TRINET GROUP, INC. Operational Highlights Our consolidated results for 2021 reflect our continuing efforts to serve our existing clients throughout the COVID-19 pandemic and to support the economic recovery of SMBs. We will continue to monitor and evaluate developments relating to the COVID-19 pandemic and will work to respond appropriately to the impact of COVID-19 on our business and our clients' businesses. During 2021 we: •continued to grow total revenues as we achieved the highest Total WSEs in our history, •entered into a definitive agreement to acquire Zenefits, •established our 2021 Credit Program to benefit our eligible clients, •hosted the 2nd annual TriNet PeopleForce conference, our showcase customer and prospect conference focused on business transformation, agility and innovation for small and medium-size businesses, •introduced TriNet Financial Services Preferred, a new top-tier version of our HR solution that addresses the critical HR needs of businesses in the financial services industry, •launched 'Connect 360', an innovative service model intended to better meet client needs, and •completed a$500 million senior notes offering, repaid and terminated our outstanding term loan, and replaced our existing revolving credit facility with a new$500 million revolving credit facility. Performance Highlights Our results for 2021 when compared to 2020 are noted below:$4.5B $455M 86% Total revenues Operating income Insurance cost ratio 13 % increase 24 % increase 1 % increase$338M $5.07 $376M Net income Diluted EPS Adjusted Net income * 24 % increase 27 % increase 24 % increase 340,067 364,940 Average WSE Total WSE 5 % increase
10 % increase * Non-GAAP measure. See definitions below under the heading " Non-GAAP Financial Measures ".
We continued to achieve year-over-year revenue growth, reflecting our higher Average WSEs, rate increases and the$111 million decrease in the Recovery Credit recognized in 2021 compared to 2020. During 2021, our Average WSEs increased 5% and total WSEs increased 10% compared to 2020, primarily as a result of continued hiring by clients in our installed base. Increased medical services utilization in 2021, combined with increased volume due to WSE growth, resulted in higher insurance costs compared to 2020. The growth in total revenues, partially offset by increases in insurance costs and operating expenses, resulted in increases in our net income and Adjusted Net Income of 24%. TRINET 35 2021 FORM 10-K
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Results of Operations
The following table summarizes our results of operations for the three years
ended December 31, 2021 , 2020 and 2019. For details of the critical accounting
judgments and estimates that could affect the Results of Operations, see the
Critical Accounting Judgments and Estimates section within MD&A.
Year Ended December 31, % Change
(in millions, except operating metrics data) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Income Statement Data:
Professional service revenues $ 639 $ 544 $ 530 17 % 3 %
Insurance service revenues 3,901 3,490 3,326 12 5
Total revenues 4,540 4,034 3,856 13 5
Insurance costs 3,339 2,979 2,927 12 2
Operating expenses 746 687 661 9 4
Total costs and operating expenses 4,085 3,666 3,588 11 2
Operating income 455 368 268 24 37
Other income (expense):
Interest expense, bank fees and other (20) (21) (21) (5) -
Interest income 6 10 23 (40) (57)
Income before provision for income taxes 441 357 270 24 32
Income taxes 103 85 58 21 47
Net income $ 338 $ 272 $ 212 24 % 28 %
Cash Flow Data:
Net cash provided by operating activities 218 546 471 (60) % 16 %
Net cash used in investing activities (135) (151) (188) (11) (20)
Net cash provided by (used in) financing (106) 18
activities 12 (208) (176)
Non-GAAP measures (1):
Adjusted EBITDA 565 468 378 21 24 %
Adjusted Net income 376 303 236 24 28
Corporate Operating Cash Flow 415 338 233 23 45
Operating Metrics:
Insurance Cost Ratio 86 % 85 % 88 % 1 (3) %
Average WSEs 340,067 323,672 324,927 5 -
Total WSEs 364,940 331,908 340,017 10 (2)
(1) Refer to Non-GAAP measures definitions and reconciliations from GAAP
measures under the heading "Non-GAAP Financial Measures".
The following table summarizes our balance sheet data as of December 31, 2021 ,
2020 and 2019.
Year Ended December 31, % Change
(in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Balance Sheet Data:
Cash and cash equivalents $ 612 $ 301 $ 213 103 % 41 %
Working capital 700 290 228 141 % 27 %
Total assets 3,309 3,043 $ 2,748 9 % 11 %
Debt 495 369 391 34 % (6) %
Total stockholders' equity 881 607 475 45 % 28 %
TRINET 36 2021 FORM 10-K
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
A discussion regarding our financial condition and results of operations for
2020 compared to 2019 can be found under Part II, Item 7. Management's
Discussion and Analysis in our Annual Report on Form 10-K for the year ended
December 31, 2020 , filed with the SEC on February 16, 2021 .
Non-GAAP Financial Measures
In addition to financial measures presented in accordance with GAAP, we monitor
other non-GAAP financial measures that we use to manage our business, to make
planning decisions, to allocate resources and to use as performance measures in
our executive compensation plan. These key financial measures provide an
additional view of our operational performance over the long-term and provide
information that we use to maintain and grow our business.
The presentation of these non-GAAP financial measures is used to enhance the
understanding of certain aspects of our financial performance. It is not meant
to be considered in isolation from, superior to, or as a substitute for the
directly comparable financial measures prepared in accordance with GAAP.
Non-GAAP Measure Definition How We Use The Measure
Adjusted EBITDA • Net income, excluding the effects •
Provides period-to-period comparisons
of: on a consistent basis and an
- income tax provision, understanding as to how our management
- interest expense, bank fees and evaluates the effectiveness of our
other, business strategies by excluding certain
- depreciation, non-cash charges such as depreciation and
- amortization of intangible assets, amortization, and stock-based
and compensation recognized based on the
- stock based compensation expense. estimated fair values. We believe these
charges are either not directly resulting
from our core operations or not
indicative of our ongoing operations.
• Enhances comparisons to prior periods
and, accordingly, facilitates the
development of future projections and
earnings growth prospects.
• Provides a measure, among others, used
in the determination of incentive
compensation for management.
• Wealso 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
of: stockholders and board of directors to
- effective income tax rate (1), understand how our management evaluates
- stock based compensation, our business, to monitor and evaluate our
- amortization of other intangible operating results, and analyze
assets, net, profitability of our ongoing operations
- non-cash interest expense (2), and and trends on a consistent basis by
- the income tax effect (at our excluding certain non-cash charges.
effective tax rate (1) of these
pre-tax adjustments.
Corporate Operating Cash • Net cash provided by (used in) • Provides information that our Flows
operating activities, excluding the stockholders and management can use to
effects of: evaluate our cash flows from operations
- Assets associated with WSEs independent of the current assets and
(accounts receivable, unbilled liabilities associated with our WSEs.
revenue, prepaid expenses and other • Enhances comparisons to prior periods
current assets) and and, accordingly, used as a liquidity
- Liabilities associated with WSEs measure to manage liquidity between
(client deposits and other client corporate and WSE related activities, and
liabilities, accrued wages, payroll to help determine and plan our cash flow
tax liabilities and other payroll and capital strategies.
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 2021, 2020 and 2019, which
excludes the income tax impact from stock based compensation, changes in
uncertain tax positions and nonrecurring benefits or expenses from federal
legislative changes.
(2) Non-cash interest expense represents amortization and write-off of our debt
issuance costs and loss on a terminated derivative.
TRINET 37 2021 FORM 10-K
--------------------------------------------------------------------------------
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:
Year Ended December 31,
(in millions) 2021 2020 2019
Net income $ 338 $ 272 $ 212
Provision for income taxes 103 85 58
Stock based compensation 50 43 41
Interest expense, bank fees and other 20 21 21
Depreciation and amortization of intangible assets ¹ 54 47 46
Adjusted EBITDA $ 565 $ 468 $ 378
Adjusted EBITDA Margin 12.5 % 11.6 % 9.8 %
(1) Amount includes impairment of customer relationship intangibles and
amortization of cloud computing arrangements included in operating expenses.
The table below presents a reconciliation of Net income to Adjusted Net Income:
Year Ended December 31,
(in millions) 2021 2020 2019
Net income $ 338 $ 272 $ 212
Effective income tax rate adjustment (10) (6) (11)
Stock based compensation 50 43 41
Amortization of other intangible assets, net ¹ 12 5 5
Non-cash interest expense 3 1 1
Income tax impact of pre-tax adjustments (17) (12) (12)
Adjusted Net Income $ 376 $ 303 $ 236 (1) Amount includes impairment of customer relationship intangibles.
The table below presents a reconciliation of net cash provided by operating activities to Corporate Operating Cash Flows:
Year Ended December 31,
(in millions) 2021 2020 2019
Net cash provided by operating activities $ 218 $ 546 $ 471
Less: Change in WSE related other current assets (51) 10 15
Less: Change in WSE related liabilities (146) 198 223
Net cash (used in) provided by operating activities - WSE $ (197) $ 208 $ 238
Net cash provided by operating activities - Corporate $ 415 $ 338 $ 233
TRINET 38 2021 FORM 10-K
--------------------------------------------------------------------------------
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
business. Average WSEs increased 5% when comparing 2021 to 2020, primarily due
to increased hiring by clients in our installed base across most verticals in
2021, led by our Technology vertical. Most of the hiring in our installed based
in 2021 was from clients that benefited from our Recovery Credit program that we
launched in April 2020 . Our Recovery Credit program was designed to assist in
the economic recovery of SMBs and to promote client loyalty and incentivize
client retention.
Total WSEs can be used to estimate our beginning WSEs for the next period and,
as a result, can be used as an indicator of our potential future success in
growing our business and retaining clients.
Anticipated revenues for future periods can diverge from the revenue expectation
derived from Average WSEs or Total WSEs due to pricing differences across our HR
solutions and services and the degree to which clients and WSEs elect to
participate in our solutions during future periods. In addition to focusing on
growing our Average WSE and Total WSE counts, we also focus on pricing
strategies, 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.
[[Image Removed: tnet-20211231_g8.jpg]]
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 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.
TRINET 39 2021 FORM 10-K
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
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.
(in millions) 2021 2020 2019
Insurance costs $ 3,339 $ 2,979 $ 2,927
Insurance service revenues 3,901 3,490 3,326
Insurance Cost Ratio 86 % 85 % 88 %
ICR increased due to the increase in medical services utilization in 2021,
combined with COVID-19 testing, treatment and vaccination costs, which together
resulted in higher insurance costs. This was partially offset by the increase in
insurance service revenues. While medical services utilization has increased in
2021, the ICR remains below pre-pandemic levels, as access to medical systems
was constrained in regions where increases in hospitalizations arising from the
COVID-19 Delta and Omicron variants reduced preventative and elective
procedures.
TRINET 40 2021 FORM 10-K
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Total Revenues
Our revenues consist of professional service revenues (PSR) and insurance
service revenues (ISR). PSR represents fees charged to clients for processing
payroll-related transactions on behalf of our clients, access to our HR
expertise, employment and benefit law compliance services, and other HR-related
services. ISR consists of insurance-related billings and administrative fees
collected from clients and withheld from WSEs for workers' compensation
insurance and health benefit insurance plans provided by third-party insurance
carriers.
In April 2020 , we created our Recovery Credit program to assist in the economic
recovery of our existing SMB clients and enhance our ability to retain eligible
clients. Eligible clients received one-time reductions against fees for future
services, accounted for as a discount, to be received over the following 12
months.
The reduction in total revenue under the Recovery Credit program was estimated
each period based on the timing of when eligible clients received the Recovery
Credit and the ultimate amount of the total Recovery Credit. As of June 30,
2021 , we had fully recognized the maximum amount of $145 million for the
Recovery Credit and no further reduction to revenue will be recognized.
In March 2021 , we created our 2021 Credit program, which was designed to return
up to $25 million to eligible customers based on the performance of our health
insurance costs in 2021. We recognized a $25 million reduction to revenue for
credits that will be paid to eligible clients under this program. These credits
are recorded as a reduction to ISR and are payable within 12 months to eligible
clients as of March 31, 2021 .
In 2021, we recognized a reduction in revenue of $17 million for the Recovery
Credit and $25 million for the 2021 Credit Program, compared to $128 million
recognized in 2020 for the Recovery Credit.
Monthly total revenues per Average WSE is a measure we use to monitor the
success of our pricing strategies. This measure increased 7% in 2021 compared to
2020.
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
•Credit - the weighted average amounts recognized for the Recovery Credit and
2021 Credit programs.
[[Image Removed: tnet-20211231_g9.jpg]][[Image Removed: tnet-20211231_g10.jpg]][[Image Removed: tnet-20211231_g11.jpg]]
PSR
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$111 million decrease in the Recovery Credit recognized in 2021. This was partially offset by the$25 million reduction in revenue recognized for the 2021 Credit Program. TRINET 41 2021 FORM 10-K -------------------------------------------------------------------------------- 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 on a year-over-year basis. (in millions)$368 2020 Operating Income Higher total revenues primarily driven by higher
Average WSEs, rate increases
+506 and a $111 million decrease in the Recovery Credit recognized. This was
partially offset by the $25 million reduction in revenue recognized for the
2021 Credit Program in 2021.
Higher insurance costs primarily as a result of higher medical services
-360 utilization in 2021 compared to 2020 when we saw a significantly lower than
typical medical services utilization due to stay-at-home orders and social
distancing practices due to the COVID-19 pandemic.
Higher OE primarily as a result of increased sales and marketing expense,
-59 higher payroll tax and assessments and D&A, together with higher compensation
and consulting expenses to support initiatives to improve client experience,
enhance service offerings, and improve processes.
$455 2021 Operating Income
Professional Service Revenues
Our 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.
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
•Recovery Credit - the weighted average amounts recognized for the Recovery
Credit program.
[[Image Removed: tnet-20211231_g12.jpg]][[Image Removed: tnet-20211231_g13.jpg]][[Image Removed: tnet-20211231_g14.jpg]]
The growth in PSR was driven by higher Average WSEs, a growth in rate and a $12
million decrease in the Recovery Credit recognized. The growth in rate was
weighted to our smaller clients, and included an increase in fees for other
services, including COBRA administration. We continued to experience a favorable
change in our vertical mix of WSEs, as SMBs in our Technology, Financial
Services and Professional Services verticals returned to hiring at a faster rate
than our Main Street vertical.
TRINET 42 2021 FORM 10-K
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Insurance Service Revenues
ISR consists of insurance services-related billings and administrative fees
collected from clients and withheld from WSE payroll for health benefits and
workers' compensation insurance provided by third-party insurance carriers.
We use the following measures to analyze changes in ISR:
•Volume - the percentage change in period over period Average WSEs,
•Rate - the weighted average percentage change in fees associated with each of
our insurance service offerings,
•Mix - all other changes including the composition of our enrolled WSEs within
our insurance service offerings (health plan enrollment), and
•Credit - the weighted average amounts recognized for the Recovery Credit and
2021 Credit programs.
[[Image Removed: tnet-20211231_g15.jpg]][[Image Removed: tnet-20211231_g16.jpg]][[Image Removed: tnet-20211231_g17.jpg]]
The growth in ISR was primarily driven by higher Average WSEs, rate increases
and the $99 million decrease in the Recovery Credit recognized, partially offset
by the $25 million reduction in revenue recognized for the 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.
TRINET 43 2021 FORM 10-K
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
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).
[[Image Removed: tnet-20211231_g18.jpg]][[Image Removed: tnet-20211231_g19.jpg]][[Image Removed: tnet-20211231_g20.jpg]]
During 2020, stay-at-home orders and social distancing practices due to the COVID-19 pandemic decreased medical services utilization, particularly in the second quarter, as enrollees deferred or cancelled elective procedures and reduced outpatient medical, dental and vision services. Medical services utilization increased in 2021 as enrollees returned to outpatient medical, dental and vision care and elective procedures. The higher utilization was partially offset by reductions in some regions for part of the year due to the surges of theCOVID-19 Delta and Omicron variants. As a result, our medical services utilization in 2021 remained below pre-pandemic levels. The increase in medical services utilization in 2021, combined with increased COVID-19 testing, treatment and vaccination costs, caused the increase in rate. This was partially offset by larger positive claims development as our accrued health costs and accrued workers' compensation costs as ofDecember 31, 2020 were paid in 2021. The increase in volume was primarily driven by higher Average WSEs. TRINET 44 2021 FORM 10-K
--------------------------------------------------------------------------------
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 2,800 corporate employees as of December 31, 2021 in 11
offices across the U.S. In 2021, we continued to exit expiring leases due to our
evolving remote work practices and policies. Our corporate employees'
compensation-related expenses represent a majority of our operating expenses.
Compensation costs for our corporate employees include payroll, payroll taxes,
SBC, bonuses, commissions and other payroll- and benefits-related costs.
Compensation-related expense represented 62% and 63% of our OE in 2021 and 2020,
respectively.
In 2021, we experienced OE growth of 9% compared to 2020. The ratio of OE to
total revenues was 16% and 17% in 2021 and 2020, respectively.
[[Image Removed: tnet-20211231_g21.jpg]][[Image Removed: tnet-20211231_g22.jpg]][[Image Removed: tnet-20211231_g23.jpg]]
% represents portion of compensation related expense included in operating expenses
TRINET 45 2021 FORM 10-K
--------------------------------------------------------------------------------
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.
[[Image Removed: tnet-20211231_g24.jpg]][[Image Removed: tnet-20211231_g25.jpg]][[Image Removed: tnet-20211231_g26.jpg]][[Image Removed: tnet-20211231_g27.jpg]][[Image Removed: tnet-20211231_g28.jpg]]
(in millions)
$687 2020 Operating Expense
+2 COPS was consistent with the prior year.
+16 S&M increased, driven primarily by increasedcompensation and costs related to
our 2nd annual TriNet PeopleForce conference.
G&A increased, driven primarily by increased payroll tax and related payroll tax
+24 assessments, compensation and technology services expenses to improve our
systems and processes, and to enhance our efficiency.
SD&P increased, driven primarily by increased consulting and technology services
+10 expenses as we continue to work to improve ourclient experience and our systems
and processes.
+7 D&A increased, driven primarily by the impairment of customer relationship
intangibles.
$746 2021 Operating Expenses
The primary drivers to the changes in our OE are presented below: [[Image Removed: tnet-20211231_g29.jpg]]
TRINET 46 2021 FORM 10-K
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Other Income (Expense)
Other income (expense) consists primarily of interest and dividend income from
investments, interest expense under our previous credit facility and interest on
our 3.50% Senior Notes due 2029 (our 2029 Notes) issued in February 2021 .
[[Image Removed: tnet-20211231_g30.jpg]][[Image Removed: tnet-20211231_g31.jpg]]
Interest income decreased primarily due to lower average market interest rates.
Interest expense, bank fees and other was consistent with the prior period.
Provision for Income Taxes
Our effective tax rate (ETR) was 23% and 24% for 2021 and 2020, respectively.
The change in ETR was primarily attributable to benefits associated with a
favorable adjustment of our previously disputed receivable from the IRS .
Liquidity and Capital Resources
Liquidity
Liquidity is a measure of our ability to access sufficient cash flows to meet
the short-term and long-term cash requirements of our business operations. Our
principal source of liquidity for operations is derived from cash provided by
operating activities. We rely on cash provided by operating activities to meet
our short-term liquidity requirements, which primarily relate to the payment of
corporate payroll and other operating costs, and capital expenditures. Our cash
flow related to WSE payroll and benefits is generally matched by advance
collection from our clients. To minimize the credit risk associated with
remitting the payroll and associated taxes and benefits costs, we require
clients to prefund the payroll and related payroll taxes and benefits costs.
We believe that we 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.
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:
TRINET 47 2021 FORM 10-K
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
December 31,
2021 2020
(in millions) Corporate WSE Total Corporate WSE Total
Current assets:
Cash and cash equivalents $ 612 $ - $ 612 $ 301 $ - $ 301
Investments 135 - 135 57 - 57
Restricted cash, cash equivalents and
investments 19 1,176 1,195 15 1,373 1,388
Other current assets 91 406 497 59 355 414
Total current assets $ 857 $ 1,582 $
2,439
Total current liabilities 157 1,582$ 1,739 $ 142 $ 1,728 $ 1,870 Working capital$ 700 $ -$ 700 $ 290 $ -$ 290 As ofDecember 31, 2021 , we did not have any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. Working capital for WSEs related activities We designate funds to ensure that we have adequate current assets to satisfy our current obligations associated with WSEs, the Recovery Credit liability and 2021 Credit Program liability. We expect the Recovery Credit and 2021 Credit Program aggregate liability of$48 million as ofDecember 31, 2021 to be settled over the following 12 months. We manage our WSE payroll and benefits obligations through collections of payments from our clients which generally occur two to three days in advance of client payroll dates. We regularly review our short-term obligations associated with our WSEs (such as payroll and related taxes, insurance premium and claim payments) and designate funds required to fulfill these short-term obligations, which we refer to as PFC. PFC is included in current assets as restricted cash, cash equivalents and investments. We manage our sponsored benefit and workers' compensation insurance obligations by maintaining collateral funds in restricted cash, cash equivalents and investments. These collateral amounts are generally determined at the beginning of each plan year and we may be required by our insurance carriers to adjust our collateral balances when facts and circumstances change. We regularly review our collateral balances with our insurance carriers and anticipate funding further collateral in the future based upon our capital requirements. We classify our restricted cash, cash equivalents and investments as current and noncurrent assets to match against the anticipated timing of payments to carriers. The following table summarizes our workers' compensation obligations, gross of collateral, as ofDecember 31, 2021 , Payments Due by Period More than 5 (in millions) Total Less than 1 year 1-3 years 3-5 years years Workers' compensation obligations (1)$ 198 $
57
(1) Represents estimated payments that are expected to be made to carriers for various workers' compensation programs under the contractual obligations. These obligations include the costs of reimbursing the carriers for paying claims within the deductible layer in accordance with the workers' compensation insurance policy. Working capital for corporate purposes Corporate working capital as ofDecember 31, 2021 increased$410 million fromDecember 31, 2020 , primarily driven by a$311 million increase in corporate unrestricted cash and cash equivalents and a$78 million increase in corporate investments. TRINET 48 2021 FORM 10-K
--------------------------------------------------------------------------------
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.
The following table summarizes our purchase obligations as of December 31, 2021 ,
Payments Due by Period
(in millions) Total Less than 1 year 1-3 years 3-5 years More than 5 years Purchase obligations (1)
$ 150 $ 87$ 56 $ 7 $ - (1) Our purchase obligations primarily consist of software licenses, consulting and maintenance agreements, and sales and marketing events pertaining to various agreements. Cash Flows The following table presents our cash flow activities for the stated periods: Year Ended December 31, (in millions) 2021 2020 Corporate WSE Total Corporate WSE Total Net cash provided by (used in): Operating activities$ 415 $ (197) $ 218 $ 338 $ 208 $ 546 Investing activities (119) (16) (135) (69) (82) (151) Financing activities 12
- 12 (208) - (208)
Net increase (decrease) in cash and cash equivalents,
$ 352 $ 1,291 $ 1,643 $ 291 $ 1,165 $ 1,456 End of period$ 660 $ 1,078 $ 1,738 $ 352 $ 1,291 $ 1,643 Net increase (decrease) in cash and cash equivalents: Unrestricted$ 311 $ -$ 311 $ 88 $ -$ 88 Restricted (3) (213) (216) (27) 126 99 Operating Activities Components of net cash provided by operating activities are as follows: Year Ended December 31, (in millions) 2021 2020 Net cash provided by operating activities $ 218$ 546 Net cash provided by operating activities - Corporate $
415
Net cash provided by (used in) operating activities - WSE $
(197)
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 2021 increased when compared to 2020 due
to the increase in our net income and the timing of our payments of corporate
obligations.
TRINET 49 2021 FORM 10-K
--------------------------------------------------------------------------------
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.
Year Ended December 31,
(in millions) 2021 2020
Investments:
Purchases of investments $ (444) $ (327)
Proceeds from sale and maturity of investments 349 224
Other - (12)
Cash used in investments $ (95) $ (115)
Capital expenditures:
Software and hardware $ (33) $ (33)
Office furniture, equipment and leasehold improvements (7) (3)
Cash used in capital expenditures $ (40) $ (36)
Cash used in investing activities 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. AtDecember 31, 2021 , our investments had a weighted average duration of less than two years and an average S&P credit rating of AA. As ofDecember 31, 2021 , we held approximately$2.3 billion in restricted and unrestricted cash, cash equivalents and investments, of which$612 million was unrestricted cash and cash equivalents and$303 million was unrestricted investments. Refer to Note 2 in Part II, Item 8. Financial Statements and Supplemental Data, in this Form 10-K for a summary of these funds. InDecember 2021 , we entered into a definitive agreement to acquire Zenefits. The total purchase price of$220 million , subject to customary closing adjustments, will be settled by the issuance of up to$20 million ofTriNet stock to eligible selling shareholders, with the remainder paid in cash from corporate working capital. The acquisition is subject to customary closing conditions and regulatory approval and is expected to close in the first quarter of 2022. Capital Expenditures During 2021, we continued to make investments in software and hardware and we enhanced our existing service offerings and technology platform. We expect capital investments in our software and hardware to continue in the future. TRINET 50 2021 FORM 10-K -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents Financing Activities Net cash provided by (used in) financing activities in the years endedDecember 31, 2021 and 2020 consisted of our debt and equity-related activities. Year Ended December 31, (in millions) 2021 2020 Financing activities Repurchase of common stock, net of issuance$ (109) $ (186) Proceeds from issuance of 2029 Notes 500 - Repayment of borrowings (370) (22) Payment of debt issuance costs (7) - Payment of long-term financing fees (2) - Draw down from revolving credit facility - 234 Repayment of borrowings under revolving credit facility
- (234)
Cash provided by (used in) financing activities $
12
During the year endedDecember 31, 2021 , we repurchased 1,161,909 shares of our common stock for approximately$94 million through our stock repurchase program. As ofDecember 31, 2021 , approximately$263 million remained available for repurchase under all authorizations by our board of directors. We plan to use current cash and cash generated from ongoing operating activities to fund this stock repurchase program. InFebruary 2022 , 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. 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 6 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K for further information. InFebruary 2021 , concurrently with the closing of our 2029 Notes offering, we entered into a new$500 million revolving credit facility under a new credit agreement (our 2021 Credit Agreement). The 2021 Credit Agreement includes a$100 million letter of credit sub-facility and a$40 million swingline sub-facility. We also have the option to incur incremental credit facilities of up to the greater of$450 million and 100% of EBITDA for the most recent period of four fiscal quarters for which financial statements have been delivered. Such incremental facilities are subject to obtaining additional commitments from lenders. AtDecember 31, 2021 , we had$500 million available under our 2021 Credit Agreement. Capital Resources As ofDecember 31, 2021 ,$500 million aggregate principal of our 2029 Notes was outstanding. The Indenture governing the 2029 Notes includes restrictive covenants limiting our ability to: (i) create liens on certain assets to secure debt; (ii) grant subsidiary guarantees of certain debt without also providing a guarantee of the 2029 Notes; and (iii) consolidate or merge with or into, or sell or otherwise dispose of all or substantially all of our assets to, another person, subject, in each case, to certain customary exceptions. Our 2021 Credit Agreement includes a$500 million revolving credit facility. The 2021 Credit Agreement includes negative covenants that 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 atDecember 31, 2021 . TRINET 51 2021 FORM 10-K -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents Critical Accounting Judgments and Estimates Our consolidated financial statements are prepared in accordance with GAAP, which require us to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Some of the assumptions are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial statements could be materially affected. For additional information about our accounting policies, refer to Note 1 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K. The following items require significant estimation or judgment: Insurance Costs We purchase workers' compensation and health benefits coverage for our employees and WSEs. As part of these insurance policies, we bear claims costs up to a defined deductible amount and as a result, we establish accrued insurance costs including both known claims filed and estimates for incurred but not reported claims. We use external actuaries to evaluate, review and recommend estimates of our accrued workers' compensation and health insurance costs. The accrued costs studies performed by these qualified external actuaries analyze historical claims data to develop a range of our potential ultimate costs using loss development, expected loss ratio and frequency/severity methods in accordance with Actuarial Standards of Practice. These methods are applied to classes of the claims data organized by policy year and risk class. Key judgments and evaluations in arriving at loss estimates by class and the accrued costs selection overall include: •the selection of method used and the relative weights given to selecting the method used for each policy year, •the underlying assumptions of LDF used in these models, •the effect of any changes to the insurers' claims handling and payment processes, •evaluation of medical and indemnity cost trends, costs from changes in the risk exposure being evaluated and any applicable changes in legal, regulatory or judicial environment. We review and evaluate these judgments and the associated recommendations in concluding the adequacy of accrued costs. Our quarterly reserving process involves the collaboration of our qualified external actuaries and our actuarial and finance departments to approve a single point best estimate. In selecting this best estimate, management considers the actuarial estimates and applies informed judgment regarding qualitative factors that may not be fully captured in these actuarial estimates. Such factors include, but are not limited to: the timing of the emergence of claims, volume and complexity of claims, social and judicial trends, and the extent of our historical loss data versus industry information. Where adjustments are necessary these are recorded in the period in which the adjustments are identified. These accrued costs may vary in subsequent quarters from the amount estimated. Certain assumptions used in estimating these accrued costs are highly judgmental. Our accrued costs, results of operations and financial condition can be materially impacted if actual experience differs from the assumptions used in establishing these accrued costs.Accrued Workers' Compensation Costs Under our policies, we are responsible for reimbursing the insurance carriers for workers' compensation losses up to$1 million per claim occurrence (Deductible Layer). As workers' compensation costs for a particular period are not known for many years after the losses have occurred, these costs represent our best estimate of unpaid claim losses and loss adjustment expenses within the deductible layer in accordance with our insurance policies. We use external actuaries to evaluate, review and recommend accrued workers' compensation costs on a quarterly basis. The data is segmented by class and state and analyzed by policy year, and states where we have small exposure are aggregated into a single grouping. TRINET 52 2021 FORM 10-K
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
We use a combination of loss development, expected loss ratio and
frequency/severity methods which include the following inputs, assumptions and
analytical techniques:
•Historical volume and severity of workers' compensation cost experience,
exposure data and industry loss experience related to TriNet's insurance
policies,
•inputs of WSEs' job responsibilities and location,
•estimates of future cost trends,
•expected loss ratios for the latest accident year or prior accident years,
adjusted for the loss trend, the effect of rate changes and other quantifiable
factors, and
•LDFs to project the reported losses for each accident year to an ultimate
basis.
Final cost settlements may vary materially from the present estimates,
particularly when payments do not occur until well into the future. In our
experience, plan years related to workers' compensation programs may take 10
years or more to be fully settled.
We believe that our estimate of accrued workers' compensation costs is most
sensitive to LDFs given the long reporting and paid development patterns for our
workers' compensation loss costs. Our methods of estimating accrued workers'
compensation costs rely on these LDFs and an estimate of future cost trend.
The following table illustrates the sensitivity of changes in the LDFs on our
year end estimate of insurance costs (in millions of dollars):
Change in loss development factor Change in insurance costs
-5.0% ($33 )
-2.5% ($19 )
+2.5% $20
+5.0% $40
Accrued Health Insurance Costs
We sponsor and administer a number of employee benefit plans, including group
health, dental, vision and life insurance as an employer plan sponsor under
section 3(5) of the ERISA. Approximately 84% of our group health insurance costs
relate to risk-based plans in which we agree to reimburse our carriers for any
claims paid within an agreed-upon per-person deductible layer up to a maximum
aggregate exposure limit per policy. These deductible dollar limits and maximum
limits vary by carrier and year.
Costs covered by these insurance plans generally develop on average within three
to six months so insurance costs and accrued health insurance costs include
estimates of reported losses and claims incurred but not yet paid (IBNP). Data
is grouped and analyzed by insurance carrier.
To estimate accrued health benefits costs we use a number of inputs, assumptions
and analytical techniques:
•historical loss claims payment patterns and medical cost trend rates related to
TriNet's insurance policies,
•current period claims costs and claims reporting patterns (completion factors),
and
•plan enrollment.
Medical cost trend rates are a significant factor we use in developing our
accrued health insurance costs. Medical cost trends are developed through an
analysis of claims incurred in prior months, provider pricing and indicators of
health care utilization, including pharmacy utilization trends, and outpatient
and inpatient utilization. Many factors may cause medical cost trend to vary
from our estimates.
TRINET 53 2021 FORM 10-K
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
The following table illustrates the sensitivity of changes in the medical cost trend on our year end estimate of insurance costs (in millions of dollars):
Change in medical cost trend Change in insurance costs
+3.0% $21
+2.0% $14
+1.0% $7
-1.0% $(7)
-2.0% $(14)
-3.0% $(21)
Completion factors are an actuarial estimate based on historical experience and
analysis of current trends, of paid costs to carriers as a percentage of the
expected ultimate costs to carriers. Many factors may cause actual claims
submissions rates from our carriers to vary from our estimated completion
factors, including carrier claims processing patterns, the mix of providers and
the mix of electronic versus manual claims submitted to our carriers.
The following table illustrates the sensitivity of changes in completion factors
on our year end estimate of insurance costs (in millions of dollars):
Change in completion factors Change in insurance costs
-0.75% $16
-0.50% $11
-0.25% $5
+0.25% $(5)
+0.50% $(11)
+0.75% $(16)
Recent Accounting Pronouncements
Refer to Note 1 in Part II, Item 8, Financial Statements and Supplementary
Data, of this Form 10-K for additional information related to recent accounting
pronouncements.
TRINET 54 2021 FORM 10-K
--------------------------------------------------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURES Table of Contents
© Edgar Online, source
