laws, or any adverse application, interpretation or interpretationenforcement of new or existing laws, including 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 relationships with our WSEs, could could:
•reduce or eliminate the need for, or value and benefit providedbenefits that clients realize by someusing our services,
•change or alleliminate the types of the products and services we provide, and/or
•require us to make significant changes to our methods of doinghow we do business and providing productsprovide services,
•require us to modify our current business practices or operations,
•affect the extent and services, including providing additional customertype of employee benefits that employers and WSE disclosures. co-employers can or must provide employees,
•alter the amount, timing and type of taxes employers, co-employers, clients and WSEs are required to pay and that we must manage for and collect from our clients,
•increase the cost and complexity of the licensing requirements for our business operations,
•create or increase our liability and responsibilities to our clients and WSEs, and/or
•mandate new compliance requirements, disclosures or services.
Any suchof the above changes could have a material adverse effect on our business, financial condition and results of operations.
For example, we have seen a growing trend, particularly at the federal level, of using payroll tax credits, deferrals and other related payroll tax programs as a mechanism for incentivizing SMB development and/or economic recovery. These programs are popular because they allow SMBs, which often have income tax losses, to realize benefits via payroll tax reductions, rather than income tax reductions. However, these programs have generally not been designed with the PEO industry in mind and rely on calculations contained in client income tax returns (which PEOs do not process in their role as the co-employer) and/or other client data that cannot be verified by a PEO, even though the resulting tax benefits are processed through the PEO’s payroll tax returns. Because minimal guidance exists in the statutes that create these programs, they are subject to broad agency interpretation and confusion. In addition, the processes used to evaluate payroll tax filings are designed with individual taxpayers in mind, not PEOs that aggregate the filings of many clients, which can further increase agency confusion and make it difficult to predict agency interpretations.
Examples of these programs include the 2015 PATH Act, which allows SMBs to use research and development tax credits submitted on the SMB’s income tax return to reduce the SMB’s payroll taxes, and the CARES Act and FFCRA Act payroll tax credit and payroll tax deferral programs enacted in 2020 and 2021, which allow SMBs to defer certain payroll tax obligations to a later date or to receive payroll tax credits based on SMB employment practices that are beyond our control. The IRS has taken positions that we and other PEOs, rather than clients, are responsible for client errors and repaying rejected tax credit claims under these and similar programs. While our clients are contractually responsible for repaying us for any rejected credits under these programs, a contract does not guarantee our ability to recover rejected tax credits and any failure to recover rejected tax credits from our clients would increase our operating expenses, which could result in a material adverse effect on our financial condition and results of operations. Similarly, and the IRS has taken positions that the tax benefits under these programs should be calculated on an aggregate PEO, rather than individual client, basis, which may limit our ability to obtain full tax benefits for our clients under these and similar programs and/or increase our exposure to credit risk if we are not able to recover excess tax credits paid to our clients. We cannot predict how these positions will ultimately be resolved and if they are resolved unfavorably, we may be forced to discontinue supporting some or all of these programs and/or incur tax expenses that we cannot recover from our clients, which could have a material adverse effect our ability to attract and retain SMB clients.
These developments, and any other new laws, changes in laws or adverse application or interpretation of laws, including payroll tax incentive programs, could also affectreduce or eliminate the extentattractiveness of our services and type of employee benefits employersour ability to support programs that clients want, provide clients with new and co-employers canattractive alternatives to our services, significantly increase our compliance costs and the cost to provide our services, require us to make substantial changes to the way in which we operate, or must provide employees, the amount and type of taxes employers, co-employers and employees are requiredrequire us to pay or the time within which employersclient liabilities with no guarantee of subsequent recovery from our clients, and co-employers must remit taxes to applicable tax authorities. The laws that apply in our industry and to employers and co-employers have and could be changed, replaced or interpreted in a manner adverse to our operations and we are not able to predict the occurrence, direction or ultimate impactany one of these events. Any such new laws, changeoutcomes could result in laws or adverse application or interpretation of laws could havea material adverse effect on our financial condition and 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.
Changes to and continued uncertainty regarding the implementation and future of health care reform in the United States, including underat the ACA, any successor to the ACA, or related or similarfederal, state and local laws,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, the elimination of the ACA individual mandate tax penalty beginning in 2019 may reduce the number of WSEs who participate in our insurance programs. SignificantIn addition, changes could be made to the ACA in 2019 and beyond, including the potential modification, amendment or repeal of the ACA. Changes to federal health care laws, including the ACA, could also result in new or amended laws being introduced at the state or local level. Our ability to comply with, and adapt our product offerings to take advantage of, any such changes could require significant additional costs and divert management attention, which could result in a material adverse effect on our financial condition and results of operations.
Similarly, changes to federal, state and local level to the laws and regulations regarding other traditional employee benefits, such as retirement and workers’ compensation benefits, also have the potential to substantially change the types of benefit programs that are available to SMBs and that we and other PEOs may be offered by PEOs. For example, proposed rule
required to offer. Our ability to comply with, and adapt our service offerings to take advantage of, any such changes by the DOL may make available "open multiple employer plans" for retirement benefits,could require significant additional costs, divert management attention, or be prohibitive based on cost, technology or other factors, which plans may compete with the benefit plans we provide. The availability of alternative employee benefit plans for SMBs, or any reductioncould result in the types of plans that we can offer our clients, could have a material adverse effect on our business, 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 ourcertain 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 anthe employer for the purposes of ERISA 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-factordifferent facts and circumstances 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 hasmay be considered important in the past in evaluating this issueunder these tests have included the employer’s degree of behavioral control (for example the extent of instructions, training and evaluation of the work), financial control and the economic aspects of the work relationship, the type of relationship, as evidenced by the specific contract, if any, whether employee benefits are provided, whether the work is indefinite in duration or project-based, and whether it is a regular part of the employer’s business. However, a definitive judicial interpretation of “employer” in the context of PEOs has not been established. For
We believe that we qualify as the employer of WSEs for the purposes of Sections 3(5) and 3(40) of ERISA purposes, for example, courts have heldand that test factors relatingour health plans are single-employer plans that, as such, are entitled to ERISA’s preemption of the ability to controlapplication of state law. The DOL, however, has determined on a facts and supervise an individual are less important, while the DOL has issued guidancecircumstances basis that certain entities in the HR outsourcing industry do not qualify as common law employers. In addition, the DOL routinely audits employee benefit plan offerings of employers, for ERISA purposes. Although we believe that we qualify as an employerand these audits can take years to complete. In one routine audit of WSEs under ERISA andone of TriNet’s health plans, the DOL has not provided guidance otherwise,indicated that while it agrees that we are not able to predict the outcome of any regulatory challenge.
If we were found not to be an employer for ERISA purposes, it could adversely affectbelieves that wherever there is more than one employer of a WSE, no employer may qualify as a single employer for ERISA purposes. This DOL interpretation is contrary to our interpretation of the applicable ERISA facts and circumstances test, and we understand it also is contrary to the position of other national PEOs. We will continue to vigorously defend our position that we are the sole employer of our WSEs for the purposes of Sections 3(5) and 3(40) of ERISA, and therefore that our health plans are single-employer plans entitled to ERISA’s preemption of applicable state laws. While we have no current DOL audit on-going regarding this issue, the DOL’s position remains uncertain, and this issue may arise in future audits of TriNet plans or the plans of other PEOs in our industry. If it were ultimately determined that all health plans sponsored by PEOs are multiple-employer plans and subject to potential regulation at the state level, we would likely adjust our business model and the manner in which we are able to provide employee health benefits to WSEs. Any such adjustment would require significant investment in time, cost and management attention and would have a material impact on our clients and WSEs, which could have a material adverse effect on our business and results of operations.
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 these 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 our 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.
IfFurther, 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.authorities. 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 co-employersevidenced by recent federal and state rule changes. In September 2019, California passed AB5, a law that could potentially reclassify client independent contractors as employees. In November 2020, California voter passed Proposition 22, which supersedes AB5 for certain types of contractors. On August 20, 2021, a California state court found that portions of Proposition 22 were unconstitutional and further held that the entirety of Proposition 22 was unenforceable. Changes like these to the rules in any jurisdiction that define when a worker is an employee or independent contractor can increase or decrease the pool of WSEs that we can co-employ and comply with state licensing, certification and registration requirementsinclude in our TriNet sponsored benefit plans, which may negatively impact client demand for the regulationservices 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 PEOs. Forty-four states have passed such lawsoperations.
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. In 2022, the National Labor Relations Board (NLRB) plans to create a new rule for determining whether two businesses are joint employers under the National Labor Relations Act (NLRA). Joint employment is not the same as co-employment, and other states may implement such requirements in the future. While we do not believe that we satisfyare a joint employer under the DOL rule or any future NLRB rule, or that these staterule changes impact our status as a co-employer. While the DOL rule has been partially vacated by a district court decision, these changes could still 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 these requirements vary from stateregarding 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 state, they canour 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 services, and could have changed frequently with varying degrees of impactan adverse effect on our business and results of operations.
If we do not comply with our regulatory license requirements, or if we are deemed to be operating in various non-PEO licensed industries without the required licenses, we and our clients could be adversely impacted.
Most states require PEOs to hold a license and we are licensed as a PEO in all states that require such licenses. If we are not able to satisfy existing or future PEO 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 the fourth quarter of 2021, we launched a new product, called IOM, that offers clients the option to receive PEO services from TriNet while obtaining client-sponsored health benefits from a third-party broker that partners with TriNet. TriNet does not broker insurance, but we do maintain producer licenses in all 50 states and select U.S. territories. If we are not able to satisfy existing or future producer licensing requirements, or other applicable regulations in any state, we may not be able to operate this program in the same manner, or we may lose the ability to collect certain administrative fees, within that state.
In addition, state 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 we 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 PEO, we may need to hire additional personnel to manage regulatory compliance and 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 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. However, the extent of our responsibility for other aspects of our co-employer relationship with our WSEs remains subject to regulatory uncertainty at the local, statelegal and federal 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, industry-specific lawstax proceedings that apply to the businesses our clients operate, other laws that apply to our clients or to employers generally, and other acts and omissions by our clients or WSEs, even if we do not violate such laws or participate in such acts or omissions. State and federal positions regarding co-employment relationships are in a constant state of flux and have changed 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.
We seek to mitigate these risks through agreements and insurance coverage. 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, 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 us, 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 other security-related incidents could result in reduced revenue, increased costs, liability claims, regulatory penalties, and damage to our reputation.
Maintaining the security of our 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 and services rely on the security of our infrastructure to ensure the reliability of our products and services and the protection of sensitive client and WSE data. We collect, store, use, process, transfer, disclose, and transmit a large amount of personal and confidential information about our clients, WSEs and colleagues, including bank account and social security numbers, data used for tax returns, certain medical information, retirement account information and payroll data. In providing our services, we also rely on third-party service providers, such as insurance carriers and banks, who have access to personal and confidential information about our clients, WSEs and employees and some of those service providers subcontract some of their responsibilities to other third-party service providers. Through contractual provisions and third party risk management processes, we take steps to require that our service providers protect our funds and sensitive information. Due to the size and complexity of our information technology system, the amount of sensitive data that we store and the number of employees and third-party service providers with access to that data, our information technology systems are potentially vulnerable to a variety of intentional and inadvertent security threats.
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 and similar types of attacks against either or both of us and our clients and service providers. Other threats include inadvertent security breaches by our employees, clients, WSEs, service providers and other business partners.
Organizations and individuals have launched and will continue to potentially launch such targeted attacks, including social engineering, phishing and credential stuffing attacks, against us, our service providers, and our clients. Such attacks have and can disrupt, or result in unauthorized access to, our networks, applications, bank accounts, and confidential data, or those of our clients or WSEs or service providers. In addition, we, our service providers and our clients have experienced inadvertent security breaches that led to disclosures of sensitive client and WSE data in the past and could have such experiences in the future.
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 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 our reputation and relationships with current or potential clients. The costs of identifying and remediating any 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. Any publicized security problems, or even public rumors about a security problem, affecting our businesses and/or those of our service providers may have a similarly material adverse effect on our business or reputation.
We have implemented policy, procedural, technical, physical, and administrative controls with the aim of protecting our networks, applications, bank accounts, and the personal and confidential information entrusted to us from such threats. While we, and our service providers, have security measures and programs in place to prevent, detect, and respond to attacks, data security incidents 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 attacks, data security 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. We also expect that intentional threats to our infrastructure and our clients’ and WSEs’ data will continue to grow in frequency, complexity and sophistication. As a result, we are investing, and plan to continue investing, resources to protect our information security ecosystem against such incidents though we may not have adequate insurance coverage to compensate for losses from a security incident.
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 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, whether deliberate or inadvertent, could result in the access, public disclosure, loss or theft of our clients' and WSEs' confidential and personal data, including PHI, 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 also subject to various federal, state and foreign laws, rules, and regulations relating to the collection, use, and security of personal and confidential information. For example, U.S. states, the District of Columbia and Canada 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 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. For example, we must comply with the requirements of the California Consumer Privacy Act of 2018 (CCPA) by January 1, 2020, which may require us to incur additional costs. 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.adverse outcomes.
Unexpected changes in workers' compensationWe are subject to claims, lawsuits, government investigations, and health insurance claims by worksite employees could harmother legal and regulatory proceedings arising from the ordinary course of 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. We establish accrued costs 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 claims activity including an increase in WSE incidents or costs of those incidents, our costs could increase or decrease, respectively. An increase in claims activity could make it more difficult to secure replacement insurance policies on competitive terms once our current policies expire. Estimating these accrued costs requires us to consider 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 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.
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 110 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K for further discussionadditional 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.
In addition, the tax authorities in the U.S. regularly examine our tax returns. Refer to Note 13 in Part II, Item 8. Financial Statements and Supplementary Data, 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 policies. We have experienced variability, andor other examinations, we may experience variability in the future, in the amounts that we arebe 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 usrecord charges to manage this aspect of our business and which mayoperations that could have a material adverse effectimpact on our business.results of operations, financial position or cash flows. Financial and 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 draw 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 service enhancements,
•any changes in laws or adverse interpretation or enforcement of laws, which 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.stock, and
•market acceptance of our performance across non-financial factors, including evolving environmental, social, and governance factors favored by investors and required by regulators.
Many of the above factors are discussed in more detail elsewhere in this Risk Factors section and in Part II, Item 7. 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, and our ability to retain or attract key personnel, and could cause other unanticipated issues, including a downgrade of our sharessecurities by or change in opinion of industry analysts and a related decline in our share price.
Any failure in our business systems, or 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 data processing 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. Our systems have 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. Any delay or failure in these systems, even if only for a short period of time, can have a significant impact on our clients and WSEs and result in a loss of clients and/or liability to our clients and WSEs or fines and penalties levied by the government agencies that regulate our operations, any of which could result in a materially adverse effect on our reputation and 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, we rely on third-party systems to provide services for our clients and WSEs, such as electronic banking systems and payroll tax systems that transmit client and WSE data to taxing agencies. If any of these systems were disrupted or if the third parties who provide those systems were to experience operational or financial difficulties even if only for a short period of time, which has happened in the past and could happen in the future, the solutions we provide to our clients and WSEs could be significantly affected, which could also result in a material adverse effect on our reputation and business. We also 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 us from providing services to our clients.
To succeed, we must constantly improve our technology to meet the expectations of our clients. If we fail to meet those expectations, we may lose clients and harm our business.
In order to attract and retain clients and satisfy their expectations, the software, hardware and networking technologies we use must be frequently and rapidly upgraded, enhanced and expanded in response to technological advances, competitive pressures, client expectations, and new and changing laws. As a result, we must timely and effectively identify, develop, or license from third parties, and integrate such upgraded, enhanced or expanded 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 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 materially 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 remediated the material weakness previously reported in our internal control over financial reporting, but if we fail to properly manage our internal control over financial reporting on a go forward basis, future material weaknesses could be identified that could, if not remediated, result in a material misstatement in our financial statements.
We have remediated the material weakness that we previously identified in connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2017 by implementing and enhancing our control procedures. 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. In order to properly manage our internal control over financial reporting, we may need to take additional measures, including system migration and automation, and we cannot be certain that the measures we have taken, and expect to take, to improve our internal controls will be sufficient to ensure that our internal controls will remain effective and eliminate the possibility that other material weakness or deficiencies may develop or be identified in the future. Implementing any changes to our internal controls may distract our officers and employees and require expenditures to implement new process or modify our existing processes. If we experience future material weaknesses or deficiencies in internal controls and we are unable to correct them 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. Any such 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 pursue 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, which may include the migration of WSEs from the technology platform and service providers used by the acquired company to our own,
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.
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.
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 decrease in revenues. It is difficult 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.
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 significantly changed our operations and internal processes in recent periods in order to improve our operational effectiveness, which has placed a strain on our systems, management, administrative, operational and financial infrastructure. We believe these efforts are important to our long-term success. 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 our vertical strategy is unsuccessful, 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.
If we are unable to train and manage our sales force effectively, our business may be harmed.
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 any newly hired sales personnel will function effectively either individually or as a group. In addition, 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 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.
Our reputation could suffer and our business could be adversely affected if our products do not perform, and our services are not delivered, as expected by our clients and WSEs.
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, breadth and depth of our benefit plans, vertical market expertise, total cost 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 continually satisfy the evolving product and service delivery expectations of our clients and WSEs, then we could experience greater rates of attrition and lower rates for on-boarding new clients, which could have a material adverse effect on 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.
Most of our clients are concentrated in certain geographic regions 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 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, 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 8 in Part II, Item 8. Financial Statements and Supplementary Data, 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 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 10 in Part II, Item 8. Financial Statements and Supplementary Data, 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 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 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 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.
There is significant competition for our clients and 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, including cost pressures, client merger and acquisition activity, increases in administrative and insurance service fees, client business failure, effects of competition, and client decisions to bring their HR administration in-house. Our standard client service agreement can be canceled 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.
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 all•complete a significant corporate transaction, such as a merger or substantially allsale of our company or its assets, or enter into merger or consolidation transactions with another person, and
•enter into agreements that prohibit the incurrence of liens or the payment by our subsidiaries of dividends and distributions.
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 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 7, 2019,January 31, 2022, Atairos beneficially owned approximately 28%33% of our outstanding common stock, and all of our directors, executive officers and their affiliates, including Atairos, beneficially own, in the aggregate, approximately 37%38% of our outstanding common stock. As a result of the foregoing, Atairos, particularly when acting with our executive officers, directors and their affiliates, 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 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.
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| PROPERTIES, LEGAL PROCEEDINGS AND MINE SAFETY DISCLOSURES | |
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease space for 58our offices in various U.S. states, including the following:
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| | | | |
Corporate:Corporate Headquarters: | Significant Client Service Centers: |
| • Dublin, California | • Bradenton, Florida |
| • Reno, Nevada |
| • Fort Mill,Indian Land, South Carolina |
| • New York, New YorkAustin, Texas |
All of these leases expire at various times up through 2028. We believe thatFor more information regarding our leases, are sufficient for our current purposesrefer to Note 8 in Part II, Item 8. Financial Statements and long-term growth and expansion goals.Supplementary Data, of this Form 10-K.Item 3. Legal Proceedings
For the information required in this section, refer to Note 810 in Part II, Item 8. 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..
On February 7, 2019, the last reported sales price of our common stock on the New York Stock Exchange was $45.53 per share. As of February 7, 2019,2022, we had 4231 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.
Dividend Policy
We did not declare or pay cash dividends in 20182021 or 2017.2020. Payment of cash dividends if any, in the future, if ever, 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 79 in Part II, Item 8. 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 page compares the cumulative return on our common stock since the initial public offering in March 2014December 31, 2016 with the cumulative return on the S&P 500 Index and a Peer Group 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 a Peer Group Index, all on the date of TriNet's initial public offering in March 2014December 31, 2016 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 57 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.
|
| 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, 2018, our board of directors had authorized us to repurchase up to an aggregate of $315 million under this program of which approximately $75 million remains available for repurchases under all authorizations approved by the board of directors. We repurchased a total of approximately $61 million of our outstanding common stock in 2018 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 Exchange Act. 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. Stock repurchases under the program are primarily intended to return value to our stockholders and offset the dilutive effect of equity-based employee incentive compensation.
The following table provides information about our purchases of TriNet common stock during the fourth quarter of 2018:2021:
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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, 2018 | 136,944 |
| $ | 50.57 |
| 135,026 |
| $ | 83 |
|
| November 1 - November 30, 2018 | 242,679 |
| $ | 45.07 |
| 158,563 |
| $ | 75 |
|
| December 1 - December 31, 2018 | 79,375 |
| $ | 41.30 |
| 1,707 |
| $ | 75 |
|
| Total | 458,998 |
| | 295,296 |
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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) (3) |
| October 1 - October 31, 2021 | 5,116 | | $ | 98.36 | | — | | $ | 264 | |
| November 1 - November 30, 2021 | 45,279 | | $ | 108.44 | | — | | $ | 264 | |
| December 1 - December 31, 2021 | 75,814 | | $ | 95.15 | | 6,202 | | $ | 263 | |
| Total | 126,209 | | | 6,202 | | |
(1) In May 2014, our board of directors approved a stock repurchase program pursuant to which we are authorized to repurchase our common stock in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934. From time to time, our board of directors authorizes increases to our stock repurchase program and approved an aggregate total of $951 million as of December 31, 2021. The total remaining authorization for future stock repurchases under our stock repurchase program was $263 million as of December 31, 2021. Our board of directors subsequently approved an aggregate total of $300 million under this program in February 2022. As a result, the total remaining authorization for future stock repurchases under our stock repurchase program was $563 million, as of February 14, 2022. The program does not have an expiration date.
(2) Includes shares surrendered by employees to us to satisfy tax withholding obligations that arose upon vesting of restricted stock units granted pursuant to approved plans.
(2)(3) We repurchased a total of approximately $14$1 million of our outstanding stock during the three months ended December 31, 2018.2021.
On February 6, 2019,We use 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 planplans and employee purchase plan. As part of our stock repurchase program, we repurchased approximately $94 million of our common stock in 2021 using existing cash and cash equivalents through our Rule 10b5-1 plan. We plan to use current cash and cash generated from ongoing operating activities to fund our stock repurchase program.
Our stock repurchases are subject to certain restrictions under the terms of our credit facility. For more information about our stock repurchases and the restrictions imposed by our credit facility, refer to Note 7 and Note 9 and Note 12 in Part II, Item 8. Financial Statements and Supplementary 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. MD&A, as well as our audited consolidated financial statements and related notes included in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K.
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| | Year Ended December 31, |
| (in millions, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 |
| Income Statement Data: | | | | | |
| Total revenues | $ | 3,503 |
| $ | 3,275 |
| $ | 3,060 |
| $ | 2,659 |
| $ | 2,194 |
|
| Net income | 192 |
| 178 |
| 61 |
| 32 |
| 15 |
|
| Diluted net income per share of common stock | 2.65 |
| 2.49 |
| 0.85 |
| 0.44 |
| 0.22 |
|
Non-GAAP measures (1): | | | | | |
Net Service Revenues | 893 |
| 809 |
| 646 |
| 547 |
| 508 |
|
Net Insurance Service Revenues | 406 |
| 351 |
| 199 |
| 146 |
| 166 |
|
| Adjusted EBITDA | 347 |
| 285 |
| 185 |
| 151 |
| 165 |
|
| Adjusted Net Income | 218 |
| 142 |
| 87 |
| 71 |
| 74 |
|
| | | | | | |
| Balance Sheet Data: | | | | | |
| Cash and cash equivalents | $ | 228 |
| $ | 336 |
| $ | 184 |
| $ | 166 |
| $ | 134 |
|
| Working capital | 221 |
| 234 |
| 156 |
| 112 |
| 121 |
|
| Total assets | 2,435 |
| 2,593 |
| 2,095 |
| 2,092 |
| 2,341 |
|
| Long-term debt | 413 |
| 423 |
| 459 |
| 494 |
| 545 |
|
| Total liabilities | 2,060 |
| 2,387 |
| 2,060 |
| 2,084 |
| 2,366 |
|
| Total stockholders’ equity (deficit) | 375 |
| 206 |
| 35 |
| 8 |
| (25 | ) |
| | | | | | |
| Cash Flow Data: | | | | | |
Net cash (used in) provided by operating activities (2) | $ | (104 | ) | $ | 606 |
| $ | 192 |
| $ | (281 | ) | $ | 1,038 |
|
| Net cash (used in) provided by investing activities | (200 | ) | (24 | ) | (27 | ) | (38 | ) | (45 | ) |
Net cash (used in) financing activities (2) | (85 | ) | (77 | ) | (104 | ) | (81 | ) | (76 | ) |
Non-GAAP measures (1): | | | | | |
| Corporate operating cash flows | 234 |
| 299 |
| 189 |
| 169 |
| 143 |
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(1) | Refer to Non-GAAP Financial Measures section on the following pages for definitions and reconciliations from GAAP measures. |
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(2) | Prior year balances were retrospectively adjusted for ASU 2016-18. Refer to Note 1 in Item 8: Financial Statements and Supplementary Data, of this Form 10-K for details. |
Non-GAAP Financial Measures
In addition to financial measures presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP), we monitor other non-GAAP financial measures that we use to manage our business, to make planning decisions, to allocate resources and to use as performance measures in our executive compensation plan. These key financial measures provide an additional view of our operational performance over the long-term and provide information that we use to maintain and grow our business.
The presentation of these non-GAAP financial measures is used to enhance the understanding of certain aspects of our financial performance. It is not meant to be considered in isolation, superior to, or as a substitute for the directly comparable financial measures prepared in accordance with GAAP.
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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 Service Margin, 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, and
- stock-based compensation expense.
| • Provides period-to-period comparisons on a consistent basis and an understanding as to how our management evaluates the effectiveness of our business strategies by excluding certain non-cash charges such as depreciation and amortization, and stock-based compensation recognized based on the estimated fair values. We believe these charges are either not directly resulting from our core operations or not indicative of our ongoing operations.
• Enhances comparisons to prior periods and, accordingly, facilitates the development of future projections and earnings growth prospects.
• Provides a measure, among others, used in the determination of incentive compensation for management.
• We also sometimes refer to Adjusted EBITDA margin, which is the ratio of Adjusted EBITDA to Net Service Revenue.
|
Adjusted Net Income | • Net income, excluding the effects of:
- effective income tax rate (1),
- stock-based compensation,
- amortization of intangible assets,
- non-cash interest expense (2), 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.
|
|
| | |
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 stockholders and management can use to evaluate our cash flows from operations independent of the current assets and liabilities associated with our WSEs.
• Enhances comparisons to prior periods and, accordingly, used as a liquidity measure to manage liquidity between corporate and WSE related activities, and to help determine and plan our cash flow and capital strategies.
|
| |
(1) | We have adjusted our non-GAAP effective tax rate to 26%, 41%, 43%, 42% and 40% for 2018, 2017, 2016, 2015 and 2014, 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, 2015 and 2014 are a result of changes in state income taxes from an increase in excludable income for state income tax purposes or state legislative changes. These non-GAAP effective tax rates exclude the income tax impact from stock-based compensation, changes in uncertain tax positions and nonrecurring benefits or expenses from federal legislative changes. |
| |
(2) | Non-cash interest expense represents amortization and write-off of our debt issuance costs. |
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) | 2018 | 2017 | 2016 | 2015 | 2014 |
| Total revenues | $ | 3,503 |
| $ | 3,275 |
| $ | 3,060 |
| $ | 2,659 |
| $ | 2,194 |
|
| Less: Insurance costs | 2,610 |
| 2,466 |
| 2,414 |
| 2,112 |
| 1,686 |
|
| Net Service Revenues | $ | 893 |
| $ | 809 |
| $ | 646 |
| $ | 547 |
| $ | 508 |
|
The table below presents a reconciliation of insurance service revenues to Net Insurance Service Revenues:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 | 2015 | 2014 |
| Insurance service revenues | $ | 3,016 |
| $ | 2,817 |
| $ | 2,613 |
| $ | 2,258 |
| $ | 1,852 |
|
| Less: Insurance costs | 2,610 |
| 2,466 |
| 2,414 |
| 2,112 |
| 1,686 |
|
| Net Insurance Service Revenues | $ | 406 |
| $ | 351 |
| $ | 199 |
| $ | 146 |
| $ | 166 |
|
| Net Insurance Service Revenue Margin | 13 | % | 12 | % | 8 | % | 6 | % | 9 | % |
The table below presents a reconciliation of net income to Adjusted EBITDA and Adjusted EBITDA Margin: |
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 | 2015 | 2014 |
| Net income | $ | 192 |
| $ | 178 |
| $ | 61 |
| $ | 32 |
| $ | 15 |
|
| Provision for income taxes | 49 |
| 22 |
| 43 |
| 28 |
| 18 |
|
| Stock-based compensation | 44 |
| 32 |
| 26 |
| 18 |
| 11 |
|
| Interest expense and bank fees | 22 |
| 20 |
| 20 |
| 19 |
| 54 |
|
| Depreciation | 35 |
| 28 |
| 19 |
| 15 |
| 14 |
|
Amortization of intangible assets
| 5 |
| 5 |
| 16 |
| 39 |
| 52 |
|
| Secondary offering costs | — |
| — |
| — |
| — |
| 1 |
|
| Adjusted EBITDA | $ | 347 |
| $ | 285 |
| $ | 185 |
| $ | 151 |
| $ | 165 |
|
| Adjusted EBITDA Margin | 39 | % | 35 | % | 29 | % | 28 | % | 33 | % |
The table below presents a reconciliation of net income to Adjusted Net Income:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 | 2015 | 2014 |
| Net income | $ | 192 |
| $ | 178 |
| $ | 61 |
| $ | 32 |
| $ | 15 |
|
| Effective income tax rate adjustment | (13 | ) | (59 | ) | (1 | ) | 3 |
| 5 |
|
| Stock-based compensation | 44 |
| 32 |
| 26 |
| 18 |
| 11 |
|
| Amortization of intangible assets | 5 |
| 5 |
| 16 |
| 39 |
| 52 |
|
| Debt prepayment premium | — |
| — |
| — |
| — |
| 4 |
|
| Secondary offering costs | — |
| — |
| — |
| — |
| 1 |
|
| Non-cash interest expense | 4 |
| 2 |
| 4 |
| 4 |
| 22 |
|
| Income tax impact of pre-tax adjustments | (14 | ) | (16 | ) | (19 | ) | (25 | ) | (36 | ) |
| Adjusted Net Income | $ | 218 |
| $ | 142 |
| $ | 87 |
| $ | 71 |
| $ | 74 |
|
The table below presents a reconciliation of net cash (used in) provided by operating activities to corporate operating cash flows:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 | 2015 | 2014 |
| Net cash (used in) provided by operating activities | $ | (104 | ) | $ | 606 |
| $ | 192 |
| $ | (281 | ) | $ | 1,038 |
|
| Change in WSE related other current assets | 33 |
| 35 |
| (96 | ) | 188 |
| (32 | ) |
| Change in WSE related liabilities | 305 |
| (342 | ) | 93 |
| 262 |
| (863 | ) |
Corporate Operating Cash Flows
| $ | 234 |
| $ | 299 |
| $ | 189 |
| $ | 169 |
| $ | 143 |
|
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Significant DevelopmentsOperational Highlights
Our consolidated results for 2021 reflect our continuing efforts to serve our existing clients throughout the COVID-19 pandemic and to support the economic recovery of SMBs. We will continue to monitor and evaluate developments relating to the COVID-19 pandemic and will work to respond appropriately to the impact of COVID-19 on our business and our clients' businesses.
During 2021 we:
•continued to grow total revenues as we achieved the highest Total WSEs in our history,
•entered into a definitive agreement to acquire Zenefits,
•established our 2021 Credit Program to benefit our eligible clients,
•hosted the 2nd annual TriNet PeopleForce conference, our showcase customer and prospect conference focused on business transformation, agility and innovation for small and medium-size businesses,
•introduced TriNet Financial Services Preferred, a new top-tier version of our HR solution that addresses the critical HR needs of businesses in the financial services industry,
•launched 'Connect 360', an innovative service model intended to better meet client needs, and
•completed a $500 million senior notes offering, repaid and terminated our outstanding term loan, and replaced our existing revolving credit facility with a new $500 million revolving credit facility.
Performance Highlights in 2018
Operational achievements in 2018
Our results for 2018 reflect2021 when compared to 2020 are noted below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| $4.5B | | $455M | | 86% |
| Total revenues | | Operating income | | Insurance cost ratio |
| 13 | % | increase | | 24 | % | increase | | 1 | % | increase |
| | | | | | | |
| $338M | | $5.07 | | $376M |
| Net income | | Diluted EPS | | Adjusted Net income * |
| 24 | % | increase | | 27 | % | increase | | 24 | % | increase |
| | | | | | | | | | | | | | | | | | | | | |
| 340,067 | | 364,940 | | | |
| Average WSE | | Total WSE | | | |
| 5 | % | increase | | 10 | % | increase | | | | |
| * | | |
We continued progress marketingto achieve year-over-year revenue growth, reflecting our higher Average WSEs, rate increases and sellingthe $111 million decrease in the Recovery Credit recognized in 2021 compared to 2020.
During 2021, our vertical productsAverage WSEs increased 5% and our insurance service offerings, combined with WSE enrollment growth within our insurance offerings. This was offset by WSE attrition that we experiencedtotal WSEs increased 10% compared to 2020, primarily as a result of our migration of Main Street WSEs to a single technology platform. Our operational achievements included:
Continuing to investcontinued hiring by clients in our effortsinstalled base.
Increased medical services utilization in 2021, combined with increased volume due to enhanceWSE growth, resulted in higher insurance costs compared to 2020.
The growth in total revenues, partially offset by increases in insurance costs and operating expenses, resulted in increases in our clients' experience through operational and process improvements,
Launching a marketing and branding campaign in September 2018 to improve our brand awareness and enhance our sales efforts,
Launching TriNet Professional Services, our sixth vertical product,
Completing the migration of existing clients from our legacy SOI platform onto our single technology platform,
Continuing to benefit from changes for one of our health insurance carrier contracts, where we converted from a guaranteed-cost to risk-based plan in late 2017,
Investing corporate funds and enhancing our investment strategy to generate interest income which improved our future interest income, net income and our Adjusted EBITDA, accordingly,
Refinancing our term loans during the second quarterNet Income of 2018, and
Continuing to invest in improving our internal control environment to support our ongoing compliance with the requirements of the Sarbanes-Oxley Act of 2002 (SOX)24%.
These operational achievements drove the financial performance improvements noted below in 2018 when compared to the prior year:
|
| | | | | | | | | | | |
| | $3.5B | | $251M | | $893M |
| | Total revenues | | Operating income | | Net Service Revenue * |
| | 7 | % | increase | | 15 | % | increase | | 10 | % | increase |
| | | | | | | | | |
| | $192M | | $2.65 | | $218M |
| | Net income | | Diluted EPS | | Adjusted Net income * |
| | 8 | % | increase | | 6 | % | increase | | 53 | % | increase |
| | | | | | | | | |
| * | Non-GAAP measure
| | | | | | |
Our results for WSEs and payroll and payroll tax payments in 2018 when compared to the prior year were:
|
| | | | | | | | | | |
| | 325,616 | | 317,104 | | $37.7B |
| | Total WSE | | Average WSE | | Payroll and payroll tax payments |
| | | Flat | | 2 | % | reduction | | 1 | % | increase |
| | | | | | | | | |
We experienced a decline in Average WSEs (defined as average monthly WSEs paid during the period) during 2018 as compared to 2017 primarily due to client attrition, including attrition from our Main Street vertical due to our planned migration of our Main Street clients from our legacy (SOI) platform onto our single technology platform, partially offset by growth in our other verticals.
|
| | | | |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Results of Operations
The following table summarizes our results of operations for the three years ended December 31, 2018, 20172021, 2020 and 2016.2019. 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 MD&A. | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | % Change |
| (in millions, except operating metrics data) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 |
| Income Statement Data: | | | | | |
| Professional service revenues | $ | 639 | | $ | 544 | | $ | 530 | | 17 | % | 3 | % |
| Insurance service revenues | 3,901 | | 3,490 | | 3,326 | | 12 | | 5 | |
| Total revenues | 4,540 | | 4,034 | | 3,856 | | 13 | | 5 | |
| Insurance costs | 3,339 | | 2,979 | | 2,927 | | 12 | | 2 | |
| Operating expenses | 746 | | 687 | | 661 | | 9 | | 4 | |
| Total costs and operating expenses | 4,085 | | 3,666 | | 3,588 | | 11 | | 2 | |
| Operating income | 455 | | 368 | | 268 | | 24 | | 37 | |
| Other income (expense): | | | | | |
| Interest expense, bank fees and other | (20) | | (21) | | (21) | | (5) | | — | |
| Interest income | 6 | | 10 | | 23 | | (40) | | (57) | |
| | | | | |
| | | | | |
| Income before provision for income taxes | 441 | | 357 | | 270 | | 24 | | 32 | |
| Income taxes | 103 | | 85 | | 58 | | 21 | | 47 | |
| Net income | $ | 338 | | $ | 272 | | $ | 212 | | 24 | % | 28 | % |
| | | | | |
| | | | | |
| Cash Flow Data: | | | | | |
| Net cash provided by operating activities | 218 | | 546 | | 471 | | (60) | % | 16 | % |
| Net cash used in investing activities | (135) | | (151) | | (188) | | (11) | | (20) | |
| Net cash provided by (used in) financing activities | 12 | | (208) | | (176) | | (106) | | 18 | |
| | | | | |
Non-GAAP measures (1): | | | | | |
| | | | | |
| | | | | |
| | | | | |
| Adjusted EBITDA | 565 | | 468 | | 378 | | 21 | | 24 | % |
| Adjusted Net income | 376 | | 303 | | 236 | | 24 | | 28 | |
| Corporate Operating Cash Flow | 415 | | 338 | | 233 | | 23 | | 45 | |
| | | | | |
| Operating Metrics: | | | | | |
| Insurance Cost Ratio | 86 | % | 85 | % | 88 | % | 1 | | (3) | % |
| Average WSEs | 340,067 | | 323,672 | | 324,927 | | 5 | | — | |
| Total WSEs | 364,940 | | 331,908 | | 340,017 | | 10 | | (2) | |
| | | | | |
(1) Refer to Non-GAAP measures definitions and reconciliations from GAAP measures under the heading "Non-GAAP Financial Measures".
The following table summarizes our balance sheet data as of December 31, 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | % Change |
| (in millions) | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 |
| Balance Sheet Data: | | | | | |
| Cash and cash equivalents | $ | 612 | | $ | 301 | | $ | 213 | | 103 | % | 41 | % |
| Working capital | 700 | | 290 | | 228 | | 141 | % | 27 | % |
| Total assets | 3,309 | | 3,043 | | $ | 2,748 | | 9 | % | 11 | % |
| Debt | 495 | | 369 | | 391 | | 34 | % | (6) | % |
| Total stockholders’ equity | 881 | | 607 | | 475 | | 45 | % | 28 | % |
|
| | | | | | | | | | | | | |
| | Year Ended December 31, | % Change |
| (in millions, except operating metrics data) | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 |
| Income Statement Data: | | | | | |
| Professional service revenues | $ | 487 |
| $ | 458 |
| $ | 447 |
| 6 | % | 3 | % |
| Insurance service revenues | 3,016 |
| 2,817 |
| 2,613 |
| 7 |
| 8 |
|
| Total revenues | 3,503 |
| 3,275 |
| 3,060 |
| 7 |
| 7 |
|
| Insurance costs | 2,610 |
| 2,466 |
| 2,414 |
| 6 |
| 2 |
|
| Operating expenses | 642 |
| 592 |
| 522 |
| 8 |
| 13 |
|
| Total costs and operating expenses | 3,252 |
| 3,058 |
| 2,936 |
| 6 |
| 4 |
|
| Operating income | 251 |
| 217 |
| 124 |
| 15 |
| 75 |
|
| Other income (expense) | (10 | ) | (17 | ) | (20 | ) | 48 |
| 10 |
|
| Income before provision for income taxes | 241 |
| 200 |
| 104 |
| 21 |
| 91 |
|
| Income tax expense | 49 |
| 22 |
| 43 |
| 128 |
| (50 | ) |
| Net income | $ | 192 |
| $ | 178 |
| $ | 61 |
| 8 | % | 190 | % |
| | | | | | |
Non-GAAP measures (1): | | | | | |
| Net Service Revenues | $ | 893 |
| $ | 809 |
| $ | 646 |
| 10 | % | 25 | % |
| Net Insurance Service Revenues | 406 |
| 351 |
| 199 |
| 16 |
| 76 |
|
| Adjusted EBITDA | 347 |
| 285 |
| 185 |
| 22 |
| 53 |
|
| Adjusted Net income | 218 |
| 142 |
| 87 |
| 53 |
| 62 |
|
| | | | | | |
| Operating Metrics: | | | | | |
| Total WSEs payroll and payroll taxes processed (in millions) | $ | 37,666 |
| $ | 37,115 |
| $ | 34,281 |
| 1 | % | 8 | % |
| Average WSEs | 317,104 |
| 324,679 |
| 326,850 |
| (2 | ) | (1 | ) |
| Total WSEs | 325,616 |
| 325,370 |
| 337,885 |
| — |
| (4 | ) |
| |
(1) | Refer to Non-GAAP measures definitions and reconciliations from GAAP measures in Part II, Item 6. Selected Financial Data. |
| | | | | |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
A discussion regarding our financial condition and results of operations for 2020 compared to 2019 can be found under Part II, Item 7. Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 16, 2021. Non-GAAP Financial Measures
In addition to financial measures presented in accordance with GAAP, we monitor other non-GAAP financial measures that we use to manage our business, to make planning decisions, to allocate resources and to use as performance measures in our executive compensation plan. These key financial measures provide an additional view of our operational performance over the long-term and provide information that we use to maintain and grow our business.
The presentation of these non-GAAP financial measures is used to enhance the understanding of certain aspects of our financial performance. It is not meant to be considered in isolation from, superior to, or as a substitute for the directly comparable financial measures prepared in accordance with GAAP.
| | | | | | | | |
| Non-GAAP Measure | Definition | How We Use The Measure |
| | |
| | |
| | |
| Adjusted EBITDA | • Net income, excluding the effects of:
- income tax provision,
- interest expense, bank fees and other,
- depreciation,
- amortization of intangible assets, and
- stock based compensation expense. | • Provides period-to-period comparisons on a consistent basis and an understanding as to how our management evaluates the effectiveness of our business strategies by excluding certain non-cash charges such as depreciation and amortization, and stock-based compensation recognized based on the estimated fair values. We believe these charges are either not directly resulting from our core operations or not indicative of our ongoing operations.
• Enhances comparisons to prior periods and, accordingly, facilitates the development of future projections and earnings growth prospects.
• Provides a measure, among others, used in the determination of incentive compensation for management.
• We also sometimes refer to Adjusted EBITDA margin, which is the ratio of Adjusted EBITDA to total revenues. |
| Adjusted Net Income | • Net income, excluding the effects of: - effective income tax rate (1), - stock based compensation, - amortization of other intangible assets, net, - non-cash interest expense (2), 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. |
| Corporate Operating Cash Flows | • Net cash provided by (used in) operating activities, excluding the effects of:
- Assets associated with WSEs (accounts receivable, unbilled revenue, prepaid expenses and other current assets) and
- Liabilities associated with WSEs (client deposits and other client liabilities, accrued wages, payroll tax liabilities and other payroll withholdings, accrued health benefit costs, accrued workers' compensation costs, insurance premiums and other payables, and other current liabilities). | • Provides information that our stockholders and management can use to evaluate our cash flows from operations independent of the current assets and liabilities associated with our WSEs.
• Enhances comparisons to prior periods and, accordingly, used as a liquidity measure to manage liquidity between corporate and WSE related activities, and to help determine and plan our cash flow and capital strategies. |
| | |
(1) Non-GAAP effective tax rate is 25.5% for 2021, 2020 and 2019, which excludes the income tax impact from stock based compensation, changes in uncertain tax positions and nonrecurring benefits or expenses from federal legislative changes.
(2) Non-cash interest expense represents amortization and write-off of our debt issuance costs and loss on a terminated derivative.
| | | | | |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Reconciliation of GAAP to Non-GAAP Measures
The table below presents a reconciliation of Net income to Adjusted EBITDA:
| | | | | | | | | | | | | |
| Year Ended December 31, |
| (in millions) | 2021 | 2020 | 2019 | | |
| Net income | $ | 338 | | $ | 272 | | $ | 212 | | | |
| Provision for income taxes | 103 | | 85 | | 58 | | | |
| Stock based compensation | 50 | | 43 | | 41 | | | |
| Interest expense, bank fees and other | 20 | | 21 | | 21 | | | |
Depreciation and amortization of intangible assets ¹ | 54 | | 47 | | 46 | | | |
| | | | | |
| Adjusted EBITDA | $ | 565 | | $ | 468 | | $ | 378 | | | |
| Adjusted EBITDA Margin | 12.5 | % | 11.6 | % | 9.8 | % | | |
(1) Amount includes impairment of customer relationship intangibles and amortization of cloud computing arrangements included in operating expenses.
The table below presents a reconciliation of Net income to Adjusted Net Income:
| | | | | | | | | | | | | |
| Year Ended December 31, |
| (in millions) | 2021 | 2020 | 2019 | | |
| Net income | $ | 338 | | $ | 272 | | $ | 212 | | | |
| Effective income tax rate adjustment | (10) | | (6) | | (11) | | | |
| Stock based compensation | 50 | | 43 | | 41 | | | |
Amortization of other intangible assets, net ¹ | 12 | | 5 | | 5 | | | |
| Non-cash interest expense | 3 | | 1 | | 1 | | | |
| Income tax impact of pre-tax adjustments | (17) | | (12) | | (12) | | | |
| Adjusted Net Income | $ | 376 | | $ | 303 | | $ | 236 | | | |
(1) Amount includes impairment of customer relationship intangibles.
The table below presents a reconciliation of net cash provided by operating activities to Corporate Operating Cash Flows:
| | | | | | | | | | | | | |
| Year Ended December 31, |
| (in millions) | 2021 | 2020 | 2019 | | |
| Net cash provided by operating activities | $ | 218 | | $ | 546 | | $ | 471 | | | |
| Less: Change in WSE related other current assets | (51) | | 10 | | 15 | | | |
| Less: Change in WSE related liabilities | (146) | | 198 | | 223 | | | |
| Net cash (used in) provided by operating activities - WSE | $ | (197) | | $ | 208 | | $ | 238 | | | |
| Net cash provided by operating activities - Corporate | $ | 415 | | $ | 338 | | $ | 233 | | | |
| | | | | |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Operating Metrics
Worksite Employees (WSE)
Average WSE growth is a volume measure we use to monitor the performance of our business. Average WSEs decreased 2% and 1% in 2018 and 2017, respectively. Throughout 2018, we experienced elevated attrition, including attritionincreased 5% when comparing 2021 to 2020, primarily due to increased hiring by clients in our planned migrationinstalled base across most verticals in 2021, led by our Technology vertical. Most of the hiring in our Main Streetinstalled based in 2021 was from clients that benefited from our legacy (SOI) platform onto our single technology platform, partially offset by an improvementRecovery Credit program that we launched in new sales growthApril 2020. Our Recovery Credit program was designed to assist in our other verticals.the economic recovery of SMBs and to promote client loyalty and incentivize client retention.
Total WSEs can be used to estimate our beginning WSEs for the next period and, as a result, can be used as an indicator of our potential future success in growing our business and retaining clients.
Anticipated revenues for future periods can diverge from the revenue expectation derived from Average WSEs or Total WSEs due to pricing differences across our HR solutions and services and the degree to which clients and WSEs elect to participate in our solutions during future periods. In addition to focusing on growing our Average WSE and Total WSE counts, we also focus on pricing strategies, productbenefit participation and productservice differentiation to expand our revenue opportunities. We report the impact of client and WSE participation differences as a change in mix.
We are focusedIn addition to focusing on retaining and growing our WSE base, including by pursuing strategic acquisitions where appropriate, while we improvecontinue to review acquisition opportunities that would add appropriately to our customer servicescale. We continue to invest in efforts intended to enhance client experience and continue to manage attrition, including attrition arising fromthrough operational and process improvements.
Insurance Cost Ratio (ICR)
ICR is a performance measure calculated as the migrationratio of insurance costs to insurance service revenues. We believe that ICR promotes an understanding of our legacy SOI clientsinsurance cost trends and our ability to align our single technology platform.relative pricing to risk performance.
We purchase workers' compensation and health benefits coverage for our colleagues and WSEs. Under the insurance policies for this coverage, we bear claims costs up to a defined deductible amount. Our insurance costs, which comprise a significant portion of our overall costs, are significantly affected by our WSEs’ health and workers' compensation insurance claims experience. We set our insurance service fees for workers’ compensation and health benefits in advance for fixed benefit periods. As a result, increases in these insurance costs above our projections, reflected as a higher ICR, result in lower net income. Conversely, decreases in these insurance costs below our projections, reflected as a lower ICR, result in higher net income.
| | | | | |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
32
Under our fully-insured workers' compensation insurance policies, we assume the risk for losses up to $1 million per claim occurrence (deductible layer). The ultimate cost of the workers’ compensation services provided cannot be known until all the claims are settled. 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. Under our risk-based health insurance policies, we assume the risk of variability in future health claims costs for our enrollees. This variability typically results from changing trends in the volume, severity and ultimate cost of medical and pharmaceutical claims, due to changes to the components of medical cost trend. These trends change, and other seasonal trends and variability may develop. As a result, it is difficult for us to predict our insurance costs with accuracy and a significant increase in these costs could have a material adverse effect on our business.
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| (in millions) | | | | 2021 | 2020 | 2019 |
| Insurance costs | | | | $ | 3,339 | | $ | 2,979 | | $ | 2,927 | |
| Insurance service revenues | | | | 3,901 | | 3,490 | | 3,326 | |
| Insurance Cost Ratio | | | | 86 | % | 85 | % | 88 | % |
ICR increased due to the increase in medical services utilization in 2021, combined with COVID-19 testing, treatment and vaccination costs, which together resulted in higher insurance costs. This was partially offset by the increase in insurance service revenues. While medical services utilization has increased in 2021, the ICR remains below pre-pandemic levels, as access to medical systems was constrained in regions where increases in hospitalizations arising from the COVID-19 Delta and Omicron variants reduced preventative and elective procedures.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Total Revenues
Our revenues consist of professional service revenues (PSR) and insurance service revenues (ISR). PSR represents fees charged to clients for processing payroll-related transactions on behalf of our clients, access to our HR expertise, employment and benefit law compliance services, and other HR-related services. ISR consists of insurance-related billings and administrative fees collected from clients and withheld from WSEs for workers' compensation insurance and health benefit insurance plans provided by third-party insurance carriers.
In April 2020, we created our Recovery Credit program to assist in the economic recovery of our existing SMB clients and enhance our ability to retain eligible clients. Eligible clients received one-time reductions against fees for future services, accounted for as a discount, to be received over the following 12 months.
The reduction in total revenue under the Recovery Credit program was estimated each period based on the timing of when eligible clients received the Recovery Credit and the ultimate amount of the total Recovery Credit. As of June 30, 2021, we had fully recognized the maximum amount of $145 million for the Recovery Credit and no further reduction to revenue will be recognized.
In March 2021, we created our 2021 Credit program, which was designed to return up to $25 million to eligible customers based on the performance of our health insurance costs in 2021. We recognized a $25 million reduction to revenue for credits that will be paid to eligible clients under this program. These credits are recorded as a reduction to ISR and are payable within 12 months to eligible clients as of March 31, 2021.
In 2021, we recognized a reduction in revenue of $17 million for the Recovery Credit and $25 million for the 2021 Credit Program, compared to $128 million recognized in 2020 for the Recovery Credit.
Monthly total revenues per Average WSE is a measure we use to monitor the success of our product and service pricing strategies. This measure increased 9% during 20187% in 2021 compared to 2017, and increased 8% during 2017 compared to 2016.
We also use the following measures to further analyze changes in total revenue:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the combined weighted average percentage changes in service fees for each vertical service and changes in service fees associated with each insurance service offering,
•Mix - the change in composition of Average WSEs within our verticals combined with the composition of our enrolled WSEs within our insurance service offerings, and
Rate•Credit - the combined percentage changes in service feesweighted average amounts recognized for each vertical productthe Recovery Credit and changes in service fees associated with each insurance service offering.2021 Credit programs.
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| | PSR | | | |
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| | ISR - % represents proportion of insurance service revenues to total revenues | | | |
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The changes attributed to mix and rate during 2018 and 2017, when compared to the respective prior year periods, weregrowth in total revenues was primarily driven by ISR.
higher Average WSEs and growth in rate, combined with the $111 million decrease in the Recovery Credit recognized in 2021. This was partially offset by the $25 million reduction in revenue recognized for the 2021 Credit Program.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Operating Income
Our operating income consists of total revenues less insurance costs and OE. Our insurance costs include insurance premiums for coverage provided by insurance carriers, reimbursement of claims payments made by insurance carriers or third-party administrators, and changes in accrued costs related to contractual obligations with our workers' compensation and health benefit carriers. Our OE consists primarily of our corporate payroll.employees' compensation related expenses, which includes payroll, payroll taxes, SBC, bonuses, commissions and other payroll-and benefits-related costs.
The table below provides a view of the changes in components of operating income on a year-over-year basis.
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| | | | | | | |
| (in millions) | |
$124368 | 20162020 Operating Income |
| +$215506 | Higher total revenues primarily asdriven by higher Average WSEs, rate increases and a result of an increase$111 million decrease in ISR related to health plan participation combined with an increasethe Recovery Credit recognized. This was partially offset by the $25 million reduction in fees per service offering.revenue recognized for the 2021 Credit Program in 2021. |
| -$52-360 | Higher insurance costs primarily as a result of an increasehigher medical services utilization in health plan participation.2021 compared to 2020 when we saw a significantly lower than typical medical services utilization due to stay-at-home orders and social distancing practices due to the COVID-19 pandemic. |
| -$70-59 | Higher OE primarily as a result of an increase in our corporate employeesincreased sales and an increase in the costs associatedmarketing expense, higher payroll tax and assessments and D&A, together with internal control remediation.higher compensation and consulting expenses to support initiatives to improve client experience, enhance service offerings, and improve processes. |
$217455 | 20172021 Operating Income |
| +$228 | Higher total revenues primarily as a result of a change in the PSR mix of our vertical products, an increase in participation in our insurance services and an increase in fees per service offering. |
| -$144 | Higher insurance costs primarily as a result of an increase in health plan participation. |
| -$50 | Higher OE primarily as a result of an increase in our corporate employees, an increase in costs associated with a marketing campaign and an increase in our investment in operational and process improvements. |
$251 | 2018 Operating Income |
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MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Professional Service Revenues
Our clients are primarily billed either based on a fee per WSE per month per transaction or on a percentage of the WSEs’ payroll. For those clients that are billed on a percentage of WSEs' payroll, as our clients' payrolls increase, our fees also increase. As such, payroll and payroll taxes processed may also be an indicator of our PSR growth.
transaction. Our vertical approach provides us the flexibility to offer our clients in different industries with varied services at different prices. Weprices, which we believe our vertical approach will improve our ability to retain our customers, and potentially reducereduces the value of solely using Average WSE and Total WSE counts as indicators of future potential revenue performance. During the year ended December 31, 2018, we experienced a change in mix of our client base due to an increase in client attrition from our Main Street vertical as a result of our planned migration from our legacy (SOI) platform onto our single technology platform, partially offset by new sales in our other verticals, primarily our Technology and Financial Services verticals.
We also use the following measure to further analyze changes in PSR:PSR with the following measures:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the weighted average percentage change in fees for each vertical,
•Mix - the change in composition of Average WSEs withinacross our verticals, and
Rate•Recovery Credit - the percentage changesweighted average amounts recognized for the Recovery Credit program.
The growth in PSR was driven by higher Average WSEs, a growth in rate and a $12 million decrease in the Recovery Credit recognized. The growth in rate was weighted to our smaller clients, and included an increase in fees for eachother services, including COBRA administration. We continued to experience a favorable change in our vertical mix of WSEs, as SMBs in our Technology, Financial Services and Professional Services verticals returned to hiring at a faster rate than our Main Street vertical.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Insurance Service Revenues
ISR consists of insurance services-related billings and administrative fees collected from clients and withheld from WSE payroll for health benefits and workers' compensation insurance provided by third-party insurance carriers.
We use the following measures to analyze changes in ISR:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the weighted average percentage change in fees associated with each of our insurance service offerings,
•Mix - all other changes including the composition of our enrolled WSEs within our insurance service offerings (health plan enrollment), and
Rate•Credit - the percentage changes in fees associated with each of our insurance service offerings.weighted average amounts recognized for the Recovery Credit and 2021 Credit programs.
Changes attributed to mixThe growth in ISR during 2018was primarily driven by higher Average WSEs, rate increases and 2017, when compared to the respective prior year periods, are primarily attributed to an increase of health plan participants.$99 million decrease in the Recovery Credit recognized, partially offset by the $25 million reduction in revenue recognized for the 2021 Credit Program.
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MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Insurance Costs
Insurance costs include insurance premiums for coverage provided by insurance carriers, payments for claims costs and other risk management services, reimbursement of claims payments made by insurance carriers or third-party administrators below a predefined deductible limit, and changes in accrued costs related to contractual obligations with our workers' compensation and health benefit carriers.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
We use the following measures to analyze changes in insurance costs:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the weighted average percentage changeschange in cost trend associated with each of our insurance service offerings, and
•Mix - all other changes including the composition of our enrolled WSEs within our insurance offerings.service offerings (health plan enrollment).
Changes in mix during 2018
During 2020, stay-at-home orders and 2017, when comparedsocial distancing practices due to the respective priorCOVID-19 pandemic decreased medical services utilization, particularly in the second quarter, as enrollees deferred or cancelled elective procedures and reduced outpatient medical, dental and vision services. Medical services utilization increased in 2021 as enrollees returned to outpatient medical, dental and vision care and elective procedures. The higher utilization was partially offset by reductions in some regions for part of the year periods, are primarilydue to the surges of the COVID-19 Delta and Omicron variants. As a result, of anour medical services utilization in 2021 remained below pre-pandemic levels.
The increase in medical services utilization in 2021, combined with increased COVID-19 testing, treatment and vaccination costs, caused the increase in rate. This was partially offset by larger positive claims development as our accrued health plan participants.
Changes in rate during 2018costs and 2017, when compared to the respective prior year periods, are driven by:
higher per enrollee medical costs (medical cost trend) of 7.0% - 8.0% in 2018 and 3.2% in 2017, as a result of higher medical utilization and prescription drug price increases,
administrative cost reductions from insurance carriers, and
favorable prior year development on our accrued workers' compensation costs as of $28 millionDecember 31, 2020 were paid in 2018 and $6 million2021. The increase in 2017,volume was primarily as a result of lower than expected severity development.
In addition, we benefited when we changed one of our carrier contracts from a guaranteed cost contract to a risk-based contract.
driven by higher Average WSEs.
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MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Net Service Revenues
NSR provides us with a comparable basis of revenues on a net basis, acts as the basis to allocate resources to different functions and helps us evaluate the effectiveness of our business strategies by each business function.
The primary drivers to the changes in our NSR are presented below.
| |
(1)
| Change in NISR during 2017 comprised of an increase in ISR of $204, partially offset by an increase in insurance costs of $52. |
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(2)
| Change in NISR during 2018 comprised of an increase in ISR of $199, partially offset by an increase in insurance costs of $144. |
NISR margin was 13%, 12% and 8% for 2018, 2017 and 2016, respectively. NISR margin expanded during 2018 and 2017, when compared to the respective prior year periods, as we managed our insurance costs while we benefited from increased health plan participation. In addition, NSR benefited during 2018 and 2017, when compared to the respective prior year periods, from improvements in both PSR and NISR.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Operating Expenses
OE includes cost of providing services (COPS), sales and marketing (S&M), general and administrative (G&A), systems development and programming (SD&P), and depreciation and amortization expenses (D&A).
We manage our operating expenses and allocate resources across different business functions based on percentage of NSR which has decreased to 72% in 2018 from 73% and 81% in 2017 and 2016, respectively.
We had approximately 3,1002,800 corporate employees as of December 31, 20182021 in 5811 offices across the U.S. In 2021, we continued to exit expiring leases due to our evolving remote work practices and policies. Our corporate employees' compensation-related expenses represent a majority of our operating expenses. Compensation costs for our corporate employees include payroll, payroll taxes, SBC, bonuses, commissions and other payroll- and benefits-related costs. Compensation-related expense represented 61%62% and 63% of our OE in 2018, 61% in 20172021 and 62% in 2016. Compensation expense for internal employees was and is primarily driven by our continued efforts2020, respectively.
In 2021, we experienced OE growth of 9% compared to improve our customer service experience, and our systems, processes, and internal controls.
We expect our2020. The ratio of OE to increase in the foreseeable future due to our continued strategy to improve our customer service experience, and our systems, processes, and internal controls. These expenses may fluctuate as a percentage of our total revenues from period-to-period depending on the timing of when expenses are incurred.was 16% and 17% in 2021 and 2020, respectively.
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| | | | | | % represents portion of compensation related expense included in operating expenses |
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
We analyze and present our OE based upon the business functions COPS, S&M, G&A and SD&P and depreciation and amortization.D&A. The charts below provide a view of the expenses of the business functions. Dollars are presented in millions and percentages represent year-over-year change.
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| (in millions) | |
| $687 | 2020 Operating Expense |
| +2 | COPS was consistent with the prior year. |
| +16 | S&M increased, driven primarily by increased compensation and costs related to our 2nd annual TriNet PeopleForce conference. |
| +24 | G&A increased, driven primarily by increased payroll tax and related payroll tax assessments, compensation and technology services expenses to improve our systems and processes, and to enhance our efficiency. |
| +10 | SD&P increased, driven primarily by increased consulting and technology services expenses as we continue to work to improve our client experience and our systems and processes. |
| +7 | D&A increased, driven primarily by the impairment of customer relationship intangibles. |
| $746 | 2021 Operating Expenses |
The primary drivers to the changes in our OE are presented below:
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
COPS increased in 2018 and 2017, when compared to the respective prior year periods, primarily due to increased initiatives to improve the customer experience, enhancing our product offerings and internal control remediation efforts.
S&M decreased in 2018, when compared to the prior year period, primarily driven by $31 million in net capitalized costs related to adoption of ASC Topic 606, offset by implementation of our new branding campaign. S&M increased in 2017, when compared to the prior year period, primarily due to an increase in sales-related compensation costs associated with a new sales performance incentive program.
G&A increased in 2018 and 2017, when compared to the respective prior year periods, primarily driven by increased headcount supporting our internal control remediation efforts.
SD&P increased in 2018, when compared to the prior year period, primarily due to an increase in expenses associated with enhancing our product offerings. SD&P increased in 2017, when compared to the prior year period, primarily due to expenses related to investments in technology to support product delivery and platform integration and as a result of our internal control remediation efforts.
Depreciation expense increased in 2018 and 2017, when compared to the respective prior year periods, as a result of our additional investment in technology products and platforms and the associated depreciation of those assets.
Amortization of intangible assets represents costs associated with acquired companies' developed technologies, client lists, trade names and contractual agreements. Amortization expense remained consistent in 2018 and decreased 67% to $5 million in 2017, when compared to the prior year period, as a result of the 2016 revision to the expected useful life of certain client lists and trademarks primarily related to our previous acquisitions.
We break out the expenses that make up our OE in the chart below:
Other Income (Expense)
Other income (expense) consists primarily of interest and dividend income from investments, interest expense under our previous credit facility and interest and dividendon our 3.50% Senior Notes due 2029 (our 2029 Notes) issued in February 2021.
Interest income from investments.
decreased primarily due to lower average market interest rates. Interest expense, bank fees and other, remained was consistent for the years ended 2018, 2017 and 2016.
Interest income increased to $12 million in 2018 from $3 million in 2017. The increase in 2018, when compared towith the prior year period, was primarily due to a change in our investment strategy initiated in the second quarter of 2018.period.
We intend to continue our new investment strategy, which we expect will improve our future interest income, net income, and our Adjusted EBITDA, accordingly.
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MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Provision for Income Taxes
Our effective tax rate (ETR) was 20%, 11%23% and 41%24% for the years ended December 31, 2018, 20172021 and 2016,2020, respectively. The primary driverschange in ETR was primarily attributable to the changes inbenefits associated with a favorable adjustment of our ETR are presented below.
Our ETR increased 9% in 2018 from 11% in 2017 primarily due to the following:
7% net increase due to current year impact and prior year non-recurring discrete tax benefits resulting from federal legislative changes,
4% increase from a decrease in excess tax benefits and disqualifying dispositions from SBC,
2% increase resultingpreviously disputed receivable from the repeal of Section 199 benefits and other non-deductible expenses,IRS.
2% decrease in uncertain tax positions (UTP) recorded compared to prior year, and
2% decrease in other as a result of 3% decrease due to changes related to ongoing litigation, partially offset by a 1% increase due to apportionment changes in higher tax jurisdictions.
Our ETR decreased 30% in 2017 from 41% in 2016 primarily due to the following:
20% decrease attributable to revaluation of deferred taxes resulting from federal legislative changes pursuant to the TCJA passed in December 2017,
8% decrease due to a discrete tax benefit from recognizing excess tax benefits from SBC,
4% decrease resulting from the recognition of Section 199 benefits and decreased non-deductible expenses, and
3% decrease related to tax credits and excludable income for state tax purposes.
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MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Liquidity and Capital Resources
Liquidity
Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. Our principal source of liquidity for operations is derived from cash provided by operating activities. We rely on cash provided by operating activities to meet our short-term liquidity requirements, which primarily relate to the payment of corporate payroll and other operating costs, and capital expenditures. Our cash flow related to WSE payroll and benefits is generally matched by advance collection from our clients. To minimize the credit risk associated with remitting the payroll and associated taxes and benefits costs, we require clients to prefund the payroll and related payroll taxes and benefits costs.
We believe that we have sufficient liquidity and capital resources to satisfy future requirements andcan meet our obligations to our clients, creditorspresent and debt holders.reasonably foreseeable operating cash needs and future commitments through existing liquid assets and continuing cash flows from corporate operating activities.
Included in our balance sheets are assets and liabilities resulting from transactions directly or indirectly associated with WSEs, including payroll and related taxes and withholdings, our sponsored workers' compensation and health insurance programs, and other benefit programs. Although we are not subject to regulatory restrictions that require us to do so, we distinguish and manage our corporate assets and liabilities separately from those current assets and liabilities held by us to satisfy our employer obligations associated with our WSEs as follows:
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
| | | | December 31, | | December 31, |
| | 2018 | 2017 | | 2021 | 2020 |
| (in millions) | Corporate | WSE | Total | Corporate | WSE | Total | (in millions) | Corporate | WSE | Total | Corporate | WSE | Total |
| Current assets: | | Current assets: | |
| Cash and cash equivalents | $ | 228 |
| $ | — |
| $ | 228 |
| $ | 336 |
| $ | — |
| $ | 336 |
| Cash and cash equivalents | $ | 612 | | $ | — | | $ | 612 | | $ | 301 | | $ | — | | $ | 301 | |
| Investments | 54 |
| — |
| 54 |
| — |
| — |
| — |
| Investments | 135 | | — | | 135 | | 57 | | — | | 57 | |
| Restricted cash, cash equivalents and investments | 15 |
| 927 |
| 942 |
| 15 |
| 1,265 |
| 1,280 |
| Restricted cash, cash equivalents and investments | 19 | | 1,176 | | 1,195 | | 15 | | 1,373 | | 1,388 | |
| Other current assets | 36 |
| 386 |
| 422 |
| 15 |
| 360 |
| 375 |
| Other current assets | 91 | | 406 | | 497 | | 59 | | 355 | | 414 | |
| Total current assets | $ | 333 |
| $ | 1,313 |
| $ | 1,646 |
| $ | 366 |
| $ | 1,625 |
| $ | 1,991 |
| Total current assets | $ | 857 | | $ | 1,582 | | $ | 2,439 | | $ | 432 | | $ | 1,728 | | $ | 2,160 | |
| | Total current liabilities | $ | 112 |
| $ | 1,313 |
| $ | 1,425 |
| $ | 139 |
| $ | 1,618 |
| $ | 1,757 |
| Total current liabilities | 157 | | 1,582 | | $ | 1,739 | | $ | 142 | | $ | 1,728 | | $ | 1,870 | |
| | Working capital | $ | 221 |
| $ | — |
| $ | 221 |
| $ | 227 |
| $ | 7 |
| $ | 234 |
| Working capital | $ | 700 | | $ | — | | $ | 700 | | $ | 290 | | $ | — | | $ | 290 | |
As of December 31, 2021, we did not have any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Working capital for WSEs related activities
We designate funds to ensure that we have adequate current assets to satisfy our current obligations associated with WSEs.WSEs, the Recovery Credit liability and 2021 Credit Program liability. We expect the Recovery Credit and 2021 Credit Program aggregate liability of $48 million as of December 31, 2021 to be settled over the following 12 months. We manage our WSE payroll and benefits obligations through collections of payments from our clients which generally occursoccur two to three days in advance of client payroll dates. We regularly review our short-term obligations associated with our WSEs (such as payroll and related taxes, insurance premium and claim payments) and designate funds required to fulfill these short-term obligations, which we refer to as PFC. PFC is included in current assets as restricted cash, cash equivalents and investments.
We manage our sponsored benefit and workers' compensation insurance obligations by maintaining collateral funds in restricted cash, cash equivalents and investments. These collateral amounts are generally determined at the beginning of each plan year and we may be required by our insurance carriers to adjust our collateral balances when facts and circumstances change. We regularly review our collateral balances with our insurance carriers and anticipate funding further collateral in the future based upon our capital requirements. We classify our restricted cash, cash equivalents and investments as current and noncurrent assets to match against the anticipated timing of paymentpayments to carriers.
The following table summarizes our workers' compensation obligations, gross of claims.collateral, as of December 31, 2021,
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| | Payments Due by Period |
| (in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years |
Workers' compensation obligations (1) | $ | 198 | | $ | 57 | | $ | 62 | | $ | 26 | | $ | 53 | |
(1) Represents estimated payments that are expected to be made to carriers for various workers' compensation programs under the contractual obligations. These obligations include the costs of reimbursing the carriers for paying claims within the deductible layer in accordance with the workers' compensation insurance policy.
Working capital for corporate purposes
Corporate working capital as of December 31, 2021 increased $410 million from December 31, 2020, primarily driven by a $311 million increase in corporate unrestricted cash and cash equivalents and a $78 million increase in corporate investments.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
We use our available cash and cash equivalents to satisfy our operational and regulatory requirements and to fund capital expenditures. We believe that our existing corporate cash and cash equivalents and positive working capital will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.
Capital Resources
Sources of Funds
We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments through existing liquid assets, continuing cash flows from corporate operating activities our borrowing capacity under our revolving credit facility and the potential issuance of debt or equity securities.
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MANAGEMENT'S DISCUSSION AND ANALYSIS | |
In June 2018 we refinanced approximately $415 million of, and repaid in full, We believe our outstanding A and A-2 term loans (together, our 2014 Term Loans) under our previous credit agreement (our 2014 Credit Agreement). Our 2014 Term Loans were replaced with a $425 million term loan A (our 2018 Term Loan) under our new credit agreement (our 2018 Credit Agreement). We also replaced our previous $75 million revolving credit facility established under our 2014 Credit Agreement with a $250 million revolving credit facility under our 2018 Credit Agreement (our 2018 Revolver), which will be used solely for working capital and other generalexisting corporate purposes.
Each of our 2018 Term Loan and our 2018 Revolver mature in June 2023 and bear interest, at our option, either at a LIBOR rate, or the prime lending rate, plus an applicable margin subject to change in the future based on our leverage ratio, as set forth in our 2018 Credit Agreement. As of December 31, 2018, $414 million was outstanding under our 2018 Term Loan and the full amount of our 2018 Revolver, less approximately $16 million representing an undrawn letter of credit, was available.
Cash Flows
In January 2018, we adopted ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash, which significantly impacted our net cash provided by (used in) operating activities as changes in our restricted cash and cash equivalents balances are no longer included within operating cash activities.and positive working capital will be sufficient to meet our working capital expenditure needs for at least the next twelve months.
The following table summarizes our purchase obligations as of December 31, 2021,
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| | Payments Due by Period |
| (in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years |
Purchase obligations (1) | $ | 150 | | $ | 87 | | $ | 56 | | $ | 7 | | $ | — | |
(1) Our purchase obligations primarily consist of software licenses, consulting and maintenance agreements, and sales and marketing events pertaining to various agreements.
Cash Flows
The following table presents our cash flow activities for the stated periods:
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| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 |
| | Corporate | WSE | Total | Corporate | WSE | Total | Corporate | WSE | Total |
| Net cash provided by (used in): | | | | | | | | | |
Operating activities (1) | $ | 234 |
| $ | (338 | ) | $ | (104 | ) | $ | 299 |
| $ | 307 |
| $ | 606 |
| $ | 189 |
| $ | 3 |
| $ | 192 |
|
| Investing activities | (200 | ) | — |
| (200 | ) | (24 | ) | — |
| (24 | ) | (27 | ) | — |
| (27 | ) |
| Financing activities | (85 | ) | — |
| (85 | ) | (77 | ) | — |
| (77 | ) | (104 | ) | — |
| (104 | ) |
| Net increase (decrease) in cash and cash equivalents, unrestricted and restricted | $ | (51 | ) | $ | (338 | ) | $ | (389 | ) | $ | 198 |
| $ | 307 |
| $ | 505 |
| $ | 58 |
| $ | 3 |
| $ | 61 |
|
| Cash and cash equivalents, unrestricted and restricted: | | | | | | | | | |
| Beginning of period | $ | 476 |
| $ | 1,262 |
| $ | 1,738 |
| $ | 278 |
| $ | 955 |
| $ | 1,233 |
| $ | 220 |
| $ | 952 |
| $ | 1,172 |
|
| End of period | $ | 425 |
| $ | 924 |
| $ | 1,349 |
| $ | 476 |
| $ | 1,262 |
| $ | 1,738 |
| $ | 278 |
| $ | 955 |
| $ | 1,233 |
|
| | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents: | | | | | | | | | |
| Unrestricted | $ | (108 | ) | $ | — |
| $ | (108 | ) | $ | 152 |
| $ | — |
| $ | 152 |
| $ | 18 |
| $ | — |
| $ | 18 |
|
| Restricted | 57 |
| (338 | ) | (281 | ) | 46 |
| 307 |
| 353 |
| 40 |
| 3 |
| 43 |
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(1) | Prior year balances were retrospectively adjusted for ASU 2016-18. |
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MANAGEMENT'S DISCUSSION AND ANALYSIS | |
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| | Year Ended December 31, |
| (in millions) | 2021 | 2020 |
| Corporate | WSE | Total | Corporate | WSE | Total |
| Net cash provided by (used in): | | | | | | |
| Operating activities | $ | 415 | | $ | (197) | | $ | 218 | | $ | 338 | | $ | 208 | | $ | 546 | |
| Investing activities | (119) | | (16) | | (135) | | (69) | | (82) | | (151) | |
| Financing activities | 12 | | — | | 12 | | (208) | | — | | (208) | |
| Net increase (decrease) in cash and cash equivalents, unrestricted and restricted | $ | 308 | | $ | (213) | | $ | 95 | | $ | 61 | | $ | 126 | | $ | 187 | |
| Cash and cash equivalents, unrestricted and restricted: | | | | | | |
| Beginning of period | $ | 352 | | $ | 1,291 | | $ | 1,643 | | $ | 291 | | $ | 1,165 | | $ | 1,456 | |
| End of period | $ | 660 | | $ | 1,078 | | $ | 1,738 | | $ | 352 | | $ | 1,291 | | $ | 1,643 | |
| | | | | | |
| Net increase (decrease) in cash and cash equivalents: | | | | | | |
| Unrestricted | $ | 311 | | $ | — | | $ | 311 | | $ | 88 | | $ | — | | $ | 88 | |
| Restricted | (3) | | (213) | | (216) | | (27) | | 126 | | 99 | |
Operating Activities
Components of net cash provided by operating activities are as follows:
| | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2021 | 2020 |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Net cash provided by operating activities | $ | 218 | | $ | 546 | |
| Net cash provided by operating activities - Corporate | $ | 415 | | $ | 338 | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Net cash provided by (used in) operating activities - WSE | $ | (197) | | $ | 208 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 |
| | Corporate | WSE | Total | Corporate | WSE | Total | Corporate | WSE | Total |
| Net income | $ | 192 |
| $ | — |
| $ | 192 |
| $ | 178 |
| $ | — |
| $ | 178 |
| $ | 61 |
| $ | — |
| $ | 61 |
|
| Depreciation and amortization | 46 |
| — |
| 46 |
| 35 |
| — |
| 35 |
| 39 |
| — |
| 39 |
|
| Stock-based compensation expense | 44 |
| — |
| 44 |
| 32 |
| — |
| 32 |
| 26 |
| — |
| 26 |
|
| Payment of interest | (17 | ) | — |
| (17 | ) | (16 | ) | — |
| (16 | ) | (15 | ) | — |
| (15 | ) |
| Income tax payments, net | (49 | ) | — |
| (49 | ) | (2 | ) | — |
| (2 | ) | (39 | ) | — |
| (39 | ) |
| Collateral (paid to) refunded from insurance carriers, net | — |
| 26 |
| 26 |
| — |
| (3 | ) | (3 | ) | — |
| (25 | ) | (25 | ) |
| Changes in deferred taxes | 1 |
| — |
| 1 |
| (25 | ) | — |
| (25 | ) | 42 |
| — |
| 42 |
|
| Changes in other operating assets | (44 | ) | (27 | ) | (71 | ) | 36 |
| (36 | ) | — |
| (38 | ) | 92 |
| 54 |
|
| Changes in other operating liabilities | 61 |
| (337 | ) | (276 | ) | 61 |
| 346 |
| 407 |
| 113 |
| (64 | ) | 49 |
|
Net cash provided by (used in) operating activities (1) | $ | 234 |
| $ | (338 | ) | $ | (104 | ) | $ | 299 |
| $ | 307 |
| $ | 606 |
| $ | 189 |
| $ | 3 |
| $ | 192 |
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(1) | Prior year balances were retrospectively adjusted for ASU 2016-18, where applicable. |
Year-over-year fluctuationThe year-over-year change in net cash used in operating activities for WSE purposes was primarily driven by timing of client payments, payments of payroll and payroll taxes, and collateral fundingsettlement of the Recovery Credit, and insurance claim activities. We expect the changes in restricted cash and cash equivalents to correspond to WSE cash provided by (or used in) operations as we manage our obligations associated with WSEs through restricted cash.
CorporateOur corporate operating cash flows decreased in 2018 as2021 increased when compared to 2017 primarily2020 due to an increase in income tax payments in 2018, partially offset by 8% increase in our net income.
Corporate operating cash flows increased in 2017 as compared to 2016 due to a 190%the increase in our net income decrease in income taxand the timing of our payments partially offset by changes in deferred tax liabilities primarily associated with the revaluation of deferred taxes resulting from the passage of the TCJA in 2017.corporate obligations.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Investing Activities
Net cashCash used in investing activities for the periods presented below primarily consisted of purchases of investments and capital expenditures, partially offset by proceeds from the sale and maturity of investments.
| | | | Year Ended December 31, | | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 | (in millions) | 2021 | 2020 |
| Investments: | | Investments: | | |
| Purchases of marketable securities | $ | (258 | ) | $ | — |
| $ | (15 | ) | |
| Proceeds from sale and maturity of marketable securities | 101 |
| 14 |
| 28 |
| |
| Cash (used in) provided by investments | $ | (157 | ) | $ | 14 |
| $ | 13 |
| |
| Purchases of investments | | Purchases of investments | $ | (444) | | $ | (327) | |
| Proceeds from sale and maturity of investments | | Proceeds from sale and maturity of investments | 349 | | 224 | |
| Other | | Other | — | | (12) | |
| Cash used in investments | | Cash used in investments | $ | (95) | | $ | (115) | |
| | | | | |
| Capital expenditures: | | Capital expenditures: | | |
| Software and hardware | $ | 30 |
| $ | 28 |
| $ | 31 |
| Software and hardware | $ | (33) | | $ | (33) | |
| Office furniture, equipment and leasehold improvements | 13 |
| 10 |
| 9 |
| Office furniture, equipment and leasehold improvements | (7) | | (3) | |
| Cash used in capital expenditures | $ | 43 |
| $ | 38 |
| $ | 40 |
| Cash used in capital expenditures | $ | (40) | | $ | (36) | |
| Cash used in investing activities | | Cash used in investing activities | $ | (135) | | $ | (151) | |
Investments
During the year ended December 31, 2018, we investedWe invest a portion of available cash in investment-grade securities with effective maturities less than five years that are classified on our balance sheetsheets as investments. As of December 31, 2018, we had approximately $189 million in investments.
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MANAGEMENT'S DISCUSSION AND ANALYSIS | |
We also invest funds held as collateral to satisfy our long-term obligation towards workers' compensation liabilities in U.S. long-term treasuries.liabilities. These investments are classified on our balance sheets as restricted cash, cash equivalents and investments. We review the amount and the anticipated holding period of these investments regularly in conjunction with our estimated long-term workers' compensation liabilities and anticipated claims payment trend. At December 31, 2021, our investments had a weighted average duration of less than two years and an average S&P credit rating of AA.
As of December 31, 2018,2021, we held approximately $1.5$2.3 billion in restricted and unrestricted cash, cash equivalents and investments, of which $612 million was unrestricted cash and cash equivalents and $303 million was unrestricted investments. Refer to Note 2 in Part II, Item 8. Financial Statements and Supplemental Data, in this Form 10-K for a summary of these funds. In December 2021, we entered into a definitive agreement to acquire Zenefits. The total purchase price of $220 million, subject to customary closing adjustments, will be settled by the issuance of up to $20 million of TriNet stock to eligible selling shareholders, with the remainder paid in cash from corporate working capital. The acquisition is subject to customary closing conditions and regulatory approval and is expected to close in the first quarter of 2022.
Capital Expenditures
During the years ended December 31, 2018, 2017 and 20162021, we continued to make investments in software and hardware and we enhanced our existing productsservice offerings and technology platform, and implemented legacy platform migrations. We also incurred expenses related to the build out of our corporate headquarters and our technology and client service centers.platform. We expect capital investments in our software and hardware to continue in the future.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Financing Activities
Net cash used inprovided by (used in) financing activities in the years ended December 31, 2018, 20172021 and 20162020 consisted of our debt and equity-related activities.
| | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2021 | 2020 |
| Financing activities | | |
| Repurchase of common stock, net of issuance | $ | (109) | | $ | (186) | |
| Proceeds from issuance of 2029 Notes | 500 | | — | |
| Repayment of borrowings | (370) | | (22) | |
| Payment of debt issuance costs | (7) | | — | |
| Payment of long-term financing fees | (2) | | — | |
| Draw down from revolving credit facility | — | | 234 | |
| Repayment of borrowings under revolving credit facility | — | | (234) | |
| | |
| Cash provided by (used in) financing activities | $ | 12 | | $ | (208) | |
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 |
| Financing activities | | | |
| Repurchase of common stock, net of issuance | $ | 69 |
| $ | 39 |
| $ | 67 |
|
| Repayment of borrowings | 22 |
| 38 |
| 37 |
|
| Net proceeds from issuance of debt | (6 | ) | — |
| — |
|
| Cash used in financing activities | $ | 85 |
| $ | 77 |
| $ | 104 |
|
In the year ended December 31, 2018 we refinanced our 2014 Term Loans with our 2018 Term Loan, as discussed above in this MD&A. For additional information refer to Note 7 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K.
Our board of directors authorizes common stock repurchases through an ongoing program initiated in May 2014, primarily to offset dilution from the issuance of stock under our equity-based incentive plan and employee stock purchase plan. During the year ended December 31, 2018,2021, we repurchased 1,190,9951,161,909 shares of our common stock for approximately $61$94 million through our stock repurchase program. As of December 31, 2018,2021, approximately $75$263 million remained available for repurchase under all authorizations by our board of directors. We plan to use current cash and cash generated from ongoing operating activities to fund this stock repurchase program.
OnIn February 6, 2019,2022, 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. We plan
In February 2021, we issued $500 million aggregate principal amount of our 2029 Notes. $370 million of the proceeds was used to use current cashrepay and cash generated from ongoing operating activities to fund this share repurchase program.
Covenants
Our 2018 Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to us, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of indebtedness (other than ourterminate the 2018 Term Loan
and our 2018 Revolver), dividends, distributions and transactions with affiliates. It also contains financial covenants requiring usA. The remaining funds were used for general corporate purposes. Refer to
maintain certain minimum interest coverage and maximum total leverage ratios, as set forth in our 2018 Credit Agreement. These covenants took effect on June 30, 2018 and require us to maintain a minimum consolidated interest coverage ratio of at least 3.50 to 1.00 at each quarter end and a maximum total leverage ratio of 3.50 to 1.00. In the event of an acquisition the maximum ratio can be raised to 4.00 to 1.00 for four consecutive quarters. We were in compliance with these financial covenants under the credit facilities at December 31, 2018. For more details on the covenants under our 2018 Credit Agreement, refer to Note 7 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K.
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MANAGEMENT'S DISCUSSION AND ANALYSIS | |
In order to meet various U.S state licensing requirements and maintain accreditation by the ESAC, we are subject to various minimum working capital and net worth requirements. As of December 31, 2018 and 2017, we believe we have fully complied in all material respects with all applicable state regulations regarding minimum net worth, working capital and all other financial and legal requirements. Further, we have maintained positive working capital throughout each of the periods covered by the financial statements.
Contractual Obligations
The following table summarizes our significant contractual obligations as of December 31, 2018:
|
| | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years |
Debt obligations (1) | $ | 483 |
| $ | 39 |
| $ | 75 |
| $ | 369 |
| $ | — |
|
Workers' compensation obligations (2) | 241 |
| 73 |
| 57 |
| 37 |
| 74 |
|
Operating lease obligations (3) | 88 |
| 18 |
| 28 |
| 17 |
| 25 |
|
Purchase obligations (4) | 42 |
| 31 |
| 11 |
| — |
| — |
|
Uncertain tax positions (5) | 6 |
| 1 |
| 5 |
| — |
| — |
|
| Total | $ | 860 |
| $ | 162 |
| $ | 176 |
| $ | 423 |
| $ | 99 |
|
(1) Includes principal and the projected interest payments of our term loans, see Note 76 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K for details.further information.
(2) Represents estimated payments that are expected to be made to carriers for various workers' compensation program under the contractual obligations. These obligations include the costs of reimbursing the carriers for paying claims within the deductible layer in accordanceIn February 2021, concurrently with the workers' compensation insurance policy as well as other liabilities.
(3) Includes variousclosing of our 2029 Notes offering, we entered into a new $500 million revolving credit facility under a new credit agreement (our 2021 Credit Agreement). The 2021 Credit Agreement includes a $100 million letter of credit sub-facility and a $40 million swingline sub-facility. We also have the option to incur incremental credit facilities of up to the greater of $450 million and equipment leases under various operating lease agreements.
(4) Our purchase obligations primarily consist100% of software licenses, consulting and maintenance agreements, and sales and marketing events pertaining to various contractual agreements.
(5) Our uncertain tax positions primarily pertain to tax credits and other related reserves, including interest and penalties.
InEBITDA for the normal coursemost recent period of business, we make representations and warranties that guarantee the performance of services under service arrangements with clients. Historically, therefour fiscal quarters for which financial statements have been no material losses relateddelivered. Such incremental facilities are subject to such guarantees. In addition,obtaining additional commitments from lenders. At December 31, 2021, we have entered into indemnification agreements withhad $500 million available under our officers and directors, which require us to defend and, if necessary, indemnify these individuals for certain pending or future legal claims as they relate to their services provided to us. Such indemnification obligations are not included in the table above.2021 Credit Agreement.
Off-Balance Sheet ArrangementsCapital Resources
As of December 31, 2018, we did not have any material off-balance sheet arrangements2021, $500 million aggregate principal of our 2029 Notes was outstanding. The Indenture governing the 2029 Notes includes restrictive covenants limiting our ability to: (i) create liens on certain assets to secure debt; (ii) grant subsidiary guarantees of certain debt without also providing a guarantee of the 2029 Notes; and (iii) consolidate or merge with or into, or sell or otherwise dispose of all or substantially all of our assets to, another person, subject, in each case, to certain customary exceptions.
Our 2021 Credit Agreement includes a $500 million revolving credit facility. The 2021 Credit Agreement includes negative covenants that are reasonably likelylimit our ability to haveincur indebtedness and liens, sell assets and make restricted payments, including dividends and investments, subject to certain exceptions. In addition, the 2021 Credit Agreement also contains other customary affirmative and negative covenants and customary events of default. The 2021 Credit Agreement also contains a current or future effect onfinancial covenant that requires the Company to maintain certain maximum total net leverage ratios.
We were in compliance with all financial covenants under our financial condition, results of operations, liquidity, capital expenditures or capital resources within the meaning of Item 303(a)(4) of Regulation S-K.2021 Credit Agreement at December 31, 2021.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Critical Accounting Judgments and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP, which require us to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Some of the assumptions are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial statements could be materially affected. For additional information about our accounting policies, refer to Note 1 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K. Recent Accounting Pronouncements
Refer to Note 1 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K for additional information related to recent accounting pronouncements.The following items require significant estimation or judgment:
Insurance Costs
We purchase fully insured workers' compensation and health benefits coverage for our employees and WSEs. As part of these insurance policies, we bear claims costs up to a defined deductible amount and as a result, we establish accrued insurance costs including both known claims filed and estimates for incurred but not reported (IBNR)claims.
We use external actuaries to evaluate, review and recommend estimates of our accrued workers' compensation and health insurance costs. The accrued costs studies performed by these qualified external actuaries analyze historical claims data to develop a range of our potential ultimate costs using loss development, expected loss ratio and frequency/severity methods in accordance with Actuarial Standards of Practice. These methods are applied to classes of the claims data organized by policy year and risk class.
Key judgments and evaluations in arriving at loss estimates by class and the accrued costs selection overall include:
•the selection of method used and the relative weights given to selecting the method used for each policy year,
•the underlying assumptions of LDF used in these models,
•the effect of any changes to the insurers' claims handling and payment processes,
•evaluation of medical and indemnity cost trends, costs from changes in the risk exposure being evaluated and any applicable changes in legal, regulatory or judicial environment.
We review and evaluate these judgments and the associated recommendations in concluding the adequacy of accrued costs. Our quarterly reserving process involves the collaboration of our qualified external actuaries and our actuarial and finance departments to approve a single point best estimate. In selecting this best estimate, management considers the actuarial estimates and applies informed judgment regarding qualitative factors that may not be fully captured in these actuarial estimates. Such factors include, but are not limited to: the timing of the emergence of claims, volume and complexity of claims, social and judicial trends, and the extent of our historical loss data versus industry information. Where adjustments are necessary these are recorded in the period in which the adjustments are identified.
These accrued costs may vary in subsequent quarters from the amount estimated. Certain assumptions used in estimating these accrued costs are highly judgmental. Our accrued costs, results of operations and financial condition can be materially impacted if actual experience differs from the assumptions used in establishing these accrued costs.
Accrued Workers' Compensation Costs
Under our policies, we are responsible for reimbursing the insurance carriers for workers' compensation losses up to $1 million per claim occurrence (Deductible Layer). As workers' compensation costs for a particular period are not known for many years after the losses have occurred, these costs represent our best estimate of unpaid claim losses and loss adjustment expenses within the deductible layer in accordance with our insurance policies.
We use external actuaries to evaluate, review and recommend estimates of our workers' compensation and health insurance costs. The accrued costs studies performed by these qualified actuaries analyze historical claims data to develop a range of potential ultimate losses using loss development, expected loss ratio and frequency/severity methods in accordance with Actuarial Standards of Practice. These loss methods are applied to classes or segments of the loss data organized by policy year and risk class.
Key judgments and evaluations in arriving at loss estimates by segment and the accrued costs selection overall include:
the selection of method used and the relative weights given to selecting the method used for each policy year,
the underlying assumptions of LDF used in these models,
the effect of any changes to claims handling and payment processes,
evaluation of loss (medical and indemnity) cost trends, costs from changes in the risk exposure being evaluated and any applicable changes in legal, regulatory or judicial environment.
We review and evaluate these judgments and the associated recommendations in concluding the adequacy of accrued costs. Where adjustments are necessary these are recorded in the period in which the adjustments are identified.
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MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Accrued Workers' Compensation Costs
Under our policies, we are responsible for reimbursing the insurance carriers for workers' compensation losses up to $1 million per claim occurrence (Deductible Layer). We use external actuaries to evaluate, review and recommend accrued workers' compensation costs on a quarterly basis. The data is segmented by class and state and analyzed by policy year;year, and states where we have small exposure are aggregated into a single segment.grouping.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
We use a combination of loss development, expected loss ratio and frequency/severity methods which include the following inputs, assumptions and analytical techniques:
TriNet's historical frequency•Historical volume and severity of workers' compensation claimscost experience, exposure data and industry loss experience related to TriNet’s insurance policies,
•inputs of WSEs’ job responsibilities and location,
•estimates of future cost trends, to establish expected loss ratios for subsequent accident years,
•expected loss ratios for the latest accident year or prior accident years, adjusted for the loss trend, the effect of rate changes and other quantifiable factors, and
•LDFs to project the reported losses for each accident year to an ultimate basis.
Final claimcost settlements may vary materially from the present estimates, particularly when those payments maydo not occur until well into the future. In our experience, plan years related to workers' compensation programs may take 10 years or more to be fully settled. Certain assumptions used in estimating these accrued costs are highly judgmental. Our accrued costs, results of operations and financial condition can be materially impacted if actual experience differs from the assumptions used in establishing these accrued costs.
We believe that our estimate of accrued workers' compensation costs areis most sensitive to LDFs given the long reporting and paid development patterns for our workers' compensation loss costs. Our methods of estimating accrued workers' compensation costs rely on these LDFs and an estimate of future cost trend.
The following table illustrates the sensitivity of changes in the LDFs on our year end estimate of insurance costs (in millions of dollars):
| | | Change in loss development factor | Change in insurance costs | Change in loss development factor | Change in insurance costs |
| -5.0% | ($33) | -5.0% | ($33) |
| -2.5% | ($18) | -2.5% | ($19) |
| +2.5% | $20 | +2.5% | $20 |
| +5.0% | $39 | +5.0% | $40 |
Accrued Health Insurance Costs
We sponsor and administer a number of fully insured, risk-based employee benefit plans, including group health, dental, vision and life insurance as an employer plan sponsor under section 3(5) of the ERISA. Approximately 81%84% of our 2018 group health insurance costs relate to risk-based plans in which 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.
Costs covered by these insurance plans generally develop on average within three to six months so insurance costs and accrued health insurance costs include estimates of reported losses and claims incurred but not yet paid (IBNP). Data is segmentedgrouped and analyzed by insurance carrier.
To estimate accrued health benefits costs we use a number of inputs, assumptions and analytical techniques:
TriNet •historical loss claims payment patterns and medical cost trend rates related to TriNet’s insurance policies,
•current period claims costs and claims reporting patterns (completion factors), and
•plan enrollment.
Medical cost trend rates are a significant factor we use in developing our accrued health insurance costs. Medical cost trends are developed through an analysis of claims incurred in prior months, provider pricing and indicators of health care utilization, including pharmacy utilization trends, and outpatient and inpatient utilization. Many factors may cause medical cost trend to vary from our estimates.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
These accrued costs may varyThe following table illustrates the sensitivity of changes in subsequent quarters from the amount estimated. Our accrued costs, results of operations and financial condition can be materially impacted if actual experience differs from our key assumptions used in establishing these accrued costs.
We believe thatmedical cost trend on our year end estimate of accrued health insurance costs (in millions of dollars):
| | | | | |
| Change in medical cost trend | Change in insurance costs |
| +3.0% | $21 |
| +2.0% | $14 |
| +1.0% | $7 |
| -1.0% | $(7) |
| -2.0% | $(14) |
| -3.0% | $(21) |
Completion factors are most sensitive to changes in medical claim costs in the markets in which participating WSEs reside (medical cost trend)an actuarial estimate based on historical experience and our estimateanalysis of current trends, of paid costs to carriers as a percentage of the expected ultimate costs to carriers. Many factors may cause actual claims submissions rates from our carriers (completion factors).to vary from our estimated completion factors, including carrier claims processing patterns, the mix of providers and the mix of electronic versus manual claims submitted to our carriers.
A 250 basis point increaseThe following table illustrates the sensitivity of changes in the medical cost trend would increasecompletion factors on our year end accrued healthestimate of insurance costs by approximately $13 million,(in millions of dollars):
| | | | | |
| Change in completion factors | Change in insurance costs |
| -0.75% | $16 |
| -0.50% | $11 |
| -0.25% | $5 |
| +0.25% | $(5) |
| +0.50% | $(11) |
| +0.75% | $(16) |
Recent Accounting Pronouncements
Refer to Note 1 in Part II, Item 8, Financial Statements and a 50 basis point decrease in completion factors would increase our year end accrued health insurance costs by approximately $8 million.Supplementary Data, of this Form 10-K for additional information related to recent accounting pronouncements.
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| QUANTITATIVE AND QUALITATIVE DISCLOSURES | |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to changes in interest rates relates primarily to our investment portfolio and outstanding floating rate debt.portfolio. Changes in U.S. interest rates affect the interest earned on the Company’sCompany's cash, cash equivalents and investments and the fair value of the investments, as well as interest costs associated with our debt.investments.
Our boardcash equivalents consist primarily of directors approvedmoney market mutual funds, which are not significantly exposed to interest rate risk. Our investments are subject to interest rate risk because these securities generally include a corporate investment policy that definesfixed interest rate. As a result, the market values of these securities are affected by changes in prevailing interest rates. We attempt to limit our investable cashexposure to interest rate risk and credit risk by investing in instruments that meet certainthe minimum credit quality, liquidity, diversification and other requirements. Underrequirements of our investment policy, the Company's investment portfolio must maintain a minimum average credit qualitypolicy. Our investments consist of AA minus by Standard & Poor's (or an equivalent nationally recognized statistical rating organization), maintain average effective maturity durations of less than 36 months (or less than 24 months in some cases), and satisfy diversification requirements intended to reduce overall investment consolidating. We believe that our exposure to losses resulting from credit risk is not significant. We performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of the investment portfolio assuming a 100 basis point parallel shift in the yield curve. Based on investment positions as of December 31, 2018, a hypothetical 100 basis point increase or decrease in interest rates across all maturities would result in a $2 million incremental increase or decrease in the fair market value of the portfolio, respectively. Such losses would only be realized if we sold the investments prior to maturity.liquid, investment-grade securities. The risk of rate changes on investment balances was not significantmaterial at December 31, 2018.
In June 2018, we refinanced our term loans which would have matured in July 20192021 and replaced them with a term loan maturing in 2023. At December 31, 2018, after this refinancing, we had total outstanding indebtedness of $414 million, of which $22 million is due within 12 months. A 100 basis point increase or decrease in market interest rates would cause interest expense on our debt as of December 31, 2018 to increase or decrease by $4 million on an annualized basis, respectively.
2020.
Item 8. Financial Statements and Supplementary Data
TRINET GROUP, INC.
Consolidated Financial Statements |
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| Note 11. Stock Based Compensation | | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of TriNet Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TriNet Group, Inc. and subsidiaries (the "Company") as of December 31, 20182021 and 2017, and2020, the related consolidated statements of income and comprehensive income, stockholders’ equity, (deficit), and cash flows, for each of the three years in the period ended December 31, 2018,2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182021 and 2017,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 14, 2019,2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accrued Workers’ Compensation and Health Insurance Costs - Refer to Note 1 and Note 7 to the financial statements
Critical Audit Matter Description
The Company offers its clients and worksite employees (WSEs) workers' compensation insurance and health insurance coverage through insurance policies provided by third-party insurance carriers. The Company is obligated to reimburse the insurance carriers for losses up to defined deductible limits, in accordance with the insurance policies. Accrued workers’ compensation and health insurance costs are established to provide for the estimated unpaid costs of reimbursing the carriers.
The accrued workers’ compensation costs include estimates of unpaid claim losses and loss adjustment expenses. The estimates are based on the Company’s historical and industry loss experience, exposure data, an estimate of future cost trends, expected loss ratios, and loss development factors. Accrued workers' compensation costs, as of December 31, 2021, were $190 million.
The accrued health insurance costs include estimates for reported losses and estimates for claims incurred but not paid. The estimates are based on the Company’s historical claim payment patterns and medical cost trends, current period claim costs and claim reporting patterns, and plan enrollment. Accrued health insurance costs as of December 31, 2021, were $174 million.
Both the accrued workers’ compensation and health insurance costs are established using actuarial methods followed in the insurance industry and the Company uses third-party actuaries to develop these estimates.
Given the subjectivity of estimating the value of the accrued workers’ compensation and health insurance costs, performing audit procedures to evaluate whether accrued workers’ compensation and health insurance costs recorded for the year ended December 31, 2021 required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the accrued workers’ compensation and health insurance costs included the following, among others:
•We tested the effectiveness of controls related to accrued workers’ compensation and health insurance costs.
•We tested the underlying data that served as inputs into the actuarial analyses, including testing historical claims and enrollment data and recreating the claim loss triangles.
•With the assistance of our actuarial specialists, we evaluated the methods and key assumptions used by management to estimate the accrued workers’ compensation and health insurance costs:
◦Compared management’s prior-year assumptions of expected development and ultimate loss to actuals incurred during the current year to identify and evaluate potential bias in the determination of the accrued workers’ compensation and health insurance costs.
◦Developed an independent range of estimates of the accrued costs, utilizing loss development factors and future cost trends for accrued workers’ compensation costs and claim payment patterns and medical trend rates for accrued health insurance costs. We compared our estimated ranges to management’s estimates.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 14, 20192022
We have served as the Company's auditor since 2016.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of TriNet Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of TriNet Group, Inc. and subsidiaries (the "Company”) as of December 31, 2018,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2018,2021, of the Company and our report dated February 14, 2019,2022, expressed an unqualified opinion on those financial statements and financial statement schedule.statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management'sManagement’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 14, 2019
2022
TRINET GROUP, INC.
CONSOLIDATED BALANCE SHEETS |
| | | | | | | | |
| | | December 31, | | December 31, |
| (in millions, except share and per share data) | | 2018 | | 2017 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 228 |
| | $ | 336 |
|
| Investments | | 54 |
| | — |
|
| Restricted cash, cash equivalents and investments | | 942 |
| | 1,280 |
|
| Accounts receivable, net | | 11 |
| | 21 |
|
| Unbilled revenue, net | | 304 |
| | 297 |
|
| Prepaid expenses | | 48 |
| | 38 |
|
| Other current assets | | 59 |
| | 19 |
|
| Total current assets | | 1,646 |
| | 1,991 |
|
| Restricted cash, cash equivalents and investments, noncurrent | | 187 |
| | 162 |
|
| Investments, noncurrent | | 135 |
| | — |
|
| Property & equipment, net | | 79 |
| | 70 |
|
| Goodwill | | 289 |
| | 289 |
|
| Other intangible assets, net | | 21 |
| | 26 |
|
| Other assets | | 78 |
| | 55 |
|
| Total assets | | $ | 2,435 |
| | $ | 2,593 |
|
| Liabilities and stockholders' equity | | | | |
| Current liabilities: | | | | |
| Accounts payable and other current liabilities | | $ | 45 |
| | $ | 59 |
|
| Long-term debt, current portion | | 22 |
| | 40 |
|
| Client deposits | | 56 |
| | 52 |
|
| Accrued wages | | 352 |
| | 329 |
|
| Accrued health insurance costs, net | | 135 |
| | 151 |
|
| Accrued workers' compensation costs, net | | 67 |
| | 67 |
|
| Payroll tax liabilities and other payroll withholdings | | 729 |
| | 1,034 |
|
| Insurance premiums and other payables | | 19 |
| | 25 |
|
| Total current liabilities | | 1,425 |
| | 1,757 |
|
| Long-term debt, less current portion | | 391 |
| | 383 |
|
| Accrued workers' compensation costs, less current portion, net | | 158 |
| | 165 |
|
| Deferred taxes | | 68 |
| | 68 |
|
| Other non-current liabilities | | 18 |
| | 14 |
|
| Total liabilities | | 2,060 |
| | 2,387 |
|
| Commitments and contingencies (see Note 8) | | | | |
| Stockholders' equity: | | | | |
| Preferred stock | | — |
| | — |
|
| ($0.000025 par value per share; 20,000,000 shares authorized; no shares issued or outstanding at December 31, 2018 and 2017) | | | | |
| Common stock and additional paid-in capital | | 641 |
| | 583 |
|
| ($0.000025 par value per share; 750,000,000 shares authorized; 70,596,559 and 69,818,392 shares issued and outstanding at December 31, 2018 and 2017, respectively) | | | | |
| Accumulated deficit | | (266 | ) | | (377 | ) |
| Total stockholders' equity | | 375 |
| | 206 |
|
| Total liabilities & stockholders' equity | | $ | 2,435 |
| | $ | 2,593 |
|
See accompanying notes.
TRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
| | | | | | | | | | Year Ended December 31, |
| | Year Ended December 31 | |
| (in millions, except share and per share data) | 2018 | 2017 | 2016 | |
| (in millions except per share data) | | (in millions except per share data) | 2021 | 2020 | 2019 |
| Professional service revenues | $ | 487 |
| $ | 458 |
| $ | 447 |
| Professional service revenues | $ | 639 | | $ | 544 | | $ | 530 | |
| Insurance service revenues | 3,016 |
| 2,817 |
| 2,613 |
| Insurance service revenues | 3,901 | | 3,490 | | 3,326 | |
| Total revenues | 3,503 |
| 3,275 |
| 3,060 |
| Total revenues | 4,540 | | 4,034 | | 3,856 | |
| Insurance costs | 2,610 |
| 2,466 |
| 2,414 |
| Insurance costs | 3,339 | | 2,979 | | 2,927 | |
| Cost of providing services (exclusive of depreciation and amortization of intangible assets) | 229 |
| 213 |
| 190 |
| |
| Cost of providing services | | Cost of providing services | 264 | | 262 | | 245 | |
| Sales and marketing | 182 |
| 187 |
| 174 |
| Sales and marketing | 202 | | 186 | | 190 | |
| General and administrative | 142 |
| 114 |
| 92 |
| General and administrative | 176 | | 152 | | 137 | |
| Systems development and programming | 49 |
| 45 |
| 31 |
| Systems development and programming | 50 | | 40 | | 43 | |
| Depreciation and amortization of intangible assets | 40 |
| 33 |
| 35 |
| Depreciation and amortization of intangible assets | 54 | | 47 | | 46 | |
| Total costs and operating expenses | 3,252 |
| 3,058 |
| 2,936 |
| Total costs and operating expenses | 4,085 | | 3,666 | | 3,588 | |
| Operating income | 251 |
| 217 |
| 124 |
| Operating income | 455 | | 368 | | 268 | |
| Other income (expense): | | Other income (expense): | |
| Interest expense, bank fees and other | (22 | ) | (20 | ) | (20 | ) | Interest expense, bank fees and other | (20) | | (21) | | (21) | |
| Interest income | 12 |
| 3 |
| — |
| Interest income | 6 | | 10 | | 23 | |
| Income before provision for income taxes | 241 |
| 200 |
| 104 |
| Income before provision for income taxes | 441 | | 357 | | 270 | |
| Income tax expense | 49 |
| 22 |
| 43 |
| |
| Income taxes | | Income taxes | 103 | | 85 | | 58 | |
| Net income | $ | 192 |
| $ | 178 |
| $ | 61 |
| Net income | $ | 338 | | $ | 272 | | $ | 212 | |
| Other comprehensive income, net of tax | — |
| — |
| 1 |
| |
| Other comprehensive (loss) income, net of income taxes | | Other comprehensive (loss) income, net of income taxes | (5) | | 4 | | — | |
| Comprehensive income | $ | 192 |
| $ | 178 |
| $ | 62 |
| Comprehensive income | $ | 333 | | $ | 276 | | $ | 212 | |
| | | |
| Net income per share: | | Net income per share: | |
| Basic | $ | 2.72 |
| $ | 2.57 |
| $ | 0.88 |
| Basic | $ | 5.13 | | $ | 4.03 | | $ | 3.04 | |
| Diluted | $ | 2.65 |
| $ | 2.49 |
| $ | 0.85 |
| Diluted | $ | 5.07 | | $ | 3.99 | | $ | 2.99 | |
| Weighted average shares: | | Weighted average shares: | |
| Basic | 70,385,639 |
| 69,175,377 |
| 70,159,696 |
| Basic | 66 | | 67 | | 70 | |
| Diluted | 72,300,663 |
| 71,385,280 |
| 71,972,486 |
| Diluted | 67 | | 68 | | 71 | |
See accompanying notes.
TRINET GROUP, INC.
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | |
| | December 31, | | December 31, |
| (in millions, except share and per share data) | | 2021 | | 2020 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 612 | | | $ | 301 | |
| Investments | | 135 | | | 57 | |
| Restricted cash, cash equivalents and investments | | 1,195 | | | 1,388 | |
| Accounts receivable, net | | 15 | | | 18 | |
| Unbilled revenue, net | | 324 | | | 246 | |
| Prepaid expenses, net | | 67 | | | 63 | |
| Other current assets | | 91 | | | 87 | |
| Total current assets | | 2,439 | | | 2,160 | |
| Restricted cash, cash equivalents and investments, noncurrent | | 166 | | | 210 | |
| Investments, noncurrent | | 168 | | | 138 | |
| Property, equipment and software, net | | 79 | | | 79 | |
| Operating lease right-of-use asset | | 42 | | | 51 | |
| Goodwill | | 294 | | | 294 | |
| Other intangible assets, net | | 6 | | | 18 | |
| Other assets | | 115 | | | 93 | |
| Total assets | | $ | 3,309 | | | $ | 3,043 | |
| Liabilities and stockholders' equity | | | | |
| Current liabilities: | | | | |
| Accounts payable and other current liabilities | | $ | 86 | | | $ | 50 | |
| | | | |
| Long-term debt | | — | | | 22 | |
| Client deposits and other client liabilities | | 97 | | | 134 | |
| Accrued wages | | 369 | | | 309 | |
| Accrued health insurance costs, net | | 174 | | | 172 | |
| Accrued workers' compensation costs, net | | 55 | | | 59 | |
| Payroll tax liabilities and other payroll withholdings | | 929 | | | 1,095 | |
| Operating lease liabilities | | 11 | | | 11 | |
| Insurance premiums and other payables | | 18 | | | 18 | |
| Total current liabilities | | 1,739 | | | 1,870 | |
| Long-term debt, noncurrent | | 495 | | | 348 | |
| Accrued workers' compensation costs, noncurrent, net | | 135 | | | 138 | |
| Deferred taxes | | 11 | | | 22 | |
| Operating lease liabilities, noncurrent | | 41 | | | 49 | |
| Other non-current liabilities | | 7 | | | 9 | |
| Total liabilities | | 2,428 | | | 2,436 | |
Commitments and contingencies (see Note 10) | | 0 | | 0 |
| Stockholders' equity: | | | | |
| Preferred stock | | — | | | — | |
| ($0.000025 par value per share; 20,000,000 shares authorized; 0 shares issued or outstanding at December 31, 2021 and 2020) | | | | |
| Common stock and additional paid-in capital | | 808 | | | 747 | |
| ($0.000025 par value per share; 750,000,000 shares authorized; 65,968,224 and 66,456,663 shares issued and outstanding at December 31, 2021 and 2020, respectively) | | | | |
| Retained earnings (Accumulated deficit) | | 74 | | | (144) | |
| Accumulated other comprehensive (loss) income | | (1) | | | 4 | |
| Total stockholders' equity | | 881 | | | 607 | |
| Total liabilities & stockholders' equity | | $ | 3,309 | | | $ | 3,043 | |
See accompanying notes.
TRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | |
| Year Ended December 31, |
| (in millions) | 2021 | 2020 | 2019 |
| Total Stockholders' Equity, beginning balance | $ | 607 | | $ | 475 | | $ | 375 | |
| Common Stock and Additional Paid-In Capital: | | | |
| Beginning balance | 747 | | 694 | | 641 | |
| Issuance of common stock from exercise of stock options | 1 | | — | | 2 | |
| Issuance of common stock for employee stock purchase plan | 10 | | 9 | | 9 | |
| Stock based compensation expense | 50 | | 44 | | 42 | |
| | | |
| Ending balance | 808 | | 747 | | 694 | |
| | | |
| Retained Earnings (Accumulated Deficit): | | | |
| Beginning balance | (144) | | (219) | | (266) | |
| Net income | 338 | | 272 | | 212 | |
| Cumulative effect of accounting change | — | | (1) | | — | |
| Repurchase of common stock | (94) | | (178) | | (140) | |
| Awards effectively repurchased for required employee withholding taxes | (26) | | (18) | | (25) | |
| Ending balance | 74 | | (144) | | (219) | |
| | | |
| Accumulated Other Comprehensive (Loss) Income: | | | |
| Beginning balance | 4 | | — | | — | |
| Other comprehensive (loss) income | (5) | | 4 | | — | |
| Ending balance | (1) | | 4 | | — | |
| | | |
| Total Stockholders' Equity, ending balance | $ | 881 | | $ | 607 | | $ | 475 | |
| | | |
|
| | | | | | | | | | | | | | |
| |
Common Stock and Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity (Deficit) |
| (in millions, except share data) | Shares | Amount |
| Balance at December 31, 2015 | 70,371,425 |
| $ | 494 |
| $ | (485 | ) | $ | (1 | ) | $ | 8 |
|
| Net income | — |
| — |
| 61 |
| — |
| 61 |
|
| Other comprehensive income | — |
| — |
| — |
| 1 |
| 1 |
|
| Issuance of common stock for vested restricted stock units | 695,253 |
| — |
| — |
| — |
| — |
|
| Issuance of common stock under employee stock purchase plan | 283,644 |
| 4 |
| — |
| — |
| 4 |
|
| Issuance of common stock from exercise of stock options | 1,297,812 |
| 5 |
| — |
| — |
| 5 |
|
| Stock-based compensation expense | — |
| 26 |
| — |
| — |
| 26 |
|
| Repurchase of common stock | (3,414,675 | ) | — |
| (72 | ) | — |
| (72 | ) |
| Awards effectively repurchased for required employee withholding taxes | (217,769 | ) | — |
| (4 | ) | — |
| (4 | ) |
| Excess tax benefit from equity incentive plan activity | — |
| 6 |
| — |
| — |
| 6 |
|
| Balance at December 31, 2016 | 69,015,690 |
| 535 |
| (500 | ) | — |
| 35 |
|
| Net income | — |
| — |
| 178 |
| — |
| 178 |
|
| Issuance of common stock from vested restricted stock units | 1,020,352 |
| — |
| — |
| — |
| — |
|
| Issuance of common stock for employee stock purchase plan | 224,928 |
| 5 |
| — |
| — |
| 5 |
|
| Issuance of common stock from exercise of stock options | 1,441,957 |
| 11 |
| — |
| — |
| 11 |
|
| Stock-based compensation expense | — |
| 32 |
| — |
| — |
| 32 |
|
| Repurchase of common stock | (1,549,434 | ) | — |
| (44 | ) | — |
| (44 | ) |
| Awards effectively repurchased for required employee withholding taxes | (335,101 | ) | — |
| (11 | ) | — |
| (11 | ) |
| Balance at December 31, 2017 | 69,818,392 |
| 583 |
| (377 | ) | — |
| 206 |
|
| Net income | — |
| — |
| 192 |
| — |
| 192 |
|
| Cumulative effect of accounting change | — |
| — |
| 2 |
| — |
| 2 |
|
| Issuance of common stock from restricted stock units and restricted stock awards | 1,634,271 |
| — |
| — |
| — |
| — |
|
| Issuance of common stock for employee stock purchase plan | 175,966 |
| 7 |
| — |
| — |
| 7 |
|
| Issuance of common stock from exercise of stock options | 617,157 |
| 7 |
| — |
| — |
| 7 |
|
| Stock-based compensation expense | — |
| 44 |
| — |
| — |
| 44 |
|
| Repurchase of common stock | (1,190,995 | ) | — |
| (61 | ) | — |
| (61 | ) |
| Awards effectively repurchased for required employee withholding taxes | (458,232 | ) | — |
| (22 | ) | — |
| (22 | ) |
| Balance at December 31, 2018 | 70,596,559 |
| 641 |
| (266 | ) | — |
| 375 |
|
See accompanying notes.
TRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | Year Ended December 31, | | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 | (in millions) | 2021 | 2020 | 2019 |
| Operating activities | | Operating activities | |
| Net income | $ | 192 |
| $ | 178 |
| 61 |
| Net income | $ | 338 | | $ | 272 | | 212 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Depreciation and amortization | 46 |
| 35 |
| 39 |
| Depreciation and amortization | 82 | | 67 | | 57 | |
| Stock-based compensation | 44 |
| 32 |
| 26 |
| |
| Stock based compensation | | Stock based compensation | 50 | | 43 | | 41 | |
| Amortization of ROU asset, lease modification and impairment | | Amortization of ROU asset, lease modification and impairment | 12 | | 15 | | 16 | |
| | Accretion of discount rate on lease liabilities | | Accretion of discount rate on lease liabilities | 2 | | 2 | | — | |
| Amortization of (premium) discount on investments | | Amortization of (premium) discount on investments | 3 | | 1 | | (1) | |
| Deferred income taxes | 1 |
| (25 | ) | 42 |
| Deferred income taxes | (9) | | (42) | | (7) | |
| | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | | |
| Accounts receivable | 10 |
| (14 | ) | — |
| |
| Unbilled revenue | (14 | ) | (4 | ) | (79 | ) | |
| Prepaid expenses | (9 | ) | 28 |
| (45 | ) | |
| Accounts receivable, net | | Accounts receivable, net | 3 | | (7) | | 5 | |
| Unbilled revenue, net | | Unbilled revenue, net | (78) | | 39 | | 19 | |
| Prepaid expenses, net | | Prepaid expenses, net | (5) | | (12) | | (5) | |
| Accounts payable and other current liabilities | (8 | ) | 23 |
| 11 |
| Accounts payable and other current liabilities | 33 | | 19 | | (15) | |
| Client deposits | 4 |
| (4 | ) | (2 | ) | |
| Client deposits and other client liabilities | | Client deposits and other client liabilities | (37) | | 87 | | (12) | |
| Accrued wages | 23 |
| 26 |
| 73 |
| Accrued wages | 60 | | (82) | | 40 | |
| Accrued health insurance costs | (16 | ) | 22 |
| 16 |
| |
| Accrued workers' compensation costs | (7 | ) | 9 |
| 60 |
| |
| Accrued health insurance costs, net | | Accrued health insurance costs, net | 2 | | 5 | | 32 | |
| Accrued workers' compensation costs, net | | Accrued workers' compensation costs, net | (7) | | (9) | | (20) | |
| Payroll taxes payable and other payroll withholdings | (305 | ) | 294 |
| (175 | ) | Payroll taxes payable and other payroll withholdings | (166) | | 194 | | 172 | |
| Operating lease liabilities | | Operating lease liabilities | (13) | | (19) | | (17) | |
| Other assets | (64 | ) | (11 | ) | 174 |
| Other assets | (50) | | (38) | | (34) | |
| Other liabilities | (1 | ) | 17 |
| (9 | ) | Other liabilities | (2) | | 11 | | (12) | |
| Net cash (used in) provided by operating activities | (104 | ) | 606 |
| 192 |
| |
| Net cash provided by operating activities | | Net cash provided by operating activities | 218 | | 546 | | 471 | |
| Investing activities | | Investing activities | | |
| | Purchases of marketable securities | (258 | ) | — |
| (15 | ) | Purchases of marketable securities | (444) | | (327) | | (302) | |
| Proceeds from sale and maturity of marketable securities | 101 |
| 14 |
| 28 |
| Proceeds from sale and maturity of marketable securities | 349 | | 224 | | 159 | |
| Acquisitions of property and equipment | (43 | ) | (38 | ) | (40 | ) | Acquisitions of property and equipment | (40) | | (36) | | (45) | |
| Other | | Other | — | | (12) | | — | |
| Net cash used in investing activities | (200 | ) | (24 | ) | (27 | ) | Net cash used in investing activities | (135) | | (151) | | (188) | |
| Financing activities | | Financing activities | | |
| Repurchase of common stock | (61 | ) | (44 | ) | (72 | ) | Repurchase of common stock | (94) | | (178) | | (140) | |
| Proceeds from issuance of common stock | 14 |
| 16 |
| 9 |
| Proceeds from issuance of common stock | 11 | | 10 | | 11 | |
| Awards effectively repurchased for required employee withholding taxes | (22 | ) | (11 | ) | (4 | ) | Awards effectively repurchased for required employee withholding taxes | (26) | | (18) | | (25) | |
| Proceeds from issuance of debt, net | 210 |
| — |
| 58 |
| |
| Payments for extinguishment of debt | (204 | ) | — |
| (58 | ) | |
| Repayment of debt | (22 | ) | (38 | ) | (37 | ) | |
| Net cash used in financing activities | (85 | ) | (77 | ) | (104 | ) | |
| Net (decrease) increase in unrestricted and restricted cash and cash equivalents | (389 | ) | 505 |
| 61 |
| |
| Proceeds from issuance of 2029 Notes | | Proceeds from issuance of 2029 Notes | 500 | | — | | — | |
| Repayment of borrowings | | Repayment of borrowings | (370) | | (22) | | (22) | |
| Payment of debt issuance costs | | Payment of debt issuance costs | (7) | | — | | — | |
| Payment of long-term financing costs | | Payment of long-term financing costs | (2) | | — | | — | |
| | Draw down from revolving credit facility | | Draw down from revolving credit facility | — | | 234 | | — | |
| | Repayment of borrowings under revolving credit facility | | Repayment of borrowings under revolving credit facility | — | | (234) | | — | |
| Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 12 | | (208) | | (176) | |
| Net increase in cash and cash equivalents, unrestricted and restricted | | Net increase in cash and cash equivalents, unrestricted and restricted | 95 | | 187 | | 107 | |
| Cash and cash equivalents, unrestricted and restricted: | | Cash and cash equivalents, unrestricted and restricted: | | |
| Beginning of period | 1,738 |
| 1,233 |
| 1,172 |
| Beginning of period | 1,643 | | 1,456 | | 1,349 | |
| End of period | $ | 1,349 |
| $ | 1,738 |
| $ | 1,233 |
| End of period | $ | 1,738 | | $ | 1,643 | | $ | 1,456 | |
| | | | | |
| Supplemental disclosures of cash flow information | | | Supplemental disclosures of cash flow information | | |
| Interest paid | $ | 17 |
| $ | 16 |
| 15 |
| Interest paid | $ | 12 | | $ | 16 | | 19 | |
| Income taxes paid, net | 49 |
| 2 |
| 39 |
| Income taxes paid, net | 129 | | 123 | | 62 | |
| Supplemental schedule of noncash investing and financing activities | | |
| Payable for purchase of property and equipment | $ | 3 |
| $ | 2 |
| 1 |
| |
|
See accompanying notes.
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
TriNet Group, Inc. (TriNet, or the Company, we, our and us), a professional employer organization, (PEO), provides comprehensive human resources (HR) solutions for small to midsizeand medium-size businesses (SMBs) under a co-employment model. These HR solutions include bundled services, such as multi-state payroll processing and tax administration, employee benefits programs, including health insurance and retirement plans, workers' compensation insurance and claims management, employment and benefit law compliance, and other HR-related services. Through the co-employment relationship, we are the employer of record for mostcertain employment-related administrative and regulatory purposes for the worksite employees (WSEs), including:
•compensation through wages and salaries,
•certain employer payroll-related tax payments,
•employee payroll-related tax withholdings and payments,
•employee benefit programs, including health and life insurance, and others, and
•workers' compensation coverage.
Our clients are responsible for the day-to-day job responsibilities of the worksite employees (WSEs).WSEs.
We operate in one1 reportable segment. All of our service revenues are generated from external clients. Less than 1% of our revenue is generated outside of the U.S.
Basis of Presentation
Our consolidated financial statements are prepared in conformity with generally accepted accounting principles in the United States of America (GAAP). All intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications and Impact of Recently Adopted Accounting Guidance
Certain prior year amounts have been reclassified to conform to current period presentation.
Balance sheet reclassifications are summarized in the tables below:
|
| | | | | | | | | | | | |
| | | December 31, 2017 |
| | | As previously | | Reclassification | | As |
| (in millions) | | Reported | | Amounts | | Revised |
| Assets | | | | | | |
| Restricted cash, cash equivalents, and investments | | $ | 15 |
| | $ | 1,265 |
| | $ | 1,280 |
|
| Accounts receivable, net | | — |
| | 21 |
| | 21 |
|
| Unbilled revenue, net | | — |
| | 297 |
| | 297 |
|
| Prepaid income taxes | | 5 |
| | (5 | ) | | — |
|
| Prepaid expenses | | 8 |
| | 30 |
| | 38 |
|
| Other current assets | | 2 |
| | 17 |
| | 19 |
|
| Worksite employee related assets | | 1,625 |
| | (1,625 | ) | | — |
|
| Workers' compensation collateral receivable | | 39 |
| | (39 | ) | | — |
|
| Deferred and other long term income taxes | | 2 |
| | (2 | ) | | — |
|
| Other assets | | 14 |
| | 41 |
| | 55 |
|
|
| | | | | | | | | | | | |
| | | December 31, 2017 |
| | | As previously | | Reclassification | | As |
| (in millions) | | Reported | | Amounts | | Revised |
| Liabilities and stockholders' equity | | | | | | |
| Accounts payable & other current liabilities | | $ | 45 |
| | $ | 14 |
| | $ | 59 |
|
| Accrued wages | | 40 |
| | 289 |
| | 329 |
|
| Client deposits | | — |
| | 52 |
| | 52 |
|
| Accrued health insurance costs, net | | — |
| | 151 |
| | 151 |
|
| Accrued workers' compensation costs, net | | — |
| | 67 |
| | 67 |
|
| Payroll tax liabilities and other payroll withholdings | | — |
| | 1,034 |
| | 1,034 |
|
| Insurance premiums and other payables | | — |
| | 25 |
| | 25 |
|
| Other current liabilities | | 14 |
| | (14 | ) | | — |
|
| Worksite employee related liabilities | | 1,618 |
| | (1,618 | ) | | — |
|
Effects on the cash flow statement due to adoption of ASU 2016-18 and effects due to reclassifications are summarized below:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | 2016 |
| (in millions) | As previously reported | Effect of ASU adoption | Reclassified amounts | As revised | As previously reported | Effect of ASU adoption | Reclassified amounts | As revised |
| Operating activities | | | | | | | | |
| Changes in operating assets and liabilities: | | |
| | | | | |
| Accounts receivable | $ | — |
| $ | — |
| $ | (14 | ) | $ | (14 | ) | $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Restricted cash, cash equivalents, and investments | (46 | ) | 46 |
| — |
| — |
| (42 | ) | 42 |
| — |
| — |
|
| Unbilled revenue | — |
| — |
| (4 | ) | (4 | ) | — |
| — |
| (79 | ) | (79 | ) |
| Prepaid income taxes | 37 |
| — |
| (37 | ) | — |
| (38 | ) | — |
| 38 |
| — |
|
| Prepaid expenses | 1 |
| — |
| 27 |
| 28 |
| (2 | ) | — |
| (43 | ) | (45 | ) |
| Workers' compensation collateral receivable | (7 | ) | — |
| 7 |
| — |
| (3 | ) | — |
| 3 |
| — |
|
| Accounts payable | 22 |
| — |
| 1 |
| 23 |
| 9 |
| — |
| 2 |
| 11 |
|
| Client deposits | — |
| — |
| (4 | ) | (4 | ) | — |
| — |
| (2 | ) | (2 | ) |
| Accrued wages | 11 |
| — |
| 15 |
| 26 |
| 4 |
| — |
| 69 |
| 73 |
|
| Accrued health insurance costs | — |
| — |
| 22 |
| 22 |
| — |
| — |
| 16 |
| 16 |
|
| Accrued workers' compensation costs | 12 |
| — |
| (3 | ) | 9 |
| 55 |
| — |
| 5 |
| 60 |
|
| Payroll taxes payable and other payroll withholdings | — |
| — |
| 294 |
| 294 |
| — |
| — |
| (175 | ) | (175 | ) |
| Worksite employee related assets | (343 | ) | 307 |
| 36 |
| — |
| 92 |
| 1 |
| (93 | ) | — |
|
| Worksite employee related liabilities | 342 |
| — |
| (342 | ) | — |
| (94 | ) | — |
| 94 |
| — |
|
| Other assets | 4 |
| — |
| (15 | ) | (11 | ) | — |
| — |
| 174 |
| 174 |
|
| Other liabilities | — |
| — |
| 17 |
| 17 |
| — |
| — |
| (9 | ) | (9 | ) |
| Net cash provided by operating activities | 253 |
| 353 |
| — |
| 606 |
| 149 |
| 43 |
| — |
| 192 |
|
| Financing activities | | | | | | | | |
| Proceeds from issuance of common stock on exercised options | 11 |
| — |
| (11 | ) | — |
| 5 |
| — |
| (5 | ) | — |
|
| Proceeds from issuance of common stock on employee stock purchase plan | 5 |
| — |
| (5 | ) | — |
| 4 |
| — |
| (4 | ) | — |
|
| Proceeds from issuance of common stock | — |
| — |
| 16 |
| 16 |
| — |
| — |
| 9 |
| 9 |
|
| Net increase in cash and cash equivalents | $ | 152 |
| $ | 353 |
| $ | — |
| $ | 505 |
| $ | 18 |
| $ | 43 |
| $ | — |
| $ | 61 |
|
Interest income previously classified in other income (expense), net is now presented in a new line item. Depreciation expense and amortization of intangible assets previously reported separately, are now presented together as depreciation and amortization of intangible assets.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect certain reported amounts and related disclosures. Significant estimates include:
liability for unpaid losses and loss adjustment expenses (accrued workers' compensation costs) related to workers' compensation and workers' compensation collateral receivable,
accrued health insurance costs,
liability for insurance premiums payable,
impairments of goodwill and other intangible assets,
income tax assets and liabilities, and
liability for legal contingencies.
These estimates are based on historical experience and on various other assumptions that we believe to be reasonable from the facts available to us. Some of the assumptions are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial statements could be materially affected.
Revenue Recognition
On January 1, 2018, we adopted Accounting Standards Codification Topic 606 (ASC Topic 606) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while the comparative prior period amounts are not restated and continue to be reported in accordance with statements previously accounted for under Accounting Standards Codification Topic 605.
Upon adoption of ASC Topic 606, we recorded a $2 million cumulative effect adjustment to opening retained earnings as of January 1, 2018. Impacts from adoption of the new standard on our revenue recognition include:
Our annual service contracts with our clients that are cancellable with 30 days' notice are initially considered 30-day contracts under the new standard;
Professional service revenues are recognized on an output basis which results in recognition at the time payroll is processed;
Our non-refundable set up fees are no longer deferred but accounted for as part of our transaction price and are allocated among professional service revenues and insurance services revenues; and
The majority of sales commissions related to onboarding new clients that were previously expensed are capitalized as contract assets and amortized over the estimated client life.
Revenues are recognized when control of the promised services are transferred to our clients, in an amount that reflects the consideration that we expect to receive in exchange for services. We generate all of our revenue from contracts with clients. We disaggregate revenues into professional services revenues and insurance services revenues as reported on the consolidated statements of income and comprehensive income. Generally,In the majority of our contracts, both the client and the Company may terminate the contract without penalty by providing a 30-day notice.
Performance Obligations
At contract inception, we assess the services promised in our contracts with clients and identify a performance obligation for each distinct promise to transfer to the client a service or bundle of services. We determined that the following distinct services represent separate performance obligations:
•Payroll and payroll tax processing,
•Health benefits services, and
Workers’ compensation services.
•Workers’ compensation services, and
•A right to receive future services at a discount through our Recovery Credit program.
Payroll and payroll tax processing performance obligations include services to process payroll and payroll tax-related transactions on behalf of our clients. Revenues associated with this performance obligation are reported as professional service revenues and recognized using an output method in which the control of the promised services is consideredare transferred when a client's payroll is processed by us and WSEs are paid. Professional service revenues are stated net of the gross payroll and payroll tax amounts funded by our clients. Although we assume the responsibilities to process and remit the payroll and payroll related obligations, we do not assume employment-related responsibilities such as determining the amount of the payroll and related payroll obligations. As a result, we are the agent in this arrangement for revenue recognition purposes.
Health benefits and workers' compensation services include performance obligations to provide TriNet-sponsored health benefits and workers' compensation insurance coverage through insurance policies provided by third-party insurance carriers and settle high deductible amounts on those policies. Revenues associated with these performance obligations are reported as insurance services revenues and are recognized using the output method over the period of time that the client and WSEs are covered under TriNet-sponsored insurance policies.
We control the selection of health benefits and workers' compensation coverage made available. As a result, we are the principal in this arrangement for revenue recognition purposes and insurance services revenues are reported gross.
In April 2020, we created our Recovery Credit program to assist in the economic recovery of our existing SMB clients and enhance our ability to retain these clients. Under this one-time program eligible clients will receive reductions against fees for future services, accounted for as a discount, over the following 12 months. This option to renew future services at a discount represents a material right and is accounted for as a performance obligation (Recovery Credit). This performance obligation will be satisfied when the clients have successfully renewed the services contracts and the future services are transferred.
The consideration we receive that is allocated to this performance obligation is deferred as an unsatisfied performance obligation and is included in client deposits and other client liabilities on the balance sheet. The amount of consideration we defer each period is dependent on the timing of when eligible clients will receive the Recovery Credit, which is subject to a limit on the total amount of $145 million.
The change in the balance of the Recovery Credit unsatisfied performance obligation was as follows:
| | | | | | | | |
| |
| (in millions) | 2021 | 2020 |
| | |
| Balance at beginning of period | $ | 92 | | $ | — | |
| (+) Accruals | 17 | | 128 | |
| (-) Distributions to clients | (86) | | (36) | |
| Balance at end of period | $ | 23 | | $ | 92 | |
We generally charge new customersclients a nominal upfront non-refundable fee to recover our costs to set them up on our TriNet platform for payroll processing and other administrative services, such as benefit enrollments. These fees are accounted for as part of our transaction price and are allocated among the performance obligations based on their relative standalone selling prices.
Client Deposits and Other Client Liabilities
Client deposits and other client liabilities represents our contractual commitments and payables to clients, including indemnity guarantee payments received from clients, amounts prefunded by clients for their payroll and related taxes and other withholding liabilities before payroll is processed or due for payment, as well as service fee consideration received for unsatisfied performance obligations of $23 million.
Variable Consideration and Pricing Allocation
Our contracts with customersclients generally do not include any variable consideration. However, from time to time, we may offer incentive credits to our clients considered to be variable consideration including incentiveconsideration. Incentive credits issued related to contract renewals. Incentive creditsrenewals are recorded as a reduction to revenue as part of the transaction price at contract inception when there is a basis to reasonably estimate the amount of the incentive credit and we reduce the full amount of the credit only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. These incentive credits are allocated among the performance obligations based on their relative standalone selling prices. Credits based on the performance of our insurance costs are recorded as a reduction to insurance services revenues and included in client deposits and other client liabilities on the balance sheet. In 2021, we accrued $25 million under our 2021 Credit Program, payable within 12 months to eligible clients as of March 31, 2021, related to the expected performance of our health insurance costs for the year.
We allocate the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised services underlying each performance obligation. The transaction price for the payroll and payroll tax processing performance obligations is determined upon establishment of the contract that contains the final terms of the arrangement, including the description and price of each service purchased. The estimated service fee is calculateddetermined based on observable inputs and include the following key assumptions: target profit margin, pricing strategies including the mix of services purchased and competitive factors, and client and industry specifics.
The transaction price for health benefits insurance and worker’sworkers' compensation insurance performance obligations is determined during the new client on-boarding and enrollment processes based on the types of benefits coverage the clients and WSEs have elected and the applicable risk profile of the client. We estimate our service fees based on actuarial forecasts of our expected insurance premiums and claimloss sensitive premium costs, and amounts to cover our costs to administer these programs.
We require our clients to prefund payroll and related taxes and other withholding liabilities before payroll is processed or due for payment. Under the provision of our contracts with clients, we generally will process the payment of a client’s payroll only when the client successfully funds the amount required. As a result, there is no financing arrangement for the contracts, however,contracts. However, certain contracts to provide payroll and payroll tax processing services permit the client to pay certain payroll tax components ratably over a 12-month periodperiods of up to 12 months rather than as payroll tax is otherwise determined on wages paid,and due, which may be considered a significant financing arrangement under ASC Topic 606. However, as the period between our performing the service under the contract and when the client pays for the service is less than one year, we have elected, as a practical expedient, not to adjust the transaction price.
Unbilled Revenue
We recognize WSE payroll and payroll tax liabilities in the period in which the WSEs perform work. When clients' pay periods cross reporting periods, we accrue the portion of the unpaid WSE payroll where we assume, under state regulations, the obligation for the payment of wages and the corresponding payroll tax liabilities associated with the work performed prior to period-end. These estimated payroll and payroll tax liabilities are recorded in accrued wages. The associated receivables, including estimated revenues, offset by advance collections from clients and an allowance for credit losses, are recorded as unbilled revenue. As of December 31, 2021 and 2020, advance collections included in unbilled revenue were $8 million and $24 million, respectively.
Contract Costs
We recognize as deferred commission expense the incremental cost to obtain a contract with a client for certain components under our commission plans for sales representatives and channel partners that are directly related to new customersclients onboarded as we expect to recover these costs through future service fees. Such assets will beare amortized over the estimated average client tenure. These commissions are earned on the basis of the revenue generated from payroll and payroll tax processing performance obligations. When the commission on a renewal contract is not commensurate with the commission on the initial contract, suchany incremental commission will be capitalized and amortized over the estimated average client tenure. If the commission for both the initial contract and renewal contracts are commensurate, such commissions are expensed in the contract period. When the amortization period is less than one year, we apply practical expedient to expense sales commissions in sales and marketing expenses in the period incurred. The below table summarizes the amounts capitalized and amortized during the yearyears ended December 31, 2018:2021, 2020 and 2019:
| | | | Year Ended December 31, 2018 | | Year Ended December 31, |
| (in millions) | Capitalized | Amortized | (in millions) | 2021 | 2020 | 2019 |
| Deferred commission costs | $ | 33 |
| $ | 2 |
| |
| Deferred commission expense: | | Deferred commission expense: | |
| Capitalized | | Capitalized | $ | 28 | | $ | 29 | | $ | 45 | |
| Amortized | | Amortized | 25 | | 19 | | 10 | |
Certain commission plans will pay a commission on estimated professional service revenues over the first 12 months of the contract with clients. The portion of commission paid in excess of the actual commission earned in that period is recorded as prepaid commission. When the prepaid commission is considered earned, it is classified as a deferred commission expense and subject to amortization. We do not have material contract liabilities as of December 31, 2018.2021 and 2020.
Insurance Costs
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.
Insurance costs include insurance premiums for coverage provided by insurance carriers, payments for claim costs and other risk management services, reimbursement of claims payments made by insurance carriers or third-party administrators below a predefined deductible limit, and changes in accrued costs related to contractual obligations with our workers' compensation and health benefit insurance.carriers.
At policy inception, annual workers' compensation premiums are estimated by the insurance carriers based on projected wages over the duration of the policy period and the risk categories of the WSEs. We initially pay premiums based on these estimates. As actual wages are realized, premium expense recorded may differ from estimated premium expense, creating an asset or liability throughout the policy year. Such asset or liability is reported on our consolidated balance sheets as prepaid expenses or insurance premiums and other payables, respectively.
Accrued Workers' Compensation Costs
We have secured fully insured workers' compensation insurance policies with insurance carriers to administer and pay claims for our clients and WSEs. We are responsible for reimbursing the insurance carriers for losses up to $1 million per claim occurrence (deductible layer). Insurance carriers are responsible for administering and paying claims. We are responsible for reimbursing each carrier up to a deductible limit per occurrence. Accrued workers' compensation costs represent our liability to reimburse insurance carriers for unpaidour share of their losses and loss adjustment expenses. These accrued costs are established to provide for the estimated ultimate costs of paying claims within the deductible layer in accordance with worker'sworkers' compensation insurance policies. These accrued costs include estimates for reported and incurred but not reported (IBNR) losses, accrued costs on reported claims, and expenses associated with processing and settling the claims. In establishing these accrued costs, we use an independentexternal actuary to provide an estimate of undiscounted future cash payments that would be made to settle the claims based upon:
•historical loss experience, exposure data, and industry loss experience related to TriNet’s insurance policies,
•inputs including WSE job responsibilities and location,
•historical frequencyvolume and severity of workers' compensation claims,
•an estimate of future cost trends, to establish expected loss ratios for subsequent accident years,
•expected loss ratios for the latest accident year or prior accident years, adjusted for the loss trend, the effect of rate changes and other quantifiable factors, and
•loss development factors to project the reported losses for each accident year to an ultimate basis.
We assess the accrued workers' compensation costs on a quarterly basis. For each reporting period, changes in the actuarial methods and assumptions resulting from changes in actual claims experience and other trends are incorporated into the accrued workers' compensation costs. Adjustments to previously established accrued costs estimateestimates are reflected in the results of operations for the period in which the adjustment is identified. Such adjustments could be significant, reflecting any variety of new adverse or favorable trends. Accordingly, final claim settlements may vary materially from the present estimates, particularly when those payments may not occur until well into the future. In our experience, plan years related to workers' compensation programs may take ten years or more to be settled.
We do not discount accrued workers' compensation costs. Claim costsCosts expected to be paid within one year are recorded as accrued workers' compensation costs. Claim costsCosts expected to be paid beyond one year are included in accrued workers' compensation costs, less current portion.
We have collateral agreements with various insurance carriers where either we retain custody of funds in trust accounts which we record as restricted cash and cash equivalents, or remit funds to carriers. Collateral whether held by us, or the carriers, is used to settle our insurance and claim deductible obligations to them. Collateral requirements are established at the policy year and are re-assessed by each carrier annually. Based on the results of each assessment, additional collateral may be required for or paid to the carrier or collateral funds may be released or returned to the Company. Collateral paidIn instances where we pay collateral to carriers byand the agreement permits net settlement of obligations against collateral held, which we record net of our accrued costs net of that collateral (Carrier Collateral Offset). We offset Carrier Collateral Offset against our obligation due within the next 12 months before applying against long termlong-term obligations. Collateral balances in excess of accrued costs are recorded as accounts receivable or in other assets.
Accrued Health Insurance Costs
We sponsor and administer a number of fully insured, risk-based employee benefit plans, including group health, dental, and vision as an employer plan sponsor under section 3(5) of the ERISA. In 2018, a2021, the majority of our group health insurance costs related to risk-based plans. Our remaining group health insurance costs were for guaranteed-cost policies.
Accrued health insurance costs are established to provide for the estimated unpaid costs of reimbursing the carriers for paying claims within the deductible layer in accordance with risk-based health insurance policies. These accrued costs include estimates for reported losses, plus estimates for claims incurred but not paid. We assess accrued health insurance costs regularly based upon independentexternal actuarial studies that include other relevant factors such as current and historical claims payment patterns, plan enrollment and medical trend rates.
In certain carrier contracts we are required to prepay the expected claims activity for the subsequent period.periods. These prepaid balances by agreement permit net settlement of obligations and offset the accrued health insurance costs. As of December 31, 2021 and 2020, prepayments and miscellaneous receivables offsetting accrued health insurance costs or whenwere $54 million and $49 million, respectively. When the prepaid amount is in excess of our recorded liability the net asset position is included in prepaid expenses. As of December 31, 20182021 and 2017, prepayments included in2020, accrued health insurance costs offsetting prepaid expenses were $33$79 million and $19$58 million, respectively.
Leases
We determine if a new contractual arrangement is a lease at contract inception. If a contract contains a lease, we evaluate whether it should be classified as an operating or a finance lease. If applicable as a lease, we record our lease liabilities and right-of-use (ROU) assets based on plan performance,the future minimum lease payments over the lease term and only include options to renew a lease in the future minimum lease payments if it is reasonably certain that we may be entitled to receive refundswill exercise that option. For certain leases with original terms of premiums whichtwelve months or less we recognize in accordance with the policy terms. lease expense as incurred and we do not recognize lease liabilities and ROU assets.
We estimate these refundsmeasure our lease liabilities based on premium and claims data and record as a reduction in the insurance costsfuture minimum lease payments discounted over the lease term. We determine our discount rate at lease inception using our incremental borrowing rate, which is based on the consolidated statements of income and comprehensive income and prepaid expenses on the consolidated balance sheets.our outstanding term debts that are collateralized by certain corporate assets. As of December 31, 2018, there were no prepaid insurance premiums. As of December 31, 2017, there2021 and 2020, the weighted-average rate used in discounting the lease liability was $11 million included within prepaid expenses3.9% and 4.0%, respectively.
We measure our ROU assets based on the associated lease liabilities adjusted for any lease incentives such as prepaid insurance premiums.tenant improvement allowances and classify operating ROU assets in other assets in our consolidated balance sheets. For operating leases, we recognize expense for lease payments on a straight-line basis over the lease term.
Cash and Cash Equivalents
Cash and cash equivalents include bank deposits and short-term, highly liquid investments. Investments with original maturity dates of three months or less are considered cash equivalents.
Restricted Cash, Cash Equivalents and Investments
Restricted cash, cash equivalents and investments presented on our consolidated balance sheets include:
•cash and cash equivalents in trust accounts functioning as security deposits for our insurance carriers,
•payroll funds collected representing cash collected in advance from clients which we designate as restricted for the purpose of funding WSE payroll and payroll taxes and other payroll related liabilities, and
•amounts held in trust for current and future premium and claim obligations with our insurance carriers, which amounts are held in trust according to the terms of the relevant insurance policies and by the local insurance regulations of the jurisdictions in which the policies are in force.
Investments
Our investments are primarily classified as available-for-sale and are carried at estimated fair value.
Unrealized gains and losses are reported as a component of accumulated other comprehensive income, net of deferred income taxes. The amortized cost of debt investments is adjusted for amortization of premiums and accretion of discounts from the date of purchase to the earliest call date for premiums or the maturity date for discounts. Such amortization is included in interest income as an addition to or deduction from the coupon interest earned on the investments. We use the specific identification method to determine the realized gains and losses on the sale of available-for-sale securities. Realized gains and losses are included in interest income in the accompanying consolidated statements of income and comprehensive income.
We assess our investments for an other-than-temporary impairment loss due to a decline in fair value or other market conditions.credit impairment. We review several factors to determine whether aan unrealized loss is other than temporary,credit related, such as the length and extent of the fair value decline, the financial condition and near-termfuture prospects of the issuer and whether we haveissuer. To the intentextent that a security's amortized cost basis exceeds the present value of the cash flows expected to be collected from the security, an allowance for credit losses will be recognized. If management intends to sell or will more likely than not be required to sell the security before the securities'any anticipated recovery, which maya write down will be at maturity. If management determines that a security is impaired under these circumstances, the impairment recognized in earnings is measured as the entire difference between the amortized cost and the then-current fair value.
We have investments within our unrestricted and our restricted accounts. Unrestricted investments are recorded on the balance sheet as current or noncurrent based upon the remaining time to maturity, and investments subject to restrictions are classified as current or noncurrent based on the expected payout of the related liability.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive (loss) income includes those gains and losses included in comprehensive income, but excluded from net income, in accordance with GAAP. Other comprehensive (loss) income is comprised of immaterial net unrealized gains or losses arising on available-for-sale investments, net of deferred taxes.
Fair Value of Financial Instruments
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
Our financial assets recorded at fair value on a recurring basis are comprised of cash equivalents, available-for-sale marketable securities and certificates of deposits. We measure certain financial assets at fair value for disclosure purposes, as well as on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. Our other current financial assets and liabilities have fair values that approximate their carrying value due to their short-term nature.
Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market to measure fair value, summarized as follows:
•Level 1—observable inputs for identical assets or liabilities, such as quoted prices in active markets,
•Level 2—inputs other than the quoted prices in active markets that are observable either directly or indirectly,
•Level 3—unobservable inputs in which there is little or no market data, which requires that we develop our own assumptions.
The fair value hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. We classify our cash equivalents, debt securitiesinvestments and long-term debt payable in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.
Unbilled Revenue
We recognize WSE payroll and payroll tax liabilities in the period in which the WSEs perform work. When clients' pay periods cross reporting periods, we accrue the portion of the unpaid WSE payroll where we assume, under state regulations, the obligation for the payment of wages and the corresponding payroll tax liabilities associated with the work performed prior to period-end. These estimated payroll and payroll tax liabilities are recorded in accrued wages. The associated receivables, including estimated revenues, offset by advance collections from clients, are recorded as unbilled revenue. As of December 31, 2018 and 2017, advance collections included in unbilled revenue were $23 million and $12 million respectively.
Accounts Receivable
Our accounts receivable represents outstanding gross billings to clients, net of an allowance for doubtful accounts.estimated credit losses. We require our clients to prefund payroll and related liabilities before payroll is processed or due for payment. If a client fails to fund payroll or misses the funding cut-off, at our sole discretion, we may pay the payroll and the resulting unfunded payroll isamounts due to us are recognized as accounts receivable. When client payment is received in advance of our performance under the contract, such amount is recorded as client deposits. We establish an allowance for doubtful accountscredit losses based on historical experience,the credit quality of clients, current economic conditions, the age of the accounts receivable balances, credit quality of clients, current economic conditionshistorical experience, and other factors that may affect clients’ ability to pay, and charge-off amounts against the allowance when they are deemed uncollectible. The allowance was immaterial at December 31, 2021 and 2020.
Property, Equipment and EquipmentSoftware
We record property and equipment at historical cost and compute depreciation using the straight-line method over the estimated useful lives of the assets or the lease terms, generally three years to five years for software and office equipment, five years to seven years for furniture and fixtures, and the shorter of the asset life or the remaining lease term for leasehold improvements. We expense the cost of maintenance and repairs as incurred and capitalize leasehold improvements.
We capitalize internal and external costs incurred to develop internal-use computer software during the application development stage. Application development stage costs include license fee paid to third-parties for software use, software configuration, coding, and installation. Capitalized costs are amortized on a straight-line basis over the estimated useful life, typically ranging from three years to five years, commencing when the software is placed into service. We expense costs incurred during the preliminary project stage, as well as general and administrative, overhead, maintenance and training costs, and costs that do not add functionality to existing systems. For the years ended December 31, 2018, 2017 and 2016, internally developed software costs capitalized were $33 million, $29 million and $21 million respectively.
We periodically assess the likelihood of unsuccessful completion of projects in progress, as well as monitor events or changes in circumstances, which might suggest that impairment has occurred and recoverability should be evaluated. An impairment loss is recognized if the carrying amount of the asset is not recoverable and exceeds the future net cash flows expected to be generated by the asset.
Goodwill and Other Intangible Assets
Our goodwill and identifiable intangible assets with indefinite useful lives are not amortized, but are tested for impairment on an annual basis or when an event occurs or circumstances change in a way to indicate that there has been a potential decline in the fair value of the reporting unit. Goodwill impairment is determined by comparing the estimated fair value of the reporting unit to its carrying amount, including goodwill. All goodwill is associated with one reporting unit within our one reportable segment.
Annually, we perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit has declined below carrying value. This assessment considers various financial, macroeconomic, industry, and reporting unit specific qualitative factors. We perform our annual impairment testing in the fourth quarter. Based on the results of our reviews, no impairment loss was recognized in the results of operations for the years ended December 31, 2018, 2017 and 2016.
Intangible assets with finite useful lives are amortized over their respective estimated useful lives ranging from two to ten years using either the straight-line method or an accelerated method. Intangible assets are reviewed for indicators of impairment at least annually and evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on the results of our reviews, no impairment loss was recognized in the results of operations for the years ended December 31, 2018, 2017 and 2016.
Impairment of Long-Lived Assets
We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is considered impaired if the carrying amount exceeds the undiscounted future net cash flows the asset is expected to generate. An impairment charge is recognized for the amount by which the carrying amount of the assets exceeds its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less selling costs.
Goodwill and Other Intangible Assets
Our goodwill and identifiable intangible assets with indefinite useful lives are not amortized, but are tested for impairment on an annual basis or when an event occurs or circumstances change in a way to indicate that there has been a potential decline in the fair value of the reporting unit. Goodwill impairment is determined by comparing the estimated fair value of the reporting unit to its carrying amount, including goodwill. All goodwill is associated with 1 reporting unit within our 1 reportable segment.
Annually, we perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit has declined below its carrying value. This assessment considers various financial, macroeconomic, industry, and reporting unit specific qualitative factors. We perform our annual impairment testing in the fourth quarter. Based on the results of our reviews, no impairment loss was recognized in the results of operations for the years ended December 31, 2021, 2020 and 2019.
Intangible assets with finite useful lives are amortized over their respective estimated useful lives ranging from one year to ten years using either the straight-line method or an accelerated method. Intangible assets are reviewed for indicators of impairment at least annually and evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on the results of our reviews, we recognized a $7 million impairment charge for customer contract lists for the year ended December 31, 2021. There were no impairment charges recognized for the years ended December 31, 2020 and 2019.
Advertising Costs
We expense the costs of producing advertisements at the time production occurs, and expense the cost of running advertisements in the period in which the advertising space or airtime is used as sales and marketing expense. Advertising costs were $17$21 million, $8$19 million, and $6$18 million for the years ended December 31, 2018, 20172021, 2020 and 2016,2019, respectively.
Stock-BasedStock Based Compensation
Our stock-basedstock based awards to employees include time-basedtime based and performance-basedperformance based restricted stock units and restricted stock awards, stock options and an employee stock purchase plan. Compensation expense associated with restricted stock units and restricted stock awards is based on the fair value of common stock on the date of grant. Compensation expense associated with stock options and employee stock purchase plan are based on the estimated grant date fair value method using the Black-Scholes option pricing model. Expense is recognized using a straight-line amortization method over the respective vesting period for awards that are ultimately expected to vest, with adjustments to expense recognized in the period in which forfeitures occur.
Income Taxes
We account for our provision for income taxes using the asset and liability method, under which we recognize income taxes payable or refundable for current year and deferred tax assets and liabilities for the future tax effect of events that have been recognized in either our financial statements or tax returns. We measure our current and deferred tax assets and liabilities based on provision of enacted tax laws of those jurisdictions in which we operate. The effect of changes in tax laws and regulations, or interpretations, is recognized in our consolidated financial statements in the period that includes the enactment date.
We recognize deferred tax assets and liabilities based on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes, as well as the expected benefits of using net operating loss and other carryforwards. We are required to establish a valuation allowance when it is determined more likely than not that the deferred tax assets will not be realized. Provision for income taxes may change when estimates used in determining valuation allowances change or when receipt of new information indicates the need for adjustment in valuation allowances. Changes in valuation allowances are reflected as a component of the provision for income taxes in the period the change is enacted.
We recognize a reserve for uncertain tax positions taken or expected to be taken in a tax return when it is concluded that tax positions are not more likely than not to be sustained upon examination by taxing authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the positions. Assumptions, judgment and the use of estimates are required in determining if the more likely than not standard has been met when developing the provision for income taxes and in determining the expected benefit. The tax benefits of the position recognized in the financial statements are then measured based on the largest amount of benefit that is greater than 50% likely to be realized upon settlement with a taxing authority. Unrecognized tax benefits due to tax uncertainties that do not meet the minimum probability threshold are included as other liabilities and are charged to earnings in the period that such determination is made. We recognize interest and penalties related to uncertain tax positions as a component of income tax expense. Accrued interest and penalties are included in other non-current liabilities on the consolidated balance sheet.
Concentrations of Credit Risk
Financial instruments subject to concentrations of credit risk include cash, cash equivalents and investments (unrestricted and restricted), accounts receivable, and amounts due from insurance carriers. We maintain these financial assets principally in domestic financial institutions. We perform periodic evaluations of the relative credit standing of these institutions. Our exposure to credit risk in the event of default by the financial institutions holding these funds is limited to amounts currently held by the institution in excess of insured amounts.
Under the terms of professional services agreements, clients agree to maintain sufficient funds or other satisfactory credit at all times to cover the cost of their current payroll, all accrued paid time off, vacation or sick leave balances, and other vested wage and benefit obligations for all their work site employees. We generally require payment from our clients on or before the applicable payroll date.
For certain clients, we require an indemnity guarantee payment (IGP) supported by a letter of credit, bond, or a certificate of deposit from certain financial institutions. The IGP typically equals the total payroll and service fee for one average payroll period.
As of December 31, 2018, no client accounted for over 10% of total accounts receivable. One client accounted for more than 47% of accounts receivable as of December 31, 2017. No client accounted for more than 10% of total revenues in the years ended December 31, 2018, 20172021, 2020 and 2016.2019. Bad debt expense, net of recoveries was $1 million,immaterial for each of the years ended December 31, 2018, 20172021, 2020 and 2016.2019.
Recent Accounting Pronouncements
Recently adopted accounting guidance
Revenue RecognitionCredit Losses -In May 2014, the FASB issuedWe adopted ASU 2014-09-Revenue from Contracts with Customers, which replaces most existing revenue recognition guidance under GAAP. The core principle of the guidance is that an entity should recognize revenue for the transfer of promised goods or services to customers that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard provides a five-step analysis of transactions to determine when and how revenue is recognized.
We have adopted the new standard2016-13 - Financial Instruments - Credit Losses (ASC Topic 326) effective January 1, 20182020 using thea modified retrospective method. For further discussion of our adoption of ASC Topic 606, including our operating results under the new standard, see Revenue Recognition section above.
The impact from the adoption of ASC Topic 606 to our consolidated income statements and balance sheets is as follows:
|
| | | | | | | | | |
| | December 31, 2018 |
| (in millions) | As reported | Balance Using Previous Standard | Increase (Decrease) |
| Balance sheet | | | |
| Assets | | | |
| Cash and cash equivalents | $ | 228 |
| $ | 235 |
| $ | (7 | ) |
| Restricted cash, cash equivalents and investments, current | 942 |
| 935 |
| 7 |
|
| Unbilled revenue, net | 304 |
| 311 |
| (7 | ) |
| Prepaid expenses | 48 |
| 44 |
| 4 |
|
| Other current assets | 59 |
| 49 |
| 10 |
|
| Other assets | 78 |
| 67 |
| 11 |
|
| Liabilities | | | |
| Accounts payable and other current liabilities | $ | 45 |
| $ | 48 |
| $ | 3 |
|
| Deferred taxes | 68 |
| 67 |
| $ | (1 | ) |
| Other non-current liabilities | 18 |
| 22 |
| $ | 4 |
|
| Equity | | | |
| Accumulated deficit | $ | (266 | ) | $ | (290 | ) | $ | (24 | ) |
|
| | | | | | | | | |
| | Year Ended December 31, 2018 |
| (in millions, except per share data) | As Reported | Balance Using Previous Standard | Increase (Decrease) |
| Income statement | | | |
| Revenue | | | |
| Professional service revenues | $ | 487 |
| $ | 485 |
| $ | 2 |
|
| Total revenues | 3,503 |
| 3,501 |
| 2 |
|
| Expense | | | |
| Sales and marketing expense |
|
|
|
| Commissions expense | 22 |
| 53 |
| (31 | ) |
| Total expense | 3,252 |
| 3,283 |
| (31 | ) |
| Income before provision for income taxes | 241 |
| 208 |
| 33 |
|
| Income tax expense | 49 |
| 40 |
| 9 |
|
| Net income | $ | 192 |
| $ | 168 |
| $ | 24 |
|
| Basic earnings per share | $ | 2.72 |
| $ | 2.40 |
| $ | 0.32 |
|
| Diluted earnings per share | $ | 2.65 |
| $ | 2.34 |
| $ | 0.31 |
|
Statement of Cash Flows - In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 addresses diversity in practice from entities classifying and presenting transfers between cash and restricted cash as operating, investing or financing activities or as a combination of those activities in the statement of cash flows. The ASU requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, transfers between such categories are no longer be presented in the statement of cash flows. We adopted ASU 2016-18 on January 1, 2018 using the retrospective method. See the effects of this adoption under the Impact of Reclassifications and Recently Adopted Accounting Guidance section above.
Recent issued accounting pronouncements
Lease arrangements -In February 2016, the FASB issued ASU 2016-02-Leases (Topic 842) and subsequent amendments to the initial guidance (collectively, ASC Topic 842) to supersede existing guidance on accounting for leases in ASC 840, Leases (ASC 840). ASC Topic 842 requires us to recognize on our balance sheet a lease liability representing the present value of future lease payments and a right-of-use asset representing our right to use, or control the use of, a specified asset for the lease term for any operating lease with a term greater than one year. This standard is effective for annual and interim reporting periods beginning after December 15, 2018. Our leases primarily consist of leases for office space. We have an immaterial amount of capitalized leases.
We will adopt the new standard effective January 1, 2019 using the optional transition method,approach, under which we will recognizerecognized the cumulative effects of initially applying the standardthis guidance as an adjustment to the opening balance of retained earnings on January 1, 20192020 with unchanged comparative periods. We are required to use forward-looking information when evaluating an allowance for our accounts receivable, unbilled revenue and other financial assets measured at amortized cost. ASC Topic 326 also modified the impairment guidance for available-for-sale debt securities to require an allowance for credit losses. The adoption of ASC Topic 326 did not have a material effect on our financial statements.
Additionally,Recognizing and Measuring Contract Assets and Contract Liabilities From Contracts With Customers Acquired in a Business Combination – We will early adopt ASU 2021-08 – Business Combinations (Topic 805) effective January 1, 2022. ASU 2021-08 amends ASC 805 to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and requires that we will elect the practical expedient approachrecognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606. The adoption of ASU 2021-08 will not reassess whether any contracts that existed prior to adoption have or contain leases or the classification ofa material effect on our existing leases. We will continue to classify initial indirect costs of existing leases as part of our existing leases and not separate any non-lease components.financial statements.
On the date of adoption, the consolidated balance sheet will be adjusted by the following amounts:
|
| | | |
| (in millions) | Increase Under New Guidance |
Recognizing right-of-use asset
| |
Long-term right-of-use assets
| $ | 53 |
|
Recognizing lease liability and derecognizing deferred rent
| |
| Accounts payable and other current liabilities | $ | 16 |
|
Other non-current liabilities
| 37 |
|
The impact on the consolidated statements of income is expected to be immaterial.
In addition, ASC Topic 842 requires significant new disclosures, including significant judgments regarding our leasing activities. We have completed our implementation, including a review of the processes and controls to ensure we meet the reporting and disclosure requirements.
NOTE 2. CASH, CASH EQUIVALENTS AND INVESTMENTS - UNRESTRICTED AND RESTRICTED
Under the terms of the agreements with certain of our workers' compensation and health benefit insurance carriers, we are required to maintain collateral in trust accounts for the benefit of specified insurance carriers and to reimburse the carriers’ claim payments within our deductible layer. We invest a portion of the collateral amounts in marketable securities. We report the current and noncurrent portions of these trust accounts as restricted cash, cash equivalents and investments on the consolidated balance sheets.
We require our clients to prefund their payroll and related taxes and other withholding liabilities before payroll is processed or due for payment. This prefund is included in restricted cash, cash equivalents and investments as payroll funds collected, which is designated to pay pending payrolls, payroll tax liabilities and other payroll withholdings.
We also invest available corporate funds, primarily in fixed income securities which meet the requirements of our corporate investment policy and are classified as available for sale (AFS).
Our total cash, cash equivalents and investments are summarized in the table below:
| | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | December 31, 2020 |
| (in millions) | Cash and cash equivalents | Available-for-sale marketable securities | | Total | Cash and cash equivalents | Available-for-sale marketable securities | | Total |
| Cash and cash equivalents | $ | 612 | | $ | — | | | $ | 612 | | $ | 301 | | $ | — | | | $ | 301 | |
| Investments | — | | 135 | | | 135 | | — | | 57 | | | 57 | |
| Restricted cash, cash equivalents and investments | | | | | | | | |
| Payroll funds collected | 1,012 | | — | | | 1,012 | | 1,228 | | — | | | 1,228 | |
| Collateral for health benefits claims | 25 | | 98 | | | 123 | | 16 | | 82 | | | 98 | |
| Collateral for workers' compensation claims | 58 | | — | | | 58 | | 60 | | — | | | 60 | |
| | | | | | | | |
| Other security deposits | 2 | | — | | | 2 | | 2 | | — | | | 2 | |
| Total restricted cash, cash equivalents and investments | 1,097 | | 98 | | | 1,195 | | 1,306 | | 82 | | | 1,388 | |
| Investments, noncurrent | — | | 168 | | | 168 | | — | | 138 | | | 138 | |
| Restricted cash, cash equivalents and investments, noncurrent | | | | | | | | |
| Collateral for workers' compensation claims | 29 | | 137 | | | 166 | | 36 | | 174 | | | 210 | |
| Total | $ | 1,738 | | $ | 538 | | | $ | 2,276 | | $ | 1,643 | | $ | 451 | | | $ | 2,094 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | December 31, 2017 |
| (in millions) | Cash and cash equivalents | Available-for-sale marketable securities | Certificate of deposits | Total | Cash and cash equivalents | Available-for-sale marketable securities | Certificate of deposits | Total |
| Cash and cash equivalents | $ | 228 |
| $ | — |
| $ | — |
| $ | 228 |
| $ | 336 |
| $ | — |
| $ | — |
| $ | 336 |
|
| Investments | — |
| 54 |
| — |
| 54 |
| — |
| — |
| — |
| — |
|
| Restricted cash, cash equivalents and investments | | | | | | | | |
| Insurance carriers security deposits | 15 |
| — |
| — |
| 15 |
| 15 |
| — |
| — |
| 15 |
|
| Payroll funds collected | 783 |
| — |
| — |
| 783 |
| 1,095 |
| — |
| — |
| 1,095 |
|
| Collateral for health benefits claims | 75 |
| — |
| — |
| 75 |
| 69 |
| — |
| — |
| 69 |
|
| Collateral for workers' compensation claims | 66 |
| 1 |
| — |
| 67 |
| 98 |
| 1 |
| — |
| 99 |
|
| Collateral to secure standby letter of credit | — |
| — |
| 2 |
| 2 |
| — |
| — |
| 2 |
| 2 |
|
| Total restricted cash, cash equivalents and investments, current | 939 |
| 1 |
| 2 |
| 942 |
| 1,277 |
| 1 |
| 2 |
| 1,280 |
|
| Investments, noncurrent | — |
| 135 |
| — |
| 135 |
| — |
| — |
| — |
| — |
|
| Restricted cash, cash equivalents and investments, noncurrent | | | | | | | | |
| Collateral for workers' compensation claims | 182 |
| 5 |
| — |
| 187 |
| 125 |
| 37 |
| — |
| 162 |
|
| Total | $ | 1,349 |
| $ | 195 |
| $ | 2 |
| $ | 1,546 |
| $ | 1,738 |
| $ | 38 |
| $ | 2 |
| $ | 1,778 |
|
NOTE 3. INVESTMENTS
All of our investment securities that have a contractual maturity date greater than three months are classified as AFS. The amortized cost, gross unrealized gains, gross unrealized losses, and fair valuesvalue of our AFS investments as of December 31, 20182021 and December 31, 20172020 are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| Asset-backed securities | $ | 49 | | $ | — | | $ | — | | $ | 49 | | | $ | 24 | | $ | — | | $ | — | | $ | 24 | |
| Corporate bonds | 167 | | 1 | | (1) | | 167 | | | 126 | | 2 | | — | | 128 | |
| U.S. government agencies and government-sponsored agencies | 17 | | — | | — | | 17 | | | 27 | | 1 | | — | | 28 | |
| U.S. treasuries | 285 | | 1 | | (1) | | 285 | | | 261 | | 4 | | — | | 265 | |
| | | | | | | | | |
| Certificate of deposit | 11 | | — | | — | | 11 | | | — | | — | | — | | — | |
| Other debt securities | 9 | | — | | — | | 9 | | | 6 | | — | | — | | 6 | |
| Total | $ | 538 | | $ | 2 | | $ | (2) | | $ | 538 | | | $ | 444 | | $ | 7 | | $ | — | | $ | 451 | |
|
| | | | | | | | | | | | |
| | December 31, 2018 |
| (in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| Asset-backed securities | $ | 33 |
| $ | — |
| $ | — |
| $ | 33 |
|
| Corporate bonds | 99 |
| — |
| — |
| 99 |
|
| U.S. government agencies and government-sponsored agencies | 7 |
| — |
| — |
| 7 |
|
| U.S. treasuries | 46 |
| — |
| — |
| 46 |
|
| Exchange traded fund | 1 |
| — |
| — |
| 1 |
|
| Other debt securities | 9 |
| — |
| — |
| 9 |
|
| Total | $ | 195 |
| $ | — |
| $ | — |
| $ | 195 |
|
|
| | | | | | | | | | | | |
| | December 31, 2017 |
| (in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| U.S. treasuries | $ | 37 |
| $ | — |
| $ | — |
| $ | 37 |
|
| Exchange traded fund | 1 |
| — |
| — |
| 1 |
|
| Total | $ | 38 |
| $ | — |
| $ | — |
| $ | 38 |
|
Investments in a continuousGross unrealized loss positionlosses were immaterial as of December 31, 20182021 and December 31, 2017 are presented below.
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Less than 12 months | 12 months or more | Total |
| (in millions) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses |
| Asset-backed securities | $ | 25 |
| $ | — |
| $ | — |
| $ | — |
| $ | 25 |
| $ | — |
|
| Corporate bonds | 84 |
| — |
| — |
| — |
| 84 |
| — |
|
| U.S. government agencies and government-sponsored agencies | 4 |
| — |
| — |
| — |
| 4 |
| — |
|
| U.S. treasuries | 21 |
| — |
| — |
| — |
| 21 |
| — |
|
| Other debt securities | 7 |
| — |
| — |
| — |
| 7 |
| — |
|
| Total | $ | 141 |
| $ | — |
| $ | — |
| $ | — |
| $ | 141 |
| $ | — |
|
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Less than 12 months | 12 months or more | Total |
| (in millions) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses |
| U.S. treasuries | $ | 5 |
| $ | — |
| $ | 24 |
| $ | — |
| $ | 29 |
| $ | — |
|
| Total | $ | 5 |
| $ | — |
| $ | 24 |
| $ | — |
| $ | 29 |
| $ | — |
|
Unrealized losses on fixed income securities are principally caused by changes in interest rates and the financial condition of the issuer. In analyzing an issuer's financial condition, we consider whether the securities are issued by the federal government or its agencies, whether downgrades by credit rating agencies have occurred, and industry analysts' reports. As we have the ability to hold these investments until maturity, or for the foreseeable future, no decline was
impairment charges were deemed to be other-than-temporary.necessary. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
The fair value of debt investments by contractual maturity are shown below:
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 |
| (in millions) | One year or less | Over One Year Through Five Years | Over Five Years Through Ten Years | Over Ten Years | Fair Value |
| Asset-backed securities | $ | 4 |
| $ | 26 |
| $ | 3 |
| $ | — |
| $ | 33 |
|
| Corporate bonds | 42 |
| 57 |
| — |
| — |
| 99 |
|
| U.S. government agencies and government-sponsored agencies | 1 |
| 2 |
| — |
| 4 |
| 7 |
|
| U.S. treasuries | 12 |
| 34 |
| — |
| — |
| 46 |
|
| Other debt securities | — |
| 1 |
| — |
| 8 |
| 9 |
|
| Total | $ | 59 |
| $ | 120 |
| $ | 3 |
| $ | 12 |
| $ | 194 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 |
| (in millions) | One year or less | Over One Year Through Five Years | Over Five Years Through Ten Years | Over Ten Years | Fair Value |
| U.S. treasuries | $ | — |
| $ | 37 |
| $ | — |
| $ | — |
| $ | 37 |
|
| Total | $ | — |
| $ | 37 |
| $ | — |
| $ | — |
| $ | 37 |
|
|
| | | | | | | | | | |
| (in millions) | | December 31, 2021 |
71
|
| |
FINANCIAL STATEMENTSOne year or less | | $ | 193 | | | | |
| Over one year through five years | | 310 | | | | |
| Over five years through ten years | | 10 | | | | |
| Over ten years | | 25 | | | | |
| Total fair value | | $ | 538 | | | | |
The gross proceeds from sales and maturities of AFS securities for the years ended December 31, 2018, 20172021, 2020, and 20162019 are shownpresented below. We had immaterial gross realized gains and losses from sales of investments for the years ended December 31, 2018, 20172021, 2020, and 2016.2019.
| | | | | | | | | | | |
| Year Ended December 31, |
| (in millions) | 2021 | 2020 | 2019 |
| | | |
| | | |
| Gross proceeds from sales | $ | 162 | | $ | 93 | | $ | 76 | |
| Gross proceeds from maturities | 187 | | 131 | | 83 | |
| Total | $ | 349 | | $ | 224 | | $ | 159 | |
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 |
| Gross proceeds from sales | $ | 54 |
| $ | — |
| $ | — |
|
| Gross proceeds from maturities | 47 |
| 14 |
| 28 |
|
| Total | $ | 101 |
| $ | 14 |
| $ | 28 |
|
Our asset-backed securities include auto loan/lease, credit card, and equipment leases with investment-grade ratings.
Our corporate bonds include investment-grade debt securities from a wide variety of issuers, industries, and sectors.
Our U.S. government agencies and government-sponsored agency securities primarily include mortgage-backed securities consisting of Federal Home Loan Mortgage Corporation and Federal National Mortgage Association securities with investment-grade ratings.
Our other debt securities primarily include mortgage-backed securities with investment-grade ratings issued by institutions without federal backing.
NOTE 4. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
We use an independent pricing source to determine the fair value of our securities. The independent pricing source utilizes various pricing models for each asset class; including the market approach. The inputs and assumptions for the pricing models are market observable inputs including trades of comparable securities, dealer quotes, credit spreads, yield curves and other market-related data.
We have not adjusted the prices obtained from the independent pricing service and we believe the prices received from the independent pricing service are representative of the prices that would be received to sell the assets at the measurement date (exit price).
The carrying value of the Company's cash equivalents and restricted cash equivalents approximate their fair values due to their short-term maturities.
We did not have any Level 3 financial instruments recognized in our consolidated balance sheets as of December 31, 2021 and 2020. There were no transfers between levels as of December 31, 2021 and 2020.
Fair Value Measurements on a Recurring Basis
The following tables summarize our financial instruments by significant categories and fair value measurement on a recurring basis as of December 31, 2021 and 2020:
| | | | | | | | | | | |
| (in millions) | Level 1 | Level 2 | Total |
| December 31, 2021 | | | |
| Cash equivalents: | | | |
| Money market mutual funds | $ | 4 | | $ | — | | $ | 4 | |
| U.S. treasuries | — | | 21 | | 21 | |
| Total cash equivalents | 4 | | 21 | | 25 | |
| Investments: | | | |
| Asset-backed securities | — | | 49 | | 49 | |
| Corporate bonds | — | | 137 | | 137 | |
| U.S. government agencies and government-sponsored agencies | — | | 2 | | 2 | |
| U.S. treasuries | — | | 106 | | 106 | |
| Other debt securities | — | | 9 | | 9 | |
| Total investments | — | | 303 | | 303 | |
| Restricted cash equivalents: | | | |
| Money market mutual funds | 93 | | — | | 93 | |
| | | |
| Certificate of deposit | — | | 1 | | 1 | |
| | | |
| Total restricted cash equivalents | 93 | | 1 | | 94 | |
| Restricted investments: | | | |
| Corporate bonds | — | | 30 | | 30 | |
| U.S. government agencies and government-sponsored agencies | — | | 15 | | 15 | |
| U.S. treasuries | — | | 179 | | 179 | |
| | | |
| Certificate of deposit | — | | 11 | | 11 | |
| Total restricted investments | — | | 235 | | 235 | |
| Total investments and restricted cash equivalents and investments | $ | 97 | | $ | 560 | | $ | 657 | |
| | | | | | | | | | | |
| (in millions) | Level 1 | Level 2 | Total |
| December 31, 2020 | | | |
| Cash equivalents: | | | |
| Money market mutual funds | $ | 2 | | $ | — | | $ | 2 | |
| U.S. treasuries | — | | 11 | | 11 | |
| Total cash equivalents | 2 | | 11 | | 13 | |
| Investments: | | | |
| Asset-backed securities | — | | 24 | | 24 | |
| Corporate bonds | — | | 93 | | 93 | |
| U.S. government agencies and government-sponsored agencies | — | | 5 | | 5 | |
| U.S. treasuries | — | | 67 | | 67 | |
| Other debt securities | — | | 6 | | 6 | |
| Total investments | — | | 195 | | 195 | |
| Restricted cash equivalents: | | | |
| Money market mutual funds | 99 | | — | | 99 | |
| | | |
| | | |
| | | |
| Total restricted cash equivalents | 99 | | — | | 99 | |
| Restricted investments: | | | |
| Corporate bonds | — | | 35 | | 35 | |
| U.S. government agencies and government-sponsored agencies | — | | 23 | | 23 | |
| U.S. treasuries | — | | 198 | | 198 | |
| | | |
| | | |
| Total restricted investments | — | | 256 | | 256 | |
| Total investments and restricted cash equivalents and investments | $ | 101 | | $ | 462 | | $ | 563 | |
Fair Value of Financial Instruments Disclosure
Long-Term Debt
The fair value of our 2029 Notes was obtained from a third-party pricing service and is based on observable market inputs. As such, the fair value of the senior notes is considered Level 2 in the hierarchy for fair value measurement. As of December 31, 2021, our 2029 Notes were carried at their cost, net of issuance costs, and had a fair value of $500 million.
Our 2018 Term Loan was floating rate debt prior to being repaid and terminated in 2021. The fair value of our 2018 Term Loan approximated its carrying value (exclusive of issuance costs) at December 31, 2020. The fair value of our 2018 Term Loan was estimated based on a discounted cash flow, which incorporates credit spreads and market interest rates to estimate the fair value and is considered Level 3 in the hierarchy for fair value measurement.
NOTE 5. PROPERTY, EQUIPMENT AND EQUIPMENT,SOFTWARE, NET
Property, equipment and equipment,software, net, consists of the following:
| | | | | | | | |
| (in millions) | December 31, 2021 | December 31, 2020 |
| Software | $ | 236 | | $ | 204 | |
| Office equipment, including data processing equipment | 31 | | 28 | |
| Leasehold improvements | 25 | | 24 | |
| Furniture, fixtures, and equipment | 17 | | 16 | |
| Projects in progress | 1 | | 1 | |
| Total | 310 | | 273 | |
| Less: Accumulated depreciation | (231) | | (194) | |
| Property and equipment, net | $ | 79 | | $ | 79 | |
|
| | | | | | |
| (in millions) | December 31, 2018 | December 31, 2017 |
| Software | $ | 144 |
| $ | 114 |
|
| Office equipment, including data processing equipment | 27 |
| 23 |
|
| Leasehold improvements | 21 |
| 15 |
|
| Furniture, fixtures, and equipment | 15 |
| 15 |
|
| Projects in progress | 2 |
| 7 |
|
| Total | 209 |
| 174 |
|
| Less: Accumulated depreciation | (130 | ) | (104 | ) |
| Property and equipment, net | $ | 79 |
| $ | 70 |
|
Depreciation expense for the years ended December 31, 2018, 2017 and 2016 was $35 million, $28 million and $19 million, respectively. Projects in progress consist primarily of development costs for internally developed software, which we capitalize and amortize on a straight-line basis over the estimated useful life. We recognized
The following table summarizes our depreciation expense forand capitalized internally developed software of $24 million, $17 million,costs and $10 million for the years ended December 31, 2018, 2017 and 2016, respectively.related depreciation expense.
| | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2021 | 2020 | 2019 |
| Depreciation expense | $ | 42 | | $ | 42 | | $ | 41 | |
| Capitalized internally developed software costs | 33 | | 36 | | 31 | |
| Depreciation expense for capitalized internally developed software costs | 33 | | 31 | | 29 | |
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
The following summarizes goodwill and other intangible assets:
|
| | | | | | | | | | | | | | | | | | | |
| | | December 31, 2018 | December 31, 2017 |
| (in millions) | Weighted Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
| Goodwill | | $ | 289 |
| $ | — |
| $ | 289 |
| $ | 289 |
| $ | — |
| $ | 289 |
|
| Amortizable intangibles: | | | | | | | |
| Customer contracts | 10 years | 90 |
| (71 | ) | 19 |
| 210 |
| (187 | ) | 23 |
|
| Developed technology | 5 years | 5 |
| (3 | ) | 2 |
| 6 |
| (3 | ) | 3 |
|
| Total | | $ | 95 |
| $ | (74 | ) | $ | 21 |
| $ | 216 |
| $ | (190 | ) | $ | 26 |
|
Amortization of intangible assets during the years ended December 31, 2018, 2017 and 2016 was $5 million, $5 million and $16 million, respectively. As of December 31, 2018, we had $120 million of fully amortized customer contracts and $1 million of fully amortized developed technology. We evaluate the remaining useful life of intangible assets annually to determine whether events and circumstances warrant a revision to the estimated remaining useful life.
Expense related to intangibles amortization in future periods as of December 31, 2018 is expected to be as follows:
|
| | | |
| Year ending December 31: | Amount
(in millions) |
| 2019 | $ | 5 |
|
| 2020 | 5 |
|
| 2021 | 4 |
|
| 2022 | 4 |
|
| 2023 | 3 |
|
| Total | $ | 21 |
|
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in goodwill for the years ended December 31, 2021 and 2020 are as follows:
| | | | | |
| (in millions) | Amount |
| Balance at December 31, 2019 | $ | 289 | |
| Additions | 5 | |
| Balance at December 31, 2020 | $ | 294 | |
| Additions | — | |
| Balance at December 31, 2021 | $ | 294 | |
Other intangibles consists of customer contact lists with a weighted average amortization period of 10 years:
| | | | | | | | |
| (in millions) | December 31, 2021 | December 31, 2020 |
| Gross carrying amount | $ | 98 | | $ | 98 | |
| Accumulated amortization | (92) | | (80) | |
| Net carrying amount | $ | 6 | | $ | 18 | |
Amortization of intangible assets during the years ended December 31, 2021, 2020 and 2019 was $5 million for each period. We evaluate the remaining useful life of intangible assets quarterly to determine whether events and circumstances warrant a revision to the estimated remaining useful life. During the year ended December 31, 2021, we recognized a $7 million impairment of a customer relationship intangible due to higher than expected attrition.
Expense related to intangibles amortization in future periods as of December 31, 2021 is expected to be as follows:
| | | | | |
| Year ending December 31: | Amount
(in millions) |
| 2022 | $ | 4 | |
| 2023 | 2 | |
| 2024 and thereafter | — | |
| |
| |
| |
| Total | $ | 6 | |
NOTE 7. ACCRUED WORKERS' COMPENSATION COSTS
The following table summarizes the accrued workers’ compensation cost activity for the years ended December 31, 2018, 20172021, 2020 and 2016:2019:
| | | | Year Ended December 31, | | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 | (in millions) | 2021 | 2020 | 2019 |
| Total accrued costs, beginning of year | $ | 255 |
| $ | 255 |
| $ | 190 |
| Total accrued costs, beginning of year | $ | 205 | | $ | 214 | | $ | 238 | |
| Incurred | | Incurred | |
| Current year | 80 |
| 98 |
| 113 |
| Current year | 66 | | 64 | | 72 | |
| Prior years | (28 | ) | (6 | ) | 28 |
| Prior years | (23) | | (20) | | (31) | |
| Total incurred | 52 |
| 92 |
| 141 |
| Total incurred | 43 | | 44 | | 41 | |
| Paid | | Paid | |
| Current year | (12 | ) | (14 | ) | (14 | ) | Current year | (10) | | (8) | | (14) | |
| Prior years | (57 | ) | (78 | ) | (62 | ) | Prior years | (40) | | (45) | | (51) | |
| Total paid | (69 | ) | (92 | ) | (76 | ) | Total paid | (50) | | (53) | | (65) | |
| Total accrued costs, end of year | $ | 238 |
| $ | 255 |
| $ | 255 |
| Total accrued costs, end of year | $ | 198 | | $ | 205 | | $ | 214 | |
