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OFFON

TRINET GROUP, INC.

(TNET)
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TriNet : Management's Discussion and Analysis of Financial Condition and Results of Operations

07/26/2021 | 04:55pm EDT
Executive Summary
Overview
TriNet 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.


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           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, 2021 compared to December 31, 2020.

                                         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

                                       11

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© Edgar Online, source Glimpses

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