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 PEO 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 recent acquisition of Zenefits, we now also 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 SMBs we serve.
Operational Highlights
Our consolidated results for the first half of 2022 reflect our continuing efforts to serve our existing clients and attract new customers while continuing to support the economic recovery of SMBs from the COVID-19 pandemic.
During the first half of 2022 we:
•continued to grow WSEs and total revenues,
•Reached approximately 610,000 users across our PEO and HCM products,
•established our 2022 Credit Program to benefit our eligible clients, resulting
in a
•announced the third annual TriNet PeopleForce to take place on
•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 second quarter and first half of 2022 when compared to the same periods of 2021 are noted below:
Q2 2022
$1.2B $119M 84%
Total revenues Operating income Insurance cost ratio
9 % increase (2) % decrease (1) % decrease
$85M $1.35 $108M
Net income Diluted EPS Adjusted Net income *
(7) % decrease (1) % decrease 4 % increase
351,366 357,855 252,565
Average WSEs Total WSEs Average HCM Users
6 % increase 5 % 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 addition of HCM cloud services following the acquisition of Zenefits inFebruary 2022 . The quarter-over-quarter revenue growth was partially offset by our 2022 Credit Program, which resulted in a$25 million reduction to revenue. This amount reflects estimated credits that will be paid to eligible clients under this program, based on the expected performance of our health insurance costs during the remainder of 2022. This program is currently limited to$25 million and the estimated credits, and actual payments, may be reduced in future periods based on the actual performance of our health insurance costs.
During the second quarter of 2022, our Average WSEs increased 6% and total WSEs increased 5% compared to the same period in 2021, primarily as a result of continued hiring in our installed base during the current and prior quarters.
Increased medical services utilization in the second 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 was offset by increases in insurance costs,
operating expenses and income taxes, which resulted in a decrease in our net
income of 7%. Excluding the impact of transaction and integration costs from our
acquisition of Zenefits, Adjusted Net Income increased 4%.
YTD 2022
$2.4B $323M 82%
Total revenues Operating income Insurance cost ratio
12 % increase 25 % increase (2) % decrease
$230M $3.58 $276M
Net income Diluted EPS Adjusted Net income *
20 % increase 25 % increase 28 % increase
347,306 252,969
Average WSEs Average HCM Users
6 % increase
* Non-GAAP measure. See definitions below under the heading " Non-GAAP Financial Measures ".
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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 second quarter
and first half of 2022 when compared to the same periods 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 June 30, Six Months Ended June 30,
(in millions, except operating metrics
data) 2022 2021 % Change 2022 2021 % Change
Income Statement Data:
Professional service revenues $ 182 $ 156 17 % $ 376 $ 309 22 %
Insurance service revenues 1,018 944 8 2,042 1,851 10
Total revenues 1,200 1,100 9 2,418 2,160 12
Insurance costs 852 798 7 1,675 1,549 8
Operating expenses 229 181 27 420 352 19
Total costs and operating expenses 1,081 979 10 2,095 1,901 10
Operating income 119 121 (2) 323 259 25
Other income (expense):
Interest expense, bank fees and other (5) (5) - (11) (10) 10
Interest income 2 1 100 3 3 -
Income before provision for income taxes 116 117 (1) 315 252 25
Income taxes 31 26 19 85 60 42
Net income $ 85 $ 91 (7) % $ 230 $ 192 20 %
Cash Flow Data:
Net cash provided by (used in) operating
activities $ 125 $ (190) (166) %
Net cash used in investing activities (191) (135) 41
Net cash provided by (used in) financing
activities (385) 43 (995)
Non-GAAP measures (1):
Adjusted EBITDA $ 162 154 5 % $ 404 $ 317 27 %
Adjusted Net income $ 108 104 4 $ 276 $ 215 28
Corporate Operating Cash Flows $ 293 $ 240 22
Operating Metrics:
Insurance Cost Ratio 84 % 85 % (1) % 82 % 84 % (2) %
Average WSEs 351,366 332,719 6 % 347,306 327,007 6 %
Total WSEs 357,855 339,935 5 % 357,855 339,935 5 %
Average HCM Users (2) 252,565 N/A N/A 252,969 N/A N/A
(1) Refer to Non-GAAP measures definitions and reconciliations from GAAP
measures under the heading "Non-GAAP Financial Measures".
(2) For the six months ended
The following table summarizes our balance sheet data as of
June 30, December 31,
(in millions) 2022 2021 % Change
Balance Sheet Data:
Working capital $ 374 $ 700 (47) %
Total assets 3,044 3,309 (8)
Debt 495 495 -
Total stockholders' equity 763 881 (13)
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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 intangible assets, profitability of our ongoing operations and
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:
Six Months Ended
Three Months Ended June 30, June 30,
(in millions) 2022 2021 2022 2021
Net income $ 85 $ 91 $ 230 $ 192
Provision for income taxes 31 26 85 60
Stock based compensation 18 13 30 24
Interest expense, bank fees and other 5 5 11 10
Depreciation and amortization of intangible assets 31
¹ 16 19 31
Transaction and integration costs 7 - 17 -
Adjusted EBITDA $ 162 $ 154 $ 404 $ 317
Adjusted EBITDA Margin 13.5 % 14.0 % 16.7 % 14.7 %
(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:
Six Months Ended
Three Months Ended June 30, June 30,
(in millions) 2022 2021 2022 2021
Net income $ 85 $ 91 $ 230 $ 192
Effective income tax rate adjustment - (4) 5 (4)
Stock based compensation 18 13 30 24
Amortization of intangible assets, net 5 9 8 10
Non-cash interest expense 1 1 1 3
Transaction and integration costs 7 - 17 -
Income tax impact of pre-tax adjustments (8) (6) (15) (10)
Adjusted Net Income $ 108 $ 104 $ 276 $ 215 The table below presents a reconciliation of net cash provided by operating activities to Corporate Operating Cash Flows:
Six Months Ended
June 30,
(in millions) 2022 2021
Net cash provided by (used in) operating activities
Less: Change in WSE related other current assets 9
(96)
Less: Change in WSE related liabilities (177)
(334)
Net cash provided by (used in) operating activities - WSE
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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 services. Average WSEs increased 6% when comparing the second 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. The increase in hiring in our installed base
was partially offset by attrition in our Main Street , Technology and
Professional Services verticals.
Total WSEs can be used to estimate our beginning WSEs for the next period and, as a result, can be used as an indicator of our potential future revenues, insurance costs and COPS.
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. Average HCM Users for the second quarter and first half of 2022 was 252,565 and 252,969, respectively.
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.
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
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
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 June 30, Six Months Ended June 30,
(in millions) 2022 2021 2022 2021
Insurance costs $ 852 $ 798 $ 1,675 $ 1,549
Insurance service revenues 1,018 944 2,042 1,851
Insurance Cost Ratio 84 % 85 % 82 % 84 %
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 decreased for the six months ended June 30, 2022 due to the increase in ISR,
resulting from higher Average WSEs, rate increases and the expiration of our
credit programs created in prior years. This was partially offset by the
reduction in revenue recognized for the 2022 Credit Program.
ICR for the quarter and first half of 2022 also benefited from favorable prior
year development on our accrued workers' compensation costs, primarily due to
lower than expected claim frequency as WSEs have shifted to remote work during
the pandemic.
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 due to a surge in COVID-19 cases
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. We also recognized a$25 million reduction to revenue under our 2022 Credit Program. This amount reflects estimated credits that will be paid to eligible clients under this program, based on the expected performance of our health insurance costs in 2022, and is currently limited to$25 million . These credits are recorded as a reduction to ISR and are payable within 12 months to eligible clients as ofJune 30, 2022 . To the extent we experience higher than expected health insurance costs during the remainder of 2022, this estimate, and our actual payment, may be reduced. TRINET 13 2022 Q2 FORM 10-Q -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Monthly total revenues per Average WSE is a measure we use to monitor the success of our PEO pricing strategies. This measure increased 2% during the second 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, 2021 Credit Program and 2022 Credit Program, and
•HCM - incremental HCM cloud services revenue from our acquisition of Zenefits
in
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PSR
ISR - % represents proportion of insurance service revenues to total revenues
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The growth in total revenues for the second quarter and the first half of 2022 was primarily driven by higher Average WSEs and growth in rate, and the expiration of credit programs created in prior years to benefit our customers during the COVID-19 pandemic. This was offset by the$25 million reduction in revenue recognized in the second quarter of 2022 for our new 2022 Credit Program. Our addition of HCM cloud services, following the acquisition of Zenefits inFebruary 2022 , also contributed to our growth. TRINET 14 2022 Q2 FORM 10-Q -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
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 second quarter and first half of 2022, as compared to the same periods
in 2021.
(in millions)
$121 Second Quarter 2021 Operating Income
+100 Higher total revenues primarily driven by higher Average WSEs and rate
increases, partially offset by our 2022 Credit Program.
-54 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
-48 to support initiatives to improve client experience, enhance service offerings,
and improve processes, together with incremental expenses, including
transaction and integration costs from our acquisition of Zenefits.
$119 Second Quarter 2022 Operating Income
(in millions)
$259 YTD 2021 Operating Income
Higher total revenues primarily driven by higherAverage WSEs, rate increases
+258 and the expiration of credit programs we created in prior years to benefit our
customers, which reduced revenue by $42 million in the prior year, partially
offset by our 2022 Credit Program.
-126 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
-68 to support initiatives to improve the client experience, enhance service
offerings, and improve processes, together with incremental expenses, including
transaction and integration costs, from our acquisition of Zenefits.
$323 YTD 2022 Operating Income
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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 June 30, Six Months Ended June 30,
(in millions) 2022 2021 2022 2021
PEO Services $ 170 $ 156 $ 358 $ 309
HCM Cloud Services (1) 12 - 18 -
Total $ 182 $ 156 $ 376 $ 309 (1) Represents revenue since 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 second quarter and the first half of 2022 was driven
by a growth in rate, volume growth due to higher Average WSEs. 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, had more WSE growth than other verticals. Our new HCM Cloud Services
revenue also contributed to the increase.
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, 2021 Credit Program and 2022 Credit Program.
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[[Image Removed: tnet-20220630_g13.jpg]][[Image Removed: tnet-20220630_g14.jpg]] The growth in ISR for the second quarter and the first half of 2022 was primarily driven by higher Average WSEs, rate increases and the decrease in the Recovery Credit and 2021 Credit Program. This was partially offset by the$25 million reduction in revenue recognized in the second quarter under our 2022 Credit Program. TRINET 17 2022 Q2 FORM 10-Q
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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 second quarter and the first half of 2022 as enrollees returned to outpatient medical, dental and vision care and elective procedures. The higher utilization was partially offset by reductions in some regions due to a surge of COVID-19 cases, which constrained access to medical systems frommid-December 2021 throughJanuary 2022 and inJune 2022 . As a result, our medical services utilization for the quarter remained below pre-pandemic levels. The decrease in utilization inDecember 2021 also contributed to positive claims development as our accrued health costs were paid during the first half 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.
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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 3,500 corporate employees as ofJune 30, 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 66% and 62% of our OE in the second quarters of 2022 and 2021 and 67% and 63% in the first half 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 tied to ongoing employment. Refer to Note 6 in Part I, Item 1. Financial Statements and Supplementary Data, of this Form 10-Q for further discussion. During the second quarter and the first half of 2022, OE increased 27% and 19%, respectively, when compared to the same periods in 2021. During the second quarter and the first half of 2022, the ratio of OE to total revenues were 19% and 17%, respectively, when compared to the same periods in 2021.
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% represents portion of compensation related expense included in operating expenses
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
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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$181 Q2 2021 Operating Expenses +10 COPS increased, driven primarily by additional hiring
to support more WSEs and
incremental costs related to our HCM Cloud Services.
+17 S&M increased, driven primarily by higher compensation and travel and
entertainment.
G&A increased, driven primarily by higher compensation, consulting and
+15 technology spend and $7 million of transaction and integration costs related to
the Zenefits acquisition.
SD&P increased, driven primarily by higher compensation and technology services
+9 expenses as we continue to work to improve our client experience and our
systems and processes.
D&A decreased due to the impairment of customer relationship intangibles in the
-3 prior year, partially offset by the amortization of intangible assets
recognized for the Zenefits acquisition.
$229 Q2 2022 Operating Expenses
(in millions)
$352 YTD 2021 Operating Expenses
+16 COPS increased, driven primarily by additionalhiring to support more WSEs and
incremental costs related to our HCM Cloud Services.
S&M increased, due to increased compensation, technology spend, travel and
+16 entertainment, partially offset by reduction in accrued broker commissions due
to settlement.
G&A increased, driven primarily by the $17 million of transaction and
+26 integration costs related to the Zenefitsacquisition, higher compensation and
technology services expenses to improve our client experience, our systems and
processes, and to enhance our service offerings.
SD&P increased, driven primarily by increased compensation and technology
+12 services expenses as we continue to work to improve our client experience and
our systems and processes.
D&A decreased due to the impairment of customer relationship intangibles in the
-2 prior year, partially offset by the amortization of intangible assets
recognized for the Zenefits acquisition.
$420 YTD 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-20220630_g29.jpg]] [[Image Removed: tnet-20220630_g30.jpg]] TRINET 21 2022 Q2 FORM 10-Q -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Interest income, interest expense, bank fees and other for the second quarter and the first half of 2022 was consistent with the prior periods.
Income Taxes
Our effective tax rate (ETR) was 27% and 22% for the second quarter of 2022 and
2021, respectively and 27% and 24% for the first half of 2022 and 2021,
respectively. Our ETR in the prior year periods benefited from a favorable
adjustment of our previously disputed receivable from the
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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:
June 30, 2022 December 31, 2021
(in millions) Corporate WSE Total Corporate WSE Total
Current assets:
Cash and cash equivalents $ 336 $ - $ 336 $ 612 $ - $ 612
Investments 120 - 120 135 - 135
Restricted cash, cash equivalents and 1,028 1,195
investments 20 1,008 19 1,176
Other current assets 76 397 473 91 406 497
Total current assets $ 552 $ 1,405 $ 1,957 $ 857 $ 1,582 $ 2,439
Total current liabilities $ 178 $ 1,405 $ 1,583 $ 157 $ 1,582 $ 1,739
Working capital $ 374 $ - $ 374 $ 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 and our 2022 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 ofJune 30, 2022 decreased$326 million fromDecember 31, 2021 , primarily driven by the$276 million decrease in corporate unrestricted cash and cash equivalents which as we paid cash to repurchase our stock and acquire Zenefits. 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. TRINET 23 2022 Q2 FORM 10-Q -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Cash Flows
The following table presents our cash flow activities for the stated periods:
Six Months Ended June 30,
(in millions) 2022 2021
Corporate WSE Total Corporate WSE Total
Net cash provided by (used in):
Operating activities $ 293 $ (168) $ 125 $ 240 $ (430) $ (190)
Investing activities (184) (7) (191) (128) (7) (135)
Financing activities (385) - (385) 43 - 43
Net increase (decrease) in cash and cash equivalents, $ (276) $ (175) $ (451) $ 155 $ (437) $ (282)
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 $ 384 $ 903 $ 1,287 $ 507 $ 854 $ 1,361
Net increase (decrease) in cash and cash equivalents:
Unrestricted $ (276) $ - $ (276) $ 163 $ - $ 163
Restricted - (175) (175) (8) (437) (445)
Operating Activities
Components of net cash provided by (used in) operating activities are as
follows:
Six Months Ended June 30,
(in millions) 2022 2021
Net cash provided by (used in) operating activities $ 125 $ (190)
Net cash provided by (used in) operating activities - WSE (168) (430)
Net cash provided by operating activities - Corporate 293 240
The year-over-year change in net cash used in operating activities for WSE
purposes was primarily driven by timing of client payments, payments of payroll
and payroll taxes, settlement of the Recovery Credit, and insurance claim
activities. We expect the changes in restricted cash and cash equivalents to
correspond to WSE cash provided by (or used in) operations as we manage our
obligations associated with WSEs through restricted cash.
Our corporate operating cash flows in the first half of June 30, 2022 increased,
when compared to the same period in 2021, due to our higher Net income and the
timing of our payments of corporate obligations.
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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.
Six Months Ended June 30,
(in millions) 2022 2021
Investments:
Purchases of investments (157) (267)
Proceeds from sale and maturity of investments 175 149
Acquisition of Zenefits, net of cash acquired (183)
-
Cash provided by (used in) investments $ (165)
Cash used in capital expenditures $ (26)$ (17) Cash used in investing activities $ (191)$ (135) 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 10 in the condensed consolidated financial statements and related notes included in this Form 10-Q.
Capital Expenditures
During the first half of 2022 and 2021, we continued to make investments in software and hardware as we enhanced our existing service offerings and technology platform. We expect capital investments in our software and hardware to continue in the future.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Financing Activities
Net cash provided by (used in) financing activities in the first half of 2022 and 2021 consisted of our debt and equity-related activities.
Six Months Ended June 30,
(in millions) 2022 2021
Financing activities
Repurchase of common stock $ (385) $ (78)
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 $
(385)
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 first half of 2022, we repurchased a total of 4,419,423 shares of our common stock for approximately$380 million , plus costs, through our stock repurchase program, including the completed tender offer. As ofJune 30, 2022 , approximately$184 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 our 2018 Term Loan. 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 ofJune 30, 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. AtJune 30, 2022 , we had$495 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
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.
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 1 0 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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