TRINET GROUP, INC. 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 services that help our clients administer and manage various HR-related needs and functions, such as compensation and benefits, payroll processing, employee data, health insurance and workers' compensation programs, and other transactional HR needs using our technology platform and HR, benefits and compliance expertise. We empower SMBs to focus on what matters most - growing their business. We leverage our scale and industry HR experience to deliver our service offerings for SMBs in specific industry verticals. We believe our vertical approach is a key differentiator for us and creates additional value for our clients driven by service offerings that are tailored to address industry-specific HR needs. We offer six industry-tailored vertical services:TriNet Financial Services , TriNet Life Sciences,TriNet Main Street ,TriNet Nonprofit, TriNet Professional Services, and TriNet Technology. Operational Highlights Our consolidated results for the first half of 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 the first half of 2021 we: •continued to grow total revenues, •established our 2021 Credit Program to benefit our eligible clients, resulting in a$25 million reduction in insurance service revenues recognized in the first quarter of 2021, •launched the 2nd annual TriNet PeopleForce, our virtual 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 firms in the financial services industry, •launched 'Connect 360', an innovative service model intended to better meet client needs, •completed a$500 million senior notes offering and repaid and terminated our outstanding term loan, and •replaced our existing revolving credit facility with a new$500 million revolving credit facility to provide additional financial flexibility. 6 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents Performance Highlights Our results for the second quarter and first half of 2021 when compared to the same periods of 2020 are noted below: Q2 2021$1.1B $121M $91M Total revenues Operating income Net income 16 % increase (30) % decrease (28) % decrease$1.37 $104M Diluted EPS Adjusted Net income * (27) % decrease (24) % decrease
* Non-GAAP measure. See definitions below under the heading "Non-GAAP Financial Measures".
Our results for WSEs in the second quarter of 2021 were:
332,719 339,935
Average WSEs Total WSEs
6 % increase 9 % increase
We continued to achieve quarter-over-quarter revenue growth, reflecting our rate
increases, higher Average WSEs and the $51 million decrease in the Recovery
Credit recognized in 2021.
During the second quarter of 2021, our Average WSEs increased 6% and total WSEs
increased 9%, primarily as a result of continued hiring in our installed base.
Medical services utilization continued to approach more typical levels in the
second quarter of 2021, resulting in higher insurance costs compared to the same
period in 2020, when stay-at-home orders and social distancing practices due to
the COVID-19 pandemic caused a decrease in the medical services utilization.
In the second quarter of 2021, increases in insurance costs and operating
expenses resulted in quarter-over-quarter decreases in our net income and
Adjusted Net Income of (28)% and (24)%, respectively.
YTD 2021
$2.2B $259M $192M
Total revenues Operating income Net income
8 % increase (12) % decrease (12) % decrease
$2.87 $215M
Diluted EPS Adjusted Net income *
(8) % decrease (9) % decrease
* Non-GAAP measure. See definitions below under the heading "Non-GAAP Financial Measures".
Our result for Average WSEs in the first half of 2021 was:
327,007
Average WSEs
1 % increase
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Results of Operations
The following table summarizes our results of operations for the second quarter
and first half of 2021 when compared to the same periods of 2020. 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
the MD&A in Item 7 of our 2020 Form 10-K.
Three Months Ended June 30, Six Months Ended June 30,
(in millions, except operating metrics
data) 2021 2020 % Change 2021 2020 % Change
Income Statement Data:
Professional service revenues $ 156 $ 121 29 % $ 309 $ 277 12 %
Insurance service revenues 944 827 14 1,851 1,719 8
Total revenues 1,100 948 16 2,160 1,996 8
Insurance costs 798 613 30 1,549 1,378 12
Operating expenses 181 162 12 352 325 8
Total costs and operating expenses 979 775 26 1,901 1,703 12
Operating income 121 173 (30) 259 293 (12)
Other income (expense):
Interest expense, bank fees and other (5) (4) 25 (10) (8) 25
Interest income 1 2 (50) 3 7 (57)
Income before provision for income taxes 117 171 (32) 252 292 (14)
Income taxes 26 45 (42) 60 75 (20)
Net income $ 91 $ 126 (28) % $ 192 $ 217 (12) %
Cash Flow Data:
Net cash used in operating activities (190) $ (130) 46
Net cash used in investing activities (135) (121) 12
Net cash provided by financing activities 43 122 (65)
Non-GAAP measures (1):
Net Service Revenues $ 302 $ 335 (10) % $ 611 $ 618 (1) %
Net Insurance Service Revenues $ 146 $ 214 (32) $ 302 $ 341 (11)
Net Insurance Margin 15 % 26 % (42) 16 % 20 % (20)
Adjusted EBITDA $ 154 199 (23) $ 317 $ 344 (8)
Adjusted Net income $ 104 136 (24) $ 215 $ 235 (9)
Corporate Operating Cash Flows 240 315 (24)
Operating Metrics:
Average WSEs 332,719 313,701 6 % 327,007 325,024 1 %
Total WSEs 339,935 313,104 9 339,935 313,104 9
(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
June 30, December 31,
(in millions) 2021 2020 % Change
Balance Sheet Data:
Working capital $ 554 $ 290 91 %
Total assets 2,978 3,043 (2)
Debt 495 370 34
Total stockholders' equity 744 607 23
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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. In
subsequent filings, we will no longer provide Net Service Revenues, Net
Insurance Service Revenues and Net Insurance Margin. Our consolidated statements
of income and comprehensive income will continue to disclose total revenues,
insurance service revenues and insurance cost, determined in accordance with
GAAP, which are the key components of these non-GAAP measures.
Non-GAAP Measure Definition How We Use The Measure Net Service Revenues • Sum of professional service revenues and • Provides a comparable basis of
Net Insurance Service Revenues, revenues on a net basis. Professional
or total revenues less insurance costs. service revenues are presented net of
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 insurance • Is a component of Net Service
Revenues 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 is the ratio of Net • Provides a comparable basis of Net
Insurance Services Revenues to insurance Insurance Service Revenues relative to
service revenues. insurance service revenues. Promotes an
understanding of our pricing to risk
performance.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Adjusted EBITDA • Net income, excluding the effects of: • Provides period-to-period comparisons on
- income tax provision, a consistent basis and an understanding as
- interest expense, bank fees and other, to how our management evaluates the
- depreciation, effectiveness of our business strategies
- amortization of intangible assets, and by excluding certain non-cash charges such
- stock based compensation expense. as depreciation and amortization, and
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 total revenues. Adjusted Net Income • Net income, excluding the effects of: • Provides information to our stockholders
- effective income tax rate (1), and board of directors to understand how
- stock based compensation, our management evaluates our business, to
- amortization of intangible assets, monitor and evaluate our operating
- non-cash interest expense (2), and results, and analyze profitability of our
- the income tax effect (at our effective ongoing operations and trends on a
tax rate (1) of these pre-tax adjustments. consistent basis by excluding certain
non-cash charges.
Corporate Operating Cash • Net cash provided by (used in) operating • Provides information that our
Flows activities, excluding the effects of: stockholders and management can use to
- Assets associated with WSEs (accounts evaluate our cash flows from operations
receivable, unbilled revenue, prepaid independent of the current assets and
expenses and other current assets) and liabilities associated with our WSEs.
- Liabilities associated with WSEs (client • Enhances comparisons to prior periods
deposits and other client liabilities, and, accordingly, used as a liquidity
accrued wages, payroll tax liabilities and measure to manage liquidity between
other payroll withholdings, accrued health corporate and WSE related activities, and
benefit costs, accrued workers' to help determine and plan our cash flow
compensation costs, insurance premiums and and capital strategies.
other payables, and other current
liabilities).
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
(1) Non-GAAP effective tax rate is 25.5% for 2021 and 2020, 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 derivative.
Reconciliation of GAAP to Non-GAAP Measures
The table below presents a reconciliation of Total revenues to Net Service
Revenues:
Three Months Ended June
30 , Six Months Ended June 30 ,(in millions) 2021 2020 2021 2020 Total revenues$ 1,100 $ 948 $ 2,160 $ 1,996 Less: Insurance costs 798 613 1,549 1,378 Net Service Revenues$ 302 $ 335 $ 611$ 618
The table below presents a reconciliation of Insurance service revenues to Net Insurance Service Revenues:
Three Months Ended June 30, Six Months Ended June 30,
(in millions) 2021 2020 2021 2020
Insurance service revenues $ 944 $ 827 $ 1,851 $ 1,719
Less: Insurance costs 798 613 1,549 1,378
Net Insurance Service Revenues $ 146 $ 214 $ 302 $ 341
Net Insurance Margin 15 % 26 % 16 % 20 %
The table below presents a reconciliation of Net income to Adjusted EBITDA:
Six Months Ended
Three Months Ended June 30, June 30,
(in millions) 2021 2020 2021 2020
Net income $ 91 $ 126 $ 192 $ 217
Provision for income taxes 26 45 60 75
Stock based compensation 13 11 24 20
Interest expense, bank fees and other 5 4 10 8
Depreciation and amortization of intangible assets 31
¹ 19 13 24
Adjusted EBITDA $ 154 $ 199 $ 317 $ 344
Adjusted EBITDA Margin 14.0 % 21.0 % 14.7 % 17.2 %
(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:
Six Months Ended
Three Months Ended June 30, June 30,
(in millions) 2021 2020 2021 2020
Net income $ 91 $ 126 $ 192 $ 217
Effective income tax rate adjustment (4) 1 (4) 1
Stock based compensation 13 11 24 20
Amortization of intangible assets ¹ 9 1 10 3
Non-cash interest expense 1 - 3 -
Income tax impact of pre-tax adjustments (6) (3) (10) (6)
Adjusted Net Income $ 104 $ 136 $ 215 $ 235 (1) Amount includes impairment of customer relationship intangibles.
The table below presents a reconciliation of net cash (used in) provided by operating activities to Corporate
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