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 nine months endedSeptember 30, 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 nine months endedSeptember 30, 2021 we: •continued to grow total revenues as we achieved the highest Total WSEs in our history, •established our 2021 Credit Program to benefit our eligible clients, •hosted the 2nd annual TriNet PeopleForce, 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. 6 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents Performance Highlights Our results for the third quarter endedSeptember 30, 2021 when compared to the same period of 2020 are noted below: Q3 2021$1.1B $105M 86% Total revenues Operating income Insurance cost ratio 18 % increase 133 % increase (3) % decrease$77M $1.16 $87M Net income Diluted EPS Adjusted Net income * 133 % increase 142 % increase 123 % increase 347,502 351,267 Average WSEs Total WSEs 9 % increase 10 % increase
* Non-GAAP measure. See definitions below under the heading "Non-GAAP Financial Measures".
We continued to achieve quarter-over-quarter revenue growth, reflecting our higher Average WSEs, rate increases and the$48 million decrease in the Recovery Credit recognized in 2021 compared to 2020. During the third quarter of 2021, our Average WSEs increased 9% and total WSEs increased 10% compared to the same period in 2020, primarily as a result of continued hiring in our installed base. Increased medical services utilization in the third quarter of 2021, combined with increased volume due to WSE growth, resulting in higher insurance costs compared to the same period in 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 133% and 123%, respectively. Our results for the nine months endedSeptember 30, 2021 when compared to the same period of 2020 are noted below: YTD 2021$3.3B $364M 84% Total revenues Operating income Insurance cost ratio 11 % increase 8 % increase 1 % increase$269M $4.03 $302M Net income Diluted EPS Adjusted Net income * 8 % increase 10 % increase 10 % increase 333,839 Average WSEs 3 % increase
* Non-GAAP measure. See definitions below under the heading "Non-GAAP Financial Measures".
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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 third quarter
and nine months ended September 30, 2021 when compared to the same periods of
2020. For details of the critical accounting judgments and estimates that could
affect our Results of Operations, see the Critical Accounting Judgments and
Estimates section within the MD&A in Item 7 of our 2020 Form 10-K.
Three Months Ended September 30, Nine Months Ended September 30,
(in millions, except operating metrics
data) 2021 2020 % Change 2021 2020 % Change
Income Statement Data:
Professional service revenues $ 156 $ 126 24 % $ 465 $ 403 15 %
Insurance service revenues 992 849 17 2,843 2,568 11
Total revenues 1,148 975 18 3,308 2,971 11
Insurance costs 851 759 12 2,400 2,137 12
Operating expenses 192 171 12 544 496 10
Total costs and operating expenses 1,043 930 12 2,944 2,633 12
Operating income 105 45 133 364 338 8
Other income (expense):
Interest expense, bank fees and other (5) (8) (38) (15) (16) (6)
Interest income 3 2 50 6 9 (33)
Income before provision for income taxes 103 39 164 355 331 7
Income taxes 26 6 333 86 81 6
Net income $ 77 $ 33 133 % $ 269 $ 250 8 %
Cash Flow Data:
Net cash used in operating activities (16) $ (40) (60)
Net cash used in investing activities (145) (151)
(4)
Net cash provided by financing activities 20 77 (74) Non-GAAP measures (1): Adjusted EBITDA $ 132 69 91 $ 449 $ 413 9 Adjusted Net income $ 87 39 123 $ 302 $ 274 10 Corporate Operating Cash Flows $ 334 $ 308 8 Operating Metrics: Insurance Cost Ratio 86 % 89 % (3) % 84 % 83 % 1 % Average WSEs 347,502 317,737 9 % 333,839 322,595 3 % Total WSEs 351,267 320,604 10 351,267 320,604 10
(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
September 30, December 31,
(in millions) 2021 2020 % Change
Balance Sheet Data:
Working capital $ 645 $ 290 122 %
Total assets 3,069 3,043 1
Debt 495 370 34
Total stockholders' equity 809 607 33
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Non-GAAP Financial Measures
In addition to financial measures presented in accordance with GAAP, we monitor
other non-GAAP financial measures that we use to manage our business, to make
planning decisions, to allocate resources and to use as performance measures in
our executive compensation plan. These key financial measures provide an
additional view of our operational performance over the long-term and provide
information that we use to maintain and grow our business.
The presentation of these non-GAAP financial measures is used to enhance the
understanding of certain aspects of our financial performance. It is not meant
to be considered in isolation from, superior to, or as a substitute for the
directly comparable financial measures prepared in accordance with GAAP.
Non-GAAP Measure Definition How We Use The Measure
Adjusted EBITDA • Net income, excluding the effects • Provides period-to-period comparisons on a
of: consistent basis and an understanding as to how
- income tax provision, our management evaluates the effectiveness of
- interest expense, bank fees and our business strategies by excluding certain
other, non-cash charges such as depreciation and
- depreciation, amortization, and stock-based compensation
- amortization of intangible assets, recognized based on the estimated fair values.
and We believe these charges are either not
- stock based compensation expense. 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 • Provides information to our stockholders and
of: board of directors to understand how our
- effective income tax rate (1), management evaluates our business, to monitor
- stock based compensation, and evaluate our operating results, and analyze
- amortization of other intangible profitability of our ongoing operations and
assets, net, trends on a consistent basis by excluding
- non-cash interest expense (2), and certain non-cash charges.
- the income tax effect (at our
effective tax rate (1) of these
pre-tax adjustments.Corporate Operating • Net cash provided by (used in) • Provides information that our stockholders Cash Flows
operating activities, excluding the and management can use to evaluate our cash
effects of: flows from operations independent of the
- Assets associated with WSEs current assets and liabilities associated with
(accounts receivable, unbilled our WSEs.
revenue, prepaid expenses and other • Enhances comparisons to prior periods and,
current assets) and accordingly, used as a liquidity measure to
- Liabilities associated with WSEs manage liquidity between corporate and WSE
(client deposits and other client related activities, and to help determine and
liabilities, accrued wages, payroll plan our cash flow and capital strategies.
tax liabilities and other payroll
withholdings, accrued health benefit
costs, accrued workers' compensation
costs, insurance premiums and other
payables, and other current
liabilities).
(1) Non-GAAP effective tax rate is 25.5% 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.
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Reconciliation of GAAP to Non-GAAP Measures
The table below presents a reconciliation of Net income to Adjusted EBITDA:
Nine Months Ended
Three Months Ended September 30, September 30,
(in millions) 2021 2020 2021 2020
Net income $ 77 $ 33 $ 269 $ 250
Provision for income taxes 26 6 86 81
Stock based compensation 13 11 37 31
Interest expense, bank fees and other 5 8 15 16
Depreciation and amortization of intangible assets 42
¹ 11 11 35
Adjusted EBITDA $ 132 $ 69 $ 449 $ 413
Adjusted EBITDA Margin 11.5 % 7.1 % 13.6 % 13.9 %
(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:
Three Months Ended September Nine Months Ended
30, September 30,
(in millions) 2021 2020 2021 2020
Net income $ 77 $ 33 $ 269 $ 250
Effective income tax rate adjustment - (4) (4) (3)
Stock based compensation 13 11 37 31
Amortization of other intangible assets, net ¹ 1 1 11 4
Non-cash interest expense - 1 3 1
Income tax impact of pre-tax adjustments (4) (3) (14) (9)
Adjusted Net Income $ 87 $ 39 $ 302 $ 274 (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 Operating Cash Flows:
Nine Months Ended
September 30,
(in millions) 2021 2020
Net cash used in operating activities $ (16) $ (40)
Less: Change in WSE related other current assets (50)
(103)
Less: Change in WSE related liabilities (300)
(245)
Net cash used in operating activities - WSE$ (350) $
(348)
Net cash provided by operating activities - Corporate
308
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Operating Metrics
Worksite Employees (WSE)
Average WSE growth is a volume measure we use to monitor the performance of our
business. Average WSEs increased 9% when comparing the third quarter of 2021 to
the same period in 2020, primarily due to increased hiring in our installed base
across all verticals in 2021, led by our Technology vertical. Our Recovery
Credit program was designed to assist in the economic recovery of SMBs and to
promote client loyalty and incentivize client retention. In the third quarter
and nine months ended September 30, 2021 , most of the hiring in our installed
based was from clients that benefited from this program.
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 experiences and manage
attrition, through operational and process improvements.
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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, and decreases in these insurance costs below our projections, reflected
as a lower ICR, result in higher net income.
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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.
Three Months Ended September 30, Nine Months Ended September 30,
(in millions) 2021 2020 2021 2020
Insurance costs $ 851 $ 759 $ 2,400 $ 2,137
Insurance service revenues 992 849 2,843 2,568
Insurance Cost Ratio 86 % 89 % 84 % 83 %
ICR decreased for the quarter due to the increase in insurance service revenues, resulting from higher Average WSEs, rate increases and the decrease in the Recovery Credit recognized, exceeding the increase in insurance costs.
ICR increased slightly for the nine months endedSeptember 30, 2021 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 certain regions due to the increase in hospitalizations arising from theCOVID-19 Delta variant, reducing preventative and elective procedures. 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. InApril 2020 , we created our Recovery Credit program to assist in the economic recovery of our existing SMB clients and enhance our ability to retain these 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. As ofJune 30, 2021 , we have fully recognized the$145 million maximum amount for the Recovery Credit and no further reduction to revenue will be recognized. 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. We did not recognize any reduction in total revenues in the third quarter of 2021 for the Recovery Credit, compared to a reduction of$48 million recognized in the third quarter of 2020. 12
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We recognized a $25 million reduction to revenue under our 2021 Credit Program
in the first quarter of 2021. This amount reflects estimated credits that will
be paid to eligible clients under this program, based on the expected
performance of our health insurance costs in 2021, and is currently limited to
$25 million . These credits are recorded as a reduction to ISR and are payable
within 12 months to eligible clients as of March 31, 2021 . To the extent we
experience higher than expected health insurance costs during the remainder of
2021, this estimate may be reduced. There was no change in this estimate in the
third quarter.
Monthly total revenues per Average WSE is a measure we use to monitor the
success of our pricing strategies. This measure increased 8% during the third
quarter of 2021 and the nine months ended September 30, 2021 compared to the
same periods in 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-20210930_g3.jpg]] [[Image Removed: tnet-20210930_g4.jpg]]
PSR
ISR - % represents proportion of ISR to total revenues
[[Image Removed: tnet-20210930_g5.jpg]][[Image Removed: tnet-20210930_g6.jpg]]
The growth in total revenues for the quarter was primarily driven by higher
Average WSEs and growth in rate, combined with the $48 million decrease in the
Recovery Credit recognized in 2021. The growth in total revenues for the nine
months ended September 30, 2021 was primarily driven by higher Average WSEs and
growth in rate,
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combined with the $87 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 in the first quarter of 2021.
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
for the quarter and nine months ended September 30, 2021 , as compared to the
same periods in 2020.
(in millions)
$45 Third Quarter 2020 Operating Income
+173 Higher total revenues primarily driven by higherAverage WSEs, rate increases
and the $48 million decrease in the Recovery Credit recognized.
-92 Higher insurance costs primarily as a result of higher medical services
utilization and higher volume driven by the growth in WSEs.
Higher OE primarily as a result of increasedsales and marketing expense,
-21 higher payroll tax and assessments, together with higher compensation and
consulting expenses to support initiatives to improve client experience,
enhance service offerings, and improve processes.
$105 Third Quarter 2021 Operating Income
(in millions)
$338 YTD 2020 Operating Income
Higher total revenues primarily driven by higherAverage WSEs, rate increases
+337 and the $87 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 the first quarter of 2021.
Higher insurance costs primarily as a result of higher medical services
-263 utilization, compared to the prior year period,which had 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 increasedsales and marketing expense,
-48 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.
$364 YTD 2021 Operating Income
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Professional Service Revenues
Our clients are 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-20210930_g7.jpg]][[Image Removed: tnet-20210930_g8.jpg]]
[[Image Removed: tnet-20210930_g9.jpg]][[Image Removed: tnet-20210930_g10.jpg]]
The growth in PSR for the quarter was driven by higher Average WSEs, a growth in
rate and the decrease in the Recovery Credit recognized. The growth in rate was
weighted to our smaller customers, 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 a return to hiring in certain industries
was partially offset by attrition in other industries. The growth in PSR for the
nine months ended September 30, 2021 was primarily driven by higher Average
WSEs, rate growth and the decrease in the Recovery Credit recognized.
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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-20210930_g11.jpg]][[Image Removed: tnet-20210930_g12.jpg]]
[[Image Removed: tnet-20210930_g13.jpg]][[Image Removed: tnet-20210930_g14.jpg]]
The growth in ISR for the quarter and nine months ended September 30, 2021 was
primarily driven by higher Average WSEs, rate increases and the decrease in the
Recovery Credit recognized. The growth in the nine months ended September 30,
2021 was partially offset by the $25 million reduction in revenue recognized in
the first quarter for the 2021 Credit Program.
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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.
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-20210930_g15.jpg]][[Image Removed: tnet-20210930_g16.jpg]]
[[Image Removed: tnet-20210930_g17.jpg]][[Image Removed: tnet-20210930_g18.jpg]]
During the third quarter and nine months ended September 30, 2020 , stay-at-home
orders and social distancing practices due to the COVID-19 pandemic decreased
the medical services utilization as enrollees deferred or cancelled elective
procedures and reduced outpatient medical, dental and vision services. Medical
services utilization increased in the third quarter and nine months ended
September 30, 2021 as enrollees returned to outpatient medical, dental and
vision care and elective procedures, with some regional volatility due to the
surge of the COVID-19 Delta variant.
The increase in medical services utilization in 2021, combined with COVID-19
testing, treatment and vaccination costs, caused the increase in rate in the
third quarter and nine months ended September 30, 2021 . This was partially
offset by larger positive claims development as our accrued health costs as of
December 31, 2020 were paid during the nine months ended September 30, 2021 .
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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 2,700 corporate employees as of September 30, 2021 in 12
offices across the U.S. In the third quarter of 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 60% and 64% of
our OE in the third quarters of 2021 and 2020 and 62% and 65% in the nine months
ended September 30, 2021 and 2020, respectively.
During the third quarter and the nine months ended September 30, 2021 , we
experienced OE increases of 12% and 10%, respectively, when compared to the same
periods in 2020. During the third quarter and the nine months ended
September 30, 2021 , the percent of OE to total revenues was 17% and 16%,
compared to the 18% and 17% in the same periods in 2020.
[[Image Removed: tnet-20210930_g19.jpg]][[Image Removed: tnet-20210930_g20.jpg]][[Image Removed: tnet-20210930_g21.jpg]]
% represents portion of compensation related expense included in operating expenses
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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-20210930_g22.jpg]][[Image Removed: tnet-20210930_g23.jpg]][[Image Removed: tnet-20210930_g24.jpg]][[Image Removed: tnet-20210930_g25.jpg]][[Image Removed: tnet-20210930_g26.jpg]]
(in millions)
$171 Q3 2020 Operating Expenses
-7 COPS decreased, driven primarily by lower compliance costs, partially offset
by increased compensation.
+11 S&M increased, driven primarily by increasedcompensation and costs related to
TriNet PeopleForce.
+14 G&A increased, driven primarily by increased payroll tax and assessments,
compensation and corporate insurance.
SD&P increased, driven primarily by higher consultingand technology services
+3 expenses as we continue to work to improve our client experience and our
systems and processes.
$192 Q3 2021 Operating Expenses
(in millions)
$496 YTD 2020 Operating Expenses -1 COPS was consistent with the prior year. +11 S&M increased, driven primarily by increased
compensation and costs related to
TriNet PeopleForce.
G&A increased, driven primarily by increased payroll tax and assessments,
+22 compensation and technology services expenses to improve our client experience, our
systems and processes, and to enhance our service offerings.
SD&P increased, driven primarily by increased consulting, compensation and
+9 technology services expenses as we continue to work to improve our client
experience and our systems and processes.
+7 D&A increased, driven primarily by the impairment of customer relationship
intangibles.
$544 YTD 2021 Operating Expenses
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The primary drivers to the changes in our OE are presented below: [[Image Removed: tnet-20210930_g27.jpg]] [[Image Removed: tnet-20210930_g28.jpg]]
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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-20210930_g29.jpg]]
[[Image Removed: tnet-20210930_g30.jpg]]
Interest income for the quarter was consistent with the prior period. Interest
income for the nine months ended September 30, 2021 decreased primarily due to
lower average market interest rates.
Interest expense, bank fees and other for the quarter decreased due to interest
expense on payroll tax compliance costs incurred in the third quarter of 2020.
Interest expense, bank fees and other for the nine months ended September 30,
2021 was consistent with the prior period.
Income Taxes
Our effective tax rate (ETR) was 25% and 14% for the third quarter of 2021 and
2020, respectively, and 24% for the nine months ended September 30, 2021 and
2020. The increase when comparing the quarter rates for 2021 with the same
period in 2020 was primarily due to a decrease in excludable income for state
tax purposes and a decrease in tax benefits related to stock-based compensation.
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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. We
believe that we have sufficient liquidity and capital resources to satisfy
future requirements and meet our obligations to our clients, creditors and debt
holders.
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:
September 30, 2021 December 31, 2020
(in millions) Corporate WSE Total Corporate WSE Total
Current assets:
Cash and cash equivalents $ 525 $ - $ 525 $ 301 $ - $ 301
Investments 155 - 155 57 - 57
Restricted cash, cash equivalents and 1,040 1,388
investments 17 1,023 15 1,373
Other current assets 76 405 481 59 355 414
Total current assets $ 773 $ 1,428 $ 2,201 $ 432 $ 1,728 $ 2,160
Total current liabilities $ 128 $ 1,428 $ 1,556 $ 142 $ 1,728 $ 1,870
Working capital $ 645 $ - $ 645 $ 290 $ - $ 290
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 $64 million as of September 30, 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.
Working capital for corporate purposes
Corporate working capital as of September 30, 2021 increased $355 million from
December 31, 2020 , primarily driven by a $224 million increase in corporate
unrestricted cash and cash equivalents and a $98 million increase in corporate
investments.
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.
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Cash Flows The following table presents our cash flow activities for the stated periods:
Nine Months Ended September 30,
(in millions) 2021 2020
Corporate WSE Total Corporate WSE Total
Net cash provided by (used in):
Operating activities $ 334 $ (350) $ (16) $ 308 $ (348) $ (40)
Investing activities (133) (12) (145) (63) (88) (151)
Financing activities 20 - 20 77 - 77
Net increase (decrease) in cash and cash equivalents, $ 221 $ (362) $ (141) $ 322 $ (436) $ (114)
unrestricted and restricted
Cash and cash equivalents, unrestricted and restricted:
Beginning of period 352 1,291 1,643 291 1,165 1,456
End of period $ 573 $ 929 $ 1,502 $ 613 $ 729 $ 1,342
Net increase (decrease) in cash and cash equivalents:
Unrestricted $ 224 $ - $ 224 $ 350 $ - $ 350
Restricted (3) (362) (365) (28) (436) (464)
Operating Activities
Components of net cash provided by operating activities are as follows:
Nine Months Ended September 30,
(in millions) 2021 2020
Net cash used in operating activities $ (16) $ (40)
Net cash used in operating activities - WSE (350) $ (348)
Net cash provided by operating activities - Corporate 334 308
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 the nine months ended September 30, 2021
increased, when compared to the same period in 2020, due to the increase in our
net income and the timing of our payments of corporate obligations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
Investing Activities
Cash used in investing activities for the periods presented below primarily
consisted of purchases of investments and capital expenditures, partially offset
by proceeds from the sale and maturity of investments.
Nine Months Ended September 30,
(in millions) 2021 2020
Investments:
Purchases of investments (348) (278)
Proceeds from sale and maturity of investments 232 166
Other - (12)
Cash used in investments $ (116) $ (124)
Capital expenditures:
Software and hardware $ (25) $ (26)
Office furniture, equipment and leasehold improvements (4) (1)
Cash used in capital expenditures $ (29) $ (27)
Cash used in investing activities $
(145)
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. AtSeptember 30, 2021 , our investments had a weighted average duration of less than two years and an average S&P credit rating of AA. As ofSeptember 30, 2021 , we held approximately$2.1 billion in restricted and unrestricted cash, cash equivalents and investments, of which$525 million was unrestricted cash and cash equivalents and$322 million was unrestricted investments. Refer to Note 2 in the condensed consolidated financial statements and related notes included in this Form 10-Q. Capital Expenditures During the nine months endedSeptember 30, 2021 and 2020, we continued to make investments in software and hardware and we enhanced our existing service offerings and technology platform. We expect capital investments in our software and hardware to continue in the future. 24 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents Financing Activities Net cash provided by financing activities in the nine months endedSeptember 30, 2021 and 2020 consisted of our debt and equity-related activities. Nine Months Ended September 30, (in millions) 2021 2020 Financing activities Repurchase of common stock, net of issuance$ (101) $ (141) Draw down from revolving credit facility - 234 Payment of long-term financing fees (2) - Payment of debt issuance costs (7) - Proceeds from issuance of 2029 Notes 500 - Repayment of borrowings (370) (16) Cash provided by financing activities $
20
During the nine months endedSeptember 30, 2021 , we repurchased 1,155,707 shares of our common stock for approximately$94 million through our stock repurchase program. As ofSeptember 30, 2021 , approximately$264 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 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 will be used for general corporate purposes. Refer to Note 6 in the condensed consolidated financial statements and related notes included in this Form 10-Q for further information. InFebruary 2021 , concurrently with the closing of the 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. Capital Resources Sources of Funds 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. Covenants The Indenture governing the 2029 Notes includes restrictive covenants limiting our ability to: (i) create liens on certain assets to secure debt; (ii) grant a subsidiary guarantee 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. 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 25
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
customary events of default. The 2021 Credit Agreement also contains a financial
covenant that requires the Company to maintain certain maximum total net
leverage ratios.
We were in compliance with all financial covenants under our 2021 Credit
Agreement at September 30, 2021 .
Critical Accounting Policies, Estimates and Judgments
There have been no material changes to our critical accounting policies as
discussed in our 2020 Form 10-K.
Recent Accounting Pronouncements
There have been no material changes to our recent accounting pronouncements as
discussed in our 2020 Form 10-K.
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