TRINET GROUP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations Executive Summary OverviewTriNet is a leading provider of HR expertise, payroll services, employee benefits and employment risk mitigation services for SMBs. We deliver a comprehensive suite of products and services, that facilitates the administration and management of various HR-related functions for our clients, including compensation and benefits, payroll processing, employee data, health insurance and workers' compensation programs, and other transactional HR needs using our technology platform and HR, benefits and compliance expertise. We also leverage our scale and industry HR experience to deliver product and service offerings for SMBs in specific industries. We believe our approach, which we call our vertical approach, is a key differentiator for us and creates additional value for our clients by allowing our product and service offerings to address HR needs in different client industries. We offer six industry-tailored vertical products,TriNet Financial Services , TriNet Life Sciences,TriNet Main Street , TriNet Nonprofit, TriNet Professional Services, and TriNet Technology. Operational Highlights During the nine months endedSeptember 30, 2020 , the outbreak of the novel coronavirus (COVID-19) pandemic, stay-at-home mandates and social distancing practices nationwide resulted in an economic slowdown and an unprecedented disruption to our business and the businesses of our small and mid-size business clients. In response to this pandemic, we have taken following actions: •launched our COVID-19 Preparedness Center, which provides ongoing and timely webinars, information, resources and offerings to clients and other SMBs to help them navigate the rapidly changing and complicated COVID-19 business landscape, •facilitated access to alternative health plan options in addition to COBRA, •enacted new programs in response to the FFCRA and CARES Act to enable new payroll tax deferral and tax credit programs and other employment and non-employment tax-related incentives for our clients, •helped our clients navigate the various small business relief loan programs through informational webinars and PPP loan application support initiatives, •hosted the first annual TriNet PeopleForce, our virtual customer and prospect conference, where we provided real insights, thought leadership and recommendations for the challenges they face, and •implemented and extended our remote working and office closures around the country for non-essential activities. We will continue to monitor and evaluate the COVID-19 pandemic and will work to respond appropriately to the impact of COVID-19 on our business and our clients' businesses. In addition, during the nine months endedSeptember 30, 2020 : •we continued to grow our revenues, although the slower rate of growth we experienced in the second quarter continued, •experienced lower utilization of health services primarily in the second quarter, •created our Recovery Credit program in the second quarter to assist our eligible clients, resulting in a reduction in revenue recognized, •completed the acquisition ofLittle Bird HR, Inc. , expanding our footprint in our non-profit vertical, and •launched the next phase of our branding campaign - our Humanity Campaign. 9 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Performance Highlights These operational achievements drove the financial performance noted below in the third quarter and nine months endedSeptember 30, 2020 when compared to the same periods of 2019: Q3 2020$975M $45M $216M Total revenues Operating income Net Service Revenue * 1 % increase (34) % decrease (2) % decrease$33M $0.48 $39M Net income Diluted EPS Adjusted Net income * (40) % decrease (38) % decrease (33) % decrease * Non-GAAP measure as defined in the section below.
Our results for WSEs, including furloughed WSEs, in the third quarter of 2020 when compared to the same period of 2019 were:
317,737 320,604
Average WSEs Total WSEs
(4) % decrease (3) % decrease
During the third quarter of 2020, our total revenues grew by 1% primarily due to
the change in our mix of WSEs and rate increases, partially offset by lower
average WSEs and the Recovery Credit recognized. In the third quarter of 2020,
we recognized a further $48 million reduction in total revenues for the Recovery
Credit, allocated proportionally to PSR and ISR. The Recovery Credit is a
program designed to assist the economic recovery of our existing SMB clients, by
providing one-time reductions against fees for future services, starting in the
fourth quarter of 2020.
The Recovery Credit and higher year-over-year operating expenses, combined with
a more typical level of medical services utilization, resulted in a contraction
of NSR, net income, and adjusted net income by (2)%, (40)% and (33)%,
respectively. The relative increase in operating expenses was due to the
non-recurring reduction in variable incentive compensation recognized in the
third quarter of 2019 reflecting prior year financial performance.
YTD 2020
$3.0B $338M $834M
Total revenues Operating income Net Service Revenue *
5 % increase 65 % increase 19 % increase
$250M $3.66 $274M
Net income Diluted EPS Adjusted Net income *
52 % increase 58 % increase 55 % increase
* Non-GAAP measure as defined in the section below.
Our results for WSEs, including furloughed WSEs, in the nine months ended
322,595
Average WSEs
1 % increase
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Key Financial Metrics
The following key financial metrics should be read in conjunction with our
condensed consolidated financial statements and related notes included in this
Form 10-Q.
Three Months Ended September 30, Nine Months Ended September 30,
(in millions, except per share
and WSE data) 2020 2019 % Change 2020 2019 % Change
Income Statement Data:
Total revenues $ 975 $ 969 1 % $ 2,971 $ 2,838 5 %
Net income 33 55 (40) 250 164 52
Diluted net income per share of
common stock 0.48 0.78 (38) 3.66 2.31 58
Non-GAAP measures (1):
Net Service Revenues 216 221 (2) 834 703 19
Net Insurance Service Revenues 90 91 (1) 431 310 39
Adjusted EBITDA 69 93 (26) 413 286 44
Adjusted Net Income 39 58 (33) 274 177 55
(1) Refer to Non-GAAP Financial Measures section below for definitions and reconciliations from GAAP measures.
September 30, December 31,
(in millions) 2020 2019 % Change
Balance Sheet Data:
Working capital $ 342 $ 228 50 %
Total assets 2,867 2,748 4
Debt 609 391 56
Total stockholders' equity 620 475 31
Nine Months Ended September 30,
(in millions) 2020 2019 % Change
Cash Flow Data:
Net cash used in operating activities $ (40) $ (211) (81) %
Net cash used in investing activities (151) (30) 403
Net cash provided by (used in) financing activities 77 (109) (171)
Non-GAAP measure(1):
Corporate operating cash flows 308 146 111
(1) Refer to Non-GAAP Financial Measures section below for definitions and reconciliations from GAAP measures.
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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Non-GAAP Measure Definition How We Use The Measure Net Service Revenues • Sum of professional service revenues • Provides a comparable basis of
and Net Insurance Service Revenues, revenues on a net basis. Professional
or total revenues less insurance service revenues are presented net of
costs. client payroll costs whereas insurance
service revenues are presented gross of
insurance costs for financial reporting
purposes.
• Acts as the basis to allocate
resources to different functions and
evaluates the effectiveness of our
business strategies by each business
function.
• Provides a measure, among others,
used in the determination of incentive
compensation for management.
Net Insurance Service • Insurance service revenues less • Is a component of Net Service
Revenues insurance costs. Revenues.
• Provides a comparable basis of
revenues on a net basis. Professional
service revenues are presented net of
client payroll costs whereas insurance
service revenues are presented gross of
insurance costs for financial reporting
purposes. Promotes an understanding of
our insurance services business by
evaluating insurance service revenues
net of our WSE related costs which are
substantially pass-through for the
benefit of our WSEs. Under GAAP,
insurance service revenues and costs
are recorded gross as we have latitude
in establishing the price, service and
supplier specifications. Net Insurance Margin • Net Insurance Margin (NIM) is the • Provides a comparable basis of Net
ratio of Net Insurance Services Insurance Service Revenues relative to
Revenues to insurance service insurance service revenues. Promotes an
revenues. understanding of the margin generated
on insurance service revenues.
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, evaluates the effectiveness of our
- depreciation, business strategies by excluding
- amortization of intangible assets, certain non-cash charges such as
and depreciation and amortization, and
- stock based compensation expense. stock-based compensation recognized
based on the estimated fair values. We
believe these charges are either not
directly resulting from our core
operations or not indicative of our
ongoing operations.
• Enhances comparisons to prior periods
and, accordingly, facilitates the
development of future projections and
earnings growth prospects.
• Provides a measure, among others,
used in the determination of incentive
compensation for management.
• We also sometimes refer to Adjusted
EBITDA margin, which is the ratio of
Adjusted EBITDA to Net Service Revenue. 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
- amortization of intangible assets, our operating results, and analyze
- non-cash interest expense (2), and profitability of our ongoing operations
- the income tax effect (at our and trends on a consistent basis by
effective tax rate (1)) of these excluding certain non-cash charges.
pre-tax adjustments.
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