TRINET GROUP, INC. Executive Summary
Overview
TriNet is a leading provider of HR expertise, payroll services, employee benefits, employment risk mitigation services and human capital management (HCM) software for SMBs. We deliver a comprehensive suite of services that help our clients administer and manage various HR-related needs and functions, such as compensation and benefits, payroll processing, employee data, health insurance and workers' compensation programs, and transactional HR needs using our technology platform, cloud-based software and HR, benefits and compliance expertise. We empower SMBs to focus on what matters most - growing their business. We leverage our scale and industry HR experience to deliver our PEO service offerings tailored for SMBs in specific industry verticals. We believe our vertical approach is a key differentiator for us and creates additional value for our PEO clients driven by addressing their industry-specific HR needs. We offer six industry-tailored PEO vertical services:TriNet Financial Services , TriNet Life Sciences,TriNet Main Street , TriNet Nonprofit, TriNet Professional Services, and TriNet Technology. Through our acquisition of Zenefits inFebruary 2022 , we now offer a self-directed, cloud-based HCM software product and other HR related services for all SMBs without using a co-employment model.
Acquisition
InFebruary 2022 , we acquired Zenefits, a leading cloud HR platform which provides innovative and intuitive HR, benefits, payroll and employee engagement software purpose-built for SMBs. We believe the acquisition of Zenefits and its cloud-based HCM software allows us to diversify our product and service offerings to all SMBs without using a co-employment model, and enables us to dynamically service SMBs throughout their lifecycle and expand the customers we serve. Operational Highlights Our consolidated results for the first quarter of 2022 reflect our continuing efforts to serve our existing clients and attract new customers while supporting the economic recovery of SMBs from the COVID-19 pandemic.
During the three months ended
•continued to grow total revenues,
•completed the acquisition of Zenefits, diversifying our product and service offerings, and
•completed a tender offer to repurchase
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Performance Highlights
Our results for the first quarter ended
Q1 2022
$1.2B $204M 80%
Total revenues Operating income Insurance cost ratio
15 % increase 48 % increase (3) % decrease
$146M $2.21 $168M
Net income Diluted EPS Adjusted Net income *
45 % increase 46 % increase 51 % increase
343,245 348,349 253,766
Average WSEs Total WSEs Average HCM Users
7 % increase 7 % increase
* Non-GAAP measure. See definitions below under the heading " Non-GAAP Financial Measures ".
We continued to achieve quarter-over-quarter revenue growth, reflecting our
higher Average WSEs, rate increases and the expiration of credit programs
created in prior years to benefit our customers during the COVID-19 pandemic.
Our addition of HCM cloud services following the acquisition of Zenefits in
During the first quarter of 2022, our Average WSEs increased 7% and total WSEs increased 7% compared to the same period in 2021, primarily as a result of continued hiring in our installed base.
Increased medical services utilization in the first quarter of 2022, combined
with increased volume due to quarter-over-quarter WSE growth, resulted in higher
insurance costs compared to the same period in 2021.
The growth in total revenues, partially offset by increases in insurance costs
and operating expenses, resulted in increases in our net income and Adjusted Net
Income of 45% and 51%, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Results of Operations
The following table summarizes our results of operations for the first quarter ofMarch 31, 2022 when compared to the same period of 2021. For details of the critical accounting judgments and estimates that could affect our Results of Operations, see the Critical Accounting Judgments and Estimates section within the MD&A in Item 7 of our 2021 Form 10-K. Three Months Ended March 31, (in millions, except operating metrics data) 2022 2021 % Change Income Statement Data: Professional service revenues$ 194 $ 153 27 % Insurance service revenues 1,024 907 13 Total revenues 1,218 1,060 15 Insurance costs 823 751 10 Operating expenses 191 171 12 Total costs and operating expenses 1,014 922 10 Operating income 204 138 48 Other income (expense): Interest expense, bank fees and other (5) (5) - Interest income 1 2 (50) Income before provision for income taxes 200 135 48 Income taxes 54 34 59 Net income$ 146 $ 101 45 % Cash Flow Data: Net cash provided by (used in) operating activities 214$ (175) (222) Net cash used in investing activities (213) (3) 7,000 Net cash provided by (used in) financing activities (353) 56 (730) Non-GAAP measures (1): Adjusted EBITDA$ 242 163 48 Adjusted Net income$ 168 111 51 Corporate Operating Cash Flows 193 131 47 Operating Metrics: Insurance Cost Ratio 80 % 83 % (3) % Average WSEs 343,245 321,295 7 % Total WSEs 348,349 326,216 7 % Average HCM Users (2) 253,766 N/A N/A
(1) Refer to Non-GAAP measures definitions and reconciliations from GAAP
measures under the heading "Non-GAAP Financial Measures".
(2) From
The following table summarizes our balance sheet data as of
March 31, December 31,
(in millions) 2022 2021 % Change
Balance Sheet Data:
Working capital $ 305 $ 700 (56) %
Total assets 3,204 3,309 (3)
Debt 495 495 -
Total stockholders' equity 695 881 (21)
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Non-GAAP Financial Measures
In addition to financial measures presented in accordance with GAAP, we monitor other non-GAAP financial measures that we use to manage our business, to make planning decisions, to allocate resources and to use as performance measures in our executive compensation plan. These key financial measures provide an additional view of our operational performance over the long-term and provide information that we use to maintain and grow our business. The presentation of these non-GAAP financial measures is used to enhance the understanding of certain aspects of our financial performance. It is not meant to be considered in isolation from, superior to, or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. Non-GAAP Measure Definition
How We Use The Measure
Adjusted EBITDA • Net income, excluding the effects • Provides period-to-period comparisons on a
of: consistent basis and an understanding as to how
- income tax provision, our management evaluates the effectiveness of
- interest expense, bank fees and our business strategies by excluding certain
other, non-recurring costs, such as transaction and
- depreciation, integration costs, and non-cash charges, such as
- amortization of intangible assets, depreciation and amortization, and stock-based
- stock based compensation expense, compensation recognized based on the estimated
and fair values. We believe these charges are either
- transaction and integration costs. not directly resulting from our core operations
or not indicative of our ongoing operations.
• Enhances comparisons to prior periods and,
accordingly, facilitates the development of
future projections and earnings growth
prospects.
• Provides a measure, among others, used in the
determination of incentive compensation for
management.
• We also sometimes refer to Adjusted EBITDA
margin, which is the ratio of Adjusted EBITDA to
total revenues.
Adjusted Net Income • Net income, excluding the effects • Provides information to our stockholders and
of: board of directors to understand how our
- effective income tax rate (1), management evaluates our business, to monitor
- stock based compensation, and evaluate our operating results, and analyze
- amortization of other intangible profitability of our ongoing operations and
assets, net, trends on a consistent basis by excluding
- non-cash interest expense (2), certain non-recurring costs and non-cash
- transaction and integration costs, charges.
and
- the income tax effect (at our
effective tax rate (1) of these
pre-tax adjustments.Corporate Operating • Net cash provided by (used in) • Provides information that our stockholders and Cash Flows
operating activities, excluding the management can use to evaluate our cash flows
effects of: from operations independent of the current
- Assets associated with WSEs assets and liabilities associated with our WSEs.
(accounts receivable, unbilled • Enhances comparisons to prior periods and,
revenue, prepaid expenses and other accordingly, used as a liquidity measure to
current assets) and manage liquidity between corporate and WSE
- Liabilities associated with WSEs related activities, and to help determine and
(client deposits and other client plan our cash flow and capital strategies.
liabilities, accrued wages, payroll
tax liabilities and other payroll
withholdings, accrued health benefit
costs, accrued workers' compensation
costs, insurance premiums and other
payables, and other current
liabilities).
(1) Non-GAAP effective tax rate is 25.5% for 2022 and 2021, which excludes the income tax impact from stock-based compensation, changes in uncertain tax positions and nonrecurring benefits or expenses from federal legislative changes.
(2) Non-cash interest expense represents amortization and write-off of our debt issuance costs and loss on a terminated derivative.
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Reconciliation of GAAP to Non-GAAP Measures
The table below presents a reconciliation of Net income to Adjusted EBITDA:
Three Months Ended March 31,
(in millions) 2022 2021
Net income $ 146 $ 101
Provision for income taxes 54 34
Stock based compensation 12 11
Interest expense, bank fees and other 6 5
Depreciation and amortization of intangible assets ¹ 14 12
Transaction and integration costs 10 -
Adjusted EBITDA $ 242 $ 163
Adjusted EBITDA Margin 19.9 % 15.4 %
(1) Amount includes amortization of cloud computing arrangements included in operating expenses.
The table below presents a reconciliation of Net income to Adjusted Net Income:
Three Months Ended March 31,
(in millions) 2022 2021
Net income $ 146 $ 101
Effective income tax rate adjustment 4 -
Stock based compensation 12 11
Amortization of other intangible assets, net 3 1
Non-cash interest expense - 2
Transaction and integration costs 10 -
Income tax impact of pre-tax adjustments (7) (4)
Adjusted Net Income $ 168 $ 111 The table below presents a reconciliation of net cash provided by operating activities to Corporate Operating Cash Flows:
Three Months Ended
March 31,
(in millions) 2022 2021
Net cash provided by (used in) operating activities
Less: Change in WSE related other current assets (9)
(85)
Less: Change in WSE related liabilities 30
(221)
Net cash provided by (used in) operating activities - WSE
$ (306) Net cash provided by operating activities - Corporate$ 193 $ 131 TRINET 10 2022 FORM 10-Q
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Operating Metrics
Worksite Employees (WSE)
Average WSE growth is a volume measure we use to monitor the performance of our
PEO business. We have historically experienced our highest volumes of changes in
new and exiting clients during the first quarter of the year, as SMBs generally
change their payroll service providers at the beginning of the payroll tax year.
Average WSEs increased 7% when comparing the first quarter of 2022 to the same
period in 2021, primarily due to higher Total WSEs at the beginning of 2022
compared to 2021 and increased hiring in our installed base across most
verticals during the current quarter, led by our Technology and Professional
Services verticals. While the number of clients exiting during the first quarter
of 2022 was consistent with the same period in 2021, we experienced higher WSE
attrition during the first quarter of 2022 primarily due to large customers
leaving as they either grew out of the PEO model or were acquired.
Total WSEs can be used to estimate our beginning WSEs for the next period and, as a result, can be used as an indicator of our potential future success in growing our business and retaining clients.
Anticipated revenues for future periods can diverge from the revenue expectation derived from Average WSEs or Total WSEs due to pricing differences across our HR solutions and services and the degree to which clients and WSEs elect to participate in our solutions during future periods. In addition to focusing on growing our Average WSE and Total WSE counts, we also focus on pricing strategies, benefit participation and service differentiation to expand our revenue opportunities. We report the impact of client and WSE participation differences as a change in mix. In addition to focusing on retaining and growing our WSE base, we continue to review acquisition opportunities that would add appropriately to our scale. We continue to invest in efforts intended to enhance client experience and manage attrition, through operational and process improvements.
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HCM Users
Average HCM Users is a volume measure we use to monitor the performance of our cloud-based HCM services business. Average HCM Users from the date of our acquisition of Zenefits,February 15, 2022 to the end of the first quarter of 2022 was 253,766. Insurance Cost Ratio (ICR)
ICR is a performance measure calculated as the ratio of insurance costs to insurance service revenues. We believe that ICR promotes an understanding of our insurance cost trends and our ability to align our relative pricing to risk performance.
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We purchase workers' compensation and health benefits coverage for our
colleagues and WSEs. Under the insurance policies for this coverage, we bear
claims costs up to a defined deductible amount. Our insurance costs, which
comprise a significant portion of our overall costs, are significantly affected
by our WSEs' health and workers' compensation insurance claims experience. We
set our insurance service fees for workers' compensation and health benefits in
advance for fixed benefit periods. As a result, increases in these insurance
costs above our projections, reflected as a higher ICR, result in lower net
income. Conversely, decreases in these insurance costs below our projections,
reflected as a lower ICR, result in higher net income.
Under our fully-insured workers' compensation insurance policies, we assume the
risk for losses up to $1 million per claim occurrence (deductible layer). The
ultimate cost of the workers' compensation services provided cannot be known
until all the claims are settled. Our ability to predict these costs is limited
by unexpected increases in frequency or severity of claims, which can vary due
to changes in the cost of treatments or claim settlements.
Under our risk-based health insurance policies, we assume the risk of
variability in future health claims costs for our enrollees. This variability
typically results from changing trends in the volume, severity and ultimate cost
of medical and pharmaceutical claims, due to changes to the components of
medical cost trend. These trends change, and other seasonal trends and
variability may develop. As a result, it is difficult for us to predict our
insurance costs with accuracy and a significant increase in these costs could
have a material adverse effect on our business.
Three Months Ended March 31,
(in millions) 2022 2021
Insurance costs $ 823 $ 751
Insurance service revenues 1,024 907
Insurance Cost Ratio 80 % 83 %
ICR decreased for the quarter as the increase in ISR in 2022 more than offset
the increase in insurance costs that resulted from increased medical services
utilization and COVID-19 testing, treatment and vaccination costs. ICR in the
first quarter of 2021 was impacted by the $32 million reduction in insurance
service revenues from the 2021 Credit Program and Recovery Credit program, which
increased the ICR by 3 points. While medical services utilization has increased
in 2022, the ICR remains below pre-pandemic levels, as access to medical systems
in the quarter was constrained in regions where increases in hospitalizations
arising from the COVID-19 Omicron variant reduced preventative and elective
procedures.
Total Revenues
Our revenues consist of professional service revenues (PSR) and insurance service revenues (ISR). PSR represents fees charged to clients for processing payroll-related transactions on behalf of our clients, access to our HR expertise, employment and benefit law compliance services, other HR-related services and fees charged to access our cloud-based HCM services. ISR consists of insurance-related billings and administrative fees collected from clients and withheld from WSEs for workers' compensation insurance and health benefit insurance plans provided by third-party insurance carriers.
Monthly total revenues per Average WSE is a measure we use to monitor the success of our PEO pricing strategies. This measure increased 8% during the first quarter of 2022 compared to the same period in 2021.
We also use the following measures to further analyze changes in total revenue:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the combined weighted average percentage changes in service fees for each vertical service and changes in service fees associated with each insurance service offering,
•Mix - the change in composition of Average WSEs within our verticals combined with the composition of our enrolled WSEs within our insurance service offerings,
•Credit - the weighted average change in amounts recognized for the Recovery Credit and 2021 Credit Program, and
•HCM - incremental HCM cloud services revenue from our acquisition of Zenefits
in
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* Total revenues exclude
PSR revenues from our HCM cloud
services
ISR - % represents proportion of
insurance service revenues to total
revenues
The growth in total revenues was primarily driven by higher Average WSEs and
growth in rate, combined with the decrease in credits to customers, as the
credit programs we created in prior years to benefit our customers during the
COVID-19 pandemic have expired.
In the first quarter of 2022, we did not recognize any reduction in revenue for
any credit programs, such as the Recovery Credit or for the 2021 Credit Program.
In the same period in 2021, we recognized a reduction in revenue of $12 million
for the Recovery Credit and $25 million for the 2021 Credit Program.
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 for the first quarter of 2022, as compared to the same period in 2021.
(in millions)
$138 First Quarter 2021 Operating Income Higher total revenues primarily driven by higher
Average WSEs, rate increases
+158 and the expiration of credit programs we created in prior years to benefit our
customers, which reduced revenue by $37 million in the prior year.
-72 Higher insurance costs primarily as a result of higher medical services
utilization and higher volume driven by the growth in WSEs.
Higher OE primarily as a result of highercompensation and consulting expenses
-20 to support initiatives to improve client experience, enhance service offerings,
and improve processes, together with transaction and integration costs from our
acquisition of Zenefits.
$204 First Quarter 2022 Operating Income
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Professional Service Revenues
Our PEO clients are primarily billed on a fee per WSE per month per transaction.
Our vertical approach provides us the flexibility to offer our clients in
different industries with varied services at different prices, which we believe
potentially reduces the value of solely using Average WSE and Total WSE counts
as indicators of future potential revenue performance. Our HCM cloud services
clients are primarily billed a monthly fee per user, with certain fees earned on
a per transaction basis.
PSR from PEO Services customers and HCM cloud services clients was as follows:
Three Months Ended March 31,
(in millions) 2022 2021
PEO Services $ 188 $ 153
HCM Cloud Services (1) 6 -
Total $ 194 $ 153 (1) Represents 1.5 months of revenue from our acquisition of Zenefits on
We also analyze changes in PSR with the following measures:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the weighted average percentage change in fees for each vertical,
•Mix - the change in composition of Average WSEs across our verticals,
•Recovery Credit - the weighted average change in amounts recognized for the Recovery Credit program, and
•HCM - incremental HCM cloud services revenue from our acquisition of Zenefits
in
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The growth in PSR for the quarter was driven by a growth in rate which
incorporates an increase in fees for other services, including COBRA
administration, volume growth due to higher Average WSEs and a decrease in the
Recovery Credit recognized. We continued to experience a favorable change in our
vertical mix of WSEs, as SMBs in our Technology and Professional Services
verticals, who generally utilize more services and had more WSE growth than
other verticals . Our new HCM Cloud Services revenue also contributed to the
increase.
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Insurance Service Revenues
ISR consists of insurance services-related billings and administrative fees collected from our PEO clients and withheld from WSE payroll for health benefits and workers' compensation insurance provided by third-party insurance carriers.
We use the following measures to analyze changes in ISR:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the weighted average percentage change in fees associated with each of our insurance service offerings,
•Mix - all other changes including the composition of our enrolled WSEs within our insurance service offerings (health plan enrollment), and
•Credit - the weighted average change in amounts recognized for the Recovery Credit and 2021 Credit Program.
[[Image Removed: tnet-20220331_g9.jpg]][[Image Removed: tnet-20220331_g10.jpg]][[Image Removed: tnet-20220331_g11.jpg]] The growth in ISR for the quarter was primarily driven by higher Average WSEs, rate increases and the decrease in the Recovery Credit and 2021 Credit Program.
Insurance Costs
Insurance costs include insurance premiums for coverage provided by insurance carriers, payments for claims costs and other risk management services, reimbursement of claims payments made by insurance carriers or third-party administrators below a predefined deductible limit, and changes in accrued costs related to contractual obligations with our workers' compensation and health benefit carriers.
We use the following measures to analyze changes in insurance costs:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the weighted average percentage change in cost trend associated with each of our insurance service offerings, and
•Mix - all other changes including the composition of our enrolled WSEs within our insurance service offerings (health plan enrollment).
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Medical services utilization increased in the first quarter of 2022 as enrollees
returned to outpatient medical, dental and vision care and elective procedures.
The higher overall utilization was partially offset by reductions in some
regions due to the surge of the COVID-19 Omicron variant, which constrained
access to medical systems from mid-December 2021 through January 2022 . As a
result, our medical services utilization for the quarter remained below
pre-pandemic levels. The decrease in utilization in December also contributed to
positive claims development as our accrued health costs were paid during the
first quarter of 2022.
The increase in medical services utilization, combined with increased COVID-19 testing, treatment and vaccination costs, caused the increase in rate. The increase in volume was primarily driven by higher Average WSEs.
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 had approximately 3,300 corporate employees as ofMarch 31, 2022 primarily located in 13 offices across theU.S. Our corporate employees' compensation-related expenses represent a majority of our operating expenses. Compensation costs for our corporate employees include payroll, payroll taxes, SBC, bonuses, commissions and other payroll- and benefits-related costs. Compensation-related expense represented 67% and 65% of our OE in the first quarters of 2022 and 2021, respectively. Transaction and integration costs associated with our acquisition of Zenefits are included in G&A. These costs include advisory, legal, employee retention and cash consideration payable for unvested Zenefits restricted stock. Refer to
Note 7 in Part I, Item 1. Financial Statements and Supplementary Data, of this Form 10-Q for further discussion.
During the first quarter, OE increased 12% when compared to the same period in
2021. The ratio of OE to total revenues was 16% in the first quarter of 2022 and
2021.
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% represents portion of compensation related expense included in operating expenses
We analyze and present our OE based upon the business functions COPS, S&M, G&A and SD&P and D&A. The charts below provide a view of the expenses of the business functions. Dollars are presented in millions and percentages represent year-over-year change.
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$171 Q1 2021 Operating Expenses +6 COPS increased, driven primarily by additional hiring
to support more WSEs.
-1 S&M was consistent with the prior year, with higher compensation offset by a
reduction in accrued broker commissions due to a settlement.
+11 G&A increased, driven primarily by the $10 million of transaction and
integration costs related to the Zenefits acquisition.
SD&P increased, driven primarily by higher technology services expenses as we
+3 continue to work to improve our client experience and our systems and
processes.
+1 D&A increased due to the amortization of intangible assets recognized for the
Zenefits acquisition.
$191 Q1 2022 Operating Expenses
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The primary drivers to the changes in our OE are presented below:
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Other Income (Expense)
Other income (expense) consists primarily of interest and dividend income from investments and interest expense on our 3.50% Senior Notes due 2029 (our 2029 Notes) issued inFebruary 2021 . [[Image Removed: tnet-20220331_g24.jpg]] [[Image Removed: tnet-20220331_g25.jpg]] Interest income, interest expense, bank fees and other for the quarter was consistent with the prior period.
Income Taxes
Our effective tax rate (ETR) was 27% and 25% for the first quarter of 2022 and
2021, respectively. The increase in ETR was primarily attributable to an
increase in nondeductible compensation and a decrease in tax benefits related to
stock-based compensation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Liquidity and Capital Resources
Liquidity
Liquidity is a measure of our ability to access sufficient cash flows to meet
the short-term and long-term cash requirements of our business operations. Our
principal source of liquidity for operations is derived from cash provided by
operating activities. We rely on cash provided by operating activities to meet
our short-term liquidity requirements, which primarily relate to the payment of
corporate payroll and other operating costs, and capital expenditures. Our cash
flow related to WSE payroll and benefits is generally matched by advance
collection from our clients. To minimize the credit risk associated with
remitting the payroll and associated taxes and benefits costs, we require
clients to prefund the payroll and related payroll taxes and benefits costs.
Included in our balance sheets are assets and liabilities resulting from
transactions directly or indirectly associated with WSEs, including payroll and
related taxes and withholdings, our sponsored workers' compensation and health
insurance programs, and other benefit programs. Although we are not subject to
regulatory restrictions that require us to do so, we distinguish and manage our
corporate assets and liabilities separately from those current assets and
liabilities held by us to satisfy our employer obligations associated with our
WSEs as follows:
March 31, 2022 December 31, 2021
(in millions) Corporate WSE Total Corporate WSE Total
Current assets:
Cash and cash equivalents $ 235 $ - $ 235 $ 612 $ - $ 612
Investments 154 - 154 135 - 135
Restricted cash, cash equivalents and 1,216 1,195
investments 19 1,197 19 1,176
Other current assets 73 415 488 91 406 497
Total current assets $ 481 $ 1,612 $ 2,093 $ 857 $ 1,582 $ 2,439
Total current liabilities $ 176 $ 1,612 $ 1,788 $ 157 $ 1,582 $ 1,739
Working capital $ 305 $ - $ 305 $ 700 $ - $ 700 Working capital for WSEs related activities
We designate funds to ensure that we have adequate current assets to satisfy our current obligations associated with WSEs, the Recovery Credit liability and 2021 Credit Program liability. We manage our WSE payroll and benefits obligations through collections of payments from our clients which generally occur two to three days in advance of client payroll dates. We regularly review our short-term obligations associated with our WSEs (such as payroll and related taxes, insurance premium and claim payments) and designate funds required to fulfill these short-term obligations, which we refer to as PFC. PFC is included in current assets as restricted cash, cash equivalents and investments. We manage our sponsored benefit and workers' compensation insurance obligations by maintaining collateral funds in restricted cash, cash equivalents and investments. These collateral amounts are generally determined at the beginning of each plan year and we may be required by our insurance carriers to adjust our collateral balances when facts and circumstances change. We regularly review our collateral balances with our insurance carriers and anticipate funding further collateral in the future based upon our capital requirements. We classify our restricted cash, cash equivalents and investments as current and noncurrent assets to match against the anticipated timing of payments to carriers.
Working capital for corporate purposes
Corporate working capital as of
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
We use our available cash and cash equivalents to satisfy our operational and
regulatory requirements and to fund capital expenditures. We believe that we can
meet our present and reasonably foreseeable operating cash needs and future
commitments through existing liquid assets, continuing cash flows from corporate
operating activities and the potential issuance of debt or equity securities. We
believe our existing corporate cash and cash equivalents and positive working
capital will be sufficient to meet our working capital expenditure needs for at
least the next twelve months.
Cash Flows
The following table presents our cash flow activities for the stated periods:
Three Months Ended March 31,
(in millions) 2022 2021
Corporate WSE Total Corporate WSE Total
Net cash provided by (used in):
Operating activities $ 193 $ 21 $ 214 $ 131 $ (306) $ (175)
Investing activities (209) (4) (213) 6 (9) (3)
Financing activities (353) - (353) 56 - 56
Net increase (decrease) in cash and cash equivalents, $ (369) $ 17 $ (352) $ 193 $ (315) $ (122)
unrestricted and restricted
Cash and cash equivalents, unrestricted and restricted:
Beginning of period 660 1,078 1,738 352 1,291 1,643
End of period $ 291 $ 1,095 $ 1,386 $ 545 $ 976 $ 1,521
Net increase (decrease) in cash and cash equivalents:
Unrestricted $ (377) $ - $ (377) $ 199 $ - $ 199
Restricted 8 17 25 (6) (315) (321)
Operating Activities
Components of net cash provided by (used in) operating activities are as
follows:
Three Months Ended March 31,
(in millions) 2022 2021
Net cash provided by (used in) operating activities $ 214 $ (175)
Net cash provided by (used in) operating activities - WSE 21 (306)
Net cash provided by operating activities - Corporate 193 131
The year-over-year change in net cash provided by operating activities for WSE
purposes was primarily driven by timing of client payments, payments of payroll
and payroll taxes, settlement of the Recovery Credit, and insurance claim
activities. We expect the changes in restricted cash and cash equivalents to
correspond to WSE cash provided by (or used in) operations as we manage our
obligations associated with WSEs through restricted cash.
Our corporate operating cash flows in the three months ended
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Investing Activities
Cash used in investing activities for the periods presented below primarily consisted of purchases of investments and capital expenditures, partially offset by proceeds from the sale and maturity of investments.
Three Months Ended March 31,
(in millions) 2022 2021
Investments:
Purchases of investments (91) (82) Proceeds from sale and maturity of investments 72 84 Acquisition of Zenefits, net of cash acquired (183) - Cash provided by (used in) investments $ (202) $ 2 Capital expenditures: Software and hardware $ (10)$ (4) Office furniture, equipment and leasehold improvements (1) (1) Cash used in capital expenditures $ (11)$ (5) Cash used in investing activities $ (213)$ (3) Investments
We invest a portion of available cash in investment-grade securities with effective maturities less than five years that are classified on our balance sheets as investments.
We also invest funds held as collateral to satisfy our long-term obligation
towards workers' compensation liabilities. These investments are classified on
our balance sheets as restricted cash, cash equivalents and investments. We
review the amount and the anticipated holding period of these investments
regularly in conjunction with our estimated long-term workers' compensation
liabilities and anticipated claims payment trend. At
As of
InFebruary 2022 , we acquired Zenefits for a total purchase price of$209 million , settled by the issuance of$17 million ofTriNet stock to eligible selling shareholders, with the remainder paid in cash from corporate working capital. Refer to Note 11 in the condensed consolidated financial statements and related notes included in this Form 10-Q.
Capital Expenditures
During the three months ended
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Financing Activities
Net cash provided by (used in) financing activities in the three months endedMarch 31, 2022 and 2021 consisted of our debt and equity-related activities. Three Months Ended March 31, (in millions) 2022 2021 Financing activities Repurchase of common stock$ (353) $ (65) Proceeds from issuance of 2029 Notes - 500 Repayment of borrowings - (370) Payment of debt issuance costs - (7) Payment of long-term financing fees
- (2)
Cash provided by (used in) financing activities $
(353)
InFebruary 2022 , our board of directors authorized a$300 million incremental increase to our ongoing stock repurchase program, which was initiated inMay 2014 . We use this program to return value to our stockholders and to offset dilution from the issuance of stock under our equity-based incentive plan and employee purchase plan. Also inFebruary 2022 , we announced a tender offer to purchase for cash up to$300 million in value of our issued and outstanding common stock, plus the right to accept for purchase up to an additional 2% of our outstanding shares. The tender offer expired onMarch 17, 2022 . In accordance with the terms and conditions of the tender offer, we accepted the tender of, and purchased, 3,653,690 shares at a price of$86.50 per share, for an aggregate cost of approximately$319 million , including fees and expenses relating to the tender offer. Included in the 3,653,690 shares that we accepted for purchase were 185,971 shares that we elected to purchase pursuant to our right to purchase up to an additional 2% of our outstanding shares. During the three months endedMarch 31, 2022 , we repurchased a total of 4,010,945 shares of our common stock for approximately$347 million , plus costs, through our stock repurchase program, including the completed tender offer. As ofMarch 31, 2022 , approximately$217 million remained available for repurchase under all authorizations by our board of directors. We plan to use current cash and cash generated from ongoing operating activities to fund this stock repurchase program. InFebruary 2021 , we issued$500 million aggregate principal amount of our 2029 Notes.$370 million of the proceeds was used to repay and terminate the 2018 Term Loan A. The remaining funds were used for general corporate purposes. Refer to Note 9 in Part II, Item 8. Financial Statements and Supplementary Data, of our 2021 Form 10-K for further information.
Capital Resources
As ofMarch 31, 2022 ,$500 million aggregate principal of our 2029 Notes was outstanding. The Indenture governing the 2029 Notes includes restrictive covenants limiting our ability to: (i) create liens on certain assets to secure debt; (ii) grant subsidiary guarantees of certain debt without also providing a guarantee of the 2029 Notes; and (iii) consolidate or merge with or into, or sell or otherwise dispose of all or substantially all of our assets to, another person, subject, in each case, to certain customary exceptions. Our 2021 Credit Agreement includes a$500 million revolving credit facility. AtMarch 31, 2022 , we had$491 million available under our 2021 Credit Agreement. The 2021 Credit Agreement includes negative covenants that limit our ability to incur indebtedness and liens, sell assets and make restricted payments, including dividends and investments, subject to certain exceptions. In addition, the 2021 Credit Agreement also contains other customary affirmative and negative covenants and customary events of default. The 2021 Credit Agreement also contains a financial covenant that requires the Company to maintain certain maximum total net leverage ratios.
We were in compliance with all financial covenants under our 2021 Credit
Agreement at
Critical Accounting Policies, Estimates and Judgments
Other than the inclusion of the following additional item that required significant estimation or judgment, there have been no material changes in our critical accounting policies as discussed in our 2021 Form 10-K.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Business Combinations
Under the acquisition method of accounting we generally recognize the identifiable assets acquired and the liabilities assumed in an acquiree at their estimated fair values as of the date of acquisition. We measure goodwill as the excess of the fair value of consideration transferred over the net of the estimated fair values of the identifiable assets acquired and liabilities assumed. Refer to Note 11 in Part I, Item 1. Financial Statements and Supplementary Data, of this Form 10-Q. The acquisition method of accounting requires us to exercise judgment and make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the estimated fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities related to uncertain tax positions, and contingencies. This method also allows us to refine these estimates over a one-year measurement period to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to retroactively adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could materially decrease net income and result in lower asset values on our consolidated balance sheet. These significant estimates are inherently uncertain as they relate to future economic conditions, future cash flows that we expect to generate from the acquired assets and customer behavior. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.
Recent Accounting Pronouncements
There have been no material changes to our recent accounting pronouncements as discussed in our 2021 Form 10-K.
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