UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 20182019
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36373
TRINET GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
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| Delaware | | 95-3359658 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| One Park Place, Suite 600, Dublin, CA | | 94568 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (510) 352-5000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company”,company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | x | Accelerated filer | o |
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| Non-accelerated filer | o(do not check if a smaller reporting company) | Smaller reporting company | o |
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| | Emerging growth company | o | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes o No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of Registrant’s Common Stock outstanding as of April 23, 201822, 2019 was 70,293,846.69,991,585.
TRINET GROUP, INC.
Form 10-Q - Quarterly Report
For the Quarterly Period Ended March 31, 20182019
TABLE OF CONTENTS
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| | Form 10-Q Cross Reference | Page |
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| Part I, Item 1. | |
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| Part I, Item 2. | |
| Part I, Item 3. | |
| Part I, Item 4. | |
| Part II, Item 1. | |
| Part II, Item 1A. | |
| Part II, Item 2. | |
| Part II, Item 3. | |
| Part II, Item 4. | |
| Part II, Item 5. | |
| Part II, Item 6. | |
Glossary of Acronyms and Abbreviations
Acronyms and abbreviations are used throughout this report, particularly in Part I, Item 1. Unaudited Condensed Consolidated Financial Statements and Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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| AFS | Available-for-sale |
| ASC | Accounting standards codification |
| ASU | Accounting standards update |
| CEO | Chief Executive Officer |
| CFO | Chief Financial Officer |
| COPS | Cost of providing services |
| D&A | Depreciation and Amortization |
| EBITDA | Earnings before interest expense, taxes, depreciation and amortization of intangible assets |
| EPS | Earnings Per Share |
| ERISA | Employee Retirement Income Security Act of 1974 |
| FASB | Financial Accounting Standards Board |
| G&A | General and administrative |
| GAAP | Generally Accepted Accounting Principles in the United States |
| HR | Human Resources |
| IRS | Internal Revenue Service |
| ISR | Insurance service revenues |
| MD&A | Management's Discussion and Analysis of Financial Condition and Results of Operations |
| NISR | Net Insurance Service Revenues |
| NSR | Net service revenues |
| OE | Operating expenses |
| PFC | Payroll funds collected |
| PSR | Professional service revenues |
| ROU | Right-of-use |
| RSA | Restricted Stock Award |
| RSU | Restricted Stock Unit |
| SBC | Stock Based Compensation |
| S&M | Sales and marketing |
| SD&P | Systems development and programming |
| SEC | Securities and Exchange Commission |
| SMB | Small to midsize business |
| U.S. | United States |
| WSE | Worksite employee |
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| FORWARD LOOKING STATEMENTS AND OTHER FINANCIAL INFORMATION | |
Cautionary Note Regarding Forward-Looking Statements and Other Financial Information
For purposes of this Quarterly Report on Form 10-Q (Form 10-Q), the terms “TriNet," "the” “the Company,"” “we,” “us” and “our"“our” refer to TriNet Group, Inc., and its consolidated subsidiaries. This Form 10-Q contains statements that are not historical in nature, are predictive in nature, or that depend upon or refer to future events or conditions or otherwise contain forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by the use of words such as, but not limited to, "ability," “anticipate,” “believe,” “can,” “continue,” “could,” “design,” “estimate,” “expect,” “forecast,” “hope,” "impact," “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “strategy,” “target,” "value," “will,” “would” and similar expressions or variations intended to identify forward-looking statements.
Forward-looking statements are not guarantees of future performance, but are based on management’s expectations as of the date of this Form 10-Q and assumptions that are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from our current expectations and any past results, performance or achievements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements are discussed throughout our Annual Report on Form 10-K for the year ended December 31, 20172018 filed with the Securities and Exchange Commission (SEC)SEC on February 27, 2018 (Form14, 2019 (2018 Form 10-K), including those appearing under the heading “Risk Factors” in Item 1A, and under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) in Item 7 of our 2018 Form 10-K, as well as in our other periodic filings with the SEC. ThoseExamples of forward-looking statements include, among others: risks associated with changes in, uncertainty regarding, or adverse application of the complex laws and regulations that govern our business; our ability to be recognized as an employer of worksite employees under federal and state regulations; our ability to mitigate business risks associated with our co-employment relationship with our worksite employees; our ability to secure private and confidential client and worksite employee data and our information technology infrastructure against cyber-attacks and security breaches; our ability to manage unexpected changes in workers’ compensation and health insurance claims by worksite employees; fluctuation in our results of operation and stock price as a result of numerous factors, many of which are outside of our control, such as the volume and severity of our workers’ compensation and health insurance claims and the amount and timing of our insurance costs, operating expenses and capital expenditure requirements; failures or limitations in the business systems we rely upon; our ability to improve our technology to meet the expectations of our clients; our ability to properly manage our internal controls over financial reporting; our ability to effectively integrate businesses we have acquired and new businesses we may acquire in the future; the effects of volatility in the financial and economic environment on the businesses that make up our client base; our ability to effectively manage and improve our operational processes; market acceptance of our vertical strategy; our ability to manage our sales force effectively; the ability of our products and services to compete effectively in our industry; the concentration of our clients in certain geographies and industries; the outcome of existing and future legal proceedings; changes in our income tax positions or adverse outcomes from on-going and future audits; adverse changes in our insurance coverage or our relationships with key insurance carriers; our ability to manage our client attrition; our ability to comply with the restrictions of our credit facility and meet our debt obligations; the impact of concentrated ownership in our stock; and the effects of increased competition and our ability to compete effectively. These and other factors could cause our actual results to differ materially from our anticipated results. The information provided in this Form 10-Q is based upon the facts and circumstances known as of the date of this Form 10-Q, and any forward-looking statements made by us in this Form 10-Q speak only as of the date of this Form 10-Q. We undertake no obligation to revise or update any of the information provided in this Form 10-Q, except as required by law.
The MD&A of this Form 10-Q includes references to our performance measures presented in conformity with accounting principles generally accepted in the United States of America (GAAP)GAAP and other non-GAAP financial measures that we use to manage our business, to make planning decisions, to allocate resources and to use as performance measures in our executive compensation plans. Refer to the Non-GAAP Financial Measures in our Key Financial and Operating Metrics section within our MD&A for definitions and reconciliations from GAAP measures.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Overview
TriNet is a leading provider of human resources (HR) solutions for small to midsize businesses (SMBs). Under our co-employment model, we assume certain of the responsibilities of being an employer and help our clients mitigate employer-related risks and manage many of the complex and burdensome administrative and compliance responsibilities associated with employment.
Our solutions includeHR expertise, payroll processing, tax administration, access toservices, employee benefits and anemployment risk mitigation services for SMBs. We deliver a comprehensive suite of products and services, which allows our clients to administer and manage various HR-related functions, including compensation and benefits, payroll processing, employee data, health insurance and workers' compensation programs, and other transactional HR needs using our technology platform with online and mobile tools that allowHR, benefits and compliance expertise.
We also leverage our scale and industry specific HR experience to design product and service offerings for SMBs in specific industries. We believe our industry-specific approach, which we call our vertical approach, is a key differentiator for us and creates additional value for our clients by allowing our product and worksite employees (WSEs)service offerings to store, view and manage their core HR-related information and efficiently conduct a variety of HR-related transactions anytime and anywhere.address the common HR needs in different client industries.
We operate in one reportable segment. Less than 1% of our revenue is generated outside of the U.S.
Significant Developments in 2018
Operational Highlights
Our consolidated results for the three months ended March 31, 2018first quarter of 2019 reflect our continued progress in attracting new customers to our industry-oriented (vertical) products, serving our existing customers and marketing our brand. The first quarter of the year is our most active for adding new customers.
Our customers are our focus, and we are investing in our processes to ensure a stronger customer experience. We expect this investment will further enhance our value to our customers, support retention and provide further efficiency and scale for our insurance service offerings, combined with higher WSE enrollment growth within our medical plansoperations. We started this work in 2018 and slower growthexpect this to continue in insurance costs.the near-term.
We experienced a decline in Average WSEs as compared toDuring the first three monthsquarter of 2017 due to the migration of clients2019, we experienced elevated attrition that was partially offset by improvements where:
we benefited from our legacy (SOI) platform onto clients growing their WSEs,
our common TriNet platform andcustomers increased new customer growth as we launched and expanded the functionality of TriNet Main Street.
In summary, we:
Completed the migration of existing clients from the SOI platform onto our common TriNet platform so that all our clients can benefit from our investment in platform and product improvements,
Continued to strengthen our leadership team with the addition of executivestheir participation, or enrollment in our sales, marketinginsurance services offerings, and operations functions,
Benefited from increased sales force retentionwe delivered profitable growth.
Our efforts to build a successful and product pricing strength,
Benefited from increased medical plan enrollment,
Benefited from changes in October 2017enduring company include building and leveraging a strong national brand presence. Our branding strategy, Incredible Starts Here, is being augmented with oneour current campaign: People Matter. We place our customers at the center of what we do, including placing our customers at the center of our health insurance carriers, where we converted an insurance carrier contract from a guaranteed-cost to risk-based insurance plan, and
Continued to invest in improving our internal control environment to support our ongoing compliance with the requirements of Sarbanes-Oxley Act of 2002 (SOX).
marketing.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Performance Highlights
Q1 20182019
DuringOur results for the first quarter of 2018, we:2019 is as follows (percentages, increases or reductions represent changes when compared to the first quarter of 2018):
Served almost 16,000 clients
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| | $934M | | $82M | | $251M |
| | Total revenues | | Operating income | | Net Service Revenue * |
| | 9 | % | increase | | 17 | % | increase | | 14 | % | increase |
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| | $63M | | $0.89 | | $69M |
| | Net income | | Diluted EPS | | Adjusted Net income * |
| | 17 | % | increase | | 19 | % | increase | | 20 | % | increase |
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| * | Non-GAAP measure as defined in the section below.
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| | 316,906 | | 312,760 | | $11.6B |
| | Total WSE | | Average WSE | | Payroll and payroll tax payments |
| | — | % | flat | | (1 | )% | decrease | | 13 | % | increase |
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In Q1 2019, we continued to achieve year-over-year revenue growth which now extends to 24 quarters of growth in total revenues. The growth year-over-year reflects our pricing approach, combined with our changing mix of WSEs and co-employed increasing enrollment, by customers that choose to benefit from all of our service offerings. We continue to price to the value of our services and, for our insurance offerings, to our expected risk.
Average WSEs (defined as average monthly WSEs paid during the period) for the first quarter of approximately 315,000, a 4% decrease in Average WSEs2019 decreased 1% compared to the same period in 2017 and
2018 from higher than normal client attrition in the Main Street vertical related to the platform migration, partially offset by the benefit from new sales combined with increased WSE hiring by our clients.Processed approximately $10.3 billionOur change in payroll and payroll tax payments for our clients, an increasemix of 5%WSEs over the same periodlast year contributed to our growth of both PSR and ISR. The expansion of our NISR margin benefited from the reduced insurance costs in 2017.
the current quarter.
Our financial highlights for the first quarter of 2018, comparedWe continue to the same period in 2017, include:
Total revenues increased 7%enhance our investment strategy to $861 millioninvest available liquid funds to improve our net income and Net Service Revenues increased 11%to $220 million,
Operating income increased 43% to $71 million,
Our effective income tax rate decreased to 20%,
Net income increased 88% to $54 million, or $0.75 per diluted share and Adjusted Net Income increased 84% to $58 million, and
Adjusted EBITDA increased 45% to $91 million.
fund our corporate initiatives.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Key Financial and Operating Metrics
The following key financial and operating metrics should be read in conjunction with our condensed consolidated financial statements and related notes included in this Form 10-Q.
| | | | Three Months Ended March 31, | | Percent | | Three Months Ended March 31, |
| (in millions, except per share and operating metrics data) | 2018 | | 2017 | | Change | |
| (in millions, except per share and WSE data) | | | 2019 | | 2018 | | % Change |
| Income Statement Data: | | | | | | | | | | | | | |
| Total revenues | $ | 861 |
| | $ | 808 |
| | 7 |
| % | | $ | 934 |
| | $ | 861 |
| | 9 |
| % |
| Operating income | 71 |
| | 50 |
| | 43 |
| | | 82 |
| | 71 |
| | 17 |
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| Net income | 54 |
| | 29 |
| | 88 |
| | | 63 |
| | 54 |
| | 17 |
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| Diluted net income per share of common stock | 0.75 |
| | 0.41 |
| | 83 |
| | | 0.89 |
| | 0.75 |
| | 19 |
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Non-GAAP measures (1): | | | | | | | | | | | | | |
Net Service Revenues (1) | 220 |
| | 199 |
| | 11 |
| | | 251 |
| | 220 |
| | 14 |
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Net Insurance Service Revenues (1) | 91 |
| | 79 |
| | 16 |
| | | 115 |
| | 91 |
| | 26 |
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Adjusted EBITDA (1) | 91 |
| | 63 |
| | 45 |
| | | 108 |
| | 91 |
| | 18 |
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Adjusted Net Income (1) | 58 |
| | 32 |
| | 84 |
| | | 69 |
| | 58 |
| | 20 |
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| Operating Metrics: | | | | | | | | | | | | | |
| Total WSEs payroll and payroll taxes processed (in millions) | $ | 10,319 |
| | $ | 9,816 |
| | 5 |
| % | |
| Average WSEs | 314,561 |
| | 327,803 |
| | (4 | ) | | | 312,760 |
| | 314,561 |
| | (1 | ) | |
| Total WSEs at period end | 316,715 |
| | 330,731 |
| | (4 | ) | | | 316,906 |
| | 316,715 |
| | — |
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| Cash Flow Data: | | | | | | | |
Net cash used in operating activities (2) | $ | (536 | ) | | $ | (161 | ) | | 231 |
| % | |
| Net cash provided by (used in) investing activities | 2 |
| | (7 | ) | | 127 |
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| Net cash used in financing activities | (19 | ) | | (37 | ) | | (48 | ) | | |
(1) Refer to Non-GAAP Financial Measures section below for definitions and reconciliations from GAAP measures.
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| (in millions) | March 31,
2019 | | December 31,
2018 | | % Change | |
| Balance Sheet Data: | | | | | | |
| Cash and cash equivalents | $ | 251 |
| | $ | 228 |
| | 10 |
| % |
| Working capital | 226 |
| | 221 |
| | 2 |
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| Total assets | 2,345 |
| | 2,435 |
| | (4 | ) | |
| Long-term debt | 407 |
| | 413 |
| | (1 | ) | |
| Total liabilities | 1,939 |
| | 2,060 |
| | (6 | ) | |
| Total stockholders’ equity | 406 |
| | 375 |
| | 8 |
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(1) | Refer to Non-GAAP Financial Measures section in the following pages | | | | | | | | | | | | | | | | Three Months Ended March 31, | | (in millions) | 2019 | | 2018 | | % Change | | Cash Flow Data: | | | | | | | | Net cash used in operating activities | $ | (142 | ) | | $ | (536 | ) | | (73 | ) | % | | Net cash (used in) provided by investing activities | (11 | ) | | 2 |
| | (661 | ) | | | Net cash used in financing activities | (47 | ) | | (19 | ) | | 145 |
| | Non-GAAP measure(1): | | | | | | | | Corporate operating cash flows | 78 |
| | 45 |
| 169 |
| 73 |
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(1) Refer to Non-GAAP Financial Measures section below for definitions and reconciliations from GAAP measures. |
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(2) | Prior year balance has been retrospectively adjusted for Accounting Standards Update (ASU) 2016-18. Refer to Note 1 in Item 1 of this Form 10-Q for details. |
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| (in millions) | March 31,
2018 | | December 31,
2017 | | Percent
Change | |
| Balance Sheet Data: | | | | | | |
| Cash and cash equivalents | $ | 330 |
| | $ | 336 |
| | (2 | ) | % |
| Working capital | 247 |
| | 234 |
| | 5 |
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| Total assets | 2,047 |
| | 2,593 |
| | (21 | ) | |
| Notes payable | 413 |
| | 423 |
| | (2 | ) | |
| Total liabilities | 1,785 |
| | 2,387 |
| | (25 | ) | |
| Total stockholders’ equity | 262 |
| | 206 |
| | 28 |
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MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Non-GAAP Financial Measures
In addition to financial measures presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP),GAAP, we monitor other non-GAAP financial measures that we use to manage our business, to make planning decisions, to allocate resources, and to use as performance measures in our executive compensation plans.plan. These key financial measures provide an additional view of our operational performance over the long-term and provide useful information that we use in order to maintain and grow our business.
The presentation of these non-GAAP financial measures is used to enhance the understanding of certain aspects of our financial performance. It isThey are not meant to be considered in isolation from, as 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.
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Net Insurance Service Revenues
| • Insurance service revenues less insurance costs.
| • Is a component of Net Service Revenues.
• Provides a comparable basis of revenues on a net basis. Professional service revenues are 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 WSE related costs which are substantially pass-through for the benefit of 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 Revenues.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
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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 presented net of client payroll costs whereas insurance service revenues are presented gross of insurance costs for financial reporting purposes.
• Acts as the basis to allocate resources to different functions and evaluates the effectiveness of our business strategies by each business function.
• Provides a measure, among others, used in the determination of incentive compensation for management.
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| 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 presented net of client payroll costs whereas insurance service revenues are presented gross of insurance costs for financial reporting purposes. Promotes an understanding of our insurance services business by evaluating insurance service revenues net of our WSE related costs which are substantially pass-through for the benefit of our WSEs. Under GAAP, insurance service revenues and costs are recorded gross as we have latitude in establishing the price, service and supplier specifications. • 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
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,margin, which is the ratio of Adjusted EBITDA to Net Service Revenues.
Revenue.
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| 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 as described above, debt payment premiums and our secondary offering costs as these are not directly resulting from our core operations or indicative of our ongoing operations. charges.
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(1) | We have adjusted the non-GAAP effective tax rate to 26% for 2018 from 41% for 2017 due primarily to a decrease in the statutory rate from 35% to 21%. 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. |
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(2) | Non-cash interest expense represents amortization and write-off of our debt issuance costs. |
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
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| 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.
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| (1) | Non-GAAP effective tax rate is 26% for 2019 and 2018, which excludes the income tax impact from stock-based compensation, changes in uncertain tax positions, and nonrecurring benefits or expenses from federal legislative changes. |
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| (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 totalTotal revenues to Net Service Revenues (NSR):Revenues: | | | | Three Months Ended
March 31, | Three Months Ended March 31, |
| (in millions) | 2018 | | 2017 | 2019 | 2018 |
| Total revenues | $ | 861 |
| | $ | 808 |
| $ | 934 |
| $ | 861 |
|
| Less: Insurance costs | 641 |
| | 609 |
| 683 |
| 641 |
|
| Net Service Revenues | $ | 220 |
| | $ | 199 |
| $ | 251 |
| $ | 220 |
|
The table below presents a reconciliation of Insurance Service Revenues (ISR)service revenues to Net Insurance Service Revenues:
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| | Three Months Ended
March 31, |
| (in millions) | 2018 | | 2017 |
| Insurance service revenues | $ | 732 |
| | $ | 688 |
|
| Less: Insurance costs | 641 |
| | 609 |
|
| Net Insurance Service Revenues | $ | 91 |
| | $ | 79 |
|
Net Insurance Service Revenue Margin (1) | 12 | % | | 11 | % |
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(1) | Net Insurance Service Revenue Margin is calculated as the ratio of Net Insurance Service Revenues (a non-GAAP measure) to Insurance Service Revenues (a GAAP measure). |
The table below presents a reconciliation of Net income to Adjusted EBITDA:
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| | Three Months Ended
March 31, |
| (in millions) | 2018 | | 2017 |
| Net income | $ | 54 |
| | $ | 29 |
|
| Provision for income taxes | 13 |
| | 16 |
|
| Stock-based compensation | 9 |
| | 6 |
|
| Interest expense and bank fees | 6 |
| | 5 |
|
| Depreciation | 8 |
| | 6 |
|
| Amortization of intangible assets | 1 |
| | 1 |
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| Adjusted EBITDA | $ | 91 |
| | $ | 63 |
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Adjusted EBITDA Margin (1) | 41 | % | | 32 | % |
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(1) | Adjusted EBITDA Margin is calculated as the ratio of Adjusted EBITDA (a non-GAAP measure) to Net Service Revenues (a non-GAAP measure). |
The table below presents a reconciliation of net income to Adjusted Net Income:
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| | Three Months Ended
March 31, |
| (in millions) | 2018 | | 2017 |
| Net income | $ | 54 |
| | $ | 29 |
|
| Effective income tax rate adjustment | (4 | ) | | (2 | ) |
| Stock-based compensation | 9 |
| | 6 |
|
| Amortization of intangible assets | 1 |
| | 1 |
|
| Non-cash interest expense | 1 |
| | 1 |
|
| Income tax impact of pre-tax adjustments | (3 | ) | | (3 | ) |
| Adjusted Net Income | $ | 58 |
| | $ | 32 |
|
|
| | | | | | |
| | Three Months Ended March 31, |
| (in millions) | 2019 | 2018 |
| Insurance service revenues | $ | 798 |
| $ | 732 |
|
| Less: Insurance costs | 683 |
| 641 |
|
| Net Insurance Service Revenues | $ | 115 |
| $ | 91 |
|
| Net Insurance Service Revenue Margin | 14 | % | 12 | % |
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
The table below presents a reconciliation of Net income to Adjusted EBITDA:
|
| | | | | | |
| | Three Months Ended March 31, |
| (in millions) | 2019 | 2018 |
| Net income | $ | 63 |
| $ | 54 |
|
| Provision for income taxes | 20 |
| 13 |
|
| Stock-based compensation | 9 |
| 9 |
|
| Interest expense and bank fees | 5 |
| 6 |
|
| Depreciation and amortization of intangible assets | 11 |
| 9 |
|
| Adjusted EBITDA | $ | 108 |
| $ | 91 |
|
| Adjusted EBITDA Margin | 43 | % | 41 | % |
The table below presents a reconciliation of Net income to Adjusted Net Income:
|
| | | | | | |
| | Three Months Ended March 31, |
| (in millions) | 2019 | 2018 |
| Net income | $ | 63 |
| $ | 54 |
|
| Effective income tax rate adjustment | (1 | ) | (4 | ) |
| Stock-based compensation | 9 |
| 9 |
|
| Amortization of intangible assets | 1 |
| 1 |
|
| Non-cash interest expense | — |
| 1 |
|
| Income tax impact of pre-tax adjustments | (3 | ) | (3 | ) |
| Adjusted Net Income | $ | 69 |
| $ | 58 |
|
The table below presents a reconciliation of net cash used in operating activities to corporate operating cash flows:
|
| | | | | | |
| | Three Months Ended March 31, |
| (in millions) | 2019 | 2018 |
| Net cash used in operating activities | $ | (142 | ) | $ | (536 | ) |
| Change in WSE related other current assets | 45 |
| 15 |
|
| Change in WSE related liabilities | 175 |
| 566 |
|
Corporate Operating Cash Flows
| $ | 78 |
| $ | 45 |
|
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Results of Operations
Operating Metrics
Worksite Employees (WSE)
Average WSE growth is a volume measure we use to monitorWe have historically experienced our highest volumes of changes in new and exiting clients during the performancefirst quarter of our business.the year, as clients generally change their payroll service providers at the beginning of the payroll tax year. Average WSEs decreased 4%1% when comparing the first quarter of 2019 to the same period in 2018. During the first quarter of 2019, we saw an increase in attrition, related to the platform migration which was completed in the first quarter of 2018 compared to the same period in 2017. The decline during the quarter in Average WSEs rate2018. This was a result of attrition, including attrition from migrating certain of our clients to our common platform, partially offset by WSE growth due toincreased new sales and continued hiring within our installed base. We expect attritionbase, especially in our Technology and Professional Services verticals.
Total WSEs can be used to remain elevated untilestimate our beginning WSEs for the third quarter of 2018next period and, as our migrated clients respond to our service offerings.
Historically, Total WSE comparisons have serveda 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.solutions during future periods. In addition to focusing on growing our Average WSE and Total WSE counts, we also focus on pricing strategies, product participation and product differentiation to expand our revenue opportunities. We report the additional volume growth we obtain from the changes inimpact of client and WSE participation in our major services (including health services) or vertical productsdifferences as a change in mix.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Total Revenues and Income
Our revenues consist of professional service revenues (PSR) and insurance service revenues (ISR). Professional service revenues representPSR represents fees charged to clients for processing payroll-related transactions on behalf of our clients, access to our HR expertise, employment and benefit law compliance services, and other HR-related services. Insurance service revenues consistISR consists of insurance-related billings and administrative fees collected from clients and withheld from WSEs for workers' compensation insurance and health benefit insurance plans provided by third-party insurance carriers.
In addition to focusing on growing our Average WSE and Total WSE counts, we also focus on pricing strategies and product differentiation to expand our revenue opportunities. Monthly total revenues per Average WSE asis a measure we use to monitor the success of such strategies, hasour product and service pricing strategies. This measure increased 11% in9% during the first quarter of 20182019 compared to the same period in 2017.2018.
Q1 2018Volume - Q1 2017 Commentary
TotalRate - the combined percentage changes in service fees for each vertical product and changes in service fees associated with each insurance service offering, and
Mix - the change in composition of Average WSEs within our verticals combined with the composition of our enrolled WSEs within our insurance offerings.
The changes in total revenues were $861 million for attributed above to rate and mix during the first quarter of 2018, a 7% increase2019, when compared to the same period in 2017.
Insurance service revenues grew 7% over the same quarter2018, were primarily driven by increases in 2017 to $732 million due primarily to increased participation in ourinsurance services fees and health plans combined with an increase in health insurance service fees per plan participant, partially offset by a decline in Average WSEs.
Professional service revenues increased 7% over the same quarter in 2017 to $129 million due primarily to rate increases.
Operating income was $71 million, up 43% from the first quarter of 2017, primarily due to improvementenrollment in our insurance service revenues as noted above, combined with favorable developments from insurance costs.
|
| |
MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Net Service Revenues
Net Service Revenues (total revenues less insurance costs) provides a comparable basis of revenues on a net basis, and acts as the basis to allocate resources to different functions, and helps us evaluate the effectiveness of our business strategies by each business function.
Q1 2018 - Q1 2017 Commentary
Net Service Revenues were $220 million for 2018, representing a 11% increase from 2017. This was driven by an increase in Net Insurance Service Revenues, which grew 16% over 2017. Monthly total service revenues per Average WSE increased 11%, while monthly insurance costs per Average WSE increased 10%.
|
| |
| 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 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 in the first quarters of 2019 and 2018.
|
| | |
| (in millions) | |
| $71 | First Quarter 2018 Operating Income |
| +73 | Higher total revenues primarily as a result of an increase in ISR fees and health plan enrollment. |
| -42 | Higher insurance costs primarily as a result of an increase in health plan participation, or enrollment. |
| -20 | Higher OE primarily as a result of growth in the number of our corporate employees and costs associated with initiatives to improve customer experience. |
| $82 | First Quarter 2019 Operating Income |
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Professional Service Revenues (PSR)
Our clients are 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 increasesincrease, our fees will also increase. As such, payroll and payroll taxes processed, iswhich includes recurring payrolls and non-recurring bonus payrolls, benefits, and associated payroll taxes may also be an indicator of our PSR growth.
Our investment in a vertical approach provides us the flexibility to offer our clients in different industries with varied services at different prices. Weprices, which we believe that this vertical approach will improve our ability to retain our customers, but which also potentially reduces the value of using WSEsAverage WSE and Total WSE counts as the only leading indicatorindicators of future potential revenue performance.
Mix - the change in composition of Average WSEs within our verticals,
Rate - the percentage changes in fees for each vertical, and
Volume - the percentage change in period over period Average WSEs.
The increase in PSR, shown above for the first quarter of 2019, reflects the ongoing change in the mix of our WSEs. During the first quarter of 2019, we continued to grow WSEs in our Technology, Financial Services, Professional Services, Life Sciences and Non-Profit verticals, while WSEs in our Main Street vertical declined.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Insurance Service Revenues (ISR)
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 percentage changes in fees associated with each of our insurance service offerings, and
Mix - all other changes including the composition of our enrolled WSEs within our insurance service offerings (health plan enrollment).
The growth in ISR represented 85% of total revenues and increased 7% inshown above for the first quarter of 2018 as compared2019 from changes in mix is due to the first quarter of 2017.
higher health plan enrollment.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Insurance Costs
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 loss reservesaccrued costs related to contractual obligations with our workers' compensation and health benefit insurance.carriers.
Insurance costs as aWe use the following measures to analyze changes in insurance costs:
Volume - the percentage change in period over period Average WSEs,
Rate - the percentage changes in cost trend associated with each of ISRour insurance service offerings, and
Mix - all other changes including the composition of 88%our enrolled WSEs within our insurance offerings (health plan enrollment).
The increase in insurance cost rates during the first quarter of 2018 were comparable2019, as shown above, was primarily driven by an increase in medical cost trend, partially offset by lower administrative costs. We continue to 89%experience favorable prior year development on our accrued workers' compensation costs, primarily due to lower than expected claim severity. The 6% increase in insurance costs attributed to change in mix during the first quarter of 2017.
2019 is consistent with the change in ISR mix. This increase is primarily due to higher health plan enrollment.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Other Operating Expenses (OOE)Net Service Revenues
Other operating expenses includes costNSR provides us with a comparable basis of providing services (COPS), sales and marketing (S&M), general and administrative (G&A), and systems development and programming (SD&P) expenses.
We manage our other operating expenses andrevenues on a net basis, acts as the basis to allocate resources acrossto different functions and helps us evaluate the effectiveness of our business functions based on OOE as a percentage of Net Service Revenues which decreased to 64% instrategies by each business function.
NISR margin expanded during the first quarter of 20182019 to 14%, from 71%12% in the same period in 2017.
At March 31, 2018, we had approximately 2,700 corporate employees in 49 offices across the United States. Our corporate employees' compensation related expenses represent the majority of our operating expenses. Compensation costs for our corporate employees include payroll, payroll taxes, stock-based compensation, bonuses, commissions and other payroll and benefits related costs.
The percentage of compensation related expenses to OOE is 69% and 64% in the first quarter of 2018 and 2017, respectively. This increase is due to decreased non-compensation related costs associated with compliance initiatives and internal control remediation efforts.
We expect our OOE toan increase in the foreseeable future due to expected growth,ISR rates while managing our continued strategy to develop new vertical products, continued platform integrations, and additional costs associated with our continued efforts to improve 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.
|
| |
MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Q1 2018 - Q1 2017 Commentary
Other operating expenses in the first quarter of 2018 remained consistent with the same period in 2017. Specific costs varied as follows:
Total compensation costs increased $7 million, or 7%, primarily due to a:
| |
▪ | $16 million increase associated with the following functions: |
| |
▪ | client services and information technology to support the growth and migration of clients to our common TriNet platform, |
| |
▪ | risk service to strengthen our insurance business, and |
| |
▪ | other support functions as a result of increased operational and compliance requirements, |
| |
▪ | partially offset by a decrease of $9 million in commission expense with the adoption of ASC Topic 606 in the first quarter of 2018. Refer to Note 1 in Item 1 of this Form 10-Q for additional details surrounding the impact of this adoption. |
Consulting expenses decreased $3 million primarily due to increased capitalization of costs related to our enhanced product offerings.
Other expenses decreased $6 million primarily due to the timing of compliance costs.
Other Income (Expense)
Other income (expense), consists primarily of interest expense under our credit facility offset by interest and dividend from income from investments.
We may seek to amend our credit facility when appropriate and if available terms become more favorable, although we can provide no assurances that we will be able to do so. We may also seek additional debt capital to fund acquisitions, accelerate the payment of principal on outstanding debt, or for other business purposes. As such, our interest expense may fluctuate as a percentage of our total revenues from period to period depending on the timing of those borrowing and or repayment activities.
|
| |
| 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 67% in the first quarter of 2019 from 68% in the same period in 2018.
We had approximately 3,100 corporate employees as of March 31, 2019 in 59 offices across the U.S. Our corporate employees' compensation-related expenses represent a majority of our OE. Compensation costs for our corporate employees include payroll, payroll taxes, SBC, bonuses, commissions and other payroll- and benefits-related costs. Compensation expense for internal employees was and is primarily driven by our continued efforts to improve our customer experience. Compensation-related expense represented 65% and 65% of our OE in the first quarters of 2019 and 2018.
We expect our OE to increase for the foreseeable future from our continued efforts to improve our customer experience, 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.
|
| |
| 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. 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.
COPS increased in 2019, when compared to the same period in 2018, primarily due to increased headcount to support initiatives to improve the customer experience, enhancing our product offerings and process improvement initiatives.
S&M increased in 2019, when compared to the same period in 2018, driven by increase in headcount and lower commission expenses in 2018 a result of adoption of new revenue recognition guidance ASC Topic 606 in the first quarter of 2018.
G&A increased in 2019, when compared to the same period in 2018, primarily driven by increased headcount to support operations.
SD&P and D&A remained flat in 2019, when compared to the same period in 2018.
We break out the change in 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 and interest expense under our credit facility.
Interest income increased to $6 million in the first quarter of 2019 from $1 million in the same period in 2018 which was the result of a change in our investment strategy initiated in the second quarter of 2018 to improve our interest income.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
We intend to continue to execute our new investment strategy, which we expect will improve our interest income, net income, and our Adjusted EBITDA.
Interest expense, bank fees and other, remained consistent for the first quarters of 2019 and 2018.
Provision for Income Taxes
Our effective income tax rate was 20%24% and 36%20% for the first quarterquarters of 20182019 and 2017,2018, respectively. The decrease wasincrease is primarily attributabledue to a reduction of the federal corporate income tax rate from 35% to 21% on January 1, 2018 under the Tax Cuts and Jobs Act (TCJA). The decrease is also attributable to charges for uncertain income tax positions arising from state tax exposures recordedan increase in the same period in 2017. The remaining impacts consisted of tax benefits recognized from excess tax benefits related tonondeductible compensation associated with stock-based compensation and an increasea decrease in excludable income for state income tax purposes.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Liquidity and Capital Resources
Liquidity
We report our liquidity separately between assets and liabilities that are WSE-related and our corporate assets and liabilities. We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to our clients, creditors and debt holders. Our liquid assets are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | December 31, 2017 |
| (in millions) | Corporate | WSE | Total | Corporate | WSE | Total |
| Current assets | | | | | | |
| WSE-related assets | $ | — |
| $ | 368 |
| $ | 368 |
| $ | — |
| $ | 360 |
| $ | 360 |
|
| Cash and cash equivalents | 330 |
| — |
| 330 |
| 336 |
| — |
| 336 |
|
| Restricted cash, cash equivalents and investments | 15 |
| 684 |
| 699 |
| 15 |
| 1,265 |
| 1,280 |
|
| All other current assets | 22 |
| — |
| 22 |
| 15 |
| — |
| 15 |
|
| Current assets | $ | 367 |
| $ | 1,052 |
| $ | 1,419 |
| $ | 366 |
| $ | 1,625 |
| $ | 1,991 |
|
| |
|
|
|
|
|
| | | |
| Current liabilities | | |
|
|
|
| |
|
|
| WSE-related liabilities | $ | — |
| $ | 1,052 |
| $ | 1,052 |
| $ | — |
| $ | 1,618 |
| $ | 1,618 |
|
| All other current liabilities | 120 |
| — |
| 120 |
| 139 |
| — |
| 139 |
|
| Current liabilities | $ | 120 |
| $ | 1,052 |
| $ | 1,172 |
| $ | 139 |
| $ | 1,618 |
| $ | 1,757 |
|
| | | | | | | |
| Working capital | $ | 247 |
| $ | — |
| $ | 247 |
| $ | 227 |
| $ | 7 |
| $ | 234 |
|
Working capital for WSE-related assets and liabilities
We presentIncluded in our WSE-related assets and liabilities separately from our corporate assets and liabilities on our condensed consolidated balance sheets to better distinguish thoseare assets and liabilities held by us to cover WSE-related obligations. WSE-related assets and liabilities primarily consist of current assets and current liabilities resulting from transactions directly or indirectly associated with WSEs, including payroll and related taxes and withholdings, our sponsored workers' compensation and health insurance programs, and other benefit programs. Although we are not subject to regulatory restrictions that require us to do so, we distinguish and manage our corporate assets and liabilities separately from those current assets and liabilities held by us to satisfy our employer obligations associated with our WSEs as follows:
|
| | | | | | | | | | | | | | | | | | |
| | March 31, 2019 | December 31, 2018 |
| (in millions) | Corporate | WSE | Total | Corporate | WSE | Total |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 251 |
| $ | — |
| $ | 251 |
| $ | 228 |
| $ | — |
| $ | 228 |
|
| Investments | 56 |
| — |
| 56 |
| 54 |
| — |
| 54 |
|
| Restricted cash, cash equivalents and investments | 15 |
| 707 |
| 722 |
| 15 |
| 927 |
| 942 |
|
| Other current assets | 34 |
| 431 |
| 465 |
| 36 |
| 386 |
| 422 |
|
| Total current assets | $ | 356 |
| $ | 1,138 |
| $ | 1,494 |
| $ | 333 |
| $ | 1,313 |
| $ | 1,646 |
|
| | | | | | | |
| Total current liabilities | $ | 130 |
| $ | 1,138 |
| $ | 1,268 |
| $ | 112 |
| $ | 1,313 |
| $ | 1,425 |
|
| | | | | | | |
| Working Capital | $ | 226 |
| $ | — |
| $ | 226 |
| $ | 221 |
| $ | — |
| $ | 221 |
|
Working capital for WSE-related assets and liabilities
We designate funds to ensure that we have adequate current assets to satisfy our current WSE-related obligations.
obligations associated with WSEs. We manage our WSE payroll and benefits obligations through collecting paymentcollections of payments from our clients which generally occurs two to three days in advance of the client'sclient payroll date.dates. We regularly review our short-term WSE-related 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 payroll funds collected (PFC).PFC. PFC is included in current assets as restricted cash, cash equivalents and investments in our condensed consolidated financial statements.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 the balanceour 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 non-currentnoncurrent assets to match against the anticipated paymenttiming of claims.
|
| |
MANAGEMENT'S DISCUSSION AND ANALYSIS | |
claims payments.
Working capital for corporate purposes
We use the remainingour available cash and cash equivalents and cash from operations 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. Corporate working capital as of March 31, 2018 increased by $20 million from2019 remained flat compared to working capital as of December 31, 2017, largely driven by the timing of payments to corporate obligations, including employee compensation, and the impact from our adoption of ASC Topic 606. Refer to Note 1 in Item 1 in this Form 10-Q for details.2018.
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 corporate cash flows from operations,corporate operating activities, our borrowing capacity under our revolving credit facility and the potential issuance of debt or equity securities under our shelf registration statement on file with the SEC.securities.
We also have available a $75 million revolving credit facility. The total unused portion of the revolving credit facility was $60 million as of March 31, 2018.
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. For more information about the effects of our adoption of Topic 230, refer to Note 1 in Item 1 in this Form 10-Q.
The following table presents our cash flow activities for the stated periods:
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, |
| (in millions) | 2018 | 2017 |
| | Corporate | WSE | Total | Corporate | WSE | Total |
| Net cash provided by (used in): | | | | | | |
Operating activities (1) | $ | 45 |
| $ | (581 | ) | $ | (536 | ) | $ | 76 |
| $ | (237 | ) | $ | (161 | ) |
| Investing activities | 2 |
| — |
| 2 |
| (7 | ) | — |
| (7 | ) |
| Financing activities | (19 | ) | — |
| (19 | ) | (37 | ) | — |
| (37 | ) |
| Net increase (decrease) in cash and cash equivalents, unrestricted and restricted | $ | 28 |
| $ | (581 | ) | $ | (553 | ) | $ | 32 |
| $ | (237 | ) | $ | (205 | ) |
| Cash and cash equivalents, unrestricted and restricted: | | | | | | |
| Beginning of period | 476 |
| 1,262 |
| 1,738 |
| 278 |
| 955 |
| 1,233 |
|
| End of period | $ | 504 |
| $ | 681 |
| $ | 1,185 |
| $ | 310 |
| $ | 718 |
| $ | 1,028 |
|
| | | | | | | |
Net increase (decrease) in cash and cash equivalents:
| | | | | | |
| Unrestricted | $ | (6 | ) | $ | — |
| $ | (6 | ) | $ | 32 |
| $ | — |
| $ | 32 |
|
| Restricted | $ | 34 |
| $ | (581 | ) | $ | (547 | ) | $ | — |
| $ | (237 | ) | $ | (237 | ) |
| |
(1) | Prior year balances were retrospectively adjusted for Accounting Standards Update (ASU) 2016-18. Refer to Note 1 in Item 1 of this Form 10-Q for details. |
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
We also have available a $250 million revolving credit facility. The total unused portion of the revolving credit facility was $234 million as of March 31, 2019.
Cash Flows
The following table presents our cash flow activities for the stated periods:
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| (in millions) | 2019 | 2018 |
| | Corporate | WSE | Total | Corporate | WSE | Total |
| Net cash provided by (used in): | | | | | | |
| Operating activities | $ | 78 |
| $ | (220 | ) | $ | (142 | ) | $ | 45 |
| $ | (581 | ) | $ | (536 | ) |
| Investing activities | (11 | ) | — |
| (11 | ) | 2 |
| — |
| 2 |
|
| Financing activities | (47 | ) | — |
| (47 | ) | (19 | ) | — |
| (19 | ) |
| Net increase (decrease) in cash and cash equivalents, unrestricted and restricted | $ | 20 |
| $ | (220 | ) | $ | (200 | ) | $ | 28 |
| $ | (581 | ) | $ | (553 | ) |
| Cash and cash equivalents, unrestricted and restricted: | | | | | | |
| Beginning of period | 425 |
| 924 |
| 1,349 |
| 476 |
| 1,262 |
| 1,738 |
|
| End of period | $ | 445 |
| $ | 704 |
| $ | 1,149 |
| $ | 504 |
| $ | 681 |
| $ | 1,185 |
|
| | | | | | | |
| Net increase (decrease) in cash and cash equivalents: | | | | | | |
| Unrestricted | $ | 23 |
| $ | — |
| $ | 23 |
| $ | (6 | ) | $ | — |
| $ | (6 | ) |
| Restricted | (3 | ) | (220 | ) | (223 | ) | 34 |
| (581 | ) | (547 | ) |
Operating Activities
Components of net cash used in operating activities are as follows:
| | | | Three Months Ended
March 31, | Three Months Ended March 31, |
| (in millions) | 2018 | 2017 | 2019 | 2018 |
| | Corporate | WSE | Total | Corporate | WSE | Total | Corporate | WSE | Total | Corporate | WSE | Total |
| Net income | $ | 54 |
| $ | — |
| $ | 54 |
| $ | 29 |
| $ | — |
| $ | 29 |
| $ | 63 |
| $ | — |
| $ | 63 |
| $ | 54 |
| $ | — |
| $ | 54 |
|
| Depreciation and amortization | 10 |
| — |
| 10 |
| 8 |
| — |
| 8 |
| 18 |
| — |
| 18 |
| 10 |
| — |
| 10 |
|
| Stock-based compensation expense | 9 |
| — |
| 9 |
| 6 |
| — |
| 6 |
| 9 |
| — |
| 9 |
| 9 |
| — |
| 9 |
|
| Payment of interest | (4 | ) | — |
| (4 | ) | (4 | ) | — |
| (4 | ) | |
| Income tax (payments) refunds, net | — |
| — |
| — |
| 1 |
| — |
| 1 |
| |
| Interest paid | | (4 | ) | — |
| (4 | ) | (4 | ) | — |
| (4 | ) |
| Income tax payments, net | | (1 | ) | — |
| (1 | ) | — |
| — |
| — |
|
| Changes in other operating assets | (2 | ) | (15 | ) | (17 | ) | 14 |
| 5 |
| 19 |
| (4 | ) | (45 | ) | (49 | ) | (2 | ) | (15 | ) | (17 | ) |
| Changes in other operating liabilities | (22 | ) | (566 | ) | (588 | ) | 22 |
| (242 | ) | (220 | ) | (3 | ) | (175 | ) | (178 | ) | (22 | ) | (566 | ) | (588 | ) |
Net cash provided by (used in) operating activities (1) | $ | 45 |
| $ | (581 | ) | $ | (536 | ) | $ | 76 |
| $ | (237 | ) | $ | (161 | ) | $ | 78 |
| $ | (220 | ) | $ | (142 | ) | $ | 45 |
| $ | (581 | ) | $ | (536 | ) |
| |
(1) | Prior year balances were retrospectively adjusted for Accounting Standards Update (ASU) 2016-18. Refer to Note 1 in Item 1 of this Form 10-Q for details. |
NetYear-over-year fluctuation in net cash used in operating activities from WSE-related activities was primarily driven by the timing of client payments, payroll amounts, collateral funding and insurance claim activities. Cash used in operating activities for WSE purposes increased by $344 million during the first quarter of 2018 and was primarily driven by timing of client payments, payments of payroll and payroll taxes, and related liabilities.collateral funding 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 WSE-related obligations associated with WSEs through restricted cash.
Cash provided byOur corporate operating activities decreased $31cash flows increased to $78 million in the first quarter of 2018 compared to2019 from $45 million in the same period in 2017 and was2018, primarily driven by the timing of payments related to vendors and employee compensation. The overall decrease was partially offset by an 88% increase in our net income.income and timing of paying our vendors and liabilities associated with our corporate activities.
We expect our tax payments to increase in 2018 due to our inability to defer taxes as a result of new restrictions in the TCJA.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Investing Activities
Net cash used in investing activities in the first quarter of 2019 increased, when compared to the same period of 2018, and 2017 primarily consisteddue to the purchases of cash paid for capital expenditures,investments, partially offset by proceeds from the sale and maturity of restricted investments.investments, and cash paid for capital expenditures.
| | | | Three Months Ended
March 31, | Three Months Ended March 31, |
| (in millions) | 2018 | 2017 | 2019 | 2018 |
| Investments: | | |
| Purchases of investments | | (30 | ) | — |
|
| Proceeds from sale and maturity of investments | | 31 |
| 14 |
|
| Cash provided by investments | | $ | 1 |
| $ | 14 |
|
| | | |
| Capital expenditures: | | |
| Software and hardware | $ | 6 |
| $ | 6 |
| $ | 7 |
| $ | 6 |
|
| Office furniture, equipment and leasehold improvements | 6 |
| 5 |
| 5 |
| 6 |
|
| Cash used in capital expenditures | $ | 12 |
| $ | 11 |
| $ | 12 |
| $ | 12 |
|
| | | |
| Investments: | | |
| Proceeds from maturity of restricted investments | 14 |
| 4 |
| |
| Cash provided by investments | $ | 14 |
| $ | 4 |
| |
Investments
We invest a portion of available cash in investment-grade securities with effective maturities less than five years that are classified on our condensed balance sheets as investments. As of March 31, 2019, we had approximately $189 million in corporate investments.
We also invest funds held as collateral to satisfy our long-term obligation towards workers' compensation liabilities in U.S. long-term treasuries. These investments are classified on our condensed 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.
As of March 31, 2019, we held approximately $1.3 billion in cash, cash equivalents and investments. Refer to Note 2 in this Form 10-Q for a summary of these funds.
Capital Expenditures
During the first quartersquarter of 20182019 and 2017,2018, we continued to make investments in software and hardware, enhanced our existing products and platforms, and implemented legacy platform migrations.technology platform. We also incurred expenses related to the build out of our corporate headquarters and our technology and client service centers. We expect capital investments in our software and hardware to continue in the future.
Financing Activities
Net cash used in financing activities in the first quarters of 2019 and 2018 consisted of our debt and equity-related activities.
|
| | | | | | |
| | Three Months Ended March 31, |
| (in millions) | 2019 | 2018 |
| Financing activities | | |
| Repurchase of common stock, net of issuance | $ | 41 |
| $ | 9 |
|
| Repayment of borrowings | 6 |
| 10 |
|
| Cash used in financing activities | $ | 47 |
| $ | 19 |
|
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
We primarily invest funds held as collateral to satisfyOn February 6, 2019, our long-term obligation towards the workers' compensation liabilities in U.S. long-term treasuries. Such investments are classified as available for sale investments and included as restricted cash, cash equivalents and investments in the balance sheet. We review the amount of investment and the anticipated holding period regularly in conjunction with our estimated long-term workers' compensation liabilities and anticipated claims payment trend. As of March 31, 2018, we held approximately $855 million in restricted long-term and short-term accounts.
As of March 31, 2018, we held approximately $1.2 billion in cash, cash equivalents and investments. Refer to Note 2 in Item 1 in this Form 10-Q for a summary of these funds.
Financing Activities
Net cash used in financing activities in the first quarter of 2018 and 2017 consisted primarily of repurchases of our common stock and repayment of debt.
Our board of directors from timeauthorized a $300 million incremental increase to time authorizesour ongoing stock repurchases ofrepurchase program initiated in May 2014, primarily to return value to our outstanding common stock primarilystockholders and to offset dilution from the issuance of stock under our equity-based incentive plan and employee stock purchase plan. During the first three monthsquarter of 2018,2019, we repurchased 160,033782,909 shares of our common stock for approximately $8 million.$38 million through our stock repurchase program. As of March 31, 2018,2019, approximately $129$337 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 share repurchase program.
Covenants
We will seek to amendwere in compliance with the currentfinancial covenants under our credit facilities as they expire, as needed byat March 31, 2019. For information on the business or if market conditions become more favorable, although we can provide no assurance that we will be ablecovenants under our 2018 Credit Agreement, refer to do so at interest rates or terms that are as or more favorable than the current interest rates or terms.Note 7 in Part II, Item 8. Financial Statements and Supplementary Data, of our Form 10-K.
Off-Balance Sheet Arrangements
There has been no material change in our off-balance sheet arrangements discussed in Part II, Item 77. Management's Discussion and Analysis of our 20172018 Form 10-K.
Critical Accounting Policies, Estimates and Judgments
During the three months ended March 31, 2018,first quarter of 2019, we adopted ASC Topic 606.842. Refer to Note 1 in Item 1 of this Form 10-Q for disclosure of the changes related to this adoption. There have been no additional material changes to our critical accounting policies as discussed in our 20172018 Form 10-K.
Recent Accounting Pronouncements
Refer to Note 1 in Item 1 of this Form 10-Q.
|
| |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND CONTROLS AND PROCEDURES | |
Quantitative and Qualitative Disclosures About Market Risk
There has been no material changeOur exposure to changes in interest rates relates primarily to our investment portfolio and outstanding floating rate debt. Changes in U.S. interest rates affect the interest earned on the Company’s cash, cash equivalents and investments and the fair value of the investments, as well as interest costs associated with our debt.
Our cash equivalents consist primarily of money market mutual funds, which are not significantly exposed to interest rate risk. Our AFS marketable securities are subject to interest rate risk because these securities generally include a fixed interest rate. As a result, the market values of these securities are affected by changes in prevailing interest rates. We attempt to limit our exposure to market risks from that discussedinterest rate risk and credit risk, as our investment policy defines minimum credit quality, liquidity, diversification and other requirements for eligible investments. Our AFS marketable securities consist of highly liquid, investment-grade securities. The risk of rate changes on investment balances was not significant at March 31, 2019.
At March 31, 2019, we had total outstanding long-term debt of $407 million. Please refer to Note 7 in Part II, Item 7A8. Financial Statement and Supplementary Data, of our 20172018 Form 10-K.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have, with the participation of our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2018. The term “disclosure controls and procedures,”2019, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, meansAct.
Based on the evaluation of our disclosure controls and other procedures as of a companyMarch 31, 2019, our CEO and CFO have concluded that are designed to ensurethe Company’s disclosure controls and procedures were effective as of such date in ensuring that (i) information required to be disclosed by a companythe Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’sCompany’s management, including its principal executive officerthe CEO and principal financial officer, as appropriateCFO, to allow timely decisions regarding required disclosure. Based ondisclosure and (ii) such information is recorded, processed, summarized and reported within the evaluation of our disclosure controlstime periods specified in the SEC rules and procedures as of March 31, 2018, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were not effective as a result of a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.forms.
Notwithstanding the material weakness in our internal control over financial reporting, weWe have concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America. Additionally, the material weakness did not result in any restatements of our condensed consolidated financial statements or disclosures for any prior period.
Additional Analyses and Procedures and Remediation Plan
We are taking specific steps to remediate the material weakness identified by management and described in greater detail in our 2017 Form 10-K. Although we intend to complete the remediation process with respect to this material weakness as quickly as possible, we cannot at this time estimate how long it will take, and our remediation plan may not prove to be successful.
Because the reliability of the internal control process requires repeatable execution, the successful remediation of this material weakness will require review and evidence of effectiveness prior to concluding that the controls are effective and there is no assurance that additional remediation steps will not be necessary. As such, as we continue to evaluate and work to improve our internal control over financial reporting, our management may decide to take additional measures to address the material weaknesses or modify the remediation steps already underway. As noted above, although we plan to complete the remediation process as quickly as possible, we cannot at this time estimate how long it will take, and our initiatives may not prove to be successful. Accordingly, until this weakness is remediated, we plan to perform additional analyses and other procedures to ensure that our condensed consolidated financial statements are prepared in accordance with GAAP.
Changes in Internal Control Over Financial Reporting
Other than the material weakness remediation efforts underway, thereThere were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended March 31, 2018,2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
|
| | | | | | | | | | | | | |
| (in millions, except share and per share data) | March 31,
2018 | | December 31,
2017 |
| Assets | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | | $ | 330 |
| | | $ | 336 |
|
| Restricted cash, cash equivalents and investments | | 699 |
| | | 1,280 |
|
| Worksite employee related assets: | | | | | |
| Unbilled revenue (net of advance collections of $12 and $12 at March 31, 2018 and December 31, 2017, respectively) | $ | 286 |
| | | $ | 297 |
| |
| Accounts receivable | 8 |
| | | 20 |
| |
| Prepaid insurance premiums and other insurance related receivables | 33 |
| | | 26 |
| |
| Other payroll assets | 41 |
| | | 17 |
| |
| Worksite employee related assets |
|
| 368 |
| |
|
| 360 |
|
| Prepaid expenses and other current assets | | 22 |
| | | 15 |
|
| Total current assets | | 1,419 |
| | | 1,991 |
|
| Restricted cash, cash equivalents and investments, noncurrent | | 182 |
| | | 162 |
|
| Workers' compensation collateral receivable | | 40 |
| | | 39 |
|
| Property and equipment, net | | 74 |
| | | 70 |
|
| Goodwill and other intangible assets, net | | 314 |
| | | 315 |
|
| Other assets | | 18 |
| | | 16 |
|
| Total assets | | $ | 2,047 |
| | | $ | 2,593 |
|
| Liabilities and stockholders’ equity | | | | | |
| Current liabilities: | | | | | |
| Accounts payable and other current liabilities | | $ | 46 |
| | | $ | 59 |
|
| Accrued corporate wages | | 31 |
| | | 40 |
|
| Notes payable | | 43 |
| | | 40 |
|
| Worksite employee related liabilities: | | | | | |
| Accrued wages | $ | 284 |
| | | $ | 289 |
| |
| Client deposits | 26 |
| | | 52 |
| |
| Payroll tax liabilities and other payroll withholdings | 500 |
| | | 1,034 |
| |
| Health benefits loss reserves (net of prepayments of $30 and $19 at March 31, 2018 and December 31, 2017, respectively) | 150 |
| | | 151 |
| |
| Workers' compensation loss reserves (net of collateral paid of $5 and $6 at March 31, 2018 and December 31, 2017, respectively) | 67 |
| | | 67 |
| |
| Insurance premiums and other payables | 25 |
| | | 25 |
| |
| Worksite employee related liabilities |
|
| 1,052 |
| |
|
| 1,618 |
|
| Total current liabilities | | 1,172 |
| | | 1,757 |
|
| Notes payable, noncurrent | | 370 |
| | | 383 |
|
Workers' compensation loss reserves
(net of collateral paid of $16 and $17 at March 31, 2018 and December 31, 2017, respectively) | | 162 |
| | | 165 |
|
| Deferred income taxes | | 71 |
| | | 68 |
|
| Other liabilities | | 10 |
| | | 14 |
|
| Total liabilities | | 1,785 |
| | | 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 and outstanding at March 31, 2018 and December 31, 2017) | | — |
| | | — |
|
Common stock and additional paid-in capital
($0.000025 par value per share; 750,000,000 shares authorized; 70,363,251 and 69,818,392 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively) | | 595 |
| | | 583 |
|
| Accumulated deficit | | (332 | ) | | | (377 | ) |
| Accumulated other comprehensive loss | | (1 | ) | | | — |
|
| Total stockholders’ equity | | 262 |
| | | 206 |
|
| Total liabilities and stockholders’ equity | | $ | 2,047 |
| | | $ | 2,593 |
|
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
|
| | | | | | |
| | Three Months Ended
March 31, |
| (in millions, except share and per share data) | 2018 | 2017 |
| Professional service revenues | $ | 129 |
| $ | 120 |
|
| Insurance service revenues | 732 |
| 688 |
|
| Total revenues | 861 |
| 808 |
|
| Insurance costs | 641 |
| 609 |
|
| Cost of providing services (exclusive of depreciation and amortization of intangible assets) | 57 |
| 57 |
|
| Sales and marketing | 39 |
| 49 |
|
| General and administrative | 31 |
| 25 |
|
| Systems development and programming | 13 |
| 11 |
|
| Depreciation | 8 |
| 6 |
|
| Amortization of intangible assets | 1 |
| 1 |
|
| Total costs and operating expenses | 790 |
| 758 |
|
| Operating income | 71 |
| 50 |
|
| Other income (expense): | | |
| Interest expense, bank fees and other, net | (4 | ) | (5 | ) |
| Income before provision for income taxes | 67 |
| 45 |
|
| Income tax expense | 13 |
| 16 |
|
| Net income | $ | 54 |
| $ | 29 |
|
| Comprehensive income | $ | 54 |
| $ | 29 |
|
| | | |
| Net income per share: | | |
| Basic | $ | 0.77 |
| $ | 0.42 |
|
| Diluted | $ | 0.75 |
| $ | 0.41 |
|
| Weighted average shares: | | |
| Basic | 70,047,752 |
| 68,509,328 |
|
| Diluted | 72,274,821 |
| 70,913,970 |
|
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| | | | | | |
| | Three Months Ended
March 31, |
| (in millions) | 2018 | 2017 |
| Operating activities | | |
| Net income | $ | 54 |
| $ | 29 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Depreciation and amortization | 10 |
| 8 |
|
| Stock-based compensation | 9 |
| 6 |
|
| Changes in operating assets and liabilities: | | |
| Prepaid income taxes | 13 |
| 15 |
|
| Prepaid expenses and other current assets | (9 | ) | 2 |
|
| Workers' compensation collateral receivable | (1 | ) | (3 | ) |
| Other assets | (2 | ) | — |
|
| Accounts payable and other current liabilities | (15 | ) | 2 |
|
| Accrued corporate wages | (9 | ) | 10 |
|
| Workers' compensation loss reserves and other non-current liabilities | (6 | ) | 8 |
|
| Worksite employee related assets | (14 | ) | 4 |
|
| Worksite employee related liabilities | (566 | ) | (242 | ) |
| Net cash used in operating activities | (536 | ) | (161 | ) |
| Investing activities | | |
| Proceeds from maturity of marketable securities | 14 |
| 4 |
|
| Acquisitions of property and equipment | (12 | ) | (11 | ) |
| Net cash provided by (used in) investing activities | 2 |
| (7 | ) |
| Financing activities | | |
| Repurchase of common stock | (8 | ) | (28 | ) |
| Proceeds from issuance of common stock on exercised options | 3 |
| 2 |
|
| Awards effectively repurchased for required employee withholding taxes | (4 | ) | (2 | ) |
| Repayment of notes payable | (10 | ) | (9 | ) |
| Net cash used in financing activities | (19 | ) | (37 | ) |
| Net increase (decrease) in cash and cash equivalents, unrestricted and restricted | (553 | ) | (205 | ) |
| Cash and cash equivalents, unrestricted and restricted: | | |
| Beginning of period | 1,738 |
| 1,233 |
|
| End of period | $ | 1,185 |
| $ | 1,028 |
|
| | | |
| Supplemental disclosures of cash flow information | | |
| Interest paid | $ | 4 |
| $ | 4 |
|
| Income taxes paid (refunded), net | — |
| (1 | ) |
| Supplemental schedule of noncash investing and financing activities | | |
| Payable for purchase of property and equipment | $ | 2 |
| $ | 2 |
|
| Supplemental schedule of cash and cash equivalents | | |
| Net increase (decrease) in unrestricted cash and cash equivalents | $ | (6 | ) | $ | 32 |
|
| Net increase (decrease) in restricted cash and cash equivalents | (547 | ) | (237 | ) |
See accompanying notes.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
|
| | | | | | | | |
| | | March 31, | | December 31, |
| (in millions, except share and per share data) | | 2019 | | 2018 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 251 |
| | $ | 228 |
|
| Investments | | 56 |
| | 54 |
|
| Restricted cash, cash equivalents and investments | | 722 |
| | 942 |
|
| Accounts receivable, net | | 12 |
| | 11 |
|
| Unbilled revenue, net | | 314 |
| | 304 |
|
| Prepaid expenses | | 58 |
| | 48 |
|
| Other current assets | | 81 |
| | 59 |
|
| Total current assets | | 1,494 |
| | 1,646 |
|
| Restricted cash, cash equivalents and investments, noncurrent | | 184 |
| | 187 |
|
| Investments, noncurrent | | 133 |
| | 135 |
|
| Property & equipment, net | | 82 |
| | 79 |
|
| Operating lease right-of-use asset | | 59 |
| | — |
|
| Goodwill | | 289 |
| | 289 |
|
| Other intangible assets, net | | 19 |
| | 21 |
|
| Other assets | | 85 |
| | 78 |
|
| Total assets | | $ | 2,345 |
| | $ | 2,435 |
|
| Liabilities and stockholders' equity | | | | |
| Current liabilities: | | | | |
| Accounts payable and other current liabilities | | $ | 55 |
| | $ | 45 |
|
| Long-term debt | | 22 |
| | 22 |
|
| Client deposits | | 38 |
| | 56 |
|
| Accrued wages | | 369 |
| | 352 |
|
| Accrued health insurance costs, net | | 135 |
| | 135 |
|
| Accrued workers' compensation costs, net | | 67 |
| | 67 |
|
| Payroll tax liabilities and other payroll withholdings | | 550 |
| | 729 |
|
| Operating lease liabilities | | 16 |
| | — |
|
| Insurance premiums and other payables | | 16 |
| | 19 |
|
| Total current liabilities | | 1,268 |
| | 1,425 |
|
| Long-term debt, noncurrent | | 385 |
| | 391 |
|
| Accrued workers' compensation costs, noncurrent, net | | 156 |
| | 158 |
|
| Deferred taxes | | 65 |
| | 68 |
|
| Operating lease liabilities, noncurrent | | 54 |
| | — |
|
| Other non-current liabilities | | 11 |
| | 18 |
|
| Total liabilities | | 1,939 |
| | 2,060 |
|
| Commitments and contingencies (see Note 6) | |
| |
|
| Stockholders' equity: | | | | |
| Preferred stock | | — |
| | — |
|
| ($0.000025 par value per share; 20,000,000 shares authorized; no shares issued or outstanding at March 31, 2019 and December 31, 2018) | | | | |
| Common stock and additional paid-in capital | | 651 |
| | 641 |
|
| ($0.000025 par value per share; 750,000,000 shares authorized; 70,079,747 and 70,596,559 shares issued and outstanding at March 31, 2019 and December 31, 2018) | | | | |
| Accumulated deficit | | (245 | ) | | (266 | ) |
| Total stockholders' equity | | 406 |
| | 375 |
|
| Total liabilities & stockholders' equity | | $ | 2,345 |
| | $ | 2,435 |
|
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
|
| | | | | | |
| | Three Months Ended March 31, |
| (in millions, except share and per share data) | 2019 | 2018 |
| Professional service revenues | $ | 136 |
| $ | 129 |
|
| Insurance service revenues | 798 |
| 732 |
|
| Total revenues | 934 |
| 861 |
|
| Insurance costs | 683 |
| 641 |
|
| Cost of providing services | 64 |
| 57 |
|
| Sales and marketing | 46 |
| 39 |
|
| General and administrative | 36 |
| 31 |
|
| Systems development and programming | 12 |
| 13 |
|
| Depreciation and amortization of intangible assets | 11 |
| 9 |
|
| Total costs and operating expenses | 852 |
| 790 |
|
| Operating income | 82 |
| 71 |
|
| Other income (expense): | | |
| Interest expense, bank fees and other | (5 | ) | (6 | ) |
| Interest income | 6 |
| 2 |
|
| Income before provision for income taxes | 83 |
| 67 |
|
| Income tax expense | 20 |
| 13 |
|
| Net income | $ | 63 |
| $ | 54 |
|
| Comprehensive income | $ | 63 |
| $ | 54 |
|
| | | |
| Net income per share: | | |
| Basic | $ | 0.91 |
| $ | 0.77 |
|
| Diluted | $ | 0.89 |
| $ | 0.75 |
|
| Weighted average shares: | | |
| Basic | 69,909,984 |
| 70,047,752 |
|
| Diluted | 71,247,427 |
| 72,274,821 |
|
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
|
| | | | | | | | | | | | | | |
| |
Common Stock and Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity |
| (in millions, except share data) | Shares | Amount |
| Balance at December 31, 2018 | 70,596,559 |
| $ | 641 |
| $ | (266 | ) | $ | — |
| $ | 375 |
|
| Net income | — |
| — |
| 63 |
| — |
| 63 |
|
| Issuance of common stock from restricted stock units and restricted stock awards | 286,719 |
| — |
| — |
| — |
| — |
|
| Issuance of common stock from exercise of stock options | 81,282 |
| 1 |
| — |
| — |
| 1 |
|
| Stock-based compensation expense | — |
| 9 |
| — |
| — |
| 9 |
|
| Repurchase of common stock | (782,909 | ) | — |
| (38 | ) | — |
| (38 | ) |
| Awards effectively repurchased for required employee withholding taxes | (101,904 | ) | — |
| (4 | ) | — |
| (4 | ) |
| Balance at March 31, 2019 | 70,079,747 |
| $ | 651 |
| $ | (245 | ) | $ | — |
| $ | 406 |
|
|
| | | | | | | | | | | | | | |
| |
Common Stock and Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity |
| (in millions, except share data) | Shares | Amount |
| Balance at December 31, 2017 | 69,818,392 |
| $ | 583 |
| $ | (377 | ) | $ | — |
| $ | 206 |
|
| Net income | — |
| — |
| 54 |
| — |
| 54 |
|
| Other comprehensive income | — |
| — |
| — |
| (1 | ) | (1 | ) |
| Cumulative effect of accounting change | — |
| — |
| 3 |
| — |
| 3 |
|
| Issuance of common stock from vested restricted stock units | 610,266 |
| — |
| — |
| — |
| — |
|
| Issuance of common stock from exercise of stock options | 206,430 |
| 3 |
| — |
| — |
| 3 |
|
| Stock-based compensation expense | — |
| 9 |
| — |
| — |
| 9 |
|
| Repurchase of common stock | (160,033 | ) | — |
| (8 | ) | — |
| (8 | ) |
| Awards effectively repurchased for required employee withholding taxes | (111,804 | ) | — |
| (4 | ) | — |
| (4 | ) |
| Balance at March 31, 2018 | 70,363,251 |
| $ | 595 |
| $ | (332 | ) | $ | (1 | ) | $ | 262 |
|
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| | | | |
| | Three Months Ended March 31, |
| (in millions) | 2019 | 2018 |
| Operating activities | | |
| Net income | 63 |
| 54 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Depreciation and amortization | 18 |
| 10 |
|
| Stock-based compensation | 9 |
| 9 |
|
| Changes in operating assets and liabilities: | | |
| Accounts receivable | 1 |
| 13 |
|
| Unbilled revenue | (9 | ) | 11 |
|
| Prepaid expenses | (12 | ) | (11 | ) |
| Other assets | (30 | ) | (24 | ) |
| Accounts payable and other current liabilities | 9 |
| (15 | ) |
| Client deposits | (19 | ) | (26 | ) |
| Accrued wages | 17 |
| (15 | ) |
| Accrued health insurance costs | — |
| (1 | ) |
| Accrued workers' compensation costs | (2 | ) | (3 | ) |
| Payroll taxes payable and other payroll withholdings | (180 | ) | (534 | ) |
| Operating lease liabilities | (4 | ) | — |
|
| Other liabilities | (3 | ) | (4 | ) |
| Net cash used in operating activities | (142 | ) | (536 | ) |
| Investing activities | | |
| Purchases of marketable securities | (30 | ) | — |
|
| Proceeds from sale and maturity of marketable securities | 31 |
| 14 |
|
| Acquisitions of property and equipment | (12 | ) | (12 | ) |
| Net cash (used in) provided by investing activities | (11 | ) | 2 |
|
| Financing activities | | |
| Repurchase of common stock | (38 | ) | (8 | ) |
| Proceeds from issuance of common stock | 1 |
| 3 |
|
| Awards effectively repurchased for required employee withholding taxes | (4 | ) | (4 | ) |
| Repayment of debt | (6 | ) | (10 | ) |
| Net cash used in financing activities | (47 | ) | (19 | ) |
| Net decrease in unrestricted and restricted cash and cash equivalents | (200 | ) | (553 | ) |
| Cash and cash equivalents, unrestricted and restricted: | | |
| Beginning of period | 1,349 |
| 1,738 |
|
| End of period | 1,149 |
| 1,185 |
|
| | | |
| Supplemental disclosures of cash flow information | | |
| Interest paid | 4 |
| 4 |
|
| Income taxes paid, net | 1 |
| — |
|
| Supplemental schedule of noncash investing and financing activities | | |
| Payable for purchase of property and equipment | 5 |
| 2 |
|
See accompanying notes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
TriNet Group, Inc. (TriNet, or the Company, we, our and us), a professional employer organization, (PEO) founded in 1988, provides comprehensive human resources (HR) solutions for small to midsize 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, including:
compensation through wages and salaries,
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 one reportable segment. All of our service revenues are generated from external clients. Less than 1% of our revenue is generated outside of the U.S.
Basis of Presentation
These unaudited condensed consolidated financial statements (Financial Statements) and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Rules and Regulations of the Securities and Exchange Commission (SEC).Commission. Certain information and note disclosures included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, that are normal and recurring in nature, necessary for fair financial statement presentation. The results of operations for the first quarter of 2018three months ended March 31, 2019 are not necessarily indicative of the operating results anticipated for the full year. These Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of our Annual Report on Form 10-K for the year ended December 31, 2017 (20172018 (2018 Form 10-K).
Reclassifications
Certain prior year amounts have been reclassified to conform to current period presentation. TheseEffects on the cash flow statement due to reclassifications include short-term restricted cash, cash equivalents and investmentsare summarized below:
|
| | | | | | | | | |
| | For the Three Months Ended March 31, 2018 |
| (in millions) | As previously reported | Reclassified amounts | As revised |
| Operating activities | | | |
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | $ | — |
| $ | 13 |
| $ | 13 |
|
| Unbilled revenue | — |
| 11 |
| 11 |
|
| Prepaid income taxes | 13 |
| (13 | ) | — |
|
| Prepaid expenses and other current assets | (9 | ) | (2 | ) | (11 | ) |
| Workers' compensation collateral receivable | (1 | ) | 1 |
| — |
|
| Other assets | (2 | ) | (22 | ) | (24 | ) |
| Accounts payable and other current liabilities | (15 | ) | — |
| (15 | ) |
| Client deposits | — |
| (26 | ) | (26 | ) |
| Accrued wages | — |
| (15 | ) | (15 | ) |
| Accrued corporate wages | (9 | ) | 9 |
| — |
|
| Accrued health insurance costs | — |
| (1 | ) | (1 | ) |
| Accrued workers' compensation costs | — |
| (3 | ) | (3 | ) |
| Workers' compensation loss reserves and other non-current liabilities | (6 | ) | 6 |
| — |
|
| Payroll taxes payable and other payroll withholdings | — |
| (534 | ) | (534 | ) |
| Other liabilities | — |
| (4 | ) | (4 | ) |
| Worksite employee related assets | (14 | ) | 14 |
| — |
|
| Worksite employee related liabilities | (566 | ) | 566 |
| — |
|
Interest income previously classified as WSE-related assets andin other income (expense), net is now presented within restricted cash, cash equivalentsin a new line item. Depreciation expense and investments. Refer to the accounting policy below for a descriptionamortization of amounts currently included in restricted cash, cash equivalents,intangible assets previously reported separately, are now presented together as depreciation and investments.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 (loss reserves)(accrued workers' compensation costs) related to workers' compensation and workers' compensation collateral receivable,
accrued health insurance loss reserves,costs,
liability for insurance premiums payable,
Valuation of the investment portfolio,
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.
Accrued Health Insurance Costs
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 completedWe sponsor and administer a number of fully insured, risk-based employee benefit plans, including group health, dental, and vision as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presentedan employer plan sponsor 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 $1 million cumulative effect adjustment to opening retained earnings as of January 1, 2018. Impacts from adoptionsection 3(5) 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 underERISA. In Q1 2019, 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 partmajority of our transaction price and are allocated among professional service revenues andgroup health insurance services revenues; and
The majority of sales commissionscosts related to onboarding new clients thatrisk-based plans. Our remaining group health insurance costs were previously expensed are capitalized as contract assets and amortized over the estimated customer life.
Accounting Policies under ASC Topic 606 and Nature of Services
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 customers. We disaggregate revenues by professional services revenues and insurance services revenues as reported on the condensed consolidated statements of operations and comprehensive income. Generally, 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 customers and identify a performance obligation for each distinct promise to transfer to the customer 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.
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 considered transferred when a client's payroll is processed by us and its 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 considered the agent in this arrangement for revenue recognition purposes.guaranteed-cost policies.
Health benefits and workers' compensation services include performance obligationsAccrued health insurance costs are established to provide TriNet-sponsoredfor the estimated unpaid costs of reimbursing the carriers for paying claims within the deductible layer in accordance with risk-based health benefitsinsurance 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 independent actuarial studies that include other relevant factors such as current and workers' compensation insurance coverage through insurance policies provided by third-party insurance carriers. Revenues associated with these performance obligations are reported as insurance services revenueshistorical claims payment patterns, plan enrollment and are recognized using the output method over the period of time that the client and WSEs are covered under TriNet-sponsored insurance policies.medical trend rates.
As we control the selection of health benefits and workers' compensation coverage made available, insurance services revenues are reported gross sinceIn certain carrier contracts we are consideredrequired to prepay the principalexpected claims activity for the subsequent period. These prepaid balances by agreement permit net settlement of obligations and offset the accrued health insurance costs or when the prepaid is in this arrangement for revenue recognition purposes. See Item 8 Note 1 in our Form 10-K for further discussion on our accounting policy for insurance costs.
We generally charge new customers a nominal upfront non-refundable fee to recover our costs to set up the client on our TriNet platform for payroll processing and other administrative services, such as benefit enrollments. These fees are accounted for as partexcess of our transaction pricerecorded liability the net asset position is included in prepaid expenses. As of March 31, 2019 and are allocated among the performance obligationsDecember 31, 2018, prepayments included in accrued health insurance costs were $39 million and $33 million, respectively.
Under certain policies, based on their relative standalone selling price.
Variable Consideration and Pricing Allocation
Our contracts with customers generally do not include any variable consideration. However, from time to time,plan performance, we may offer incentive creditsbe entitled to our clients considered to be variable consideration including incentive credits issued related to contract renewals. Incentive credits are recordedreceive refunds of premiums which we recognize in accordance with the policy terms. We estimate these refunds based on premium and claims data and record as a reduction in the insurance costs on the consolidated statements of income and comprehensive income and prepaid expenses on the consolidated balance sheets. As of March 31, 2019 and December 31, 2018, there were no prepaid insurance premiums included in prepaid expenses.
Leases
We adopted ASU 2016-02 - Leases (ASC 842) effective January 1, 2019 using the optional transition method, under which we recognized the cumulative effects of initially applying the standard as an adjustment to revenue asthe opening balance of retained earnings on January 1, 2019 with unchanged comparative periods. As part of this adoption, we elected the transaction pricefollowing practical expedients:
not to reassess 1) whether any contracts that existed prior to adoption have or contain leases, 2) the classification of our existing leases or 3) initial direct costs for existing leases,
to use the practical expedient of using hindsight to determine the lease terms and evaluate any impairments in right-of-use assets upon transition, and
not separately record non-lease and lease components for all leases in which we act as a lessee.
We determine if a new contractual arrangement is a lease at contract inception when there isinception. If a basis to reasonably estimate the amount of the incentive creditcontract 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 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 price.
We allocate the total transaction price to each performance obligationROU assets based on the estimated relative standalone selling prices offuture minimum lease payments over the promised services underlying each performance obligation. The transaction price for payrolllease term and payroll tax processing performance obligations are determined upon establishment ofonly include options to renew a lease in the contractminimum lease payments if it is reasonably certain that contains the finalwe will exercise that option. For certain leases with original terms of twelve months or less we recognize the sale, including the descriptionlease expense as incurred and price of each service purchased. The estimated service fee is calculated based on observable inputswe do not recognize lease liabilities and include the following key assumptions: target profit margin, pricing strategies including the mix of services purchased and competitive factors, and customer and industry specifics.ROU assets.
The transaction price for health benefits insurance and worker’s compensation insurance performance obligations is determined during the new client on-boarding and enrollment processesWe measure our lease liabilities based on the types of benefits coveragefuture minimum lease payments discounted over the clients and WSEs have elected and the applicable risk profile of the client.lease term. We estimatedetermine our service feesdiscount rate at lease inception using our incremental borrowing rate, which is based on actuarial specialists' forecastsour outstanding term debts that are collateralized by certain corporate assets.As of our expected insurance premiums and claim costs, and our proprietary model to develop an amount to cover our costs to administer these programs.March 31, 2019, the weighted-average rate used in discounting the lease liability was 4.6%.
We requiremeasure our clients to prefund payrollROU assets based on the associated lease liabilities adjusted for any lease incentives such as tenant improvement allowances and related taxes andclassify operating ROU assets in other withholding liabilities before payroll is processed or dueassets in our condensed consolidated balance sheet. For operating leases, we recognize expense for payment. Underlease payments on a straight-line basis over the provision of our contracts with customers, we generally will process the payment of a client’s payroll only when the client successfully funds the amount required. Certain contracts to provide payroll and payroll tax processing services permit the client to pay certain payroll tax components ratably over a 12-month period rather than as payroll tax is determined on wages paid, 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 taxes liabilities are accrued wages in WSE
related liabilities. The associated receivables, including estimated insurance services revenues, offset by advance collections from clients, are recorded as unbilled revenues in WSE-related assets.lease term.
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 customers onboarded as we expect to recover these costs through future service fees. Such assets will be 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, such commission will be capitalized and amortized over the estimated average client tenure. If the commission for both 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. We capitalized $9 million and amortized less than $1 million of the deferred commission during the first quarter 2018.
Certain commission plans will pay a commission on estimated professional service revenues over the first 12 months of the contract with customers. 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 assets and contract liabilities as of March 31, 2018. 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 is recognized as accounts receivable on the accompanying consolidated balance sheets. When client payment is received in advance of our performance under the contract, such amount is recorded as client deposits.
Restricted Cash, Cash Equivalents and Investments
Restricted cash and cash equivalents presented on our condensed consolidated balance sheets include:
corporate cash and cash equivalents in trust accounts functioning as security deposits for our insurance carriers,
payroll funds collected represents 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.
Recent Accounting Pronouncements
Recently adopted accounting guidance
Revenue RecognitionLeases -In May 2014,February of 2016, the FASB issued ASU 2014-09-Revenue from Contracts with Customers,ASC 842, which will replace mostreplaced existing revenue recognitionlease guidance under GAAP. The core principleUnder this guidance, we recognize on our condensed balance sheet lease liabilities representing the present value of future lease payments and an associated right-of-use asset representing our right to use or control the guidance is that an entity should recognize revenueuse of specified assets for the transfer of promised goods or services to customers that reflects the consideration to which the entity expects to be entitled in exchangelease term for those goods or services. The standard providesany operating lease with a five-step analysis of transactions to determine when and how revenue is recognized.term greater than one year.
We have adopted the new standard effective January 1, 2018 using the modified retrospective method. For further discussionThe impact of our adoption of ASC 842 did not have a material impact on our income statement or cash flow statement. The impact on our condensed balance sheets is as follows:
|
| | | | | | | | | | | | |
| | | March 31, 2019 |
| (in millions) | | As reported | | Balance Using Previous Standard | | Increase (Decrease) |
| Balance sheet | | | | | | |
| Assets | | | | | | |
| Operating lease right-of-use assets | | $ | 59 |
| | $ | — |
| | $ | 59 |
|
| Liabilities | | | | | | |
| Operating lease liabilities | | 16 |
| | — |
| | 16 |
|
| Operating lease liabilities, noncurrent | | 54 |
| | 11 |
| | 43 |
|
| Equity | | | | | | |
| Accumulated deficit | | $ | (245 | ) | | $ | (245 | ) | | $ | — |
|
Recently issued accounting pronouncements
Credit Losses - In June 2016, the FASB issued ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326), which requires financial assets to be presented at the net amount expected to be collected. We will be required to use forward-looking information when evaluating an allowance for our accounts receivable, unbilled revenue and other financial assets measured at amortized cost. Topic 606,326 also modifies the impairment guidance for available-for-sale debt securities to require an allowance for credit losses. We will adopt Topic 326 effective January 1, 2020 using a modified retrospective approach through a cumulative-effect adjustment to retained earnings. We are currently evaluating the impact of this standard on our consolidated financial statements, including our operating results under the new standard, see Revenue Recognition section above.accounting policies, processes, and systems.
The impact from the adoption of ASC Topic 606 to our condensed consolidated income statements and balance sheets is as follows:
|
| | | | | | | | | |
| (in millions) | As of and for the Three Months Ended March 31, 2018 | Balance Using Previous Standard | Increase (Decrease) |
| Income statement | | | |
| Revenue | | | |
| Professional service revenues | $ | 129 |
| $ | 126 |
| $ | 3 |
|
| Total revenues | 861 |
| 858 |
| 3 |
|
| Expense | | | |
| Sales and marketing expense | | |
|
|
| Commissions expense | 4 |
| 13 |
| (9 | ) |
| Total expense | 790 |
| 799 |
| (9 | ) |
| Income before provision for income taxes | 67 |
| 56 |
| 11 |
|
| Income tax expense | 13 |
| 11 |
| 2 |
|
| Net income | 54 |
| 45 |
| 9 |
|
| Basic earnings per share | 0.77 |
| 0.64 |
| 0.13 |
|
| Diluted earnings per share | 0.75 |
| 0.62 |
| 0.13 |
|
| | | |
|
|
| Balance sheet | | | |
| Assets | | |
|
|
| Unbilled revenue (net of advance collections) | $ | 286 |
| $ | 291 |
| $ | (5 | ) |
| Prepaid expenses and other current assets | 22 |
| 14 |
| 8 |
|
| Other assets | 18 |
| 14 |
| 4 |
|
| Liabilities | | |
|
|
| Accounts payable and other current liabilities | 46 |
| 47 |
| (1 | ) |
| Other liabilities | 10 |
| 12 |
| (2 | ) |
| Equity | | |
|
|
| Retained earnings | (332 | ) | (342 | ) | 10 |
|
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.
Recently issued accounting pronouncements
Lease arrangements -In February 2016, the FASB issued ASU 2016-02-Leases. The amendment requires that lease arrangements longer than 12 months result in an entity recognizing lease assets and lease liabilities. Most significant impact is on those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The amendment is effective for annual reporting periods and interim periods within those years beginning after December 15, 2018. We currently anticipate adoption of the new standard effective January 1, 2019.
We anticipate this standard will have a material impact on our condensed consolidated financial statements. While we continue to assess all potential impacts of the standard, we anticipate that there will be a material increase to assets and lease liabilities for existing property leases representing our nationwide office locations not already included on our condensed consolidated balance sheets.
NOTE 2. CASH, CASH EQUIVALENTS AND INVESTMENTS
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 portionand noncurrent portions of these trust accounts as restricted cash and cash equivalents in WSE-related assets, and the long-term portion 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 WSE-related liabilities.payroll withholdings.
We also invest available corporate funds, primarily in fixed income securities which meet the requirements of our corporate investment policy and are classified as available for sale (AFS).
Our total cash, cash equivalents and investments are summarized below:
| | | | March 31, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 |
| (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 | 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 | $ | 330 |
| $ | — |
| $ | — |
| $ | 330 |
| $ | 336 |
| $ | — |
| $ | — |
| $ | 336 |
| $ | 251 |
| $ | — |
| $ | — |
| $ | 251 |
| $ | 228 |
| $ | — |
| $ | — |
| $ | 228 |
|
| Investments | | — |
| 56 |
| — |
| 56 |
| — |
| 54 |
| — |
| 54 |
|
| Restricted cash, cash equivalents and investments | | |
|
| |
|
|
| Insurance carriers security deposits | 15 |
| — |
| — |
| 15 |
| 15 |
| — |
| — |
| 15 |
| |
| Insurance carriers' security deposits | | 15 |
| — |
| — |
| 15 |
| 15 |
| — |
| — |
| 15 |
|
| Payroll funds collected | 523 |
| — |
| — |
| 523 |
| 1,095 |
| — |
| — |
| 1,095 |
| 564 |
| — |
| — |
| 564 |
| 783 |
| — |
| — |
| 783 |
|
| Collateral for health benefits claims | 71 |
| — |
| — |
| 71 |
| 69 |
| — |
| — |
| 69 |
| 75 |
| — |
| — |
| 75 |
| 75 |
| — |
| — |
| 75 |
|
| Collateral for workers' compensation claims | 87 |
| 1 |
| — |
| 88 |
| 98 |
| 1 |
| — |
| 99 |
| 65 |
| 1 |
| — |
| 66 |
| 66 |
| 1 |
| — |
| 67 |
|
| Collateral to secure standby letter of credit | — |
| — |
| 2 |
| 2 |
| — |
| — |
| 2 |
| 2 |
| — |
| — |
| 2 |
| 2 |
| — |
| — |
| 2 |
| 2 |
|
| Total restricted cash, cash equivalents and investments | 696 |
| 1 |
| 2 |
| 699 |
| 1,277 |
| 1 |
| 2 |
| 1,280 |
| 719 |
| 1 |
| 2 |
| 722 |
| 939 |
| 1 |
| 2 |
| 942 |
|
| Investments, noncurrent | | — |
| 133 |
| — |
| 133 |
| — |
| 135 |
| — |
| 135 |
|
| Restricted cash, cash equivalents and investments, noncurrent | | |
|
| |
|
|
| Collateral for workers' compensation claims | 159 |
| 23 |
| — |
| 182 |
| 125 |
| 37 |
| — |
| 162 |
| 179 |
| 5 |
| — |
| 184 |
| 182 |
| 5 |
| — |
| 187 |
|
| Total | $ | 1,185 |
| $ | 24 |
| $ | 2 |
| $ | 1,211 |
| $ | 1,738 |
| $ | 38 |
| $ | 2 |
| $ | 1,778 |
| $ | 1,149 |
| $ | 195 |
| $ | 2 |
| $ | 1,346 |
| $ | 1,349 |
| $ | 195 |
| $ | 2 |
| $ | 1,546 |
|
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 values and related maturities of securities available for saleour investments as of March 31, 20182019 and December 31, 20172018 are presented below:below.
| | | | | | | | | | | | | March 31, 2019 | December 31, 2018 |
| (in millions) | Maturity
(in years) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| March 31, 2018 | | | |
| Asset-backed securities | | $ | 35 |
| $ | — |
| $ | — |
| $ | 35 |
| $ | 33 |
| $ | — |
| $ | — |
| $ | 33 |
|
| Corporate bonds | | 100 |
| — |
| — |
| 100 |
| 99 |
| — |
| — |
| 99 |
|
U.S. government agencies and government- sponsored agencies | | 6 |
| — |
| — |
| 6 |
| 7 |
| — |
| — |
| 7 |
|
| U.S. treasuries | 1-5 years | $ | 23 |
| $ | — |
| $ | — |
| $ | 23 |
| 47 |
| — |
| — |
| 47 |
| 46 |
| — |
| — |
| 46 |
|
| Exchange traded fund | N/A | 1 |
| — |
| — |
| 1 |
| 1 |
| — |
| — |
| 1 |
| 1 |
| — |
| — |
| 1 |
|
| Other debt securities | | 6 |
| — |
| — |
| 6 |
| 9 |
| — |
| — |
| 9 |
|
| Total | | $ | 24 |
| $ | — |
| $ | — |
| $ | 24 |
| $ | 195 |
| $ | — |
| $ | — |
| $ | 195 |
| $ | 195 |
| $ | — |
| $ | — |
| $ | 195 |
|
| | | | |
| December 31, 2017 | | | |
| U.S. treasuries | 1-5 years | $ | 37 |
| $ | — |
| $ | — |
| $ | 37 |
| |
| Exchange traded fund | N/A | 1 |
| — |
| — |
| 1 |
| |
| Total | | $ | 38 |
| $ | — |
| $ | — |
| $ | 38 |
| |
There were immaterial realized gains or
Gross unrealized losses for the three months ended March 31, 2018 and 2017. The fair value of our U.S. Treasury securities in an unrealized loss position represented 89% and 78% of the total fair value of all U.S. Treasury securities as of March 31, 20182019 and December 31, 2017, respectively.2018 were not material.
Unrealized losses on fixed income securities are principally caused by changes in interest rates.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 bondcredit rating agencies have occurred, and industry analysts' reports. As we have the ability to hold these available for sale marketable securitiesinvestments until maturity, or for the foreseeable future, no decline was deemed to be other-than-temporary. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
The fair value of debt investments by contractual maturity are shown below:
|
| | | | | |
| (in millions) | | March 31, 2019 | |
| One year or less | | $ | 61 |
| |
| Over one year through five years | | 117 |
| |
| Over five years through ten years | | 7 |
| |
| Over ten years | | 9 |
| |
| Total fair value | | $ | 194 |
| |
The gross proceeds from sales and maturities of AFS securities for the three months ended March 31, 2019 and March 31, 2018 are presented below.
|
| | | | | | |
| | Three Months Ended
March 31, |
| (in millions) | 2019 | 2018 |
| Gross proceeds from sales | $ | 14 |
| $ | — |
|
| Gross proceeds from maturities | 17 |
| 14 |
|
| Total | $ | 31 |
| $ | 14 |
|
NOTE 3.4. LEASES
Our leasing activities predominantly consist of leasing office space that we occupy, which we have classified as operating leases. Our leases are comprised of fixed payments with remaining lease terms of 1 year to 9.5 years, some of which include options to extend for up to 15 years. As of March 31, 2019, we have not included any options to extend or cancel in the calculation of our lease liability or ROU asset. We do not have any significant residual value guarantees or restrictive covenants in our leases.
During the three months ended March 31, 2019, we recognized operating lease expense of $5 million.
During the three months ended March 31, 2019, we paid $5 million to reduce operating lease liabilities and recognized $12 million in new operating lease liabilities in exchange for ROU assets.
As of March 31, 2019, the weighted average remaining lease term on our operating leases was 6.4 years. Future minimum lease payments as of March 31, 2019 and December 31, 2018 were the following:
|
| | | | | | |
| (in millions) | March 31, 2019 (2) | December 31, 2018 (3) |
2019(1) | $ | 15 |
| $ | 18 |
|
| 2020 | 17 |
| 17 |
|
| 2021 | 10 |
| 11 |
|
| 2022 | 8 |
| 9 |
|
| 2023 | 8 |
| 8 |
|
| 2024 | 5 |
| 5 |
|
| 2025 and thereafter | 19 |
| 20 |
|
| Total future minimum lease payments | $ | 82 |
| $ | 88 |
|
| Less: imputed interest | (12 | ) | N/A(4) |
|
| Total operating lease liabilities | 70 |
| N/A(4) |
|
| Current portion | 16 |
| N/A(4) |
|
| Non-current portion | 54 |
| N/A(4) |
|
(1) The remaining payments as of March 31, 2019 exclude those made during the three months ended March 31, 2019.
| |
| (2) | Presented in accordance with ASC 842, which excludes base payments of $3 million for leases that do not yet have a commencement date. |
(3) Presented in accordance with ASC 840.
(4) N/A - Not Applicable under ASC 840.
As of March 31, 2019, we have entered into two leases that have not yet commenced for terms of up to 5 years. Those leases will require minimum lease payments over their terms of $3 million.
NOTE 5. ACCRUED WORKERS' COMPENSATION LOSS RESERVESCOSTS
The following table summarizes the accrued workers’ compensation loss reservecost activity for the three months ended March 31, 20182019 and 2017:2018:
| | | | Three Months Ended
March 31, | Three Months Ended
March 31, |
| (in millions) | 2018 | 2017 | 2019 | 2018 |
| Total loss reserves, beginning of period | $ | 255 |
| $ | 255 |
| |
| Total accrued costs, beginning of period | | $ | 238 |
| $ | 255 |
|
| Incurred | | |
| Current year | 20 |
| 27 |
| 19 |
| 20 |
|
| Prior years | (7 | ) | 1 |
| (5 | ) | (7 | ) |
| Total incurred | 13 |
| 28 |
| 14 |
| 13 |
|
| Paid | | |
| Current year | — |
| — |
| (1 | ) | — |
|
| Prior years | (18 | ) | (22 | ) | (15 | ) | (18 | ) |
| Total paid | (18 | ) | (22 | ) | (16 | ) | (18 | ) |
| Total loss reserves, end of period | $ | 250 |
| $ | 261 |
| |
| Total accrued costs, end of period | | $ | 236 |
| $ | 250 |
|
The following summarizes workers' compensation liabilities on the condensed consolidated balance sheets:
|
| | | | | | |
| (in millions) | March 31,
2018 | December 31,
2017 |
| Total loss reserves, end of period | $ | 250 |
| $ | 255 |
|
| Collateral paid to carriers and offset against loss reserves | (21 | ) | (23 | ) |
| Total loss reserves, net of carrier collateral offset | $ | 229 |
| $ | 232 |
|
| | | |
Payable in less than 1 year
(net of collateral paid to carriers of $5 and $6 at March 31, 2018 and December 31, 2017, respectively) | $ | 67 |
| $ | 67 |
|
Payable in more than 1 year
(net of collateral paid to carriers of $16 and $17 at March 31, 2018 and December 31, 2017, respectively) | 162 |
| 165 |
|
Total loss reserves, net of carrier collateral offset
| $ | 229 |
| $ | 232 |
|
|
| | | | | | |
| (in millions) | March 31, 2019 | December 31, 2018 |
| Total accrued costs, end of period | $ | 236 |
| $ | 238 |
|
| Collateral paid to carriers and offset against accrued costs | (13 | ) | (13 | ) |
| Total accrued costs, net of carrier collateral offset | $ | 223 |
| $ | 225 |
|
| | | |
Payable in less than 1 year
(net of collateral paid to carriers of $4 and $3 at March 31, 2019 and December 31, 2018, respectively) | $ | 67 |
| $ | 67 |
|
Payable in more than 1 year
(net of collateral paid to carriers of $9 and $10 at March 31, 2019 and December 31, 2018, respectively) | 156 |
| 158 |
|
| Total accrued costs, net of carrier collateral offset | $ | 223 |
| $ | 225 |
|
Incurred claims related to prior years represent changes in estimates for ultimate losses on workers' compensation claims. For the three months ended March 31, 2018,2019, the favorable developmentchange was primarily due to lower than expected severitya decrease in estimate of reported claims associated with officeultimate losses related to older plan years and non-office worker WSEs in recent accident years.the recognition of current year development of ultimate losses.
As of March 31, 20182019 and December 31, 2017,2018, we had $61$56 million and $63$57 million, respectively, of collateral held by insurance carriers of which $21$13 million and $23$13 million, respectively, was offset against accrued workers' compensation loss reservescosts as the agreements permit and are net settled of insurance obligations against collateral held. Collateral paid to each carrier for a policy year in excess of our loss reserves is recorded as workers' compensation collateral receivable.
NOTE 4. FINANCIAL INSTRUMENTS6. COMMITMENTS AND FAIR VALUE MEASUREMENTSCONTINGENCIES
Fair Value MeasurementsContingencies
In August 2015, Howard Welgus, a purported stockholder, filed a putative securities class action lawsuit, Welgus v. TriNet Group, Inc., et. al., under the Securities Exchange Act of 1934 in the U.S. District Court for the Northern District of California. The complaint was later amended in April 2016 and again in March 2017. On December 18, 2017, the district court granted TriNet’s motion to dismiss the amended complaint in its entirety, without leave to amend. Plaintiff filed a notice of appeal of the district court’s order on January 17, 2018. Plaintiff-Appellant filed his opening appeal brief before the Ninth Circuit Court of Appeals on April 27, 2018. TriNet filed a Recurring Basisresponsive brief on June 28, 2018. Plaintiff-Appellant filed his reply brief on August 20, 2018. Oral arguments were held before the Ninth Circuit Court of Appeals on March 14, 2019. On March 26, 2019, the Ninth Circuit Court of Appeals affirmed the district court’s dismissal of the amended complaint in its entirety. Plaintiff-Appellant may appeal the decision by the Ninth Circuit Court of Appeals but to date has not done so. We are unable to reasonably estimate the possible loss or expense, or range of losses and expenses, if any, arising from this litigation.
The following table summarizesWe are and, from time to time, have been and may in the future become involved in various litigation matters, legal proceedings, and claims arising in the ordinary course of our financial instruments by significant categoriesbusiness, including disputes with our clients or various class action, collective action, representative action, and fair value measurement onother proceedings arising from the nature of our co-employment relationship with our clients and WSEs in which we are named as a recurring basis as of March 31, 2018 and December 31, 2017.
|
| | | | | | | | | |
| (in millions) | Level 1 | Level 2 | Total |
| March 31, 2018 | | | |
| Restricted cash equivalents: | | | |
| Money market mutual funds | $ | 224 |
| $ | — |
| $ | 224 |
|
| Commercial paper | 20 |
| — |
| 20 |
|
| Total restricted cash equivalents | 244 |
| — |
| 244 |
|
| Restricted investments: | | | |
| U.S. Treasuries | 23 |
| — |
| 23 |
|
| Exchange traded fund | 1 |
| — |
| 1 |
|
| Certificate of deposit | — |
| 2 |
| 2 |
|
| Total restricted investments | 24 |
| 2 |
| 26 |
|
| Total restricted cash equivalents and investments | $ | 268 |
| $ | 2 |
| $ | 270 |
|
| | | | |
| December 31, 2017 | | | |
| Restricted cash equivalents: | | | |
| Money market mutual funds | $ | 199 |
| $ | — |
| $ | 199 |
|
| Commercial paper | 21 |
| — |
| 21 |
|
| Total restricted cash equivalents | 220 |
| — |
| 220 |
|
| Restricted investments: | | | |
| U.S. Treasuries | 37 |
| — |
| 37 |
|
| Exchange traded fund | 1 |
| — |
| 1 |
|
| Certificate of deposit | — |
| 2 |
| 2 |
|
| Total restricted investments | 38 |
| 2 |
| 40 |
|
| Total restricted cash equivalents and investments | $ | 258 |
| $ | 2 |
| $ | 260 |
|
Restricted Cash Equivalents
Our restricted cash equivalents include money market mutual funds and commercial paper. The carrying value of cash equivalents approximate their fair valuesdefendant. In addition, due to the short-term maturitiesnature of our co-employment relationship with our clients and WSEs, we could be subject to liability for federal and state law violations, even if we do not participate in such violations. While our agreements with our clients contain indemnification provisions related to the conduct of our clients, we may not be able to avail ourselves of such provisions in every instance. We have accrued our current best estimates of probable losses with respect to these matters, which are classified as Level 1individually and in aggregate immaterial to our consolidated financial statements.
While the outcome of the matters described above cannot be predicted with certainty, management currently does not believe that any such claims or proceedings or the above-mentioned securities class action will have a materially adverse effect on our consolidated financial position, results of operations, or cash flows. However, the unfavorable resolution of any particular matter or our reassessment of our exposure for any of the above matters based on additional information obtained in the fair value hierarchy because we use quoted market prices that are readily available in an active market to determine the fair value.
Restricted Investments
Our restricted investments include U.S. Treasuries, an exchange traded fund andfuture could have a certificatematerial impact on our consolidated financial position, results of deposit. The U.S. Treasuries and exchange traded fund are classified as Level 1 securities in the fair value hierarchy as we use active quoted market prices that are readily available in an active market to determine fair value. The certificate of deposit is classified as Level 2 in the fair value hierarchy as we use a market approach that compares the fair values on certificates with similar maturities.
We did not have any Level 3 financial instruments as of March 31, 2018 and December 31, 2017. There were no transfers between levels as of March 31, 2018 and December 31, 2017.
Fair Value of Financial Instruments Disclosures
Notes Payable
The carrying value of our notes payable at March 31, 2018 and December 31, 2017 was $415 million and $425 million, respectively. The estimated fair values of our notes payable at March 31, 2018 and December 31, 2017 were $418 million and $428 million, respectively. These valuations are considered Level 2 in the hierarchy for fair value measurement and are based on quoted market prices.operations, or cash flows.
NOTE 5.7. STOCKHOLDERS’ EQUITY
Equity-Based Incentive Plans
Our 2009 Equity Incentive Plan (2009(the 2009 Plan) provides for the grant of stock awards, including stock options, restricted stock units (time-based and performance-based), restricted stock awards (time-based and performance-based)RSUs, RSAs, and other equitystock awards. The number of sharesShares available for grant under this 2009 Plan as of March 31, 2018 was2019 were approximately 1114 million.
The following table summarizes stock option activity under our 2009 Plan forRestricted Stock Units (RSUs) and Restricted Stock Awards (RSAs)
Time-based RSUs and RSAs generally vest over a four-year term. Performance-based RSUs and RSAs are subject to vesting requirements based on certain financial performance metrics as defined in the three months ended March 31, 2018:
|
| | |
| Number
of Shares |
Balance at December 31, 2017 | 1,296,863 |
|
Exercised | (206,430 | ) |
Forfeited | (4,167 | ) |
Balance at March 31, 2018 | 1,086,266 |
|
Exercisable at March 31, 2018 | 1,011,038 |
|
The aggregate intrinsic valuegrant notice. Actual number of stock options outstanding was $37 million and $41 million as of March 31, 2018 and December 31, 2017, respectively.
In March 2018, the Equity Award Committeeshares earned may range from 0% to 200% of the Compensation Committee granted awards of time-based restricted stock (RSAs) and performance-based restricted stock (PRSAs) to the Company's named executive officers (as defined in Item 402(a)(3) of Regulation S-K promulgated by the Securities and Exchange Commission). A recipient of RSAs owns the underlying shares of common stock upon grant and some of the benefits of ownership, such as voting and dividend rights, but the recipient may not sell those shares and realize any value on a sale, until all time-based and performance-based restrictions have been satisfied or lapsed.
Our RSAstarget award. Awards granted in March2019 and 2018 are eligible to vest in equal installments on a quarterly basis over four years, subject to continued employment through the applicable vesting dates. The PRSAs are earned based on the extent to which the Company meets or exceeds certain annual growth rate percentages. Our PRSAs granted in March 2018 are designed with a single-year performance period subject to subsequent multi-year vesting requirements. Fifty percentwith 50% of the shares earned (if any) duringvesting in one year after the performance period (January 1, 2018 to December 31, 2018) will vest on December 31, 2019 and the remaining shares earned (if any) will vest on December 31, 2020.in the year after.
The following tables summarize restricted stock unit (RSU), performance-based restricted stock unit (PSU),table summarizes RSU and RSA and PRSA activity under our 2009 Planequity-based plans for the three months ended March 31, 2018:2019:
| | | | RSUs | PSUs | RSUs | RSAs |
| | Number of Units | Weighted-Average Grant Date Fair Value | Number of Units | Weighted-Average Grant Date Fair Value | Number of Units | Weighted-Average Grant Date Fair Value | Number of Units | Weighted-Average Grant Date Fair Value |
| Nonvested at December 31, 2017 | 2,249,661 |
| $ | 24.83 |
| 453,674 |
| $ | 30.72 |
| |
| Nonvested at December 31, 2018 | | 1,737,554 |
| $ | 32.83 |
| 346,792 |
| $ | 49.13 |
|
| Granted | 548,054 |
| 46.97 |
| 23,842 |
| 47.61 |
| 669,415 |
| 60.43 |
| — |
| — |
|
| Vested | (286,121 | ) | 23.96 |
| (82,066 | ) | 33.51 |
| (297,822 | ) | 28.83 |
| (13,565 | ) | 50.48 |
|
| Forfeited | (88,396 | ) | 25.51 |
| — |
| — |
| (14,908 | ) | 42.79 |
| (11,103 | ) | 49.35 |
|
| Nonvested at March 31, 2018 | 2,423,198 |
| $ | 29.91 |
| 395,450 |
| $ | 30.89 |
| |
| Nonvested at March 31, 2019 | | 2,094,239 |
| $ | 42.15 |
| 322,124 |
| $ | 49.20 |
|
|
| | | | | | | | | | |
| | RSAs | PRSAs |
| | Number of Units | Weighted-Average Grant Date Fair Value | Number of Units | Weighted-Average Grant Date Fair Value |
| Nonvested at December 31, 2017 | — |
| $ | — |
| — |
| $ | — |
|
| Granted | 72,991 |
| 47.61 |
| 169,088 |
| 47.61 |
|
| Nonvested at March 31, 2018 | 72,991 |
| $ | 47.61 |
| 169,088 |
| $ | 47.61 |
|
Stock-BasedEquity-Based Compensation
Stock-based compensation expense is measured based on the fair value of the stock optionaward on the grant date and recognized over the requisite service period for each separately vesting portion of the stock option award. Stock-based compensation expense and other disclosures for stock-based awards made to our employees pursuant to the equity plans was as follows:
| | | | Three Months Ended
March 31, | Three Months Ended March 31, |
| (in millions) | 2018 | 2017 | 2019 | 2018 |
| Cost of providing services | $ | 2 |
| $ | 2 |
| $ | 2 |
| $ | 2 |
|
| Sales and marketing | 2 |
| 1 |
| 1 |
| 2 |
|
| General and administrative | 4 |
| 2 |
| 5 |
| 4 |
|
| Systems development and programming costs | 1 |
| 1 |
| 1 |
| 1 |
|
| Total stock-based compensation expense | $ | 9 |
| $ | 6 |
| $ | 9 |
| $ | 9 |
|
| Income tax benefit related to stock-based compensation expense | $ | 2 |
| $ | 2 |
| $ | 3 |
| $ | 2 |
|
| Tax benefit realized from stock options exercised and similar awards | $ | 6 |
| $ | 6 |
| |
| Tax benefit realized from stock options exercise and similar awards | | $ | 2 |
| $ | 6 |
|
Stock Repurchases
TheIn February 2019, our board of directors authorizes repurchases through anauthorized a $300 million incremental increase to our ongoing stock repurchase program initiated in May 2014. During the three months ended March 31, 2018,2019, we repurchased 160,033782,909 shares of common stock for approximately $8$38 million. As of March 31, 2018,2019, approximately $129$337 million remained available for further repurchases of our common stock under our ongoing stock repurchase program under all authorizations from our board of directors.
NOTE 6. EARNINGS PER SHARE (EPS)
The following table presents the computation of our basic and diluted EPS attributable to our common stock:
|
| | | | | | |
| | Three Months Ended
March 31, |
| (in millions, except per share data) | 2018 | 2017 |
| Net income | $ | 54 |
| $ | 29 |
|
| Weighted average shares of common stock outstanding | 70 |
| 69 |
|
| Basic EPS | $ | 0.77 |
| $ | 0.42 |
|
| | | |
| Net income | $ | 54 |
| $ | 29 |
|
| Weighted average shares of common stock | 70 |
| 69 |
|
| Dilutive effect of stock options and restricted stock units | 2 |
| 2 |
|
| Weighted average shares of common stock outstanding | 72 |
| 71 |
|
| Diluted EPS | $ | 0.75 |
| $ | 0.41 |
|
| | | |
| Common stock equivalents excluded from income per diluted share because of their anti-dilutive effect | 1 |
| 1 |
|
NOTE 7.8. INCOME TAXES
Our effective income tax rate was 20%24% and 36%20% for the three months ended March 31, 20182019 and 2017,2018, respectively. The decrease wasincrease is primarily attributabledue to a reduction of the federal corporate income tax rate from 35% to 21% on January 1, 2018 under the Tax Cuts and Jobs Act (TCJA). The decrease is also attributable to changes to uncertain income tax positions arising from state tax exposures recordedan increase in the same period of 2017. The remaining impacts consisted of tax benefits recognized from excess tax benefits related tonondeductible compensation associated with stock-based compensation and an increasea decrease in excludable income for state income tax purposes.
During the three months ended March 31, 2018,2019, there was a de minimis increasechange in our unrecognized tax benefits. The total amount of gross interest and penalties accrued was immaterial. OurIt is reasonably possible the amount of the unrecognized tax benefits are not expected to change significantly duringbenefit could increase or decrease within the next 12 months.twelve months, which would have an impact on net income.
We are subject to tax in U.S. federal and various state and local jurisdictions, as well as Canada. We are not subject to any material income tax examinations in federal or state jurisdictions for tax years prior to January 1, 2011.2012. We previously paid Notices of Proposed Assessments disallowing employment tax credits totaling $11 million, plus interest of $4 million in connection with the IRS examination of Gevity HR, Inc. and its subsidiaries, which was acquired by TriNet in June 2009. ThisTriNet filed suit in June 2016 to recover the disallowed credits, and the issue is being resolved through the litigation process. Currently, we anticipate our recovery ofTriNet and the refund to likely be less than the total amount.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Lease Commitments
We lease office facilities, including our headquarters and other facilities, and equipment under non-cancellable operating leases. For detail of these commitments refer to Note 13IRS filed cross motions for summary judgment in Part II, Item 8this matter in our 2017 Form 10-K.
Credit Facilities
We maintain a $75 million revolving credit facility which includes capacity for a $40 million letter of credit facility and a $10 million swingline facility. Letters of credit issued pursuant to the revolving credit facility reduce the amount available for borrowing under the revolving credit facility. The total unused portion of the revolving credit facility was $60 million as of March 31, 2018.
The terms of the credit agreement governing the revolving credit facility require us to maintain certain financial ratios at each quarter end. We were in compliance with these covenants at March 31, 2018.federal
We also have a $5 million line of credit facility to secure standby letters of credit related to our workers' compensation obligations. At March 31,district court on February 27, 2018. On September 17, 2018, the total unused portion of the credit facility was $3 million.
Standby Letters of Credit
We have two standby letters of credit totaling $18 million provided as collateral for our workers’ compensation obligations. At March 31, 2018, the facilities were not drawn down.
Contingencies
In August 2015, Howard Welgus, a purported stockholder. filed a putative securities class action lawsuit, Welgus v. TriNet Group, Inc. et. al., under the Securities Exchange Act of 1934 in the United States District Court for the Northern District of California. The complaint was later amended in April 2016 and again in March 2017. On December 19, 2017, the district court granted TriNet’sour motion to dismissfor summary judgment and denied the amended complaintIRS’ motion. On January 18, 2019, the district court entered judgment in its entirety, without leave to amend. Plaintifffavor of TriNet in the amount of $15 million, plus interest. The IRS filed a notice of appeal of the district court’s orderdecision on January 17, 2018. Plaintiff-Appellant filed his opening appeal brief before the Ninth Circuit Court of Appeals on April 27, 2018. TriNet intends to file a responsive brief by May 29, 2018.March 18, 2019. We will continue to vigorously defend our position through the appeal of the district court’s decision vigorously as we see no basis for reversal. We are unable to reasonably estimate the possible loss or expense, or range of losses and expenses, if any, arising from this litigation.litigation process.
NOTE 9. EARNINGS PER SHARE (EPS)
We are and, from time to time, have been and may inThe following table presents the future become involved in various litigation matters, legal proceedings and claims arising in the ordinary course of its business, including disputes with our clients or various class action, collective action, representative action and other proceedings arising from the naturecomputation of our co-employment relationship with our clientsbasic and WSEs in which we are named as a defendant. In addition, due to the nature of our co-employment relationship with our clients and WSEs, we could be subject to liability for federal and state law violations, even if we do not participate in such violations. While our agreements with our clients contain indemnification provisions related to the conduct of our clients, we may not be able to avail ourselves of such provisions in every instance. We have accrued our current best estimates of probable losses with respect to these matters which are individually and in aggregate immaterialdiluted EPS attributable to our consolidated financial statements.common stock:
While the outcome of the matters described above cannot be predicted with certainty, management currently does not believe that any such claims or proceedings or the above mentioned securities class action will have a materially adverse effect on our consolidated financial position, results of operations or cash flows. However, the unfavorable resolution of any particular matter or our reassessment of our exposure for any of the above matters based on additional information obtained in the future could have a material impact on our consolidated financial position, results of operations or cash flows. |
| | | | | | |
| | Three Months Ended March 31, |
| (in millions, except per share data) | 2019 | 2018 |
| Net income | $ | 63 |
| $ | 54 |
|
| Weighted average shares of common stock outstanding | 70 |
| 70 |
|
| Basic EPS | $ | 0.91 |
| $ | 0.77 |
|
| Net income | $ | 63 |
| $ | 54 |
|
| Weighted average shares of common stock | 70 |
| 70 |
|
| Dilutive effect of stock options and restricted stock units | 1 |
| 2 |
|
| Weighted average shares of common stock outstanding | 71 |
| 72 |
|
| Diluted EPS | $ | 0.89 |
| $ | 0.75 |
|
| | | |
| Common stock equivalents excluded from income per diluted share because of their anti-dilutive effect | 1 |
| 1 |
|
NOTE 10. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
We use an independent pricing source to determine the fair value of our AFS. 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. The Company's restricted investments are valued using quoted market prices and multiple dealer quotes.
We did not have any Level 3 financial instruments recognized in our balance sheet as of March 31, 2019 and December 31, 2018. There were no transfers between levels for the three months ended March 31, 2019 and 2018.
Fair Value Measurements on a Recurring Basis
The following table summarizes our financial instruments by significant categories and fair value measurement on a recurring basis as of March 31, 2019 and December 31, 2018.
|
| | | | | | | | | |
| (in millions) | Level 1 | Level 2 | Total |
| March 31, 2019 | | | |
| Cash equivalents: | | | |
| Money market mutual funds | $ | 74 |
| $ | — |
| 74 |
|
| U.S. treasuries | — |
| 3 |
| 3 |
|
| Total cash equivalents | 74 |
| 3 |
| 77 |
|
| Investments: | | | |
| Asset-backed securities | — |
| 35 |
| 35 |
|
| Corporate bonds | — |
| 100 |
| 100 |
|
| U.S. government agencies and government-sponsored agencies | — |
| 6 |
| 6 |
|
| U.S. treasuries | — |
| 42 |
| 42 |
|
| Other debt securities | — |
| 6 |
| 6 |
|
| Total investments | — |
| 189 |
| 189 |
|
| Restricted cash equivalents: | | | |
| Money market mutual funds | 42 |
| — |
| 42 |
|
| Commercial paper | 19 |
| — |
| 19 |
|
| Total restricted cash equivalents | 61 |
| — |
| 61 |
|
| Restricted investments: | | | |
| U.S. treasuries | — |
| 5 |
| 5 |
|
| Exchange traded fund | 1 |
| — |
| 1 |
|
| Certificate of deposit | — |
| 2 |
| 2 |
|
| Total restricted investments | 1 |
| 7 |
| 8 |
|
| Total unrestricted and restricted cash equivalents and investments | $ | 136 |
| $ | 199 |
| $ | 335 |
|
|
| | | | | | | | | |
| (in millions) | Level 1 | Level 2 | Total |
| December 31, 2018 | | | |
| Cash equivalents | | | |
| Money market mutual funds | $ | 4 |
| $ | — |
| $ | 4 |
|
| U.S. treasuries | — |
| 1 |
| 1 |
|
| Total cash equivalents | 4 |
| 1 |
| 5 |
|
| Investments | | | |
| Asset-backed securities | — |
| 33 |
| 33 |
|
| Corporate bonds | — |
| 99 |
| 99 |
|
| U.S. government agencies and government-sponsored agencies | — |
| 7 |
| 7 |
|
| U.S. treasuries | — |
| 41 |
| 41 |
|
| Other debt securities | — |
| 9 |
| 9 |
|
| Total investments | — |
| 189 |
| 189 |
|
| Restricted cash equivalents: | | | |
| Money market mutual funds | 48 |
| — |
| 48 |
|
| Commercial paper | 20 |
| — |
| 20 |
|
| Total restricted cash equivalents | 68 |
| — |
| 68 |
|
| Restricted investments: | | | |
| U.S. treasuries | — |
| 5 |
| 5 |
|
| Exchange traded fund | 1 |
| — |
| 1 |
|
| Certificate of deposit | — |
| 2 |
| 2 |
|
| Total restricted investments | 1 |
| 7 |
| 8 |
|
| Total unrestricted and restricted cash equivalents and investments | $ | 73 |
| $ | 197 |
| $ | 270 |
|
Fair Value of Financial Instruments Disclosure
Long-Term Debt
The carrying value of our long-term debt at March 31, 2019 and December 31, 2018 was $407 million and $414 million, respectively. The estimated fair values of our debt payable at March 31, 2019 and December 31, 2018 were $409 million and $414 million, respectively. The fair value of our debt payable is estimated based on a discounted cash flow, which incorporates credit spreads and market interest rates to estimate the fair value and is considered Level 3 in the hierarchy for fair value measurement.
Legal Proceedings
For the information required in this section, refer to Note 86 in the condensed consolidated financial statements and related notes included in this Form 10-Q.
Risk Factors
There have been no material changes in our risk factors disclosed in Part 1, Item 1A, of our 20172018 Form 10-K.
Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities
Not applicable.
(b) Use of Proceeds from Sales of Unregistered Securities
Not applicable.
(c) Issuer Purchases of Equity Securities
The following table provides information about our purchases of TriNet common stock during the quarter ended March 31, 2018:2019:
|
| | | | | | | | | | | | | |
| Period | Total Number of
Shares Purchased (1) | | Weighted Average Price
Paid Per Share | | Total Number of
Shares
Purchased as Part of Publicly
Announced Plans (2) | | Approximate Dollar Value ($ millions)
of Shares that May Yet be Purchased
Under the Plans (2) |
| January 1 - January 31, 2018 | 2,325 |
| | $ | 43.13 |
| | — |
| | $ | 136 |
|
| February 1 - February 28, 2018 | 73,761 |
| | $ | 41.36 |
| | — |
| | $ | 136 |
|
| March 1 - March 31, 2018 | 195,751 |
| | $ | 47.31 |
| | 160,033 |
| | $ | 129 |
|
| Total | 271,837 |
| | | | 160,033 |
| |
|
|
| | | | | | | | | | | | | |
| Period | Total Number of
Shares Purchased (1) | | Weighted Average Price
Paid Per Share | | Total Number of
Shares
Purchased as Part of Publicly
Announced Plans (2) | | Approximate Dollar Value ($ millions)
of Shares that May Yet be Purchased
Under the Plans (2) |
| January 1 - January 31, 2019 | 419,557 |
| | $ | 43.29 |
| | 395,300 |
| | $ | 58 |
|
| February 1 - February 28, 2019 | 354,542 |
| | $ | 50.75 |
| | 277,300 |
| | $ | 344 |
|
| March 1 - March 31, 2019 | 110,714 |
| | $ | 61.00 |
| | 110,309 |
| | $ | 337 |
|
| Total | 884,813 |
| |
|
| | 782,909 |
| |
|
| |
(1) | Includes shares surrendered by employees to us to satisfy tax withholding obligations that arose upon vesting of restricted stock units granted pursuant to approved plans. |
| |
(2) | We repurchased a total of approximately $8 million of our outstanding common stock during the three months ended March 31, 2018. |
(1) Includes shares surrendered by employees to us to satisfy tax withholding obligations that arose upon vesting of RSUs granted pursuant to approved plans.
(2) We repurchased a total of approximately $38 million of our outstanding common stock during the period ended March 31, 2019.
As of March 31, 2018,2019, we had approximately $129$337 million remaining for repurchases under our stock repurchase program. Stock repurchases under the program are primarily intended to offset the dilutive effect of share-based employee incentive compensation. The purchases were funded from existing cash and cash equivalents balances.
Our stock repurchases and dividends are subject to certain restrictions under the terms of our credit facility.2018 Credit Agreement. For more information about our credit facility2018 Credit Agreement and our stock repurchases, refer to Notes 87 and 9 in Part II, Item 88. Financial Statements and Supplementary Data of our 20172018 Form 10-K.
Defaults Upon Senior Securities
Not applicable.
Mine Safety Disclosures
Not applicable.
Other Information
Not applicable.
Exhibits
Incorporated herein by reference is a list of the exhibits contained in the Exhibit Index below.
EXHIBIT INDEX
|
| | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
| Exhibit No. | | Exhibit | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
10.1*10.1 | | | | | | | | | | | | X |
| 10.2 | | | | | | | | | | | | X |
10.2*10.3 | | | | | | | | | | | | X |
10.3* | | | | | | | | | | | | X |
10.4* | | | | | | | | | | | | X |
10.5* | | | | | | | | | | | | X |
| 31.1 | | | | | | | | | | | | X |
| 31.2 | | | | | | | | | | | | X |
32.1* | | | | | | | | | | | | X |
101.INS | | XBRL Instance Document | | | | | | | | | | |
101.SCH | | XBRL Taxonomy Extension Schema Linkbase Document | | | | | | | | | | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | |
|
| | |
| | | |
| * | Document has been furnished, is deemed not filed and is not to be incorporated by reference into any of TriNet Group, Inc.’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | TRINET GROUP, INC. |
| | |
Date: April 30, 201829, 2019 | | By: | /s/ Burton M. Goldfield |
| | | | Burton M. Goldfield |
| | | | Chief Executive Officer |
| | | | |
Date: April 30, 201829, 2019 | | By: | /s/ Richard Beckert |
| | | | Richard Beckert |
| | | | Chief Financial Officer |
| | | | |
Date: April 30, 201829, 2019 | | By: | /s/ Michael P. Murphy |
| | | | Michael P. Murphy |
| | | | Chief Accounting Officer |
