TRINET GROUP, INC. Executive Summary
Overview
TriNet offers access to human capital expertise, benefits, payroll, risk mitigation and compliance, all enabled by industry leading technology capabilities.TriNet's suite of products also includes services and software-based solutions to help streamline workflows by connecting HR, benefits, payroll, time and attendance, and employee engagement. Clients can use our industry tailored PEO services and technology platform to receive the full benefit of our HCM services enabling their WSEs to participate in ourTriNet -sponsored employee benefit plans. Clients can alternatively choose to use our self-directed, cloud-based HRIS software solution and add HR services such as payroll and access to benefits management as needed. By providing PEO and HRIS services, we believe that we can support a wider range of SMBs and create a pipeline of HRIS clients that may be able to benefit from and transition toTriNet's higher-touch PEO services at future points in their business lifecycle.
Operational Highlights
Our consolidated results for the first quarter of 2023 reflect our continuing efforts to serve our clients through the current economic uncertainty and invest in our platform.
During the three months ended
•continued to focus on improving customer retention and sales performance,
•grew total revenues,
•continued to invest in expanding our sales organization to drive future growth,
•prepared for our new branding launch at the beginning of April, and
•utilized our scale and knowledge to assist our WSEs, PEO clients and HRIS clients during and following the liquidity challenges in regional banks ensuring that all of our SMB clients were able to successfully run payroll in the critical week following theSilicon Valley Bank failure. TRINET 8 2023 Q1 FORM 10-Q
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Performance Highlights
Our results for the first quarter ended
Q1 2023
$1.2B $169M 82%
Total revenues Operating income Insurance cost ratio
2 % increase (17) % decrease 2 % increase
$131M $2.17 $150M
Net income Diluted EPS Adjusted Net income *
(10) % decrease (2) % decrease (11) % decrease
327,107 328,299 231,347
Average WSEs Total WSEs Average HRIS Users
(5) % decrease (6) % decrease (9) % decrease
* Non-GAAP measure. See definitions below under the heading " Non-GAAP Financial Measures ".
We continued to achieve quarter-over-quarter revenue growth, reflecting our insurance and service fee rate increases and the addition of HRIS cloud services following the acquisitions of Zenefits inFebruary 2022 and Clarus R+D inSeptember 2022 , partially offset by lower volume due to a decrease in Average WSEs. During the first quarter of 2023, our Average WSEs decreased 5% and total WSEs decreased 6% compared to the same period in 2022, primarily as a result of large client attrition in 2022 and lower hiring in our installed base.
Increased medical services utilization in the first quarter of 2023, resulted in a higher insurance cost ratio compared to the same period in 2022 due to increased health benefits utilization and inflation in health costs.
Growth in our health insurance costs and growth in operating expenses including
the expenses to support our HRIS product, partially offset by higher revenues
and interest income, resulted in decreases in our net income of 10% and Adjusted
Net income of 11%.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Results of Operations
The following table summarizes our results of operations for the first quarter endedMarch 31, 2023 when compared to the same period of 2022. For details of the critical accounting judgments and estimates that could affect our Results of Operations, see the Critical Accounting Judgments and Estimates section within the MD&A in Item 7 of our 2022 Form 10-K. Three Months Ended March 31, (in millions, except operating metrics data) 2023 2022 % Change Income Statement Data: Professional service revenues$ 205 $ 194 6 % Insurance service revenues 1,041 1,024 2 Total revenues 1,246 1,218 2 Insurance costs 852 823 4 Operating expenses 225 191 18 Total costs and operating expenses 1,077 1,014 6 Operating income 169 204 (17) Other income (expense): Interest expense, bank fees and other (7) (5) 40 Interest income 18 1 1,700 Income before provision for income taxes 180 200 (10) Income taxes 49 54 (9) Net income$ 131 $ 146 (10) % Cash Flow Data: Net cash provided by (used in) operating activities (77) 214 (136) Net cash used in investing activities (23) (213) (89) Net cash provided by (used in) financing activities 200 (353) (157) Non-GAAP measures (1): Adjusted EBITDA$ 223 242 (8) Adjusted Net income$ 150 168 (11) Corporate Operating Cash Flows 169 193 (12) Operating Metrics: Insurance Cost Ratio 82 % 80 % 2 % Average WSEs 327,107 343,245 (5) % Total WSEs 328,299 348,349 (6) % Average HRIS Users (2) 231,347 253,766 (9) %
(1) Refer to Non-GAAP measures definitions and reconciliations from GAAP measures under the heading "Non-GAAP Financial Measures".
(2) For the three months ended
The following table summarizes our balance sheet data as of
March 31, December 31,
(in millions) 2023 2022 % Change
Balance Sheet Data:
Working capital 394 $ 338 17 %
Total assets 3,736 3,443 9
Debt 791 496 59
Total stockholders' equity 825 775 6
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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, which include transaction
- depreciation, and integration costs, as well as certain
- amortization of intangible assets, non-cash charges such as depreciation and
- stock based compensation expense, amortization, and stock-based compensation and
- amortization of cloud computing certain impairment charges recognized based on
arrangements, and the estimated fair values. We believe these
- transaction and integration costs. charges are either not directly resulting from
our core operations or not indicative of our
ongoing operations.
• Enhances comparisons to the prior period 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, certain non-cash charges.
- transaction and integration costs,
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 period 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 25.6% and 25.5% for the first quarter of
2023 and 2022, respectively, 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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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
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) 2023 2022
Net income $ 131 $ 146
Provision for income taxes 49 54
Stock based compensation 11 12
Interest expense, bank fees and other 7 6
Depreciation and amortization of intangible assets 18 14
Amortization of cloud computing arrangements 2 -
Transaction and integration costs 5 10
Adjusted EBITDA $ 223 $ 242
Adjusted EBITDA Margin 17.9 % 19.9 %
The table below presents a reconciliation of Net income to Adjusted Net Income:
Three Months Ended March 31,
(in millions) 2023 2022
Net income $ 131 $ 146
Effective income tax rate adjustment 3 4
Stock based compensation 11 12
Amortization of other intangible assets, net 6 3
Transaction and integration costs 5 10
Income tax impact of pre-tax adjustments (6) (7)
Adjusted Net Income $ 150 $ 168 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) 2023 2022
Net cash provided by (used in) operating activities $
(77)
Less: Change in WSE related other current assets
(178) (9)
Less: Change in WSE related liabilities (68) 30 Net cash provided by (used in) operating activities - WSE$ (246) $ 21 Net cash provided by operating activities - Corporate$ 169 $ 193 TRINET 12 2023 Q1 FORM 10-Q
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Operating Metrics
Worksite Employees (WSE)
Average WSE change is a volume measure we use to monitor the performance of our
business. Average WSEs decreased 5% when comparing the first quarter of 2023 to
the same period in 2022 as seasonal client attrition at the start of the year,
primarily from our Technology and Professional Services verticals, outpaced new
client additions. In addition, while employment in our installed client base
rose during the first quarter of 2022, employment was slightly down in the first
quarter of 2023.
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
generating revenue, growing our business and retaining clients. Total WSEs
decreased 6% when compared to the same period in 2022, as net client attrition
over the past year has outpaced new client additions and an overall increase in
employment in our installed client base over the past year, which has declined
given the current macroeconomic environment.
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.
We continue to invest in efforts intended to enhance client experience and
manage attrition, through product development as well as operational and process
improvements. In addition to focusing on retaining and growing our WSE base, we
continue to review acquisition opportunities that would add appropriately to
expand our product offering and to provide scale.
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HRIS Users
Average HRIS Users is a volume measure we use to monitor the performance of our cloud-based HRIS services. Average HRIS Users for the first quarter of 2023 was 231,347. Average HRIS Users from the date of our acquisition of Zenefits,February 15, 2022 to the end of the first quarter of 2022 was 253,766. The decrease in Average HRIS Users was primarily driven by client attrition outpacing new client additions. While the client attrition rate for the first quarter of 2023 was similar to the prior year, new client additions in the first quarter have not been as high as the prior year.
Insurance Cost Ratio (ICR)
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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 health benefits in advance for fixed benefit periods. As a result, increases in insurance costs above our projections, reflected as a higher ICR, result in lower net income. Decreases in insurance costs below our projections, reflected as a lower ICR, result in higher net income, but can be an indicator that insurance costs are developing more slowly than our projections, which are reflected in our fees, and this can have a negative impact on client retention and new sales. 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, which we define as changes in participant use of services, including the introduction of new treatment options, changes in treatment guidelines and mandates, and changes in the mix, cost of providing treatment and timing of services provided to plan participants. 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) 2023 2022 Insurance costs $ 852 $ 823 Insurance service revenues 1,041 1,024 Insurance Cost Ratio 82 % 80 % ICR increased for the first quarter of 2023 as insurance costs grew at a higher rate than ISR. Insurance costs increased due to higher medical services utilization compared to last year and we have seen early evidence of inflation in health costs. ISR increased due to rate increases, partially offset by lower volume due to lower Average WSEs. The increase in ICR was partially increased by higher margins earned on worker's compensation services.
Total Revenues
Our revenues consist of PSR and ISR. PSR represents fees charged to clients for processing payroll-related transactions on behalf of our PEO and HRIS clients, access to our HR expertise, employment and benefit law compliance services, other HR-related services and fees charged to access our cloud-based HRIS 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 our PEO pricing strategies. This measure increased 6% during the first quarter of 2023 compared to the same period in 2022.
We also use the following measures to further analyze changes in total revenue:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the combined weighted average percentage changes in service fees for each vertical service and changes in service fees associated with each insurance service offering, •Mix - the change in composition of Average WSEs within our verticals combined with the composition of our enrolled WSEs within our insurance service offerings and the composition of products and services our clients receive, including Clarus R+D,
•Credit - the weighted average change in amounts recognized for our previous credit programs, and
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
•HRIS - incremental HRIS cloud services revenue from our acquisition of Zenefits
in
[[Image Removed: 2276]] [[Image Removed: 2280]][[Image Removed: 2284]]
PSR
ISR - % represents proportion of insurance service revenues to total revenues
*Total revenues generated from PEO services only
The growth in total revenues for the first quarter of 2023 was primarily driven
by rate increases, partially offset by lower volume from our PEO services. Lower
volume was driven by lower WSEs primarily in our Technology and Professional
Services verticals due to client attrition and lower employment in our client
base. First quarter revenues were also higher due to a full quarter of revenue
from our HRIS product in the first quarter of 2023 compared to a half-quarter in
2022.
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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, expenses for claims costs and risk management and administrative services, and changes in accrued costs related to contractual obligations with our workers' compensation and health benefit carriers. Our OE consists primarily of our colleagues' 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 2023, as compared to the same period in 2022.
(in millions)
$204 First Quarter 2022 Operating Income +28 Higher total revenues primarily driven by rate
increases and a full quarter of
HRIS revenue, partially offset by lower Average WSEs.
-29 Higher insurance costs primarily as a result of higher medical services
utilization and health cost inflation partiallyoffset by lower Average WSEs.
Higher OE primarily as a result of higher compensation expenses to support a
-34 full quarter of supporting the HRIS product as well as initiatives to improve
client experience, enhance service offerings, and improve processes, together
with higher sales and marketing expenses.
$169 First Quarter 2023 Operating Income
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Professional Service Revenues
Our PEO and HRIS clients are primarily billed on a fee per WSE or HRIS User per
month per transaction. Our vertical approach provides us the flexibility to
offer our PEO 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.
PSR from PEO Services customers and HRIS cloud services clients was as follows:
Three Months Ended March 31,
(in millions) 2023 2022
PEO Services $ 193 $ 188
HRIS Cloud Services 12 6
Total $ 205 $ 194 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 and the composition of products and services our clients receive, including Clarus R+D,
•Credit - the weighted average change in amounts recognized for our Recovery Credits, and
•HRIS - incremental HRIS cloud services revenue from our acquisition of Zenefits
in
[[Image Removed: 1555]][[Image Removed: 1556]][[Image Removed: 1558]]
The growth in PSR for the first quarter of 2023 was primarily driven by rate increases from our PEO services, as well as the higher HRIS revenue from a full quarter of offering our HRIS product versus only half a quarter in the first quarter of 2022. These increases were partially offset by lower volume as a result of lower WSEs, primarily in our Technology and Professional services verticals due to client attrition and lower employment at existing clients.
Insurance Service Revenues
ISR consists of insurance services-related billings and administrative fees collected from 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 amounts recognized for our previous credit programs.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
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The growth in ISR for the first quarter of 2023 was primarily driven by rate
increases, including higher participation rates in health benefits services from
WSEs. This was partially offset by lower volume due to lower average WSEs.
Insurance Costs
Insurance costs include insurance premiums for coverage provided by insurance carriers, expenses for claims costs and other risk management and administrative 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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The increase in insurance costs from the first quarter of 2022 was primarily
driven by higher medical services utilization, higher participation rates in
health benefits services and health cost inflation. These trends were partially
offset by lower volume due to lower Average WSEs in the first quarter of 2023.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
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 3,600 corporate employees as ofMarch 31, 2023 primarily across theU.S. but also inIndia andCanada following our 2022 acquisition of Zenefits. Compensation costs for our colleagues include payroll, payroll taxes, SBC, bonuses, commissions and other payroll- and benefits-related costs. Compensation-related expense represented 65% and 67% of our OE in the first quarters of 2023 and 2022, respectively.
Transaction and integration costs associated with our acquisitions of Zenefits and Clarus R+D are included in G&A. These costs include advisory, legal, employee retention costs tied to ongoing employment.
During the first quarter of 2023, OE increased 18%, when compared to the same period in 2022. The ratio of OE to total revenues were 18% and 16%, during the first quarter of 2023 and 2022.
[[Image Removed: 1325]][[Image Removed: 1326]][[Image Removed: 1327]]
% 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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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
(in millions)
$191 Q1 2022 Operating Expenses +8 COPS increased, driven primarily by additional hiring
and incremental costs
related to a full quarter of our HRIS services product.
+24 S&M increased, driven primarily by advertising costs, broker commissions,
additional hiring and higher compensation to support sales.
-4 G&A decreased, driven primarily by lower transactionand integration expenses.
+1 SD&P was consistent with the prior year as we continue to invest in our systems
and processes.
+5 D&A increased due to the amortization of intangible assets recognized for the
Zenefits and Clarus R+D acquisitions.
$225 Q1 2023 Operating Expenses
The primary spend type drivers to the changes in our OE are presented below:
[[Image Removed: 1663]] 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 and the draw-down on our 2021 Revolver. [[Image Removed: 216]] [[Image Removed: 227]] The growth in interest income for the first quarter of 2023 was primarily driven by higher interest earned on cash deposits due to higher market interest rates in 2023. Interest expense, bank fees and other for the first quarter of 2023 was higher compared to prior period due to borrowings under our 2021 Revolver. TRINET 20 2023 Q1 FORM 10-Q -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Income Taxes
Our ETR was 27% for the first quarter of 2023 and 2022 as our slight decrease in
tax benefits related to stock compensation from the first quarter of 2022 was
offset by a decrease in non-deductible compensation in the first quarter of
2023.
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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 PEO clients to prefund the payroll and related payroll taxes and benefits costs.
To ensure that we maintained excess liquidity during the regional banking
liquidity challenges, we drew down the available
We believe that we can meet our present and reasonably foreseeable operating
cash needs and future commitments through existing liquid assets and continuing
cash flows from corporate operating activities. We hold both corporate cash and
cash associated with WSEs across multiple financial institutions to reduce
concentrations of counterparty risk.
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, 2023 December 31, 2022
(in millions) Corporate WSE Total Corporate WSE Total
Current assets:
Cash and cash equivalents $ 707 $ - $ 707 $ 354 $ - $ 354
Investments 89 - 89 76 - 76
Restricted cash, cash equivalents and 1,016 1,263
investments 21 995 22 1,241
Other current assets 84 733 817 78 555 633
Total current assets $ 901 $ 1,728 $ 2,629 $ 530 $ 1,796 $ 2,326
Total current liabilities $ 507 $ 1,728 $ 2,235 $ 192 $ 1,796 $ 1,988
Working capital $ 394 $ - $ 394 $ 338 $ - $ 338
As of March 31, 2023 , we did not have any material off-balance sheet
arrangements that are reasonably likely to have a current or future effect on
our financial condition, results of operations, liquidity, capital expenditures
or capital resources.
Working capital for WSEs related activities
We designate funds to ensure that we have adequate current assets to satisfy our
current obligations associated with WSEs. 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Working capital for corporate purposes
Corporate working capital as of
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) 2023 2022
Corporate WSE Total Corporate WSE Total
Net cash provided by (used in):
Operating activities $ 169 $ (246) $ (77) $ 193 $ 21 $ 214
Investing activities (21) (2) (23) (209) (4) (213)
Financing activities 200 - 200 (353) - (353)
Net increase (decrease) in cash and cash equivalents, $ 348 $ (248) $ 100 $ (369) $ 17 $ (352)
unrestricted and restricted
Cash and cash equivalents, unrestricted and restricted:
Beginning of period $ 406 $ 1,131 $ 1,537 $ 660 $ 1,078 $ 1,738
End of period $ 754 $ 883 $ 1,637 $ 291 $ 1,095 $ 1,386
Net increase (decrease) in cash and cash equivalents:
Unrestricted $ 353 $ - $ 353 $ (377) $ - $ (377)
Restricted $ (5) $ (248) $ (253) $ 8 $ 17 $ 25
Operating Activities
Components of net cash provided by (used in) operating activities are as
follows:
Three Months Ended March 31,
(in millions) 2023 2022
Net cash provided by (used in) operating activities $ (77) $ 214
Net cash provided by (used in) operating activities - WSE (246) 21
Net cash provided by operating activities - Corporate 169 193
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 our previous credit programs, 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, capital expenditures and acquisition of
subsidiaries, partially offset by proceeds from the sale and maturity of
investments.
Three Months Ended March 31,
(in millions) 2023 2022
Investments:
Purchases of investments $ (82) $ (91)
Proceeds from sale and maturity of investments 76 72
Acquisition of subsidiary - (183)
Cash used in investments $ (6) $ (202)
Capital expenditures:
Software and hardware $ (15) $ (10)
Office furniture, equipment and leasehold improvements (2) (1)
Cash used in capital expenditures $ (17) $ (11)
Cash used in investing activities $ (23) $ (213)
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 consider industry and issuer concentrations in our
investment policy.
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
Capital Expenditures
During the three months ended
We had lower cash used in investing activities in the first quarter of 2023 as
compared the same period in 2022 primarily due to our acquisition of Zenefits in
the first quarter of 2022.
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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 ended 2023 and 2022 consisted of our debt and equity-related activities.
Three Months Ended March 31,
(in millions) 2023 2022
Financing activities
Repurchase of common stock (95) (353)
Revolver drawdown, net of repayment 295 -
Cash provided by (used in) financing activities $
200
InFebruary 2023 , our board of directors authorized a$300 million incremental increase to our ongoing stock repurchase program 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. During the three months endedMarch 31, 2023 , we repurchased 1,157,871 shares of our common stock for approximately$90 million through our stock repurchase program in addition to 49,701 shares acquired to satisfy tax withholding obligations related to stock based compensation vesting. As ofMarch 31, 2023 , approximately$455 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. InMarch 2023 , to ensure that we maintained excess liquidity during the regional banking liquidity challenges, we drew down the available$495 million of capacity under our 2021 Revolver. As concerns about market liquidity subsided later in March, we repaid$200 million . As ofMarch 31, 2023 ,$295 million of borrowings remained outstanding. We repaid the remaining outstanding balance inApril 2023 . Capital Resources As ofMarch 31, 2023 ,$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 of which$295 million remained outstanding as ofMarch 31, 2023 . This amount was subsequently fully repaid inApril 2023 . 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
There have been no material changes to our recent accounting pronouncements as discussed in our 2022 Form 10-K.
Recent Accounting Pronouncements
There have been no material changes to our recent accounting pronouncements as discussed in our 2022 Form 10-K.
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