UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
|
| |
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 20152018
OR
|
| |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
orFORoTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE TRANSITION PERIOD FROMSECURITIES EXCHANGE ACT OF 1934
For the transition period from TOto
Commission File Number: 001-36373
TRINET GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
|
| | |
| Delaware | | 95-3359658 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1100 San Leandro Blvd.,One Park Place, Suite 400, San Leandro,600, Dublin, CA | | 9457794568 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (510) 352-5000
Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.000025 Per Share; Common stock traded on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ox No xo
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | |
| Large accelerated filer | x | Accelerated filer | o |
| | | | |
| Non-accelerated filer | o (do not check if a smaller reporting company) | Smaller reporting company | o |
| | | |
| Emerging growth company | o
| | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes oNo o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The New York Stock Exchange on June 30, 2015,2018, was $1,055,737,584.$2.5 billion.
The number of shares of Registrant’s Common Stock outstanding as of March 28, 2016February 7, 2019 was 70,711,536.70,170,155.
Portions of the Registrant’s Definitive Proxy Statement to be issued in connection with its Annual Meeting of Stockholders, scheduled to be held on May 26, 2016,9, 2019, are incorporated by reference into Part III of this Form 10-K.
TriNet, Inc.TRINET GROUP, INC.
Form 10-K - Annual Report
For the Fiscal Year End December 31, 20152018
TABLE OF CONTENTS
|
| |
| |
| |
| | Form 10-K Cross Reference | Page |
| | |
| Part I, Item 1A. 1. | |
| Part I, Item 1A. | |
| Part I, Item 1B. | |
| Part I, Item 2. | |
| Part I, Item 3. | |
| Part I, Item 4. | |
| |
| |
| |
| Part II, Item 5. | |
| Part II, Item 6. | |
| Part II, Item 7. | |
| Part II, Item 7A. | |
| Part II, Item 8. | |
| | |
| | |
| | |
| | |
| | |
| Part II, Item 9. | |
| Part II, Item 9A. | |
| Part II, Item 9B. | |
| |
| |
| |
| Part III, Item 10. | |
| Part III, Item 11. | |
| Part III, Item 12. | |
| Part III, Item 13. | |
| Part III, Item 14. | |
| |
| |
| |
| Part IV, Item 15. | |
| Part IV, Item 16. | |
| | |
Glossary of Acronyms and Abbreviations
Acronyms and abbreviations are used throughout this report, particularly in Part I, Item 1. Business; Part 1, Item 1A. Risk Factors; Part II, Item 7. MD&A; Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk and Part II, Item 8. Financial Statements and Supplementary Data.
|
| |
| ACA | The Patient Protection and Affordable Care Act |
| ACH | Automated Clearinghouse Transaction |
| AFS | Available-for-sale |
| ASC | Accounting standards codification |
| ASU | Accounting standards update |
| CCPA | California Consumer Privacy Act of 2018 |
| COBRA | Consolidated Omnibus Budget Reconciliation Act |
| COPS | Cost of providing services |
| COSO | Committee of Sponsoring Organizations of Treadway Commission |
| DOL | U.S. Department of Labor |
| EBITDA | Earnings before interest expense, taxes, depreciation and amortization of intangible assets |
| EPLI | Employment Practices Liability Insurance |
| EPS | Earnings Per Share |
| ERISA | Employee Retirement Income Security Act of 1974 |
| ESAC | Employer Services Assurance Corporation |
| ESPP | Employee stock purchase plan |
| ETR | Effective tax rate |
| FASB | Financial Accounting Standards Board |
| G&A | General and administrative |
| GAAP | Generally Accepted Accounting Principles in the United States |
| HIPAA | Health Insurance Portability and Accountability Act of 1996 |
| HITECH Act | Health Information Technology for Economic and Clinical Health Act of 2009 |
| HR | Human Resources |
| IBNP | Incurred but not yet reported |
| IBNR | Incurred but not reported |
| IGP | Indemnity Guarantee Payment |
| IRS | Internal Revenue Service |
| ISR | Insurance service revenues |
| LDF | Loss development factor |
| LIBOR | London Inter-bank Offered Rate |
| MD&A | Management's Discussion and Analysis of Financial Condition and Results of Operations |
| NISR | Net Insurance Service Revenues |
| NSR | Net service revenues |
| OE | Operating expenses |
| PCAOB | Public Company Accounting Oversight Board |
| PEO | Professional Employer Organization |
| PFC | Payroll funds collected |
| PHI | Protected Health Information |
| PSR | Professional service revenues |
|
| |
| RSA | Restricted Stock Award |
| RSU | Restricted Stock Unit |
| SBC | Stock Based Compensation |
| S&M | Sales and marketing |
| S&P 500 | Standard and Poor's 500 Stock Index |
| SD&P | Systems development and programming |
| SEC | Securities and Exchange Commission |
| SMB | Small to midsize business |
| SOX | Sarbanes-Oxley Act of 2002 |
| TCJA | Tax Cuts and Jobs Act of 2017 |
| U.S. | United States |
| UTP | Uncertain tax position |
| WSE | Worksite employee |
SpecialCautionary Note Regarding Forward-Looking Statements
For purposes of this Annual Report, the terms “TriNet,” “the Company,” “we,” “us” and “our” refer to TriNet Group, Inc., and its subsidiaries. This reportAnnual Report on Form 10-K (Form 10-K) contains statements that are not historical in nature, are predictive in nature, or that depend upon or refer to future events or conditions or otherwise contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E21 of the Securities Exchange Act of 1934, as amended, orand the Exchange Act.Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by the use of words such as, but not limited to, “ability,” “anticipate,” “believe,” “can,” “continue,” “could,” “design,” “estimate,” “expect,” “forecast,” “hope,” “impact,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “strategy,” “target,” “value,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. TheseExamples of forward-looking statements include, among others, TriNet’s expectations regarding: the growth of our customer base, our ability to roll out additional offerings as and when planned, our planned improvements to our technology platform, our ability to drive operating efficiencies and improve the customer experience, the impact of any future changes to health care regulations, our ability and intention to pursue strategic acquisitions, the possibility and impact of future competitors entering our industry, our ability to execute on our vertical market strategy, the impact of our vertical approach, metrics that may be indicators of future financial performance, relative value of our benefit offerings versus those SMBs can independently obtain, the principal competitive drivers in our market, our plans to retain clients and manage client attrition, our ability to penetrate the market for human resources (HR) solutions for small to midsize businesses, our investment strategy and its impact on our ability to generate future interest income, net income, and Adjusted EBITDA, the types of cyber security threats we may face, insurance cost variability, seasonal trends and variability, fluctuations in the period-to-period timing of when we incur certain operating expenses, and other expectations, outlooks and forecasts on our future business, operational and financial performance.
Forward-looking statements are not guarantees of future performance, but are based on management’s expectations as of the date of this reportForm 10-K and assumptions that are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Forward-looking statements are subject toinvolve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those inour current expectations and any past results, performance or achievements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to,discussed throughout this Form 10-K, including those identified below and those discussed in the section titled “Risk Factors” includedappearing under Part I, Item 1A below. All1A. Risk Factors, and Part II, Item 7. MD&A, as well as in our periodic filings with the SEC. Those factors could cause our actual results to differ materially from our anticipated results.
The information provided in this reportForm 10-K is based upon the facts and circumstances known at this time, and any forward-looking statements made by us in this Form 10-K speak only as of the date of this report and weForm 10-K. We undertake no dutyobligation to revise or update any of the information provided in this informationForm 10-K, except as required by law.
PART I
Item 1. Business
Business Overview
TriNet Group Inc., or TriNet or the Company, is a leading provider of comprehensive human resources, or HR solutionsexpertise, payroll services, employee benefits and employment risk mitigation services for smallSMBs. Since our founding in 1988, TriNet has served, and continues to midsize businesses, or SMBs, under a co-employment model. Our HR solutions are designed to manage an increasingly complex setserve, thousands of HR regulations, costs, risksSMBs. For the year ended December 31, 2018, we processed $37.7 billion in payroll and responsibilitiespayroll taxes for our clients allowing them to focus on operating and growing their core businesses. Our bundled HR solutions include offerings such as:
multi-state payroll processing and tax administration;
employee benefits programs, including health insurance and retirement plans;
workers compensation insurance and claims management;
federal, state and local labor, employment and benefit law compliance;
risk mitigation, including employment practices claims management;
expense and time management; and
human capital consulting.
Our proprietary, cloud-based HR software systems are used by ourended 2018 with approximately 16,900 clients and their employees, whom we refer to as worksite employees, orwith about 325,600 WSEs to efficiently store and manage their core HR-related information and conduct a variety of HR-related transactions anytime and anywhere.
In addition, our expert teams of in-house HR professionals also provide additional services upon request to support various stages of our clients' growth, including talent management, recruiting and training, performance management consulting or other consulting services (with an incremental charge for such services).
As of December 31, 2015, we served over 12,700 clientsprimarily in all 5048 states, the District of Columbia, and Canada, co-employed more than 324,000 WSEs and had processed over $31 billion in payroll and payroll tax payments for clients on our systems in 2015. Our clients are distributed across a variety of industries, including technology, life sciences, not-for-profit, professional services, financial services, property management, retail, manufacturing, and hospitality. Our sales and marketing, client services and product development teams are increasingly focused on specific industry verticals. This verticalized approach gives us a deeper understanding of the HR needs facing SMBs in particular industries, which better enables us to provide HR solutions and services tailored to the specific needs of clients in these verticals. We conduct our business primarily in the United States, with more than 99% of our total revenues for each of 2015, 2014 and 2013 being attributable to WSEs in the U.S. and the remainder being attributable to WSEs in Canada.
For 2015, 2014Our Products and 2013, our total revenues were $2.7 billion, $2.2 billion and $1.6 billion respectively. Our total revenues consist of professional service revenues and insurance service revenues. For 2015 and 2014, 15% and 16% of our total revenues, respectively, consisted of professional service revenues, and 85% and 84% of our total revenues, respectively, consisted of insurance service revenues.Services
We recognize as professional service revenues the fees we earn for providing our clients withdeliver a comprehensive suite of products and services, which allows our clients to administer and manage various HR-related functions, including compensation and benefits, payroll processing, employee data, health insurance and workers' compensation programs, and other transactional HR professional services, but do not include amounts paid to us by clients as payroll that are paid out to WSEs or amounts withheldneeds using our technology platform and remitted to authorities as taxes.
We recognize as insurance service revenues all insurance-related billings and administrative fees collected from clients and withheld from WSEs. We pay premiums to third-party insurance carriers for client and WSE insuranceHR, benefits and reimburse the insurance carriers and third-party administrators for claims payments made on our behalf within our insurance deductible layer, where applicable. These premiums and reimbursements are classified as insurance costs on our statements of operations.
To augment our financial information prepared in accordance with U.S. generally accepted accounting principles, or GAAP, we use internally a non-GAAP financial measure, Net Insurance Service Revenues, which consists of insurance service revenues less insurance costs. We also use a measure of total non-GAAP revenue, or Net Service Revenues, which is the sum of professional service revenues and Net Insurance Service Revenues. For 2015, 2014 and 2013, Net Service Revenues were $546.9 million, $507.2 million and $417.7 million, respectively. For 2015, 73% of our Net Service Revenues consisted of professional service revenues and 27% of our Net Service Revenues consisted of Net Insurance Service Revenues.
For 2015, 2014 and 2013, our net income was $31.7 million, $15.5 million and $13.1 million, respectively, and our Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization, or Adjusted EBITDA, was $151.3 million, $165.3 million and $136.0 million, respectively.
Our Services
Professional Services
We provide our clients with a comprehensive suite of HR professional services that we believe enable SMBs to effectively execute fundamental HR transactions and manage an increasingly complex set of HR regulations, costs, risks and responsibilities.
As part of our professional service offerings, we provide our clients with fundamental HR transactional capabilities, including multi-state payroll processing and tax administration, as well as a cloud-based system of record for all their HR transactions. Our online and mobile self-service tools enable our clients, for example, to manage effectively employee hiring and termination, administer changes to employee payroll, view real-time benefits data and create compensation reports. In addition, WSEs are able to access our system to manage their own payroll information, request paid time off (PTO) and view approval status real-time, view paystubs, PTO balances, W-2s and more. This HR functionality is a core component of our professional HR service offering.compliance expertise.
We also leverage our scale and industry specific HR experience to design product and service offerings for SMBs in specific industries. We believe our industry-specific 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 the common HR needs in different client industries. For example, in 2018 we launched TriNet Professional Services to better support consulting, advertising, and other expertise-driven industries. As of December 31, 2018, we offer six industry-tailored vertical products, TriNet Financial Services, TriNet Life Sciences, TriNet Nonprofit, TriNet Technology, TriNet Main Street, and TriNet Professional Services.
Our comprehensive HR products and solutions include the following common capabilities:
|
| | | | | | | | |
| | | | | | | | |
| HR EXPERTISE | | ACCESS TO BENEFITS | | PAYROLL SERVICES | | RISK MITIGATION | | TECHNOLOGY
PLATFORM |
| | | | | | | | |
HR ExpertiseWe use the collective insights and experience that we have gained overof our 27-year operating historyteams of HR, benefits, risk management and compliance professionals to help clients mitigatemanage many of the many administrative, regulatory and practical risksrequirements associated with their responsibilities asbeing employers. We continuously monitor changes in the labor, employment and benefit regulatory environment and offer guidance and training to clients to assist them in avoiding or reducing liability and exposure. Our professional HR services include access to HR templates, best practices, employee handbooks, disciplined process management guidelines, employee relations consultation, issue investigation, workplace employment posters, and compensation practice benchmarking data. In addition, our clients are able to consult directly with our HR professionals throughand services help clients address a variety of interaction models,HR issues, including employee onboarding and terminations, benefits enrollment and support, immigration and visa support, and support for certain types of tax credits. Depending on their needs, our clients and WSEs have access to varying levels of service and support from our HR professionals ranging from call center support for basic questions, to pooled specializedHR resources, to onsite consulting and dedicated HR professionals, depending upon the needs of the client and their WSEs.services. Our HR teamsprofessionals also provide additional specialized HR consulting and services upon requestrequest.
Access to support stages of our clients’ growth, including recruiting or other services (with an incremental charge for such services).Insurance ServicesBenefits
We offerutilize our size and scale to provide our clients and WSEs access to a broad range of cost-effective, TriNet-sponsored benefitsemployee benefit and insurance programs at a value that manywe believe most of our clients maywould be unable to obtain for their WSEs on their ownown. Our benefit and thatinsurance programs are compliantdesigned to comply with state, local, and federal regulations. We believe access toregulations, and our fully-insured, Affordable Care Act compliant group healthbenefit and insurance plans is one of the
most important benefits we provide to our clients and WSEs. In addition, our insurance servicesservice offerings include plan design and administration, enrollment management, leave management, plan document distribution and WSE and client communications relating tocommunications.
Under our sponsoredbenefit and insurance programs, we pay third-party insurance carriers for WSE insurance benefits and reimburse insurance programs. As described below, the principal components ofcarriers or third-party administrators for claims payments within our insurance services offerings are employee benefit plans, workers compensation insurance and employment practices liability insurance.deductible layer, where applicable.
Employee Benefit Plans
We sponsor and administer a number of fully-insured, risk basedseveral fully insured employee benefit plans through a broad range of carriers, including group health, dental, vision, short- and long-term disability, and life insurance as an employer plan sponsor under Section 3(5) of the Employee Retirement Income Security Act, or ERISA. We also offer other benefit programs to our clients and WSEs, including flexible spending accounts, health savings accounts, retirement benefits, COBRA benefits, individual life insurance, a legal services plan, commuter benefits, home insurance, critical illness insurance, accident insurance, hospital indemnity, pet insurance, and auto insurance. We provide group insurance coverage to our WSEs through a national network of carriers including Aetna, Blue Shield of California, Florida Blue, BlueCross BlueShield of North Carolina, Tufts, Kaiser Permanente, MetLife United Healthcare, EyeMed, Delta Dental and Vision Service Plan.
Approximately 38%For further discussion of our 2015 group health insurance premiums were for fully insured programs including policies with respect to which our carriers set the premiums and for whichwhere we were not responsible for any deductible, which are referred to as ‘guaranteed cost’ policies. The remaining 62% of our 2015 group health insurance premiums were for fully insured policies with respect to which we agree to pay additional amounts toreimburse our carriers for anycertain amounts relating to claims, paid within an agreed-upon deductible layer. Our agreements with our health insurance carriers with respect to these non-'guaranteed cost' policies typically include limits to our exposure for individual claims, which we refer to Note 1 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K.
Payroll ServicesWe help clients manage all aspects of their employee compensation by providing multi-state payroll processing and tax administration services and other payroll-related services, such as ‘pooling’ limits,time and limitsattendance management, time off and overtime tracking, and expense management solutions. Our clients and WSEs can access payroll and tax information and carry-out a variety of common HR transactions using our online and mobile tools. Our tax administration services include calculating, withholding and reporting certain federal, state and local payroll and unemployment taxes on behalf of clients and WSEs.
Risk MitigationOur HR professionals monitor employment-related regulatory developments at the local, state and federal levels to help our maximum aggregate exposure for claims in a given policy year, which we refer to as ‘stop loss’ limits. We have experienced variability,clients comply with employment laws and maymitigate many of the risks associated with being an employer. Using our HR experience, variability in the future, in the amounts that we are requiredable to pay our healthprovide guidance on a variety of employment regulations, from state and local laws like minimum wage, unemployment insurance, carriers for group health insurance expenses incurred by WSEs within our deductible layer under non-'guaranteed cost' policies, based on continually changing trends infamily and medical leave laws and anti-discrimination laws, to federal laws like the frequency and severity of claims. These historical trends may change, and other seasonal trends and variability may develop, which may make it more difficult for us to manage this aspect of our business.
Workers Compensation InsuranceACA.
We provide fully-insured workersfully insured workers' compensation insurance coverage for our clients and WSEs through agreementsinsurance policies that we negotiate with our third-party insurance providers. These agreements typically include a deductible layer that obligates us to reimburse our carriers up to $1 million per claim occurrence.carriers. We manage the deductible risk that we assume in connection with these policies by being selective in the types of businesses that we take on as new clients, and by monitoring claims data and the performance of our carriers and third-party claims management services and vendors andvendors. In addition, we advise clients on workers’ compensation best practices, including by providing risk management services for existing clients. These services include performing workplace assessment safety consultation, accident investigationconsultations and other risk management services at ourassisting with client locationsefforts to help prevent situationsidentify conditions or practices that couldmight lead to claims and services to help remediate claims when they occur.
Employment Practices Liability Insuranceemployee injuries.
We also provide employment practices liability insurance (EPLI)EPLI coverage for our clients through agreementsinsurance policies that we negotiate with ourobtain from a third-party EPLI insurance provider.carrier. These EPLI policies provide coverage for certain claims that arise in the course of the employment relationship, such as discrimination, harassment, and certain other employee claims, with a per-claim retention amount. For most of our clients, theThe retention amount is split between the client and TriNet, with the client generally paying its portion of the retention amount first.
While we do not provide legal representation to our clients, our clients can benefit from the extensive experience of our employment law specialists in our legal department who support ourand HR professionals in their efforts towho assist clients in avoidingimplementing HR best practices to avoid employment practices liability claims to manage, process and in managing, processing and respondingrespond to such claims. For claims covered by theour EPLI, insurance, actual litigation defense is conducted by one of several outside employment law firms chosen by the EPLI carrier with whom we and our EPLI carriers have previously negotiated rates, established billing guidelines and invoice review processes andprocesses. We have also developed a case management protocol to efficiently and effectively defend such claims.
Seasonality and Insurance Variability
Technology PlatformOur business is affected by cyclicalitytechnology platform includes online and mobile tools that allow our clients and WSEs to store, view, and manage core HR information and administer a variety of HR transactions, such as payroll processing, tax administration, employee onboarding and termination, compensation reporting, expense management, and benefits enrollment and administration. In 2018, we continued to make significant investments in business activityour technology platform to provide our users with improved functionality and WSE behavior. Historically,HR management options, and we have experiencedcontinued to retire legacy technology inherited from acquisitions. We intend to continue to invest in our highest monthly additiontechnology platform to improve its functionality, ease of WSEs, as well as our highest monthly levels of client attrition, inuse and the month of January, primarily because clients that change their payroll service providers tend to do so at the beginning of a calendar year. We alsooverall user experience higher levels of client attrition in connection with renewals of the health insurance we sponsor for our WSEs,clients and WSEs. We believe the continued investment in and improvement of our technology platform will drive operating efficiencies and improve the event that such renewals result in higher costs tocustomer experience.
We invested approximately $81 million, $74 million and $53 million, during 2018, 2017 and 2016, respectively, developing our clients. We have also historically experienced higher insurance claim volumes in the second and third quarters of a fiscal year than in the first and fourth quarters of a fiscal year, as WSEs typically access their health care providers more often in the second and third quarters of a fiscal year, which has negatively impacted our insurancetechnology platform.
costs in these quarters. We have also experienced variability on a quarterly basis in the amount of our health and workers compensation insurance costs due to the number and severity of insurance claims being unpredictable. These historical trends may change, and other seasonal trends and variability may develop which would make it more difficult for us to manage our business.
Our Co-Employment Model
We operate underusing a co-employment model business model, under which employment-related responsibilities are contractually allocated by contract between us and our clients, which affords us a close relationship withclients. This model allows WSEs to receive the full benefit of our clients and their WSEs.services, including access to our sponsored employee benefit plan offerings. Each of our clients enters into a client service agreement with us that defines the suite of professional and insurance services and benefits to be provided by us, the fees payable to us, and the division of responsibilities between us and our clientclients as co-employers. The division of responsibilities under our client service agreements is typically as follows:
TriNet Responsibilities
We generally assume responsibility for, and manage certain risks associated with:
remittance to WSEs of salaries, wages and certain other compensation as(as reported and paid to us by the client,our client), related tax reporting and remittance to tax authorities, and processing of garnishment and wage deduction orders. Unlike a payroll service provider, we issue each WSE apay WSEs from our own bank accounts,
reporting of wages, withholding and deposit of associated payroll check drawn on our bank accounts;taxes as the employer for regulatory reporting and payroll tax returns,
provision and maintenance of workersworkers' compensation insurance and workersworkers' compensation claims processing;processing,
provision of access to, and administration of, group health, welfare, and retirement benefits to WSEs based on our clients’ elections, under TriNet-sponsored insurance plans;plans,
compliance with applicable law for certain employee benefits offered to WSEs;WSEs,
processing of unemployment claims;claims, and
provision of certain HR policies, including an employee handbook describing the co-employment relationship.
| |
| ��� | provision of certain HR policies, including an employee handbook describing the co-employment relationship. |
Client Responsibilities
Our clients are responsible for employment-related responsibilities that we do not specifically assume, generally including:
day-to-day management of their worksites and WSEs;WSEs,
compliance with laws associated with the classification of employees as exempt or non-exempt, such as overtime pay and minimum wage law compliance;compliance,
accurate and timely reporting to TriNet of compensation and deduction information, including information relating to hours worked, rates of pay, salaries, wages and certain other compensation;compensation,
accurate and timely reporting to TriNet of information relating to workplace injuries, employee hires and termination, and certain other information relevant to TriNet’s services;services,
provision and administration of any employee benefits not provided by TriNet (e.g.,such as equity incentive plans);plans,
compliance with all laws and regulations applicable to the client’sclients' workplace and business, including work eligibility laws, laws relating to workplace safety or the environment, laws relating to family and medical leave, laws pertaining to employee organizing efforts and collective bargaining and employee termination notice requirements;requirements,
payment of TriNet invoices, which include salary, wages and other relevant compensation to WSEs and applicable employment taxes and service fees;fees, and
all other matters for which TriNet does not assume responsibility under the client service agreement, such as intellectual property ownership and protection and liability for products produced and/orand services provided.provided by the client company to its own customers.
As a result of our co-employment relationship with each of our WSEs, we are liable for payment of salary, wages and certain other compensation to the WSEs as reported and paid to us by the client, and are responsible for providing specified employee benefits to such persons to the extent provided in each client service agreement and under federal and state law. In most instances, clients are required to remit payment prior to the applicable payroll date by wire transfer or automated clearinghouse transaction. Although we may become liable, as the employer for payroll purposes, to pay certain amounts for work previously performed, we are not obligated to continue to provide services to the client if payment has not been made. For the year ended December 31, 2015, our bad debt expense relating to such obligations was approximately $2.0 million.ACH.
We also assume responsibility for payment and liability for the withholding and remittance of federal and state income and employment taxes with respect to salaries, wages and certain other compensation paid to WSEs, although we reserve the right to seek recourse against our clients for any liabilities arising out of their conduct. ExceptWe perform these functions as the statutory employer for federal employment tax purposes, since our clients transfer legal control over these payroll functions to us. The laws that govern the payment of salaries, wages and related payroll taxes for our WSEs are complex and the various federal, state and local laws that govern such payments can have significant differences. For example, except to the extent applicable federal legislation and applicable state lawlaws otherwise provide, the client may be held ultimately liable for those obligations if we fail to remit taxes and the bonding security provided by the Employer Services Assurance Corporation (ESAC)ESAC or other surety is not sufficient to satisfy the obligation. We also secure insurance in the event that we fail to meet these obligations.
Our Technology Platform
We provide our clients and WSEs with fundamental HR transactional capabilities, as well as a cloud-based system of record for all their HR transactions. Our online and mobile self-service tools allow our clients and WSEs 24/7 access to their core HR information. On our systems, clients can effectively manage employee hiring and termination, administer employee payroll, view real-time benefits data and create compensation reports. WSEs can also manage their own payroll information, request paid time off (PTO) and view approval status real-time, enroll in benefits, and view paystubs, PTO balances, and W-2s, among other things. We also offer human capital management software offerings, including talent management and development, applicant tracking, expense management, and performance management. These modules can be either bundled into the product offering or purchased as add-ons for certain of our verticals. We have also made significant investments to integrate our software offerings with those of certain third-party technology and benefits services providers to allow clients and WSEs to access a unified view of all of their pertinent HR information.
By offering a proprietary, cloud-based HR system, our clients gain the efficiencies of an enterprise-level software solution without the significant cost of in-house installation or ongoing maintenance. Features include:
multi-tenant system enabling multiple clients and WSEs to share one version of our system while isolating each client’s and WSE’s data;
rule-based provisioning ensuring that all users are authenticated, authorized and validated before they can access our systems;
redundant processing centers to protect client data from loss;
integrated benefits and payroll processing for faster, more accurate data; and
flexible and extensible platform architecture.
From 2013 through 2015, we invested approximately $111.3 million in our technology systems. We plan to continue to invest to upgrade and improve our technology offerings, including enhancements of our solutions to address specific needs of clients in our key vertical markets, as we believe the continued improvement of our technology provides TriNet with the ability to drive operating efficiencies while improving our clients’ experience. We will leverage our existing online technology offerings to build additional products and features, including a full-service mobile platform, standard APIs for selected third party offerings, improved client experience for key processes, and retirement of legacy software systems from acquisitions and migration of clients to the primary TriNet software system.
Competition
We face significant competition on a national and regional level from a number of companies purporting to deliver a range of bundled services that are generally similar to the services we provide. The National Association of Professional Employer Organizations, or NAPEO, estimates that there are between 780 and 980 such entities currently operating in the United States. We are one of only five PEOs accredited by the Employer Services Assurance Corporation that offers services in all 50 states and believe that we are one of the largest PEOs in the industry. Our competitors include large PEOs such as the TotalSource unit of Automatic Data Processing, Inc. and Insperity, Inc., as well as specialized and smaller PEOs and similar service providers. If and to the extent that we and other companies providing these services are successful in growing our businesses, we anticipate that future competitors will enter this industry.
In addition to competition from other professional employer organizations, we also face significant competition in the form of companies serving their HR needs in both traditional and non-traditional manners. These forms of competition include:
HR and information systems departments and personnel of companies that perform their own administration of employee benefits, payroll and HR;
providers of certain endpoint HR services, including payroll, employee benefits and business process outsourcers with high-volume transaction and administrative capabilities, such as Automatic Data Processing, Inc., Paychex, Inc. and other third-party administrators;
employee benefit exchanges that provide benefits administration services over the Internet to companies that otherwise maintain their own employee benefit plans; and
insurance brokers who allow third party HR systems to integrate with their platform.
We believe that our services are attractive to many SMBs in part because of the quality and breadth of our workers compensation, group health insurance and other employee benefits programs. We compete with insurance brokers and other providers of this coverage in this regard.
We believe the principal competitive factors in our market include the following:
level of client satisfaction;
ease of client setup and on-boarding;
breadth and depth of benefit plans;
vertical market expertise;
total cost of service;
brand awareness and reputation;
ability to innovate and respond to client needs rapidly;
online and mobile functionality; and
subject matter expertise.
We believe that we compete favorably on the basis of each of these factors.
Sales and Marketing
Our Sales Organization
We sell our solutions primarily through our direct sales organization. We have aligned our sales organization by industry vertical with the goal of drivinggrowing profitable market share in our targeted industries. This vertical approach deepens our network of relationships and gives us an understanding of the unique HR needs facing SMBs in those industries. As part of our vertical approach, we conduct industry-specific client marketing programs, including industry and geographic focus groups, to foster a sense of community through the sharing of best practices, while also collecting valuable information about the unique requirements of companies in particular industries. This knowledge then allows our sales team to work with our product development and client service teams to build bundled solutions of services that are tailored to the specific needs of clients in these industries.
The number ofOur sales representatives in the field has grown substantially in recent years, through both internal hiring and through onboarding sales representatives from acquired businesses, from 80 sales representatives as of December 31, 2011 to 481 sales representatives as of December 31, 2015. In our direct sales organization, we recruit and seek to hire sales professionals who have experience in a specific industry vertical market, and with a background in selling business services such as accounting, HR or sales solutions. As of December 31, 2015, we had approximately 50 regional field sales offices.
Our sales team’s primary focus and goal is to win new accounts as opposed to mining our installed base of business for incremental revenue. In order to drive the most effective cost of acquisition for this new business, we continually fine-tune our lead generation and marketing efforts and our initiatives to attempt to drive higher productivity per sales representative.
Ourare supported by marketing, inside sales, lead generation efforts, and lead incubation efforts support the success of our direct sales representatives. We employ a broad range of vertically focused awareness and demand-generation marketing programs, including digital and print advertising, e-mail, direct mail and social media. We have an internal public relations team that works with an external agency to promote relevant content to target media outlets. referral networks.
We sponsor and participate in associations and events around the country and utilize these forums to target specific vertical and geographic markets. We also generate
sales opportunities and deepen our relationships within key industry verticals, through marketing alliances and other indirect channels, such as existing clients, certified public accountants,accounting firms, venture capital firms, incubators, insurance brokers, and other vertical market industry associations. Additionally, we utilize digital marketing programs, including digital advertising, search and email marketing, to create awareness and interest in our products.
We drive sales representative productivityOur Marketing Organization
Our marketing organization is charged with driving overall brand awareness, managing lead generation, creating and managing our website and other online properties, creating content for all of our outbound and inbound marketing efforts, media relations, and managing our sponsorships, major marketing events, and client communications. In 2018 our marketing team focused on strategic marketing, communications and branding initiatives, in part by launching a comprehensive company re-branding and marketing campaign that included social media and advertising across digital, television, radio and out-of-home media.
Legal and Regulatory
Our business operates in a number of ways, including by improving the quality of leads generated by our marketing and inside sales teams, and through the development of a sales operations team that offloads sales process work. We believe our focus on specific verticals, and the expertise gained through this focus, makes our sales representatives increasingly relevant to their target audience. Recently, we have expanded our focus on various channel relationships and alliances that drive warm leads to our direct sales force. Finally, our sales representatives benefit from building strong relationships with prospects during the sales process, resulting in referrals to new prospects as well as direct support through providing reference calls in regards to our products and services.
Strategic Acquisitions
Historically, we have pursued strategic acquisitions to both expand our product capabilities and supplement our growth across geographies and certain industry verticals. Our acquisition targets have included other bundled HR providers as well as technology companies or technology product offerings to supplement or enhance our existing HR solutions. We intend to continue to pursue strategic acquisitions that will enable us to add new clients and WSEs, expand our presence in certain geographies or industry verticals and offer our clients and WSEs more comprehensive and attractive products and services.
Clients
We approach the market with a vertical, or industry-based, focus. Our clients span a variety of industries, including technology, life sciences, not-for-profit, professional services, financial services, property management, retail, manufacturing and hospitality. We have grown our number of clients from approximately 4,500 as of December 31, 2011 to over 12,700 clients as of December 31, 2015. We have also grown our number of WSEs from approximately 83,000 as of December 31, 2011 to approximately 324,000 in all 50 states, the District of Columbia and Canada as of December 31, 2015.
U.S. Legal and Regulatory Environment
The complex environment created by theof numerous federal, state and local laws and regulations relating to labor and employment matters, benefit plans and income and employment taxes creates a significant demand for our HR solutions. Many of those laws and regulations also significantly affect how we are able to provide our HR solutions to our clients. Many of these laws, such as ERISA, were enacted before the development of the co-employment relationship and other non-traditional employment relationships, such as temporary employment and other employment-related outsourcing arrangements. Therefore, many of these laws do not specifically address the obligations and responsibilities of professional employer organizations utilizing a co-employment model like ours, creating uncertainty about their interpretation and application to our industry. In addition, other federal and state laws and regulations, such as the Affordable Care Act, are relatively new and administrative agencies and federal and state courts have only begun to interpret and apply these regulations to our industry. The development of additional regulations and interpretation of these laws and regulations can be expected over time.
We believe that our operations are currently in compliance in all material respects with applicable federal and state statutes and regulations. The sections discussed below summarizefollowing summarizes what we believe are the most important legal and regulatory aspects of our business:
Federal Regulations
Employer Status
In order for clients and WSEs to receive the full benefit ofWe sponsor our employee benefit plan offerings it is important that we constituteas the “employer”employer of theour WSEs under the Internal Revenue Code of 1986, or the Code,as amended (the Code), and ERISA. The multiple definitions of “employer” under both the Code and ERISA are not clear and most are defined in part by complex multi-factor tests under common law. We believe that we qualify as an “employer” of our WSEs in the United StatesU.S. under both the Code and ERISA, and we implement processesas well as various state regulations, but this status could be subject to protect and preserve this status. With Congressional passage of the Small Business Efficiency Act in December 2014, the Code clarified thechallenge by various regulators. For additional information on our employer status and its impact on our business and results of professional employer organizations, or PEOs, for federal tax purposes, for those PEOs who voluntarily become certified underoperations, refer to Part I, Item 1A. Risk Factors, of this law. The IRS is expected to begin accepting applications for certification in July 2016 and we currently intend to apply for certification.
Tax Qualified Plans. In order to qualify for favorable tax treatmentForm 10-K, under the Code, certain employee benefit plans such as 401(k) retirement plans and cafeteria plans must be established and maintained by an employer for the exclusive benefit of its employees. Generally, an entity is an “employer” of certain workers for federal employment tax purposes if an employmentheading -
relationship exists between the entity and the workers under the common law test of employment. The common law test of employment, as applied by the IRS, involves an examination of many factors to ascertain whether an employment relationship exists between a worker and a purported employer. Our 401(k) retirement plans are operated pursuant to guidance provided by the IRS for the operation of defined contribution plans maintained by co-employers that benefit WSEs. This guidance provides qualification standards for such plans. All of our 401(k) retirement plans have received favorable determination letters from the IRS confirming the qualified status of the plans. The IRS 401(k) guidance and qualification requirementsIf we are not applicable to the operation of our cafeteria plans.
ERISA Regulation. Employee pension and welfare benefit plans are also governed by ERISA. ERISA defines an “employer” as “any person acting directlyrecognized as an employer of worksite employees under federal and state regulations, or indirectly in the interest of an employer, in relation to an employee benefit plan.” ERISA defines the term “employee” as “any individual employed by an employer.” The courts have held that the common law test of employment must be applied to determine whether an individual is an employee or an independent contractor under ERISA. However, in applying that test, control and supervision are less important for ERISA purposes when determining whether an employer has assumed responsibility for providing employee benefits. A definitive judicial interpretation of “employer” in the context of a professional employer organization has not been established, and the U.S. Department of Labor has issued guidance that certain entities in the HR outsourcing industry do not qualify as common law employers for ERISA purposes. If we were found notdeemed to be an employer for ERISA purposes, itinsurance agent or third-party administrator, we and our clients could affect the manner in which we are able to provide employee benefits to our WSEs.be adversely impacted.
Affordable Care Act
The AffordableACA and Health Care Act, or the Act,Reform
The ACA was signed into law in March 2010. The ACA implemented sweeping health care reforms with staggered effective dates from 2010 through 2020, and many provisions in the ActACA still require the issuance of additional guidance from the U.S. Department of Labor,DOL, the IRS, the U.S. Department of Health and Human Services and various U.S. states. Passage of the states. The Act imposed a numberTCJA in December 2017 eliminated the individual mandate tax penalty under the ACA beginning in 2019, while retaining employer ACA obligations. Further significant changes to health care statutes, regulations and policy at the federal, state and local levels could occur in 2019 and beyond, including the potential further modification, amendment or repeal of new mandatesthe ACA. For additional information on the coverageACA and its impact on our business and results of operations, refer to Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading - Our business is subject to numerous complex state and federal laws, and changes in, uncertainty regarding, or adverse application of these laws could adversely affect our business.
HIPPA
Maintaining the security of our WSEs information is important to TriNet as we sponsor employee benefit plans and may have access to personal health information (PHI) of our WSEs. The manner in which we manage PHI is subject to HIPAA and the HITECH Act. HIPAA contains restrictions and health data privacy, security and breach notification requirements with respect to the use and disclosure of PHI. Further, under the HITECH Act there are penalties and fines for HIPAA violations. Our health plans are covered entities under HIPAA, and we are therefore required to be provided under health insurance plans beginning in 2010, with additional requirements staged in subsequent years. We believe that our group health insurance plans comply with existing mandates. However,HIPAA's portability, privacy, and security requirements.
To the guidance issued to date byextent possible, the IRShealth claim information we possess is anonymized and accessed through a secured third-party database. For additional information on the security of our clients' and WSEs' personal data and PHI and the U.S. Department of Health and Human Services has not addressed, or in some instances is unclear, as to its application in the co-employer context. As a result, we are not yet able to predict all of the impactspotential impact to our business if we fail to protect such personal data and PHI, refer to Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading - Cyber-attacks or security breaches could result in reduced revenue, increased costs, liability claims, regulatory penalties, and damage to our reputation.
U.S. State Regulations
Forty-four states have adopted provisions for licensing, registration, certification or recognition of co-employers, and others are considering such regulation. Such laws vary from state to state but generally provide for monitoring or ensuring the fiscal responsibility of PEOs, and in some cases codify and clarify the co-employment relationship for unemployment, workers' compensation and other purposes under state laws. We believe we are in compliance in all material respects with the requirements in those forty-four states.
We must also comply with state unemployment tax requirements where our clients resulting from the Act.
State Unemployment Taxes
are located. State unemployment taxes are based on taxable wages and tax rates assigned by each state. The tax rates vary by state and are determined, in part, based on our prior years’ compensation and unemployment claims experience in each state. Certain rates are also determined, in part, by each client’s own compensation and unemployment claims experience. In addition, states have the ability under law to increase unemployment tax rates, including retroactively, to cover deficiencies in the unemployment tax funds. Due
We must also comply with general state tax laws, including payroll tax laws. Continued tax reform efforts may lead to the adverse U.S. economic conditions during recent yearssignificant state tax law changes in 2019 and the associated reductionsbeyond.
Strategic Acquisitions
Historically, we have pursued strategic acquisitions to both expand our product capabilities and supplement our growth across geographies and certain industry verticals. Our acquisition targets have included PEOs and other HR solution providers as well as technology companies or technology product offerings to supplement or enhance our existing HR solutions. We intend to continue to pursue strategic acquisitions, where appropriate, that will enable us to add new clients and WSEs, expand our presence in employment levels, the state unemployment tax funds have experiencedcertain geographies or industry verticals and offer our clients and WSEs more attractive products and services.
Client Industries and Geographies
Our clients are distributed across a significant increasevariety of industries, including technology, life sciences, not-for-profit, professional services, financial services, property management, retail, manufacturing, and hospitality. Our clients execute annual service contracts with us that automatically renew. Generally, our clients may cancel these contracts with thirty days'
notice and we may cancel these contracts with thirty days' notice.
We conduct our business primarily in the numberUnited States, with more than 99% of unemployment claims. Accordingly, state unemploymentour total revenues being attributable to WSEs in the United States and its territories with the remainder being attributable to WSEs in Canada. Substantially all our long-lived assets are located in the United States.
Seasonality
Our business is affected by seasonality in client business activity and WSE product selection. In addition, the timing of benefits open enrollment periods and utilization of medical services above each WSE's deductible causes variation in our quarterly results. Finally, clients generally change their payroll service providers at the beginning of the payroll tax rates increased substantially over the past few years. Employers in certain states are also experiencing higher federal unemployment tax ratesyear; as a result, we have historically experienced our highest volumes of new and exiting clients in the month of January.
Competition
We face competition from:
PEOs that compete directly with us,
HR and information systems departments and personnel of companies that administer employee benefits, payroll and HR for their companies in-house,
providers of certain states not repayingendpoint HR services, including payroll, employee benefits, business process outsourcers with high-volume transaction and administrative capabilities, and other third-party administrators,
employee benefit exchanges that provide benefits administration services over the Internet to companies that otherwise maintain their unemployment loans fromown employee benefit plans, and
insurance brokers who allow third-party HR systems to integrate with their technology platform.
Our competitors include large PEOs such as the federal governmentTotalSource unit of Automatic Data Processing, Inc., the PEO operations of Paychex, Inc. and Insperity, Inc., as well as specialized and smaller PEOs and similar HR service providers with PEO operations. To the extent that we and other companies providing these services are successful in growing our businesses, we anticipate that future competitors will enter this industry.
We believe that our services are attractive to many SMBs in part because of our ability to provide access to a timely manner.broad range of TriNet-sponsored workers' compensation, health insurance and other benefits programs on a cost-effective basis. We have taken stepscompete with insurance brokers and other providers of this coverage in this regard, and our offerings must be priced competitively with those provided by these competitors in order for us to mitigateattract and retain our clients.
We believe that we compete based upon the riskbreadth and depth of fluctuations in stateour benefit plans, vertical market expertise, total cost of service, brand awareness and federal unemployment tax rates, including reportingreputation, ability to innovate and remitting unemployment insurance taxes or contributions at the client level and/orrespond to customer needs rapidly, access to online and mobile solutions, and subject matter expertise. We believe that we are competitive across these factors. For additional information about our competition, please refer to Part I, Item 1A. Risk Factors, of this Form 10-K, under the client’s own account number in approximately 40 states,heading - Our reputation could suffer and we will continue to evaluate such reporting relationships in the future.
State Regulation of Co-Employers
Forty-two states have adopted provisions for licensing, registration, certification or recognition of co-employers,our business could be adversely affected if our products do not perform, and othersour services are considering such regulation. Such laws vary from state to state but generally provide for monitoring or ensuring the fiscal responsibility of professional employer organizations,not delivered, as expected by our clients and in some cases codify and clarify the co-employment relationship for unemployment, workers compensation and other purposes under state law. We believe we are in compliance in all material respects with the requirements in all 42 states. Regardless of whether a state has licensing, registration or certification requirements for co-employers, we must comply with a number of other state and local regulations that could impact our operations, such as state and local taxes, licensing and business regulations.WSEs.
Intellectual Property
Our success depends in part onWe own or license from third parties various computer software, as well as other intellectual property rights, to the services thatused in our business. Generally, we develop. We rely on a combination of contractual rights, including non-disclosure agreements, trade secrets, copyrights and trademarks, to establish and protect our
intellectual property rights inthrough the use of confidentiality and non-disclosure agreements and policies with our names, services, methodologiesemployees and related technologies. If we lose intellectual property protection or the ability to secure intellectual property protection on any of our names, confidential information or technology, this could harm our business. Our intellectual property rights may not prevent competitors from independently developing servicesthird-party partners and methodologies similar to ours, and the steps we take might be inadequate to deter infringement or misappropriation of our intellectual property by competitors, former employees or other third parties, any of which could harm our business.vendors. We currently have one pending U.S. patent application covering our technology. Wealso own registered trademarks in the United States, Canada and the European Union that have various expiration dates unless renewed through customary processes. Our trademark registrations may be unenforceable or ineffective in protectingcovering our trademarks. Ourname and other trademarks may be unenforceable in countries outside of the United States, which may adversely affect our ability to build our brand outside of the United States.
Althoughand logos that we believe thatare materially important to our conduct of our business does not infringe on the intellectual property rights of others, third parties may nevertheless assert infringement claims against us in the future. We may be required to modify our products, services, internal systems or technologies, or obtain a license to permit our continued use of those rights. We may be unable to do so in a timely manner, or upon reasonable terms and conditions, which could harm our business. In addition, future litigation over these matters could result in substantial costs and resource diversion. Adverse determinations in any litigation or proceedings of this type could subject us to significant liabilities to third parties and could prevent us from using some of our services, internal systems or technologies.operations.
Corporate Employees
We refer to our employees excluding employees that we co-employ on behalf ofare not co-employed with our clients as our corporate employees. We had approximately 2,5003,100 corporate employees as of December 31, 2015. None of our2018. Our corporate employees isare not covered by a collective bargaining agreement.
Corporate and Other Available Information
We were incorporated in 1988 as TriNet Employer Group, Inc., a California corporation. We reincorporated as TriNet Merger Corporation, a Delaware corporation, in 2000 and during that year changed our name to TriNet Group, Inc. Our principal executive offices areoffice is located at 1100 San Leandro Blvd.,One Park Place, Suite 400, San Leandro,600, Dublin, CA 9457794568 and our telephone number is (510) 352-5000. Our website address is www.trinet.com. Information contained in or accessible through our website is not a part of this report.
On the Investor Relations page of our Internet website at http://www.trinet.com, we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Information contained in or accessible through our website isAlternatively, the public may access these reports at the SEC's internet site at www.sec.gov. The contents of these websites are not incorporated into this report and isare not a part of this report.
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and all of the other information contained in this report, including the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. Any of the following risks could materially and adversely affect our business, financial condition and results of operations and cause a decline in the trading price of our common stock, and you may lose some or all of your investment.
Risks Related to Our Business and Industry
Our co-employment relationship with our worksite employees exposes us to business risks.
Under our agreements with our clients, we are a co-employer of our WSEs and assume certain obligations, including the responsibility to pay salaries, wages and related payroll taxes of our WSEs, and to do so, to the extent required by law, regardless of whether our client timely remits payments to us. In addition, we provide benefits to our WSEs, even if the cost of providing such benefits is greater than fees received from our clients. Although our client agreements require clients to pay these amounts or indemnify us for failure to make such payments, we may not be able to effectively enforce or collect on these contractual obligations. Accordingly, our ultimate liability for payroll and benefits expenses for our WSEs could exceed the amounts we receive from our clients, which could have a material adverse effect on our financial condition or results of operations.
Moreover, as a co-employer of our WSEs, there is a possibility that we may be subject to liability for violations of employment laws and other acts and omissions by our clients or WSEs, who may be deemed to be our agents, even if we do not participate in any such acts or violations. Such laws include, but are not limited to, laws relating to payment of wages, employment discrimination, labor relations and whistleblower protection. Although our client agreements establish the contractual division of responsibilities between us and our clients for various personnel management matters, including compliance with and liability under various governmental regulations, as well as providing for clients to indemnify us for any liability attributable to clients’ or their employees’ conduct, we may not be able to effectively enforce or collect on these contractual obligations, which could have a material adverse effect on our financial condition or results of operations.
We maintain employment practices liability insurance coverage (often including coverage for our clients) to manage our and our clients’ exposure for various WSE-related claims and are responsible (often together with our clients) for any deductible layer under such coverage. Furthermore, employment practices liability insurance generally excludes coverage for claims relating to compliance with laws associated with the classification of employees as exempt or non-exempt, such as overtime pay and minimum wage law compliance. We cannot assure you that our insurance will be sufficient in amount or scope to cover all claims that may be asserted against us and for which we are unable to obtain indemnification from our clients. If judgments or settlements or defense costs exceed our insurance coverage, it could harm our results of operations and financial condition. We cannot assure you that we will be able to obtain appropriate types and levels of insurance in the future, that we will be able to replace existing policies on acceptable terms, or at all, or that our insurers will be able to pay all claims that we may make under our policies, any of which could have a material adverse effect on our financial condition or results of operations.
Our business is subject to numerous state and federalcomplex laws, and changes in, uncertainty as to theregarding, or adverse application of these laws or adverse applications of these laws, as well as changes in applicable laws, could adverselynegatively affect our business.
Our operationsThe products and services we provide to our clients are governed bysubject to numerous complex federal, state and local laws relating to labor, tax, employee benefits, insurance and employment matters. However, manyregulations, including those described in Part I, Item 1. Business, of this Form 10-K. Many of these laws (such as ERISA, andthe ACA, other federal and state employee benefit laws, workers' compensation laws, employment tax laws)laws, worksite safety laws, insurance and banking laws, wage and hour laws, anti-discrimination laws, and laws specific to the industries of our clients) do not specifically address PEOs or co-employment relationships, which can lead to unpredictable application, regulatory interpretation and discretion in enforcement at the obligationsfederal, state and responsibilities of a professional employer organization providing outsourced HR serviceslocal levels in a co-employment relationship, and the definition of employer under these laws is not uniform. relation to our business.
In addition, many states have not addressed the co-employment relationship for purposes of compliance with applicable statenew laws, governing the relationship between employers and employees and state insurance laws. We are not able to predict whether broader federalchanges in existing laws, or state regulation governing our business and the co-employment relationship with our WSEs will be implemented, or if it is, how it will affect us, our clients or our WSEs. Any adverse application or interpretation (in courts, agencies or otherwise) of new or existing federallaws, whether they apply to employers generally or state lawsspecifically to thePEOs or our co-employment relationshiprelationships with our clients and WSEs, could have a material adverse effect on our financial condition and results of operations. If federal, state or local jurisdictions were to change their regulatory framework related to outsourced HR services, or introduce new laws governing our industry that were materially different from existing laws, those changes could reduce or eliminate the need for, or value and benefit provided by, some or all of ourthe products and services we provide, and/or could require that weus to make significant changes into our methods of doing business which could increase our costand providing products and services, including providing additional customer and WSE disclosures. Any such new laws, changes in laws or adverse application or interpretation of doing business. Changes in regulationslaws could also affect the extent and type of employee benefits employers and co-employers can or must provide employees, the amount and type of taxes employers, co-employers and employees are required to pay, or the time within which employers and co-employers must remit taxes to applicable tax authorities. The laws that apply in our industry and to employers and co-employers have and could be changed, replaced or interpreted in a manner adverse to our operations and we are not able to predict the applicable authority. Theseoccurrence, direction or ultimate impact of these events. Any such new laws, change in laws or adverse application or interpretation of laws could have material adverse effect on our financial condition and results of operations.
Changes to and continued uncertainty regarding the implementation and future of health care reform in the United States, including under the ACA, any successor to the ACA, or related or similar state and local laws, has the potential to substantially change the health insurance market for SMBs and how such employers provide health insurance to their employees, which could have a materially adverse effect on our ability to attract and retain our clients. For example, the elimination of the ACA individual mandate tax penalty beginning in 2019 may reduce the number of WSEs who participate in our insurance programs. Significant changes could substantially decreasebe made to the ACA in 2019 and beyond, including the potential modification, amendment or repeal of the ACA. Changes to federal health care laws, including the ACA, could also result in new or amended laws being introduced at the state or local level. Our ability to comply with, and adapt our revenuesproduct offerings to take advantage of, any such changes could require significant additional costs and substantially increase our cost of doing business and havedivert management attention, which could result in a material adverse effect on our financial condition and results of operations.
Although some states do not explicitly regulate professionalSimilarly, changes to federal, state and local laws regarding other traditional employee benefits, such as retirement benefits, also have the potential to substantially change the types of benefit programs that are available to SMBs and that may be offered by PEOs. For example, proposed rule changes by the DOL may make available "open multiple employer organizations, 42 states have passed laws that have licensing, certificationplans" for retirement benefits, which plans may compete with the benefit plans we provide. The availability of alternative employee benefit plans for SMBs, or registration requirements applicable to professional employer organizations or recognize the professional employer organization model, and other states may implement such requirementsany reduction in the future. Laws regulating professional employer organizations vary from state to state, but generally provide for oversighttypes of the fiscal responsibility of professional employer organizations, and in some cases codify and clarify the co-employment relationship for processing unemployment claims, workers compensation and other purposes under state law. We may be required to spend significant time and resources to satisfy licensing requirements or other applicable regulations in some states, andplans that we may not be able to satisfy these requirements or regulations in all states, which could prohibit us from doing business in such states, whichcan offer our clients, could have a material adverse effect on our financial condition and results of operations.
If we are not recognized as an employer of worksite employees under federal and state regulations, or are deemed to be an insurance agent or third-party administrator, we and our clients could be adversely impacted.
In order to sponsor our employee benefit plan offerings for WSEs, to receive the full benefit of our employee benefits plan offerings, it is important that we act andmust qualify as an employer of the WSEs for certain purposes under the Code and ERISA. In addition, our status as an employer is important for purposes of ERISA’s preemption of certain state laws. The definition of employer under various laws is not uniform, and under both the Code and ERISA, the term is defined in part by complex multi-factor tests. We believe that we
qualify asGenerally, these tests are designed to evaluate whether an individual is an independent contractor or employee and they provide substantial weight to whether a purported employer has the right to direct and control the details of our WSEsan individual's work. Some factors that the IRS has considered important in the United States forpast in evaluating this issue have included the relevant purposeemployer’s degree of bothbehavioral control (for example the Codeextent of instructions, training and ERISA, and we implement processes to protect and preserve this status. With passageevaluation of the Small Business Efficiency Actwork), financial control and the economic aspects of the work relationship, the type of relationship, as evidenced by the specific contract, if any, whether employee benefits are provided, whether the work is indefinite in December 2014,duration or project-based, and whether it is a regular part of the U.S. Congress clarifiedemployer’s business. However, a definitive judicial interpretation of “employer” in the employer statuscontext of professional employer organizations or PEOs has not been established. For ERISA purposes, for federal tax purposes underexample, courts have held that test factors relating to the Code for those PEOs who voluntarily become certified under this law. The IRS is expectedability to begin accepting applications for certification undercontrol and supervise an individual are less important, while the Code in July 2016 and we currently intend to apply for certification. However, the U.S. Department of LaborDOL has issued guidance that certain entities in the HR outsourcing industry maydo not qualify as common law employers for ERISA purposes. Although we believe that we qualify as an employer of WSEs under ERISA and the DOL has not provided guidance otherwise, we are not able to predict the outcome of any regulatory challenge.
If we were found not to be an employer under the Code orfor ERISA purposes, it could adversely affect the manner in which we are able to provide employee benefits to WSEs. Similarly, to qualify for favorable tax treatment under the Code, certain employee benefit plans, such as 401(k) retirement plans and cafeteria plans must be established and maintained by an employer for the exclusive benefit of its employees. All of our 401(k) retirement plans are operated pursuant to guidance provided by the IRS and we have received favorable determination letters from the IRS confirming the qualified status of these plans. However, the IRS uses its own complex, multi-factor test to ascertain whether an employment relationship exists between a worker and a purported employer. Although we believe that we qualify as an employer of WSEs under the Code, we cannot assure you that the IRS will not challenge our position or continue to provide favorable determination letters. Moreover, the IRS' 401(k) guidance and qualification requirements are not applicable to the operation of our cafeteria plans.
If we are not recognized as an employer under the Code or ERISA, we may be required to change the method by which we report and remit payroll taxes to the tax authorities and the method by which we provide, or discontinue providing, certain employee benefits to WSEs. Such changes could have a material adverse effect on our financial conditionbusiness and results of operations.
We must also qualify as co-employers of WSEs and comply with state licensing, certification and registration requirements for the regulation of PEOs. Forty-four states have passed such laws and other states may implement such requirements in the future. While we believe that we satisfy these state regulations, these requirements vary from state to state, they can and have changed frequently with varying degrees of impact on our operations. If we are not able to satisfy existing or future licensing requirements or other applicable regulations in any state, we may be prohibited from doing business in that state, including having any clients within that state.
In addition, state regulatory authorities generally require licenses forimpose licensing requirements on companies that do business in their statesacting as insurance agents or third-party administrators, such as those that handle health or retirement plan funding and claim processing. Insurance and third-party administrator regulation covers a host of activities, including sales, underwriting, rating, claims payments and record keeping by companies and agents. We do not believe that our services constitute acting as an insurance agent or third-party administrator.current activities require such licensing, but we and others in our industry have received inquiries from regulatory authorities in the past and could receive them in the future. If regulatory authorities in any state determine that the nature of our business requires that we be licensedare acting as an insurance agent, or as a third-party administrator, we may need to hire additional personnel to manage regulatory compliance and become obligated to pay annual regulatory fees, which could have a material adverse effect on our financial condition and results of operations.
Our co-employment relationship with our worksite employees exposes us to business risks.
We are the co-employer of our WSEs. As the co-employer of our WSEs, we assume certain risks and obligations of an employer. For instance, we face the risk of providing access to health benefits to our clients could be adversely impacted by health care reform.
The Affordable Care Act, orWSEs even if the ACA, proposes sweeping health care reformscost of providing benefits exceeds the fees received from our clients. However, the extent of our responsibility for other aspects of our co-employer relationship with staggered effective dates from 2010 through 2020, and many provisions ofour WSEs remains subject to regulatory uncertainty at the ACA require the issuance of additional guidance from the U.S. Departments of Labor and Health and Human Services, the IRS and the states. A number of key provisions of the ACA have begun to take effect over the past several years, including the establishment oflocal, state and federal insurance exchanges, insurance market reforms, “play or pay” penalties on applicable large employerslevels. For example, under certain circumstances, we may be found to be responsible for paying salaries, wages and related payroll taxes of our WSEs, even if our clients have not timely remitted payments to us.
Our WSEs work in our clients' workplaces. Our ability to control the imposition and assessmentworkplace environment of excise taxes and reinsurance taxes on insurers and third-party administrators. Collectively, these items have the potential to significantly change the insurance marketplace for employers and how employers offer or provide insurance to employees.
our clients is limited. As a co-employer of our clients’ WSEs, we assume or share certain employer-related responsibilitiesmay be subject to liability for violations of labor and legal risks and assistemployment laws, industry-specific laws that apply to the businesses our clients operate, other laws that apply to our clients or to employers generally, and other acts and omissions by our clients or WSEs, even if we do not violate such laws or participate in complyingsuch acts or omissions. State and federal positions regarding co-employment relationships are in a constant state of flux and have changed with many employment-related governmental regulations. Generally, the ACAvarying degrees of impact on our operations. We cannot predict when changes will occur or forecast whether any particular future changes will be favorable or unfavorable to our operations.
We seek to mitigate these risks through agreements and subsequently issued guidance by the IRS and the U.S. Department of Health and Human Services have not addressed, or in some instances are unclear, as to their application in the co-employment relationship. In future periods, the changes may result in increased costs toinsurance coverage. Our agreements with our clients divide responsibilities between us and our clients and could affectprovide that our abilityclients will indemnify us for any liability attributable to attract and retain clients. Additionally,their own or our WSEs' conduct. However, we may not be limitedable to effectively enforce or delayedcollect on these obligations. In addition, we maintain insurance coverage, including workers’ compensation and EPLI coverage, to limit our and our clients' exposure to various WSE-related claims, but subject to split by contract, we are still responsible for any deductible layer under such insurance and such insurance generally excludes coverage for claims relating to the classification of employees as exempt or non-exempt, other wage and hour issues, and employment contract disputes, among other things. We cannot assure you that our insurance will be sufficient in amount or scope to cover all claims that may be asserted against us and for which we are unable to obtain indemnification from our abilityclients.
Negative publicity relating to increase service feesevents or activities attributed to offset anyus, our corporate employees, WSEs, or others associated potential increased costs resulting from compliance with us, whether or not justified, may tarnish our reputation and reduce the ACA. Furthermore, the uncertainty surrounding the terms and applicationvalue of the ACA may delay or inhibit the decisions of potential clients to outsource their HR needs. Any of these developmentsour brand. In addition, if our brand is negatively impacted, it may have a material adverse effect on our financial conditionbusiness, including creating challenges in retaining clients or attracting new clients and results of operations.hiring and retaining employees.
Our inability to offer competitive health and/Cyber-attacks or workers compensation insurance ratesother security-related incidents could harm our business.
If we are unable to offer competitive health and/or workers compensation insurance ratesresult in reduced revenue, increased costs, liability claims, regulatory penalties, and damage to our reputation.
Maintaining the security of our infrastructure and the confidentiality of our clients' and WSEs' personal data and information is paramount for us and our clients. Clients using our technology platform and services rely on the security of our infrastructure to ensure the reliability of our products and services and the protection of sensitive client and WSE data. We collect, store, use, process, transfer, disclose, and transmit a large amount of personal and confidential information about our clients, it could affectWSEs and colleagues, including bank account and social security numbers, data used for tax returns, certain medical information, retirement account information and payroll data. In providing our abilityservices, we also rely on third-party service providers, such as insurance carriers and banks, who have access to attractpersonal and retainconfidential information about our clients, which would haveWSEs and employees and some of those service providers subcontract some of their responsibilities to other third-party service providers. Through contractual provisions and third party risk management processes, we take steps to require that our service providers protect our funds and sensitive information. Due to the size and complexity of our information technology system, the amount of sensitive data that we store and the number of employees and third-party service providers with access to that data, our information technology systems are potentially vulnerable to a material adverse effect onvariety of intentional and inadvertent security threats.
Threats to our business. For example, where we offerinformation technology systems and data security can take a variety of forms. Hackers may develop and deploy viruses, worms and other malicious software programs that attack our networks and data centers or those of our service providers. Other malicious actors may direct social engineering, phishing, credential stuffing and similar types of attacks against either or both of us and our clients and their WSEs group health insurance policies with respect to which our carriers set the premiums and for which we are not responsible for any deductible, the rates setservice providers. Other threats include inadvertent security breaches by our carriers onemployees, clients, WSEs, service providers and other business partners.
Organizations and individuals have launched and will continue to potentially launch such policies may not be competitive. Further, for policies with respect to which we agree to pay additional amountstargeted attacks, including social engineering, phishing and credential stuffing attacks, against us, our service providers, and our clients. Such attacks have and can disrupt, or result in unauthorized access to, our carriers for any claims that they pay within an agreed-upon deductible layer, we may not be able to control costs through the deductible layer in a way that would makenetworks, applications, bank accounts, and confidential data, or those of our rates competitive.clients or WSEs or service providers. In addition, broad adoptionwe, our service providers and our clients have experienced inadvertent security breaches that led to disclosures of sensitive client and WSE data in the past and could have such experiences in the future.
Any cyber-attack, unauthorized intrusion, insider theft, malicious software infiltration, network disruption, denial of service or other data security incident could result in disruption to our systems and services, in certain geographiesproduct development delays, and the disclosure or industries may make it more difficult for us to obtain competitive health and/or workers compensation insurance rates due to concentrationmisuse of clients within a particular geography or industry. The inability to offer competitive insurance rates, for the above reasons or any other,personal and confidential information. This could have a material adverse effect on our financial conditionbusiness operations, result in liability or regulatory sanction or a loss of confidence in our ability to provide our services, or harm our reputation and resultsrelationships with current or potential clients. The costs of operations.identifying and remediating any attack, breach, or disclosure, and the costs associated with responding to litigation or regulatory investigations, could have a material adverse effect on our business and reduce our operating margins. Any publicized security problems, or even public rumors about a security problem, affecting our businesses and/or those of our service providers may have a similarly material adverse effect on our business or reputation.
We have implemented policy, procedural, technical, physical, and administrative controls with the aim of protecting our networks, applications, bank accounts, and the personal and confidential information entrusted to us from such threats. While we, and our service providers, have security measures and programs in place to prevent, detect, and respond to attacks, data security incidents and other similar threats, these security measures and programs and our collective efforts may not always succeed. Despite our efforts and those of our service providers, we cannot fully eliminate the possibility of such attacks, data security incidents and other threats, whether intentional or inadvertent and whether internal or external and we, our clients or our service providers may not discover a security incident for a significant period of time after the incident occurs. We also expect that intentional threats to our infrastructure and our clients’ and WSEs’ data will continue to grow in frequency, complexity and sophistication. As a result, we are investing, and plan to continue investing, resources to protect our information security ecosystem against such incidents though we may not have adequate insurance coverage to compensate for losses from a security incident.
Maintaining the security of confidential WSE information is particularly important to us as a sponsor of employee benefit plans with access to certain personal health information. The manner in which we manage PHI is subject to HIPAA and the HITECH Act. To the extent possible, the health information we possess is anonymized and accessed through a secured third-party database. Although we maintain, and actively seek to improve, security measures and infrastructure designed to protect against unauthorized access to this sensitive data, cyber-attacks and security breaches remain a significant threat to our business. Any security breach, whether deliberate or inadvertent, could result in the access, public disclosure, loss or theft of our clients' and WSEs' confidential and personal data, including PHI, which could negatively affect our ability to attract new clients, cause existing clients to terminate their agreements with us, result in reputational damage and subject us to lawsuits, regulatory fines, or other actions or liabilities which could materially and adversely affect our business and operating results.
We are also subject to various federal, state and foreign laws, rules, and regulations relating to the collection, use, and security of personal and confidential information. For example, U.S. states, the District of Columbia and Canada have enacted breach notification laws that may require us to notify WSEs, clients, employees, or regulators in the event of unauthorized access to or disclosure of personal or confidential information. Complying with these various laws, and with any new laws or regulations or changes to existing laws, could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. For example, we must comply with the requirements of the California Consumer Privacy Act of 2018 (CCPA) by January 1, 2020, which may require us to incur additional costs. Changes or inconsistencies in interpretations of these laws and regulations and/or changes in enforcement priorities may result in significant penalties or liability for non-compliance.
Unexpected changes in workersworkers' compensation and health insurance claims by worksite employees could harm our business.
We maintain health and workers compensation insurance covering our WSEs. Our insurance costs, which make up a significant portion of our overall costs, are impacted significantly affected by our WSEs’ health and workersworkers' compensation insurance claims experience. We establish reservesaccrued costs to provide for the estimated costs of reimbursing our workersworkers' compensation and health insurance carriers for payingunder our insurance policies, relying on third-party actuaries and our own experience, but the volume and severity of claims within the deductible layeractivity is inherently unpredictable. If we experience a sudden or unexpected increase or decrease in accordance with theirclaims activity including an increase in WSE incidents or costs of those incidents, our costs could increase or decrease, respectively. An increase in claims activity could make it more difficult to secure replacement insurance policies.policies on competitive terms once our current policies expire. Estimating these reserves involves our consideration ofaccrued costs requires us to consider a number
of factors and requires significant judgment. If there is an unexpected increase or decrease in the severity or frequency of claims activity of our WSEs (including activity arising from any of a number of factors that affect claim activity levels, such as changes in general economic conditions, claims differing significantly from expectations, for new and existing clients, proposed and enacted regulatory changes, and terrorism, disease outbreaks or other catastrophic events ),events), or if we subsequently receive updated information indicating insurance claims were higher or lower than previously estimated and reported, our insurance costs could be higher or lower, respectively, in that period or subsequent periods as we adjust our reserves accordingly. We have also experienced variability in the amount of our insuranceaccrued costs due to the number and severity of insurance claims being unpredictable. For example, in the three months ended June 30, 2015, we experienced a significant increase in the number of large medical claims,accordingly, which resulted in a significant increase in insurance costs. In addition, we may be unable to increase our pricing to offset increases in insurance costs either in full or on a timely basis. Incorporating cost increases into what we charge our clients could also adversely impact our ability to attract and retain clients. The occurrence of any of the above could have a material adverse effect on our financial conditionbusiness. We have experienced both favorable and results of operations.unfavorable insurance cost variability due to claims activity in the past and could have similar or worse experiences in the future.
Adverse changes in our relationships with key vendors, particularly our employee benefit carriers, could harm our business.
Our success depends in part on our ability to establish and maintain arrangements and relationships with vendors that supply us with essential components
Some of our services. These service providershealth insurance policies include insurance carriersrisk-based policies that can limit our exposure for individual claims and our maximum aggregate claims exposure in each policy year. Refer to provide healthNote 1 in Part II, Item 8. Financial Statements and workers compensation insurance coverageSupplementary Data, of this Form 10-K for WSEs, as well as other vendors such as couriers used to deliver client payroll checks and banks used to electronically transfer funds from clients to their WSEs. Failure by these service providers, for any reason, to deliver their services in a timely manner could result in material interruptions to our operations, impact client relations, and result in significant penalties or other liabilities to us. If anyfurther discussion of these vendors decidepolicies. We have experienced variability, and may experience variability in the future, in the amounts that we are required to terminate its relationship withpay for group health insurance expenses incurred by WSEs within our deductible layer under these risk-based policies, based on continually changing trends in the frequency and severity of claims. These historical trends may change, and other seasonal trends and variability may develop, which may make it more difficult for us particularly our employee benefit carriers, we may have difficulty obtaining replacement services at reasonable rates or on a timely basis, if at all. The loss of any one or moreto manage this aspect of our key vendors, or our inability to partner with certain vendors that are better-known or more desirable to our clients or potential clients, couldbusiness and which may have a material adverse effect on our financial condition andbusiness.
Our results of operations.
Security breaches could result in the improper disclosure of sensitive company, employee, client and WSE data, including personal information, exposing us to liability, which would cause our business and reputation to suffer.
Our ability to ensure secure electronic processing, maintenance and transmission of payroll, insurance and other sensitive employee, client and WSE information is critical to our operations. This information could include sensitive or confidential data, such as employees’ Social Security numbers, bank account numbers, retirement account information and medical information.
We rely on standard internet and other security systems to provide the security and authentication necessary to effect secure transmission of data. Despite our security measures, it is possible that our information technology and infrastructure may be vulnerable to cybersecurity threats, including attacks by hackers and other malfeasance. Third parties, including vendors that provide services for our operations, could also be a source of security risk to us in the event of a failure of their own security systems and infrastructure. Any such security breach could compromise our networks and result in the information stored or transmitted there to be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings leading to liability, including under laws that protect the privacy of personal information, disrupt our operations and the services we provide to our clients and WSEs, damage our reputation and cause a loss of confidence in our products and services, which could adversely affect our business, operations and competitive position. In the course of providing our services to our clients, we also rely on certain third-party service providers and products, such as insurance carriers, to process information related to our employees, clients and WSEs. Through contractual provisions, we take steps to require that our service providers protect sensitive information. However, we cannot provide assurances as to the security steps taken by such providers. Any security breach or other disruption of our third-party service providers that results in an inadvertent disclosure or loss of confidential information could adversely affect our reputation and our business.
Our quarterly results of operationsstock price may fluctuate as a result of numerous factors, many of which are outside of our control.
Our future operating results and stock price are subject to fluctuations and quarterly resultsvariations based upon a variety of operationsfactors, many of which are likely to fluctuate, andnot within our results in some quarters may be below the expectations of research analysts and our investors, which could cause the price of our common stock to decline. Some of our significant expenses, such as insurance costs for our WSEs, may require significant lead time to offset or reduce. If we do not achieve our expected revenues targets, we may be unable to adjust our costs quickly enough to offset any revenues shortfall, which could
harm our results of operations. Some of the important factors that have and may cause our revenues, results of operations and cash flows to fluctuate from quarter to quarter include:control, including, without limitation:
the numbervolume and severity of health and workersworkers' compensation insurance claims by our WSEs, recorded as part of our insurance costs, and the timing of related claims information provided by our insurance carriers;carriers,
the amount and timing of our other insurance costs, operating expenses and capital expenditures;expenditures,
the number of our new clients initiating service and the number of WSEs employed by each new client;client,
the retention, loss or merger of existing clients;clients,
a reduction in the number of WSEs employed by existing clients;clients,
the timing of client payments and payment defaults by clients;clients,
the costs associated with our acquisitions of companies, assets and technologies;technologies,
any payments or drawdownsdraw downs on our credit facility, or
any amendments to our obligations under our credit facility;
unanticipated expenses, such as litigation or other dispute-related settlement payments;payments,
any expenses we incur for geographic and service expansion;expansion,
any changes in laws or adverse interpretation of laws, which may require us to change the manner in which we operate and/or increase our regulatory compliance costs;costs,
any changes in our effective tax rate;rate, and
the impact of new accounting pronouncements.
In addition, the trading price of our common stock is subject to fluctuation in response to a variety of factors, including the factors above and below, many of which are not within our control, including, without limitation:
the overall performance of the equity markets,
any trading activity, or a market expectation regarding such activity, by our directors, executive officers and significant stockholders,
the economy as a whole, and its impact on SMBs and our clients,
the performance and market perception of companies that investors believe are similar to us, and
any significant changes in the liquidity of our common stock.
Many of the above factors are discussed in more detail elsewhere in this “Risk Factors”Risk Factors section and in the sectionPart II, Item 7. MD&A, of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”Form 10-K. Many of these factors are outside our control, and the variability and unpredictability of these factors have in the past and could in the future cause us to fail to meet our expectations for revenues or resultsand the expectations of operations forinvestors and any industry analysts who cover our shares, which could result in a given period.decline in our share price and reduced liquidity in our shares. In addition, the occurrence of one or more of these factors might cause our results of operations to vary widely, which could lead to negative impacts on our margins, short-term liquidity, orand our ability to retain or attract key personnel, and could cause other unanticipated issues. Accordingly, we believe that quarter-to-quarter comparisonsissues, including a downgrade of our shares by or change in opinion of industry analysts and a related decline in our share price.
Any failure in our business systems, or any third-party business systems or service provider that we rely upon, could reduce the quality of our business services, harm our reputation and expose us to liability.
Our business is highly dependent on data processing systems that rely on the complex integration of numerous hardware and software subsystems to manage, on a daily basis, a large volume of client and WSE transactions, including the processing of employee, payroll and benefits data. Our systems have and could be disrupted by, among other things, equipment failures, computer server or systems failures, network outages, malicious acts, software errors or defects, vendor performance problems, power failures, natural disasters, terrorist actions or similar events. Any delay or failure in these systems, even if only for a short period of time, can have a significant impact on our clients and WSEs and result in a loss of clients and/or liability to our clients and WSEs or fines and penalties levied by the government agencies that regulate our operations, any of which could result in a materially adverse effect on our reputation and business. For example, errors in our products and services, such as the erroneous denial of healthcare benefits or delays in making payroll, could expose our clients to liability claims from improperly serviced WSEs, for which we may be contractually obligated to provide indemnification.
In addition, we rely on third-party systems to provide services for our clients and WSEs, such as electronic banking systems and payroll tax systems that transmit client and WSE data to taxing agencies. If any of these systems were disrupted or if the third parties who provide those systems were to experience operational or financial difficulties even if only for a short period of time, which has happened in the past and could happen in the future, the solutions we provide to our clients and WSEs could be significantly affected, which could also result in a material adverse effect on our reputation and business. We also rely on enterprise software applications licensed from third parties that are upgraded from time to time. Any difficulties we encounter in adapting application upgrades to our systems could harm our performance, delay or prevent us from providing services to our clients.
To succeed, we must constantly improve our technology to meet the expectations of our clients. If we fail to meet those expectations, we may lose clients and harm our business.
In order to attract and retain clients and satisfy their expectations, the software, hardware and networking technologies we use must be frequently and rapidly upgraded, enhanced and expanded in response to technological advances, competitive pressures, client expectations, and new and changing laws. As a result, we must timely and effectively identify, develop, or license from third parties, and integrate such upgraded, enhanced or expanded technologies into the solutions that we provide. New products or upgrades may not be released according to schedule, or may contain defects when released. Difficulties in integrating new technologies could result in adverse publicity, loss of sales, delay in market acceptance of our services, or client claims against us, any of which could materially harm our business. We could also incur substantial costs in modifying our services or infrastructure to adapt to these changes. In addition, we could lose market share if our competitors develop technologically superior products and services.
We have remediated the material weakness previously reported in our internal control over financial reporting, but if we fail to properly manage our internal control over financial reporting on a go forward basis, future material weaknesses could be identified that could, if not remediated, result in a material misstatement in our financial statements.
We have remediated the material weakness that we previously identified in connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2017 by implementing and enhancing our control procedures. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. In order to properly manage our internal control over financial reporting, we may need to take additional measures, including system migration and automation, and we cannot be certain that the measures we have taken, and expect to take, to improve our internal controls will be sufficient to ensure that our internal controls will remain effective and eliminate the possibility that other material weakness or deficiencies may develop or be identified in the future. Implementing any changes to our internal controls may distract our officers and employees and require expenditures to implement new process or modify our existing processes. If we experience future material weaknesses or deficiencies in internal controls and we are unable to correct them in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission, will be adversely affected. Any such failure could negatively affect the market price and trading liquidity of our common stock, lead to delisting, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition.
We have acquired, and may in the future acquire, other businesses and technologies, which can divert management's attention and create integration risks and other risks for our business.
We have completed numerous acquisitions of other businesses and technologies, and we expect that we will continue to pursue future acquisitions. Such acquisitions involve numerous other risks, including:
identifying attractive acquisition candidates,
over-valuing and over-paying for acquisition candidates,
integrating the operations, systems, technologies, services and personnel of the acquired companies, which may include the migration of WSEs from the technology platform and service providers used by the acquired company to our own,
establishing or maintaining internal controls, procedures and policies relating to the acquired systems and processes, including the potential for actual or perceived control weaknesses associated with or arising from the acquisitions and integration of acquired systems,
diversion of management’s attention from other business concerns,
litigation resulting from activities of the acquired company, including claims from terminated employees, clients, former stockholders and other third parties,
insufficient revenues to offset increased expenses associated with the acquisitions and unanticipated liabilities of the acquired companies,
insufficient indemnification or security from the selling parties for legal liabilities that we may assume in connection with our acquisitions,
entering markets in which we have no prior experience and may not succeed,
potential loss of key employees of the acquired companies, and
impairment of relationships with clients and employees of the acquired companies or our clients and employees as a result of the integration of acquired operations and new management personnel.
We have experienced increased operating costs to resolve the challenges of prior acquisitions. If we fail to appropriately integrate any acquired business, we may fail to achieve our growth, service enhancement or operational efficiency objectives, and our business, results of operations and cash flowsfinancial condition could be harmed.
We may not be meaningful and should not be relied upon as an indicationpay for acquisitions by issuing additional shares of our common stock, which would dilute our stockholders, or by issuing debt, which could include terms that restrict our ability to operate our business or pursue other opportunities and subject us to significant debt service obligations. We may also use significant amounts of cash to complete acquisitions. To the extent that we complete acquisitions in the future, performance.we likely will incur future amortization expenses associated with the acquired assets. We may also record significant amounts of intangible assets, including goodwill, which could become impaired in the future. Any such impairment charges would adversely affect our results of operations.
VolatilityOur SMB clients are particularly affected by volatility in the financial and economic environment, which could harm our business.
Demand for our services is sensitiveOur clients are small and mid-sized businesses that we believe can be particularly susceptible to changes in the level of overall economic activity in the markets in which we operate. During periods of weak economic conditions, employment levels tend to decrease, small business failures tend to increase and interest rates may become more volatile.employment levels tend to decrease. Current or potential clients may also react to weak economic conditions or forecasted weak economic conditions by reducing their employee headcount or by lowering their wage, bonuswages, bonuses or benefits levels, any of which would affect our revenues, and may affect our margins, because we may be unable to reduce our operating expenses sufficientsufficiently enough or quickly enough to offset the dropdecrease in revenues. It is difficult for us to forecast future demand for our services due to the inherent difficulty in forecasting the direction, strength and length of economic cycles. These conditions may affect the willingness of our clients and potential clients to pay outside vendors for services like ours, and may impact their ability to pay their obligations to us on time, or at all. In addition, if
For example, as a result of macroeconomic factors, interest rates may become more volatile. Increased interest rate volatility could also negatively impact our clients' and prospects' access to credit. If businesses have difficulty obtaining credit, business growth and new business formation may be impaired, which could also harm our business. Even modest downturns in economic activity or the availability of credit on a regional or national level could have a material adverse effect on our financial condition or results of operations.
Our business and operations have undergone and will continue to undergo significant change as we seek to improve our operational effectiveness. If we are unable to effectively manage this change, our business and results of operations may suffer.
We have significantly changed our operations and internal processes in recent periods in order to improve our operational effectiveness, which has placed a strain on our systems, management, administrative, operational and financial infrastructure. We believe these efforts are important to our long-term success. Managing these changes will continue to require further refinement to our operational, financial and management controls and reporting systems and procedures while we simultaneously seek to effectively recruit, integrate, train and motivate new corporate employees, retain our existing corporate employees, maintain the beneficial aspects of our corporate culture, effectively execute our business plan, satisfy the requirements of our existing clients, acquire new clients, and enhance the quality and scope of our services. These activities will require significant operating and capital expenditures and allocation of valuable management and employee resources, which we expect will continue to place significant demands on our management and on our operational and financial infrastructure. If we fail to manage these changes effectively, our costs and expenses may increase more than we expect and our business, financial condition and results of operations may be harmed.
If our vertical strategy is unsuccessful, we may not be able to grow our business at the rate that we anticipate.
We have developed an industry vertical business strategy and we plan to continue to devote significant resources and time in pursuit of this strategy. Under our industry vertical strategy, our sales force, product development, and service teams are focused on specific business sectors. We cannot assure you that our industry vertical approach will resonate with our existing and prospective clients, that we will target the right industries, that our vertical products will have all of the features most valuable to existing and prospective clients in those industries, or that we will implement our strategy in a timely and effective manner. If our vertical strategy is unsuccessful, our business may not grow at the rate that we anticipate, which could have a material adverse effect on our financial condition and results of operations.
If we are unable to train and manage our sales force effectively, our business may be harmed.
We have experienced sales force attrition in the past and we rely on a well-trained sales force to promote our industry vertical strategy and sell our solutions. Competition for skilled sales personnel is intense, and we cannot assure you that we will be successful in attracting, training and retaining qualified sales personnel, or that any newly hired sales personnel will function effectively either individually or as a group. In addition, newly hired sales personnel are typically not productive for some period of time following their hiring, which results in increased near-term costs to us relative to their actual sales contributions during this period. If we are unable to effectively train our sales force and benefit from greater productivity of our sales representatives, or if our sales force is otherwise unable to sell our solutions as we anticipate, our revenues likely will not increase at the rate that we anticipate, which could have a material adverse effect on our business, financial condition and results of operations.
Our reputation could suffer and our business could be adversely affected if our products do not perform, and our services are not delivered, as expected by our clients and WSEs.
In order to attract and retain clients, we believe that we must compete in our industry effectively on the basis of the value proposition that we deliver to our clients including customer experience and satisfaction, breadth and depth of our benefit plans, vertical market expertise, total cost of service, brand awareness and reputation, ability to innovate and respond to customer needs rapidly, access to online and mobile solutions, and subject matter expertise. The expectations of our clients and prospective clients in these areas change over time as a result of many factors outside of our control, such as competition, regulatory and technical changes, and changing trends in the demands employees place on SMB employers. If we are unable to continually satisfy the evolving product and service delivery expectations of our clients and WSEs, then we could experience greater rates of attrition and lower rates for on-boarding new clients, which could have a material adverse effect on our business. Even if we are capable of satisfying client expectations in these areas, we may not be able to do so on a cost-effective basis, which could have a material adverse effect on our financial condition and our results of operations.
Most of our clients are concentrated in certain geographiesgeographic regions and a relatively small number of industries, making us vulnerable to downturns in those geographies and industries.
Most of our clients are concentrated in certain geographiesgeographic regions and operate in a relatively small number of industries, including the technology, life sciences, not-for-profit, professional services and financial services real estate, retail, manufacturing, and hospitality industries. As a result, if any of those geographic regions or specific industries suffers a downturn, the portion of our business attributable to clients in that region or industry could be adversely affected, which could have a material adverse effect on our financial condition or results of operations.
We are subject to legal proceedings that may result in adverse outcomes.
15
Our businessWe are subject to claims, suits, government investigations, and operations have experienced rapid growthproceedings arising from the ordinary course of our business. Refer to Note 8 in recent periods,Part II, Item 8. Financial Statements and ifSupplementary Data, of this Form 10-K for additional information about the legal proceedings we are unable to effectively manage this growth, our businesscurrently involved in and results of operations may suffer.
We have experienced rapid growth and have significantly expanded our operations in recent periods, which has placed a strain on our management and our administrative, operational and financial infrastructure. Managing this growth requires us to further refine our operational, financial and management controls and reporting systems and procedures.
Our ability to effectively manage any significant growth of our business will depend on a number of factors, including our ability to do the following:
effectively recruit, integrate, train and motivate new employees, while retaining our existing employees, maintaining the beneficial aspects of our corporate culture and effectively executing our business plan;
satisfy our existing clients and identify and acquire new clients;
enhance the breadth and quality of our services;
continue to improve our operational, financial and management controls; and
make sound business decisions in light of the scrutiny associated with operating as a public company.
These activities will require significant operating and capital expenditures and allocation of valuable management and employee resources, and we expect that our growth will continue to place significant demands on our management and on our operational and financial infrastructure.
Our future financial performance and our ability to execute on our business plan will depend, in part, on our ability to effectively manage any future growth. We cannot assure youproceedings that we will be able to do somay face. Current and future legal proceedings may result in an efficient or timely manner, or at all. In particular, any failure to successfully implement systems enhancements and improvements will likely negatively impact our ability to manage our expected growth, ensure uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public companies. If we fail to manage our growth effectively, oursubstantial costs and expenses may increase more than we expect them to, which in turn could harm our business, financial conditiondivert management’s attention and results of operations.
We may not be able to sustain our profitability or revenue growth rate in the future.
While we have achieved profitability on an annual basis in each of the last four fiscal years, we have not consistently achieved profitability on a quarterly basis during that same period. Our operating expenses could increase substantially in the near term, particularly as we continue to invest in our sales and marketing organization, expand our operations and improve our infrastructure and enhance the breadth and quality of our services. If our revenues do not increase to offset these increases in our operating expenses, we may not be profitable in future periods.
Moreover, you should not consider our historical revenue growth rate to be indicative of our future performance. As we grow our business, our revenue growth rates may slow in future periods due to a number of reasons,resources, which may include slowing demand for our services, increasing competition, a decrease in the growth of our overall market, our failure, for any reason, to continue to capitalize on growth opportunities, the maturation of our business or the decline in the number of SMBs in our target markets and verticals.
If our vertical sales strategy is unsuccessful or if our sales force is otherwise unable to sell our solutions at the rate that we anticipate, we may not be able to maintain our client base or grow our business, which could have a material adverse effect on our financial condition and results of operations.
We have aligned our business based on an industry vertical approach where our sales force, product development, and service teams are increasingly focused on specific business sectors. Our vertical approach gives us an understanding of the HR needs facing SMBs in those industries. This knowledge enables us to provide a bundled solution of services that is tailored to its specific needs of clients in these industries. If our vertical strategy is unsuccessful, our business may not grow at the rate that we anticipate, which could have a material adverse effect on our financial condition and results of operations.
In order to raise awareness of the benefits of our services and identify and acquire new clients, we have rapidly grown our direct sales force. Competition for skilled sales personnel is intense, and we cannot assure you that we will be successful in attracting, training and retaining qualified sales personnel, or that our newly hired sales personnel will function effectively, either individually or as a group. In addition, our newly hired sales personnel are typically not productive for up to a year following their hiring. This results in increased near-term costs to us relative to the sales contributions of these newly hired sales personnel. If we are unable to effectively train our sales force and benefit from greater productivity of our sales
representatives, or if our sales force is otherwise unable to sell our solutions as we anticipate, our revenues likely will not increase at the rate that we anticipate, which could have a material adverse effect on our business, financial condition and results of operations.
Our industry is highly competitive, which may limit our ability to maintain or increase our market share or improve our results of operations.
We face significant competition on a national and regional level from a number of companies purporting to deliver a range of bundled services that are generally similar to the services we provide, including large professional employer organizations such as the TotalSource business unit of Automatic Data Processing, Inc. and Insperity, Inc., as well as specialized and small professional employer organization service providers. If and to the extent that we and other companies providing these services are successful, we anticipate that future competitors will enter this industry. Some of our current, and any future, competitors have or may have greater marketing and financial resources than we have, and may be better positioned than we are in certain markets. Increased competition in our industry could result in price reductions or loss of market share, any of which could harm our business. We expect that we will continue to experience competitive pricing pressure. If we cannot compete effectively, our market share, business, results of operations and financial condition may suffer.
In addition to competition from other professional employer organizations, we also face significant competition in the form of companies serving their HR needs in both traditional and non-traditional manners. These forms of competition include:
HR and information systems departments and personnel of companies that perform their own administration of employee benefits, payroll and HR;
providers of certain endpoint HR services, including payroll, employee benefits and business process outsourcers with high-volume transaction and administrative capabilities, such as Automatic Data Processing, Inc., Paychex, Inc. and other third-party administrators;
employee benefit exchanges that provide benefits administration services over the Internet to companies that otherwise maintain their own employee benefit plans; and
insurance brokers who allow third party HR systems to integrate with their platform.
We believe that our services are attractive to many SMBs in part because of our ability to provide workers compensation, health care and other benefits programs to them on a cost-effective basis. We compete with insurance brokers and other providers of this coverage in this regard, and our offerings must be priced competitively with those provided by these competitors in order for us to attract and retain our clients.
We may not be successful in convincing potential clients that the use of our services is a superior, cost-effective means of satisfying their HR obligations relative to the way in which they currently satisfy these obligations.
If we cannot compete effectively against other professional employer organizations or against the alternative means by which companies meet their HR obligations, or if we are unable to convince clients or potential clients of the advantages of our offerings, our market share and business may suffer, resulting in a material , adverse effect on our financial condition and results of operations.
Our failure to maintain or enhance our reputation or brand identity could harm our business.
We believe that maintaining and enhancing our reputation and the TriNet brand identity is critical to maintaining our relationships with our clients and vendors and our ability to attract new clients and vendors. We also believe that our reputation and brand identity will become more important as competition in our industry continues to develop. Our ability to maintain and enhance our reputation and brand identity will be affected by a number of factors, some of which are beyond our control, including:
the effectiveness of our marketing efforts;
our ability to attract and retain new sales personnel to expand our direct sales force;
our ability to retain our existing clients and attract new clients;
the quality and perceived value of our services;
our ability to successfully differentiate our services from those of our competitors;
actions of our competitors and other third parties;
positive or negative publicity about us or our industry in general;
timeliness of our filings with the SEC,
interruptions, delays or attacks on our platform or mobile applications; and
litigation or regulatory developments.
Any brand promotion activities in which we engage may not be successful or yield increased revenues. Furthermore, negative publicity, whether or not justified, relating to events or activities attributed to us, our corporate employees, our WSEs, our vendors, other companies in our industry or others associated with any of these parties, may tarnish our reputation and reduce the value of our brand. Damage to our reputation and loss of brand identity may reduce demand for our services andseriously harm our business, results of operations, and financial condition. Moreover, any attempts to rebuild our reputation and restore the value of our brand may be costly and time-consuming, and any such efforts may not ultimately be successful.
We are subject to client attrition.
We regularly experience significant client attrition due to a variety of factors, including cost, client merger and acquisition activity, increases in administrative fees and insurance costs, client business failure, effects of competition and clients deciding to bring their HR administration in-house. Our standard client service agreement can be cancelled by us or by the client without penalty with 30 days’ prior written notice. Clients who intend to cease doing business with us often elect to do so effective as of the beginning of a calendar year. As a result, we have historically experienced our largest concentration of client attrition in the first quarter of each year. In addition, we experience higher levels of client attrition in connection with renewals of the health insurance we provide for WSEs in the event that such renewals result in increased premiums that we pass on to our clients. If we were to experience client attrition in excess of our projected annual attrition rate of approximately 20% of our installed WSE base, which occurred most recently in 2011, it could have a material adverse effect on our business, financial condition and results of operations.liquidity.
Our acquisition strategy creates risks forChanges in our business.
We have completed numerous acquisitions of other businesses and technologies, and we expect that we will continue to grow through acquisitions of other businesses, assetsincome tax positions or technologies. We may fail to identify attractive acquisition candidates or we may be unable to reach acceptable terms for future acquisitions. If we are unable to complete acquisitions in the future, our ability to grow our business will be impaired.
Acquisitions involve numerous other risks, including:
difficulties integrating the operations, systems, technologies, services and personnel of the acquired companies, including the migration of WSEs from an acquired company’s technology platform to ours;
challenges associated with establishing or maintaining internal controls, procedures and policies relating to the acquired systems and processes, including the potential for actual or perceived control weaknesses associated with or arising from the acquisitions and integration of acquired systems;
diversion of management’s attention from other business concerns;
over-valuation by us of acquired companies;
litigationadverse outcomes resulting from activities of the acquired company, including claims from terminated employees, clients, former stockholders and other third parties;
insufficient revenues to offset increased expenses associated with the acquisitions and unanticipated liabilities of the acquired companies;
insufficient indemnificationon-going or security from the selling parties for legal liabilities that we may assume in connection with our acquisitions;
entering markets in which we have no prior experience and may not succeed;
risks associated with foreign acquisitions, such as communication and integration problems resulting from geographic dispersion and language and cultural differences, compliance with foreign laws and regulations and general economic or political conditions in other countries or regions;
potential loss of key employees of the acquired companies; and
impairment of relationships with clients and employees of the acquired companies or our clients and employees as a result of the integration of acquired operations and new management personnel.
If we fail to integrate newly acquired businesses effectively, we might not achieve the growth, service enhancement or operational efficiency objectives of the acquisitions, and our business, results of operations and financial condition could be harmed.
We may pay for acquisitions by issuing additional shares of our common stock, which would dilute our stockholders, or by issuing debt, which could include terms that restrict our ability to operate our business or pursue other opportunities and subject us to meaningful debt service obligations. We may also use significant amounts of cash to complete acquisitions. To the extent that we complete acquisitions in the future we likely will incur future depreciation and amortization expenses associated with the acquired assets. We may also record significant amounts of intangible assets, including goodwill, which could become impaired in the future. Any such impairment charges would adversely affect our results of operations.
We may have additional tax liabilities, whichaudits could harm our business, operating results, financial condition and prospects.
Significant judgments and estimates are required in determining our provision for income taxes and other tax liabilities. Our provision for income taxes, results of operations and cash flows may be impacted if any of our tax positions are challenged and successfully disputed by the tax authorities. In determining the adequacy of our tax provision, we assess the likelihood of adverse outcomes that could result if our tax positions were challenged by the IRS and other tax authorities. The tax authorities in the United StatesU.S. regularly examine our income and other tax returns. For example,Refer to Note 10 in connection with an IRS examinationPart II, Item 8. Financial Statements and Supplementary Data, of prior federal incomethis Form 10-K for additional details regarding our on-going tax returns filed by Gevity, a company we acquired in 2009, we received a technical advice memorandum from the IRS taking the position that a total of $10.1 million employment tax credits taken by Gevity,examinations and an additional approximately $2.3 million taken by us after acquiring Gevity, should be reversed, which position we dispute.disputes. The ultimate outcome of thesetax examinations and tax disputes cannot be predicted with certainty. Should the IRS or other tax authorities assess additional taxes as a result of these or other examinations, we may be required to record charges to operations that could have a material impact on our results of operations, financial position or cash flows.
We have a substantial amount of indebtedness, which
Adverse changes in our insurance coverage, or in our relationships with key insurance carriers, could adversely affectharm our financial conditionbusiness.
Our success depends in part on our ability to maintain competitive health and our operating flexibility.
As of December 31, 2015,workers' compensation coverage options and insurance rates through well-known insurance carriers. If we had $499.6 million in outstanding indebtedness under our credit facility, all of which was secured indebtedness of our subsidiary, TriNet HR Corporation, guaranteed on a senior secured basis by usare unable to maintain competitive insurance rates or obtain popular and certain of our subsidiaries. Our level of indebtedness and the limitations imposed on us by our credit facilitydesirable coverage plans through well-known insurance carriers, it could affect our business in various ways, includingability to attract and retain clients, which could have a material adverse effect on our business. Where we sponsor insurance coverage and we are not responsible for any deductibles, our carriers set the following:
premiums and the rates set by our carriers on these policies may not be competitive. Even where we will have to use a portion of our cash flows from operating activitiessponsor insurance under which we are responsible for debt service rather than for other operational activities;
deductibles, we may not be able to borrow additional fundscontrol costs through the deductible layer in a way that would make our rates competitive.
In addition, broad adoption of our services in certain geographic regions or industries may make it more difficult for us to obtain additional financing for future working capital, acquisitions, capital expenditures competitive health and/or other corporate purposes,workers' compensation insurance rates due to concentration of clients within a particular region or may have to payindustry. The loss of any one or more for such financing;
someof our key insurance vendors in these areas, or all of the indebtedness under our current or future credit facilities bears interest at variable interest rates, making us more vulnerable to interest rate increases;
we could be less able to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions; and
we may be more vulnerable to general adverse economic and industry conditions as a result of our inability to reducepartner with certain vendors that are better-known or more desirable to our debt service costs in response to reduced revenues.
Because borrowings under our credit facility bear interest atclients or potential clients, could have a variable rate, our interest expense could increase even though the amount borrowed remains the same, exacerbating these risks. Our ability to meet these expenses dependsmaterial adverse effect on our future business performance,financial condition and results of operations.
There is significant competition for our clients and clients may terminate our services based on a variety of factors, many of which will be affected by various factors, including the risks described in this “Risk Factors” section. We are not abledifficult for us to control, manywhich can negatively impact our business.
We regularly experience client attrition due to a variety of these factors suchthat are difficult for us to control, including cost pressures, client merger and acquisition activity, increases in administrative and insurance service fees, client business failure, effects of competition, and client decisions to bring their HR administration in-house. Our standard client service agreement can be canceled by us or by the client without penalty with 30 days’ prior written notice. Clients who intend to cease doing business with us often elect to do so effective as economic conditionsof the beginning of a calendar year. As a result, we have historically experienced our largest concentration of client attrition in the markets where we operate and pressure from competitors. Our operations may provide insufficient cash to pay the principal and interest on our credit facility and to meet our other debt obligations. If so, we may be required to refinance all or partfirst quarter of our existing indebtedness or borrow additional funds, which we may not be able to do on terms that are acceptable to us, if at all.each year. In addition, we experience higher levels of client attrition in connection with renewals of the terms of our existing or future debt agreements may restrict our ability to take some or all of these responsive actions.health insurance coverage we sponsor for WSEs in the event that such renewals result in increased costs. If we were unable to pay the principal and interestexperience client attrition in excess of our historic annual attrition rate, it could have a material adverse effect on our credit facility or meet our other debt obligations, the lenders under our credit facility could
terminate their commitments to extend further credit to usbusiness, financial condition and accelerate a substantial part of our indebtedness. If that were to happen, we may not be able to repay all of the amounts that would become due under our indebtedness or refinance our debt. If we were unable to repay those amounts or refinance our debt, the lenders under our credit facility could proceed against the collateral granted to them to secure that indebtedness. If that were to happen, our results of operations and financial condition could be harmed and we might be forced to seek bankruptcy protection.operations.
The terms of our credit facility may restrict our current and future operations, which would impair our ability to respond to changes in our business and to manage our business.
Our credit facility contains, and any future indebtedness of ours would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us subject to customary exceptions, including restricting our ability to:
incur, assume or guarantee additional debt;debt,
pay dividends or distributions or redeem or repurchase capital stock;stock,
incur or assume liens;liens,
make loans, investments and acquisitions;acquisitions,
engage in sales of assets and subsidiary stock;stock,
enter into sale-leaseback transactions;transactions,
enter into certain transactions with affiliates;affiliates,
complete dividends, loans or asset transfers from our subsidiaries;enter into certain hedging agreements,
enter into new lines of business;business,
prepay other indebtedness;certain indebtedness,
transfer all or substantially all of our assets or enter into merger or consolidation transactions with another person;person, and
make capital expenditures.
Underenter into agreements that prohibit the credit facility, we are required to comply with a financial covenant that requires us andincurrence of liens or the payment by our subsidiaries to maintain a maximum leverage ratio so long as there is any indebtedness outstanding under the revolving credit facility (excluding letters of credit issueddividends and outstanding of up to $15.0 million other than letters of credit that have been cash collateralized). Our ability to meet the leverage ratio can be affected by events beyond our control, and we may be unable to comply with it. distributions.
Our failure to comply with this financial covenant orthese restrictions and the other restrictive covenantsterms and conditions under our credit facility and other debt instruments could result in a default, under our credit facility and/or other debt instruments, which in turn could result in the termination of the lenders’ commitments to extend further credit to us under our credit facility and acceleration of a substantial portion of our indebtedness then outstanding under our credit facility. If that were to happen, we may not be able to repay all of the amounts that would become due under our indebtedness or refinance our debt. If we were unable to repay those amounts or refinancedebt, which could materially harm our debt, the lenders under our credit facility could proceed against the collateral granted to them to secure that indebtedness. If that were to happen, our results of operationsbusiness and financial condition could be harmed and we might be forcedforce us to seek bankruptcy protection.
If we fail to retainAtairos, our key personnel or fail to attract additional skilled personnel, our business may suffer.
Our operations are dependent on the continued efforts of our officers and executive management and the performance and productivity of our regional managers and field personnel. Our ability to attract and retain business depends on the quality of our services and the relationships that we maintain with our clients. If we lose key personnel with significant experience in managing our business, this could impair our ability to deliver services effectively or profitably, could divert other senior management time in seeking replacements, and could adversely affect our reputation with our clients and potential clients. Some of our most important client relationships depend on the continued involvement of individual managers or sales personnel, and any loss of those individuals could jeopardize those relationships and in turn adversely affect our operating results.
Our future success will depend on our ability to attract, hire, train and retain highly skilled technical, sales and marketing and support personnel, particularly with expertise in outsourced solutions and the technology platforms that we deploy today and will deploy in the future. Our failure to attract and retain the appropriate personnel may limit the rate at which we can expand our business, including developing new services and attracting new clients, or otherwise have a material adverse effect on our financial condition or results of operations.
We have identified material weaknesses in our internal control over financial reporting that could, if not remediated, result in material misstatements in our financial statements.
In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2015, we have identified material weaknesses relating to our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. As described in Item 9A. Controls and Procedures, we have concluded that our internal control over financial reporting was not effective as of December 31, 2015 due to material weaknesses. Specifically, we identified material weaknesses relating to (i) ineffective information technology general controls, primarily with respect to computer operations, access controls and change management, (ii) ineffective control environment and risk assessment, (iii) ineffective management review controls and controls over system-generated reports, (iv) ineffective controls over payroll operations, (v) ineffective controls over health and workers compensation liabilities and related expenses, (vi) ineffective controls over validating accuracy of payroll tax liabilities, and (vii) ineffective authorization controls over procurement processes. However, giving full consideration to these weaknesses, and the additional analyses and other procedures we performed to ensure that our consolidated financial statements included in this Annual Report on Form 10-K were prepared in accordance with U.S. generally accepted accounting principles (GAAP), our management has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods disclosed in conformity with GAAP. While the material weaknesses described above create a reasonable possibility that an error in financial reporting may go undetected, after extensive review and the performance of additional analysis and other procedures, no material adjustments, restatement or other revisions to our previously issued financial statements were required.
As further described in Part II, Item 9A “Controls and Procedures” below, we are taking specific steps to remediate the material weaknesses that we identified; however, the material weaknesses will not be remediated until the necessary controls have been implemented and we have determined the controls to be operating effectively. Because the reliability of the internal control process requires repeatable execution, the successful remediation of these material weaknesses will require review and evidence of effectiveness prior to concluding that the controls are effective. In addition, we may need to take additional measures to address the material weaknesses or modify the remediation steps, and we cannot be certain that the measures we have taken, and expect to take, to improve our internal controls will be sufficient to address the issues identified, to ensure that our internal controls are effective or to ensure that the identified material weaknesses will not result in a material misstatement of our annual or interim consolidated financial statements. Implementing any appropriate changes to our internal controls may distract our officers and employees and require material cost to implement new process or modify our existing processes. Moreover, other material weaknesses or deficiencies may develop or be identified in the future. If we are unable to correct material weaknesses or deficiencies in internal controls in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission, will be adversely affected. This failure could negatively affect the market price and trading liquidity of our common stock, lead to delisting, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition.
We are subject to legal proceedings that may result in adverse outcomes.
We are subject to claims, suits, government investigations, and proceedings arising from the ordinary course of our business, including actions with respect to intellectual property claims, privacy, data protection or law enforcement matters, tax matters, labor and employment claims, commercial claims, purported class action lawsuits, and other matters. For example, we are a party to a putative securities class action lawsuit filed by a purportedlargest stockholder, of our company in the United States District Court for the Northern District of California. Such claims, suits, government investigations, and proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of the outcome, such legal proceedings can have an adverse impact on us because of legal costs, diversion of management and other personnel, and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in liability, penalties, or sanctions, as well as judgments, consent decrees, or orders preventing us from offering certain features, functionalities, products, or services, or requiring a change in our business practices, products or technologies, which could in the future materially and adversely affect our business, operating results, and financial condition. See Part I, Item 3, “Legal Proceedings” below for additional information about the legal proceedings we are currently involved in and future proceedings that we may face.
Our failure to timely file any periodic reports with the SEC may prevent us from complying with the NYSE rules and may make it more difficult for us to access the public markets to raise debt or equity capital.
Despite extensive efforts, we were unable to file our Annual Report on Form 10-K for the year ended December 31, 2015 within the time frame required by the SEC (including the extension permitted by Rule 12b-25 under the Exchange Act).
As a result, we were not in full compliance with the NYSE Listed Company Manual, Section 802.01E, but have cured this deficiency upon filing our Annual Report. We are required to comply with the NYSE Listed Company Manual as a condition for our common stock to continue to be listed on the NYSE. If we are unable to comply with such conditions, then our shares of common stock are subject to delisting from the NYSE. Any delisting of our common stock from the NYSE could have a significant negative effect on the value and liquidity of our securities, may preclude us from using exemptions from certain state and federal securities regulations, and could adversely affect our ability to raise capital on terms acceptable to us or at all.
In addition, because we were unable to timely file our Annual Report, we will not be eligible to use a registration statement on Form S-3 to conduct public offerings of our securities until we have timely made our periodic filings with the SEC for a full year. Our inability to use Form S-3 during this time period may have a negative impact onsignificant influence over our ability to access the public capital markets in a timely fashion because we would be required to file a long-form registration statement on Form S-1 and have it reviewed and declared effective by the SEC. This may limit our ability to access the public markets to raise debt or equity capital. Our limited ability to access the public markets could prevent us from pursuing transactions or implementing business strategies that we believe would be beneficial to our business.
Any failure in our business systems could reduce the quality of our business services, which could harm our reputation and expose us to liability.
Our business systems rely on the complex integration of numerous hardware and software subsystems to manage client transactions including the processing of employee, payroll and benefits data. These systems can be disrupted by, among other things, equipment failures, computer server or systems failures, network outages, malicious acts, software errors or defects, vendor performance problems and power failures. Any delay or failure in our systems that impairs our ability to communicate electronically with our clients, employees or vendors or our ability to store or process data could harm our reputation and our business. If we are unable to meet client demands or service expectations, we may lose existing clients and we may have difficulty attracting new clients. In addition, errors in our products and services, such as the erroneous denial of healthcare benefits or delays in making payroll, could expose our clients to liability claims from improperly serviced WSEs, for which we may be contractually obligated to provide indemnification.
We have disaster recovery, business continuity, and crisis management plans and procedures designed to protect our business against a multitude of events, including natural disasters, military or terrorist actions, power or communication failures, or similar events. Despite our preparations, our plans may not be successful in preventing the loss of client data, service interruptions, and disruptions to our operations, or damage to our important facilities. The precautions that we have taken to protect ourselves against these types of events may prove to be inadequate. If we suffer damage to our data or operations centers, experience a telecommunications failure or experience a security breach, our operations could be interrupted. Any interruption or other loss may not be covered by our insurance and could harm our reputation.
If our systems were to fail for any of these reasons during payroll processing, preventing the proper payment of employees, or the proper remission of payroll taxes, we could be liable for wage payment delay penalties and payroll tax penalties, as well as other contractual penalties. Any inaccuracies in the processing of health insurance benefits could result in our being liable for lapses in insurance. If any of our systems fails to operate properly or becomes disabled even for a brief period of time, we could suffer financial loss, a disruption of our businesses, liability to clients, regulatory intervention, or damage to our reputation.
We depend on licenses with third-party software in order to provide our services.
We license a substantial portion of the software on which we depend to provide services to our clients from third-party vendors. If we are unable to maintain these licenses, or if we are required to make significant changes in the terms and conditions of these licenses, we may need to seek replacement vendors or change our software architecture to address licensing revisions with our current vendors, either of which could increase our expenses and impair the quality of our services. In addition, we cannot assure you that our key vendors will continue to support their technology. Financial or other difficulties experienced by these vendors may adversely affect the technologies we incorporate into our products and services. If this software ceases to be available, we may be unable to find suitable alternatives on reasonable terms, or at all.
We must keep pace with rapid technological change in order to succeed.
Our business depends upon the use of software, hardware and networking technologies that must be frequently and rapidly upgraded in response to technological advances, competitive pressures and consumer expectations. To succeed, we will need to effectively develop or license and integrate these new technologies as they become available to improve our services commensurate with client requirements. In particular, we rely on enterprise software applications licensed from third parties that are upgraded from time to time such as PeopleSoft HR information systems and Oracle databases, which provide the basis
for our HR information system platform supporting payroll, benefits and other HR functions. Any difficulties we encounter in adapting applications upgrades to our systems could harm our performance or delay or prevent the successful development, introduction or marketing of new services. New products or upgrades may not be released according to schedule, or may contain defects when released. Difficulties in integrating new technologies could result in adverse publicity, loss of sales, delay in market acceptance of our services, or client claims against us, any of which could harm our business. We could also incur substantial costs in modifying our services or infrastructure to adapt to these changes. In addition, we could lose market share if our competitors develop technologically superior products and services.
If we are unable to protect our intellectual property, or if we infringe on the intellectual property rights of others, our business may be harmed.
Our success depends in part on intellectual property rights to the services that we develop. We rely on a combination of contractual rights, including non-disclosure agreements, trade secrets, copyrights and trademarks, to establish and protect our intellectual property rights in our names, services, methodologies and related technologies. If we lose intellectual property protection or the ability to secure intellectual property protection on any of our names, confidential information or technology, this could harm our business. Our intellectual property rights may not prevent competitors from independently developing services and methodologies similar to ours,Company, and the steps we take might be inadequate to deter infringement or misappropriation of our intellectual property by competitors, former employees or other third parties, any of which could harm our business. We currently have one pending U.S. patent application covering our technology. We own registered trademarks in the United States, Canada and the European Union that have various expiration dates unless renewed through customary processes. Our trademark registrations may be unenforceable or ineffective in protecting our trademarks. Our trademarks may be unenforceable in countries outside of the United States, which may adversely affect our ability to build our brand outside of the United States.
Although we believe that our conduct of our business does not infringe on the intellectual property rights of others, third parties may nevertheless assert infringement claims against us in the future. We may be required to modify our products, services, internal systems or technologies, or obtain a license to permit our continued use of those rights. We may be unable to do so in a timely manner, or upon reasonable terms and conditions, which could harm our business. In addition, future litigation over these matters could result in substantial costs and resource diversion. Adverse determinations in any litigation or proceedings of this type could subject us to significant liabilities to third parties and could prevent us from using some of our services, internal systems or technologies.
Our use of open source software could subject us to possible litigation.
A portion of our technologies incorporates open source software, and we expect to continue to incorporate open source software into our platform in the future. Few of the licenses applicable to open source software have been interpreted by courts, and their application to the open source software integrated into our proprietary technology platform may be uncertain. If we fail to comply with these licenses, then pursuant to the terms of these licenses, we may be subject to certain requirements, including requirements that we make available the source code for our software that incorporates the open source software. We cannot assure you that we have not incorporated open source software in our software in a manner that is inconsistent with the terms of the applicable licenses or our current policies and procedures. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could incur significant legal expenses defending against such allegations. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our technology platform.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile or may decline regardless of our operating performance, resulting in substantial losses for our stockholders.
The market price of our common stock has been, and is likely to continue to be, volatile for the foreseeable future. Since shares of our common stock were sold in our initial public offering in March 2014 at a price of $16.00 per share, the daily closing price of our common stock has ranged from $16.33 to $37.88 per share through December 31, 2015. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including the factors listed below and other factors described in this “Risk Factors” section:
actual or anticipated fluctuations in our results of operations;
any financial projections we provide to the public, any changes in these projections or our failure to meet these projections;
failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
ratings changes by any securities analysts who follow our company;
announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
changes in operating performance and stock market valuations of other business services companies generally, or those in our industry in particular;
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
changes in our board of directors or management;
sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
lawsuits threatened or filed against us;
short sales, hedging and other derivative transactions involving our capital stock;
general economic conditions in the United States and abroad; and
other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many business services companies. Stock prices of many business services companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. Securities litigation could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, results of operations and financial condition.
Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.
We may issue additional shares of common stock or securities convertible into shares of our common stock in one or more transactions and at prices and in a manner as we may determine from time to time. Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that such sales may have on the prevailing market price of our common stock.
As of December 31, 2015, there were 4,446,149 shares of common stock subject to outstanding options, 956,687 shares of common stock issuable upon settlement of restricted stock units and 173,286 shares of common stock issuable upon settlement of performance-based restricted stock units. We have registered all of the shares of common stock issuable upon exercise of these outstanding options and settlement of these outstanding restricted stock units, and upon exercise or settlement of any options or other equity incentives we may grant in the future, as well as the shares we have reserved for future issuance under our Employee Stock Purchase Plan, or ESPP, for public resale under the Securities Act of 1933, as amended. Accordingly, these shares are eligible for sale in the public market to the extent such options are exercised or such restricted stock units settle, or such shares are purchased pursuant to our ESPP, subject to compliance with applicable securities laws.
As of December 31, 2015, the holders of 20,091,312 shares of common stock have rights, subject to some conditions, to require us to file registration statements for the public resale of such shares or to include such shares in registration statements that we may file for TriNet or our stockholders.
The existing ownership of capital stock, byand thus the voting control, of our Company remains concentrated in our executive officers, directors and their affiliates, has the effect of concentrating voting control with our executive officers, directors and their affiliates for the foreseeable future, which limits your ability to influence corporate matters.
As of December 31, 2015, fundsOn February 1, 2017, an entity affiliated with General Atlantic,Atairos Group, Inc. (together with its affiliates, “Atairos”) became our largest stockholder when it acquired the shares of TriNet common stock previously held by General Atlantic. In connection with this transaction, we appointed Michael J. Angelakis, the Chairman and CEO of Atairos, to our board of directors and agreed to nominate Mr. Angelakis or another designee of Atairos reasonably acceptable to our Nominating and Corporate Governance Committee for election at future annual meetings until Atairos’ beneficial ownership falls below 15% of our common stock. As of February 7, 2019, Atairos beneficially ownowned approximately 28.6%28% of our outstanding common stock, and all of our directors, executive officers and their affiliates, including the funds affiliated with General Atlantic,Atairos, beneficially own, in the aggregate, approximately 40.8%37% of our outstanding common stock. As
a result, these stockholdersof the foregoing, Atairos, particularly when acting with our executive officers, directors and their affiliates, will be able to determine substantiallyexert substantial influence on all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit the ability of other stockholders to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.
If securitiesOur industry is highly competitive, which may limit our ability to maintain or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business,increase our market share or improve our results of operations.
We face significant competition on a national and regional level from other PEOs, as well as other existing, and potential, companies and industries that service, or may in the future service, client HR needs. Refer to the heading “Competition” under Part I, Item 1. Business, above for more details. Our competitors, regardless of industry, may have greater marketing and financial resources than we have, and may be better positioned than we are in certain markets. Increased competition in our industry could result in price reductions or loss of market share, any of which could harm our business. We expect that we will continue to experience competitive pricing pressure.
Moreover, we may not be successful in convincing potential clients that the use of our services is a superior, cost-effective means of satisfying their HR obligations relative to the way in which they currently satisfy these obligations either by themselves or by using the services of our competitors. We do not have any control over these analysts. If onewe cannot compete effectively against other PEOs or moreagainst the alternative means by which companies meet their HR obligations, or if we are unable to convince clients or potential clients of the analysts who cover us downgrade our shares or change their opinionadvantages of our shares,offerings, our market share price would likely decline. If one or moreand business may suffer, resulting in a material, adverse effect on our financial condition and results of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and bylaws include provisions that:
establish a classified board of directors so that not all members of our board of directors are elected at one time;
permit our board of directors to establish the number of directors;
provide that directors may only be removed “for cause”;
require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;
eliminate the ability of our stockholders to call special meetings of stockholders;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
provide that our board of directors is expressly authorized to make, alter or repeal our bylaws; and
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for our stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any holder of at least 15% of our capital stock for a period of three years following the date on which the stockholder became a 15% stockholder.operations.
|
| |
| PROPERTIES, LEGAL PROCEEDINGS AND MINE SAFETY DISCLOSURES |
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease space for our corporate headquarters in San Leandro, California, approximately 50 regional sales58 offices in various U.S. states, inincluding the United States and our client service centers in Bradenton, Florida; Reno, Nevada; Fort Mill, South Carolina; Oklahoma City, Oklahoma and New York, New York. following:
|
| |
| Corporate: | Client Service Centers: |
| • Dublin, California | • Bradenton, Florida |
| • Reno, Nevada |
| • Fort Mill, South Carolina |
| • New York, New York |
All of these leases expire at various times up through 2023.
2028. We believe that our leases are sufficient for our current facilities are adequate for the purposes for which they are intended and provide for further expansion to accommodate our long-term growth and expansion goals. We believe that short-term leased facilities are readily available if needed to accommodate near-term needs if they arise. We will continue to evaluate the need for additional facilities
based on the extent of our product and service offerings, the rate of client growth, the geographic distribution of our client base and our long-term service delivery requirements.
Item 3. Legal Proceedings
Securities Class Action. On or about August 7, 2015, Howard Welgus, a purported stockholderFor the information required in this section, refer to Note 8 in Part II, Item 8. Financial Statements and Supplementary Data, of the Company, filed a putative securities class action lawsuit arising under the Securities and Exchange Act of 1934 in the United States District Court for the Northern District of California. The case has not been certified as a class action, although it purports to be filed on behalf of purchasers of the Company’s common stock between May 5, 2014 and August 3, 2015, inclusive. The name of the case is Welgus v. TriNet Group, Inc. et al., Case No. 3:15-cv-03625. No stockholder other than Mr. Welgus submitted a motion for appointment as lead plaintiff to represent the putative class, and, on December 3, 2015, the Court appointed Mr. Welgus as lead plaintiff. On February 1, 2016, Mr. Welgus filed an amended complaint. The defendants named in the case are the Company and certain of its officers and directors, as well as General Atlantic, LLC, a significant shareholder, and formerly majority shareholder, of the Company. The amended complaint generally alleges that the Company caused damage to stockholders of the Company by misrepresenting and/or failing to disclose facts generally pertaining to alleged trends affecting health insurance and workers compensation claims. Under a stipulated briefing schedule approved by the Court, the Company intends to move to dismiss the amended complaint no later than April 11, 2016. The Company believes that it has meritorious defenses against this action and intends to continue to defend itself vigorously against the allegations of Mr. Welgus.Form 10-K.
Other Litigation. The Company is and, from time to time, has been and may in the future become involved in various litigation matters, legal proceedings and claims arising in the ordinary course of its business, including disputes with its clients or various class action, collective action, representative action and other proceedings arising from the nature of its co-employment relationship with its clients and WSEs in which the Company is named as a defendant. In addition, due to the nature of the Company’s co-employment relationship with its clients and WSEs, the Company could be subject to liability for federal and state law violations, even if the Company does not participate in such violations. While the Company’s agreements with its clients contain indemnification provisions related to the conduct of its clients, the Company may not be able to avail itself of such provisions in every instance.
While the outcome of the matters described above cannot be predicted with certainty, management currently does not believe that any such claims or proceedings or the above mentioned securities class action will have a materially adverse effect on the Company’s consolidated financial position, results of operations or cash flows. However, the unfavorable resolution of any particular matter or the Company’s reassessment of its exposure for any of the above matters based on additional information obtained in the future could have a material impact on the Company’s consolidated financial position, results of operations or cash flows. In addition, regardless of the outcome, the above matters, individually and in the aggregate, could have an adverse impact on the Company because of diversion of management resources and other factors.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders of Record
Our common stock has been listed on the New York Stock Exchange under the symbol “TNET” since March 27, 2014. Prior to that date, there was no public trading market for our common stock. The following table sets forth for the periods indicated the high and low sale prices per share of our common stock as reported on the New York Stock Exchange:
|
| | | | | | | | |
| Year Ended December 31, 2015: | | High | | Low |
| First Quarter | | $ | 37.88 |
| | $ | 30.04 |
|
| Second Quarter | | $ | 37.27 |
| | $ | 25.23 |
|
| Third Quarter | | $ | 26.88 |
| | $ | 16.33 |
|
| Fourth Quarter | | $ | 20.05 |
| | $ | 16.79 |
|
| | | | | |
| Year Ended December 31, 2014: | | High | | Low |
| First Quarter | | $ | 23.44 |
| | $ | 17.28 |
|
| Second Quarter | | $ | 27.78 |
| | $ | 18.81 |
|
| Third Quarter | | $ | 29.96 |
| | $ | 21.79 |
|
| Fourth Quarter | | $ | 32.79 |
| | $ | 24.38 |
|
On March 29, 2016,February 7, 2019, the last reported salesales price of our common stock on the New York Stock Exchange was $13.97$45.53 per share. As of March 29, 2016,February 7, 2019, we had 4842 holders of record of our common stock per Computershare Trust Company N.A., our transfer agent. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
For information regarding our equity-based incentive plans, please refer to Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this Form 10-K.
Dividend Policy
Our boardWe did not declare or pay cash dividends in 2018 or 2017. Payment of directors has declared two special dividends since January 1, 2013. In August 2013, our board of directors declared a special dividend of $5.88 per common-equivalent share for holders of record of our preferred stock and $5.88 per share for holders of record of our common stock and restricted stock units, for a total of approximately $310.8 million. In December 2013, our board of directors declared a special dividend of $0.88 per common-equivalent share for holders of record of our preferred stock and $0.88 per share for holders of record of our common stock and restricted stock units, for a total amount of approximately $46.7 million. In each case, we determined to pay such dividends to our stockholders because our board of directors determined that such dividends were in our best interests and those of our stockholders, that we had sufficient surplus capital to pay such dividends and that we would be able to continue to fund our operations and service our indebtedness utilizing cash flows from operations after payment of such dividends.
Any future determination as to the declaration and payment of dividends, if any, in the future will be at the discretion of our board of directors and will depend on then existingthen-existing conditions, including our financial condition, operating results, contractual restrictions under our credit facility (refer to Note 7 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K), capital requirements, business prospects and other factors our board of directors may deem relevant.
In addition, our credit facility, as amended and restated in 2014, contains restrictions on our ability to declare and pay cash dividends on our capital stock. So long as no event of default has occurred and is continuing and no ECF Shortfall Amount (as defined in the credit agreement) exists, our credit facility permits cash dividends in amounts up to the sum of (a) specified dollar amounts under the facility, plus (b) so long as a specified leverage ratio under the credit facility is satisfied, the available Excess Cash Flow (as defined in the credit agreement and subject to certain adjustments). See Note 8 to our consolidated financial statements included elsewhere in this report.
Performance Graph
The graph on the following graphpage compares the cumulative return on the Company’sour common stock since the initial public offering onin March 27, 2014 with the cumulative return on the S&P 500 Index and a Peer Group Index. The cumulative return is based on the assumption that $100 had been invested in TriNet Group, Inc. common stock, the Standard & Poor's 500 Stock Index (S&P 500) and common stock of members of a Peer Group Index, all on the date of TriNet's initial public offering in March 2014 and that all quarterly dividends were reinvested. The cumulative dollar returns shown on the graph represent the value that such investments would have had at each quarter end.
COMPARISON OF 2157 MONTH CUMULATIVE TOTAL RETURN
Among TriNet Group, Inc., the S&P 500 Index, and a Peer Group*Group(1)
*(1) The Peer Group Index used in the chart above consists of the following companies:
Automatic Data Processing, Inc. |
| | |
| Automatic Data Processing, Inc. | Insperity, Inc. | Paychex, Inc.
|
| Barrett Business Services, Inc. | Intuit, Inc. | |
Paychex, Inc.
Barrett Business Services, Inc.
Heartland Payment Systems, Inc.
Intuit, Inc.
This graph shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, regardless of any general incorporation language in such filing.
Issuer Purchases of Equity Securities
Our ongoing stock repurchase program was originally approved by our board of directors in 2014 and has been subsequently amended. As of December 31, 2018, our board of directors had authorized us to repurchase up to an aggregate of $315 million under this program of which approximately $75 million remains available for repurchases under all authorizations approved by the board of directors. We repurchased a total of approximately $61 million of our outstanding common stock in 2018 using existing cash and cash equivalents through our Rule 10b5-1 plan. Under the program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. This repurchase authorization has no expiration. We plan to use current cash and cash generated from ongoing operating activities to fund this share repurchase program. Stock repurchases under the program are primarily intended to return value to our stockholders and offset the dilutive effect of equity-based employee incentive compensation.
The following table provides information about our purchases of TriNet common stock during the fourth quarter of 2018:
|
| | | | | | | | | | |
| Period | Total Number of Shares Purchased (1) | Weighted Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans (2) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans (in millions) (2) |
| October 1 - October 31, 2018 | 136,944 |
| $ | 50.57 |
| 135,026 |
| $ | 83 |
|
| November 1 - November 30, 2018 | 242,679 |
| $ | 45.07 |
| 158,563 |
| $ | 75 |
|
| December 1 - December 31, 2018 | 79,375 |
| $ | 41.30 |
| 1,707 |
| $ | 75 |
|
| Total | 458,998 |
| | 295,296 |
|
|
(1) Includes shares surrendered by employees to us to satisfy tax withholding obligations that arose upon vesting of restricted stock units granted pursuant to approved plans.
(2) We repurchased a total of approximately $14 million of our outstanding stock during the three months ended December 31, 2015:2018.
On February 6, 2019, our board of directors authorized a $300 million incremental increase to our ongoing stock repurchase program initiated in May 2014. We use this program to return value to our stockholders and to offset dilution from the issuance of stock under our equity-based incentive plan and employee purchase plan. |
| | | | | | | | | | | | |
| Period | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans (1) | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans (1) |
| October 1 - October 31, 2015 | — |
| | — |
| | — |
| | $ | 31,628,073 |
|
| November 1 - November 30, 2015 | — |
| | — |
| | — |
| | $ | 31,628,073 |
|
| December 1 - December 31, 2015 | — |
| | — |
| | — |
| | $ | 31,628,073 |
|
| Total | — |
| | | | | | |
|
| |
(1)SELECTED FINANCIAL DATA | In May 2014, our board of directors authorized a program to repurchase in the aggregate up to $15 million of our outstanding common stock. Our board of directors subsequently approved incremental increases to our ongoing stock repurchase program of $30 million in November 2014 and $50 million on June 29, 2015. In 2014 and 2015, we repurchased approximately $15 million and approximately $49.2 million, respectively, of our outstanding common stock. As of December 31, 2015 we had approximately $31.6 million remaining for repurchases under our stock repurchase program. Stock repurchases under the program are primarily intended to offset the dilutive effect of share-based employee incentive compensation. |
Item 6. Selected Financial Data.Data
The following selected consolidated financial and other data should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”Part II, Item 7. MD&A, as well as our audited consolidated financial statements and related notes included in Part II, Item 88. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. We have derived the consolidated statement of operations data for the years ended December 31, 2015, 2014 and 2013 and the consolidated balance sheet data as of December 31, 2015 and 2014 from our audited consolidated financial statements that are included elsewhere in this report. We have derived the consolidated statement of operations data for the years ended December 31, 2012 and 2011 and consolidated balance sheet data as of December 31, 2013, 2012 and 2011 from our audited consolidated financial statements that are not included in this report. Our historical results are not necessarily indicative of the results to be expected in the future.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| | (in thousands, except share and per share data) |
| Consolidated Statement of Operations: | | | | | | | | | |
| Professional service revenues | $ | 401,287 |
| | $ | 342,074 |
| | $ | 272,372 |
| | $ | 148,233 |
| | $ | 113,279 |
|
| Insurance service revenues | 2,258,001 |
| | 1,851,457 |
| | 1,371,903 |
| | 870,828 |
| | 727,111 |
|
| Total revenues | 2,659,288 |
| | 2,193,531 |
| | 1,644,275 |
| | 1,019,061 |
| | 840,390 |
|
| Costs and operating expenses: | | | | | | | | | |
| Insurance costs | 2,112,376 |
| | 1,686,315 |
| | 1,226,585 |
| | 750,025 |
| | 651,094 |
|
Cost of providing services (exclusive of depreciation and amortization of intangible assets) (1) | 150,694 |
| | 134,256 |
| | 106,661 |
| | 63,563 |
| | 59,388 |
|
Sales and marketing (1) | 166,759 |
| | 139,997 |
| | 109,183 |
| | 59,931 |
| | 38,087 |
|
General and administrative (1) | 69,626 |
| | 53,926 |
| | 52,455 |
| | 37,879 |
| | 31,421 |
|
Systems development and programming costs (1) | 27,558 |
| | 26,101 |
| | 19,948 |
| | 16,718 |
| | 15,646 |
|
| Amortization of intangible assets | 39,346 |
| | 52,302 |
| | 51,369 |
| | 17,441 |
| | 12,388 |
|
| Depreciation | 14,612 |
| | 13,843 |
| | 11,737 |
| | 11,676 |
| | 9,201 |
|
| Restructuring | — |
| | — |
| | — |
| | — |
| | 2,358 |
|
| Total costs and operating expenses | 2,580,971 |
| | 2,106,740 |
| | 1,577,938 |
| | 957,233 |
| | 819,583 |
|
| Operating income | 78,317 |
| | 86,791 |
| | 66,337 |
| | 61,828 |
| | 20,807 |
|
| Other income (expense): | | | | | | | | | |
| Interest expense and bank fees | (19,449 | ) | | (54,193 | ) | | (45,724 | ) | | (9,709 | ) | | (751 | ) |
| Other, net | 1,142 |
| | 478 |
| | 471 |
| | 57 |
| | 127 |
|
| Income before provision for income taxes | 60,010 |
| | 33,076 |
| | 21,084 |
| | 52,176 |
| | 20,183 |
|
| Provision for income taxes | 28,315 |
| | 17,579 |
| | 7,937 |
| | 20,344 |
| | 5,421 |
|
| Net income | $ | 31,695 |
| | $ | 15,497 |
| | $ | 13,147 |
| | $ | 31,832 |
| | $ | 14,762 |
|
| Net income per share attributable to common stock: | | | | | | | | | |
| Basic | $ | 0.45 |
| | $ | 0.24 |
| | $ | 0.26 |
| | $ | 0.66 |
| | $ | 0.32 |
|
| Diluted | $ | 0.44 |
| | $ | 0.22 |
| | $ | 0.24 |
| | $ | 0.63 |
| | $ | 0.31 |
|
| Weighted average common stock outstanding: | | | | | | | | | |
| Basic | 70,228,159 |
| | 56,160,539 |
| | 12,353,047 |
| | 9,805,384 |
| | 7,842,682 |
|
| Diluted | 72,618,069 |
| | 59,566,773 |
| | 15,731,807 |
| | 12,476,091 |
| | 10,103,979 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 |
| Income Statement Data: | | | | | |
| Total revenues | $ | 3,503 |
| $ | 3,275 |
| $ | 3,060 |
| $ | 2,659 |
| $ | 2,194 |
|
| Net income | 192 |
| 178 |
| 61 |
| 32 |
| 15 |
|
| Diluted net income per share of common stock | 2.65 |
| 2.49 |
| 0.85 |
| 0.44 |
| 0.22 |
|
Non-GAAP measures (1): | | | | | |
Net Service Revenues | 893 |
| 809 |
| 646 |
| 547 |
| 508 |
|
Net Insurance Service Revenues | 406 |
| 351 |
| 199 |
| 146 |
| 166 |
|
| Adjusted EBITDA | 347 |
| 285 |
| 185 |
| 151 |
| 165 |
|
| Adjusted Net Income | 218 |
| 142 |
| 87 |
| 71 |
| 74 |
|
| | | | | | |
| Balance Sheet Data: | | | | | |
| Cash and cash equivalents | $ | 228 |
| $ | 336 |
| $ | 184 |
| $ | 166 |
| $ | 134 |
|
| Working capital | 221 |
| 234 |
| 156 |
| 112 |
| 121 |
|
| Total assets | 2,435 |
| 2,593 |
| 2,095 |
| 2,092 |
| 2,341 |
|
| Long-term debt | 413 |
| 423 |
| 459 |
| 494 |
| 545 |
|
| Total liabilities | 2,060 |
| 2,387 |
| 2,060 |
| 2,084 |
| 2,366 |
|
| Total stockholders’ equity (deficit) | 375 |
| 206 |
| 35 |
| 8 |
| (25 | ) |
| | | | | | |
| Cash Flow Data: | | | | | |
Net cash (used in) provided by operating activities (2) | $ | (104 | ) | $ | 606 |
| $ | 192 |
| $ | (281 | ) | $ | 1,038 |
|
| Net cash (used in) provided by investing activities | (200 | ) | (24 | ) | (27 | ) | (38 | ) | (45 | ) |
Net cash (used in) financing activities (2) | (85 | ) | (77 | ) | (104 | ) | (81 | ) | (76 | ) |
Non-GAAP measures (1): | | | | | |
| Corporate operating cash flows | 234 |
| 299 |
| 189 |
| 169 |
| 143 |
|
| |
| (1) | Includes stock-based compensation expense as follows: |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| | (in thousands) |
| Cost of providing services | $ | 4,244 |
| | $ | 2,658 |
| | $ | 1,193 |
| | $ | 516 |
| | $ | 438 |
|
| Sales and marketing | 4,490 |
| | 2,755 |
| | 1,284 |
| | 500 |
| | 637 |
|
| General and administrative | 7,501 |
| | 4,517 |
| | 3,220 |
| | 3,144 |
| | 3,590 |
|
| Systems development and programming costs | 1,688 |
| | 1,030 |
| | 416 |
| | 200 |
| | 160 |
|
| Total stock-based compensation expense | $ | 17,923 |
| | $ | 10,960 |
| | $ | 6,113 |
| | $ | 4,360 |
| | $ | 4,825 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| | (in thousands) |
| Other Financial Data: | | | | | | | | | |
Net Insurance Service Revenues (1) | $ | 145,625 |
| | $ | 165,142 |
| | $ | 145,318 |
| | $ | 120,803 |
| | $ | 76,017 |
|
Net Service Revenues (2) | $ | 546,912 |
| | $ | 507,216 |
| | $ | 417,690 |
| | $ | 269,036 |
| | $ | 189,296 |
|
Adjusted EBITDA (3) | $ | 151,340 |
| | $ | 165,319 |
| | $ | 136,027 |
| | $ | 95,362 |
| | $ | 47,348 |
|
Adjusted Net Income (4) | $ | 70,720 |
| | $ | 74,392 |
| | $ | 57,456 |
| | $ | 47,431 |
| | $ | 27,626 |
|
| |
(1) | Net Insurance Service Revenues is a non-GAAP financial measure that we calculate as insurance service revenues less insurance costs. For more information about Net Insurance Service RevenuesRefer to Non-GAAP Financial Measures section on the following pages for definitions and a reconciliation of Net Insurance Service Revenues to insurance service revenues, the most directly comparable financial measure calculated and presented in accordance withreconciliations from GAAP see “Non-GAAP Financial Measures.”measures. |
| |
| (2) | Prior year balances were retrospectively adjusted for ASU 2016-18. Refer to Note 1 in Item 8: Financial Statements and Supplementary Data, of this Form 10-K for details. |
Non-GAAP Financial Measures
In addition to financial measures presented in accordance with U.S. Generally Accepted Accounting Principles (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, 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 |
Net Service Revenues is a non-GAAP financial measure that we calculate as the sum | • Sum of professional service revenues and Net Insurance Service Revenues. For more information about Revenues, or total revenues less insurance costs. | • Provides a comparable basis of revenues on a net basis. Professional service revenues are represented 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 Revenues and | • Insurance revenues less insurance costs. | • Is a reconciliationcomponent of Net Service RevenuesRevenues. • Provides a comparable basis of revenues on a net basis. Professional service revenues are represented 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. • We also sometimes refer to total revenues,Net Insurance Service Margin, which is the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Non-GAAP Financial Measures.” |
| ratio of Net Insurance Revenue to Insurance Service Revenue. |
(3) | Adjusted EBITDA is a non-GAAP financial measure that we calculate as net | • Net income, excluding the effects of ourof: - income tax provision, - interest expense, - depreciation, - amortization of intangible assets, and - stock-based compensation expenseexpense.
| • Provides period-to-period comparisons on a consistent basis and in 2014, certain costs relatedan understanding as to a public offering of shareshow our management evaluates the effectiveness of our common stock. For more information aboutbusiness strategies by excluding certain non-cash charges such 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 and a reconciliationmargin, which is the ratio of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Non-GAAP Financial Measures.” |
| Net Service Revenue.
|
(4) | Adjusted Net Income is a non-GAAP financial measure that we calculate as net | • Net income, excluding the effects of ourof: - effective income tax rate (1), - stock-based compensation, - amortization of intangible assets, - non-cash interest expense debt prepayment premium(2), and - the income tax effect (at our effective tax rate)rate (1)) of these pre-tax adjustmentsadjustments. | • Provides information to our stockholders and in 2014, certain costs relatedboard of directors to a public offeringunderstand how our management evaluates our business, to monitor and evaluate our operating results, and analyze profitability of our sharesongoing operations and trends on a consistent basis by excluding certain non-cash charges.
|
|
| | |
| Corporate Operating Cash Flows | • Net cash (used in) provided by operating activities, excluding the effects of: - Assets associated with WSEs (accounts receivable, unbilled revenue, prepaid expenses and other current assets) and - Liabilities associated with WSEs (client deposits, accrued wages, payroll tax liabilities and other payroll withholdings, accrued health benefit costs, accrued workers' compensation costs, insurance premiums and other payables, and other current liabilities). | • Provides information that our stockholders and management can use to evaluate our cash flows from operations independent of common stock. For purposes ofthe current assets and liabilities associated with our non-GAAP financial presentation,WSEs.
• Enhances comparisons to prior periods and, accordingly, used as a result of a 2015 increase in New York City tax ratesliquidity measure to manage liquidity between corporate and an increase in blended state rates, weWSE related activities, and to help determine and plan our cash flow and capital strategies.
|
| |
| (1) | We have adjusted theour non-GAAP effective tax rate to 41.5%26%, 41%, 43%, 42% and 40% for 2018, 2017, 2016, 2015 and 2014, respectively. The change in 2018 is due primarily to a decrease in the year ended December 31,statutory tax rate from 35% to 21%. The changes in 2017, 2016, 2015 and 2014 are a result of changes in state income taxes from 39.5%an increase in excludable income for year ended December 31, 2014. For more information about Adjusted Net Incomestate income tax purposes or state legislative changes. These non-GAAP effective tax rates exclude the income tax impact from stock-based compensation, changes in uncertain tax positions and a reconciliationnonrecurring benefits or expenses from federal legislative changes. |
| |
| (2) | Non-cash interest expense represents amortization and write-off of Adjusted Net Income to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Non-GAAP Financial Measures.”our debt issuance costs. |
Reconciliation of GAAP to Non-GAAP Measures
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| | (in thousands) |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Cash and cash equivalents | $ | 166,178 |
| | $ | 134,341 |
| | $ | 94,356 |
| | $ | 63,749 |
| | $ | 31,620 |
|
Working capital(1) | $ | 112,428 |
| | $ | 121,290 |
| | $ | 81,528 |
| | $ | 61,340 |
| | $ | 26,944 |
|
Total assets(1) | $ | 2,098,230 |
| | $ | 2,340,580 |
| | $ | 1,434,738 |
| | $ | 887,727 |
| | $ | 334,849 |
|
| Notes payable and borrowings under capital leases | $ | 499,716 |
| | $ | 545,150 |
| | $ | 818,877 |
| | $ | 301,334 |
| | $ | 1,683 |
|
Total liabilities(1) | $ | 2,090,149 |
| | $ | 2,366,339 |
| | $ | 1,705,100 |
| | $ | 830,407 |
| | $ | 241,251 |
|
| Convertible preferred stock | $ | — |
| | $ | — |
| | $ | 122,878 |
| | $ | 122,878 |
| | $ | 122,878 |
|
| Total stockholders’ equity (deficit) | $ | 8,081 |
| | $ | (25,759 | ) | | $ | (393,240 | ) | | $ | (65,558 | ) | | $ | (29,280 | ) |
(1) In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. We elected to early adopt and retrospectively apply the provisions of the amendment. Historical amounts above are conformed to the current presentation. See note 11 for further details.
Non-GAAP Financial Measures
We use Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income to provide an additional view of our operational performance. Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income are financial measures that are not prepared in accordance with GAAP. We define Net Insurance Service Revenues as insurance service revenues less insurance costs, which include the premiums we pay to insurance carriers for the health and workers compensation insurance coverage provided to our clients and WSEs and the reimbursements we pay to the insurance carriers and third-party administrators for claim payments made on our behalf within our insurance deductible layer, where applicable. We define Net Service Revenues as the sum of professional service revenues and Net Insurance Service Revenues. We define Adjusted EBITDA as net income, excluding the effects of our income tax provision, interest expense, depreciation, amortization of intangible assets, stock-based compensation expense and, in 2014, certain costs related to a public offering of our shares of common stock. We define Adjusted Net Income as net income, excluding the effects of our effective income tax rate, stock-based compensation, amortization of intangible assets, non-cash interest expense, debt prepayment premium, the income tax effect (at our effective tax rate) of these pre-tax adjustments and, in 2014, certain costs related to a public offering of our shares of common stock. For purposes of our non-GAAP financial presentation, as a result of a 2015 increase in New York City tax rates and an increase in blended state rates, we have adjusted the effective tax rate to 41.5% for
the year ended December 31, 2015, from 39.5% for year ended December 31, 2014. Each of these effective tax rates exclude income tax on non-deductible stock-based compensation and discrete items including the cumulative effect of state legislative changes. Non-cash interest expense represents amortization and write-off of our debt issuance costs.
We believe that the use of Net Insurance Service Revenues provides useful information as itThe table below presents a
measure of revenues from our provision of insurance services to our clients less the costs associated with such insurance. We believe that Net Service Revenues provides a useful measurereconciliation of total revenues
for the two main components of our revenues calculated on a consistent basis. We believe that the use of Adjusted EBITDA and Adjusted Net Income provides additional period-to-period comparisons and analysis of trends in our business, as they exclude certain one-time and non-cash expenses. We believe that Net Insurance Service Revenues,to Net Service
Revenues, Adjusted EBITDA and Adjusted Net Income are useful for our stockholders and board of directors by helping them to identify trends in our business and understand how our management evaluates our business. We use Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income to monitor and evaluate our operating results and trends on an ongoing basis and internally for operating, budgeting and financial planning purposes, in addition to allocating our resources to enhance the financial performance of our business and evaluating the effectiveness of our business strategies. We also use Net Service Revenues and Adjusted EBITDA in determining the incentive compensation for management.Revenues:Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income are not prepared in accordance with, and should not be considered in isolation of, or as an alternative to, measurements required by GAAP. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. As non-GAAP measures, Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. In particular:
Net Insurance Service Revenues and Net Service Revenues are reduced by the premiums that we pay to the insurance carriers and any reimbursements we pay to the insurance carriers and third-party administrators for claims payments made on our behalf within our insurance deductible layer, where applicable;
Adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our debt;
Adjusted EBITDA does not reflect the amounts we paid in taxes or other components of our tax provision;
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
Adjusted EBITDA and Adjusted Net Income do not reflect changes in, or cash requirements for, our working capital needs;
Adjusted EBITDA and Adjusted Net Income do not reflect the non-cash component of employee compensation;
Although depreciation and amortization of intangible assets are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and
Other companies in our industry may calculate these measures or similar measures differently than we do, limiting their usefulness as a comparative measure.
Because of these limitations, you should consider Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income alongside other financial performance measures, including total revenues, net income and our financial results presented in accordance with GAAP. |
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 | 2015 | 2014 |
| Total revenues | $ | 3,503 |
| $ | 3,275 |
| $ | 3,060 |
| $ | 2,659 |
| $ | 2,194 |
|
| Less: Insurance costs | 2,610 |
| 2,466 |
| 2,414 |
| 2,112 |
| 1,686 |
|
| Net Service Revenues | $ | 893 |
| $ | 809 |
| $ | 646 |
| $ | 547 |
| $ | 508 |
|
The table below sets forthpresents a reconciliation of GAAP insurance service revenues to Net Insurance Service Revenues:
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | |
| | (in thousands) | |
| (in millions) | | 2018 | 2017 | 2016 | 2015 | 2014 |
| Insurance service revenues | $ | 2,258,001 |
| | $ | 1,851,457 |
| | $ | 1,371,903 |
| | $ | 870,828 |
| | $ | 727,111 |
| $ | 3,016 |
| $ | 2,817 |
| $ | 2,613 |
| $ | 2,258 |
| $ | 1,852 |
|
| Less: Insurance costs | 2,112,376 |
| | 1,686,315 |
| | 1,226,585 |
| | 750,025 |
| | 651,094 |
| 2,610 |
| 2,466 |
| 2,414 |
| 2,112 |
| 1,686 |
|
| Net Insurance Service Revenues | $ | 145,625 |
| | $ | 165,142 |
| | $ | 145,318 |
| | $ | 120,803 |
| | $ | 76,017 |
| $ | 406 |
| $ | 351 |
| $ | 199 |
| $ | 146 |
| $ | 166 |
|
| Net Insurance Service Revenue Margin | | 13 | % | 12 | % | 8 | % | 6 | % | 9 | % |
The table below sets forthpresents a reconciliation of GAAP total revenuesnet income to Net Service Revenues:
Adjusted EBITDA and Adjusted EBITDA Margin: |
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| | (in thousands) |
| Total revenues | $ | 2,659,288 |
| | $ | 2,193,531 |
| | $ | 1,644,275 |
| | $ | 1,019,061 |
| | $ | 840,390 |
|
| Less: Insurance costs | 2,112,376 |
| | 1,686,315 |
| | 1,226,585 |
| | 750,025 |
| | 651,094 |
|
| Net Service Revenues | $ | 546,912 |
| | $ | 507,216 |
| | $ | 417,690 |
| | $ | 269,036 |
| | $ | 189,296 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 | 2015 | 2014 |
| Net income | $ | 192 |
| $ | 178 |
| $ | 61 |
| $ | 32 |
| $ | 15 |
|
| Provision for income taxes | 49 |
| 22 |
| 43 |
| 28 |
| 18 |
|
| Stock-based compensation | 44 |
| 32 |
| 26 |
| 18 |
| 11 |
|
| Interest expense and bank fees | 22 |
| 20 |
| 20 |
| 19 |
| 54 |
|
| Depreciation | 35 |
| 28 |
| 19 |
| 15 |
| 14 |
|
Amortization of intangible assets
| 5 |
| 5 |
| 16 |
| 39 |
| 52 |
|
| Secondary offering costs | — |
| — |
| — |
| — |
| 1 |
|
| Adjusted EBITDA | $ | 347 |
| $ | 285 |
| $ | 185 |
| $ | 151 |
| $ | 165 |
|
| Adjusted EBITDA Margin | 39 | % | 35 | % | 29 | % | 28 | % | 33 | % |
The table below sets forthpresents a reconciliation of GAAP net income to Adjusted EBITDA:
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| | (in thousands) |
| Net income | $ | 31,695 |
| | $ | 15,497 |
| | $ | 13,147 |
| | $ | 31,832 |
| | $ | 14,762 |
|
| Provision for income taxes | 28,315 |
| | 17,579 |
| | 7,937 |
| | 20,344 |
| | 5,421 |
|
| Stock-based compensation | 17,923 |
| | 10,960 |
| | 6,113 |
| | 4,360 |
| | 4,825 |
|
| Interest expense and bank fees | 19,449 |
| | 54,193 |
| | 45,724 |
| | 9,709 |
| | 751 |
|
| Depreciation | 14,612 |
| | 13,843 |
| | 11,737 |
| | 11,676 |
| | 9,201 |
|
| Amortization of intangible assets | 39,346 |
| | 52,302 |
| | 51,369 |
| | 17,441 |
| | 12,388 |
|
| Secondary offering costs | — |
| | 945 |
| | — |
| | — |
| | — |
|
| Adjusted EBITDA | $ | 151,340 |
| | $ | 165,319 |
| | $ | 136,027 |
| | $ | 95,362 |
| | $ | 47,348 |
|
The table below sets forth a reconciliation of GAAP net income to Adjusted Net Income:
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | |
| | (in thousands) | |
| (in millions) | | 2018 | 2017 | 2016 | 2015 | 2014 |
| Net income | $ | 31,695 |
| | $ | 15,497 |
| | $ | 13,147 |
| | $ | 31,832 |
| | $ | 14,762 |
| $ | 192 |
| $ | 178 |
| $ | 61 |
| $ | 32 |
| $ | 15 |
|
| Effective income tax rate adjustment | 3,411 |
| | 4,514 |
| | — |
| | — |
| | — |
| (13 | ) | (59 | ) | (1 | ) | 3 |
| 5 |
|
| Stock-based compensation | 17,923 |
| | 10,960 |
| | 6,113 |
| | 4,360 |
| | 4,825 |
| 44 |
| 32 |
| 26 |
| 18 |
| 11 |
|
| Amortization of intangible assets | 39,346 |
| | 52,302 |
| | 51,369 |
| | 17,441 |
| | 12,388 |
| 5 |
| 5 |
| 16 |
| 39 |
| 52 |
|
| Debt prepayment premium | | — |
| — |
| — |
| — |
| 4 |
|
| Secondary offering costs | | — |
| — |
| — |
| — |
| 1 |
|
| Non-cash interest expense | 3,610 |
| | 21,880 |
| | 13,577 |
| | 3,768 |
| | 375 |
| 4 |
| 2 |
| 4 |
| 4 |
| 22 |
|
| Debt prepayment premium | — |
| | 3,800 |
| | — |
| | — |
| | — |
| |
| Secondary Offering Costs | — |
| | 945 |
| | — |
| | — |
| | — |
| |
| Income tax impact of pre-tax adjustments | (25,265 | ) | | (35,506 | ) | | (26,750 | ) | | (9,970 | ) | | (4,724 | ) | (14 | ) | (16 | ) | (19 | ) | (25 | ) | (36 | ) |
| Adjusted Net Income | $ | 70,720 |
| | $ | 74,392 |
| | $ | 57,456 |
| | $ | 47,431 |
| | $ | 27,626 |
| $ | 218 |
| $ | 142 |
| $ | 87 |
| $ | 71 |
| $ | 74 |
|
The table below presents a reconciliation of net cash (used in) provided by operating activities to corporate operating cash flows:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 | 2015 | 2014 |
| Net cash (used in) provided by operating activities | $ | (104 | ) | $ | 606 |
| $ | 192 |
| $ | (281 | ) | $ | 1,038 |
|
| Change in WSE related other current assets | 33 |
| 35 |
| (96 | ) | 188 |
| (32 | ) |
| Change in WSE related liabilities | 305 |
| (342 | ) | 93 |
| 262 |
| (863 | ) |
Corporate Operating Cash Flows
| $ | 234 |
| $ | 299 |
| $ | 189 |
| $ | 169 |
| $ | 143 |
|
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussionSignificant Developments and Performance Highlights in 2018
Operational achievements in 2018
Our results for 2018 reflect continued progress marketing and selling our vertical products and our insurance service offerings, combined with WSE enrollment growth within our insurance offerings. This was offset by WSE attrition that we experienced primarily as a result of our financial conditionmigration of Main Street WSEs to a single technology platform. Our operational achievements included:
Continuing to invest in our efforts to enhance our clients' experience through operational and resultsprocess improvements,
Launching a marketing and branding campaign in September 2018 to improve our brand awareness and enhance our sales efforts,
Launching TriNet Professional Services, our sixth vertical product,
Completing the migration of operations in conjunction withexisting clients from our consolidated financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterizelegacy SOI platform onto our business. In particular, we encourage yousingle technology platform,
Continuing to review the risks and uncertainties described in the section titled “Risk Factors” included under Part I, Item 1A above. These risks and uncertainties could cause actual results to differ materiallybenefit from those projected in forward-looking statements contained in this report or implied by past results or trends.
Overview
TriNet is a leading providerchanges for one of comprehensive HR solutions for small to midsize businesses under a co-employment model. Our HR solutions are designed to manage an increasingly complex set of HR regulations, costs, risks, and responsibilities for our clients, allowing them to focus on operating and growing their core businesses. Our bundled HR solutions include multi-state payroll processing and tax administration, employee benefits programs (including health insurance carrier contracts, where we converted from a guaranteed-cost to risk-based plan in late 2017,
Investing corporate funds and retirement plans), workers compensation insuranceenhancing our investment strategy to generate interest income which improved our future interest income, net income, and claims management, federal, stateour Adjusted EBITDA, accordingly,
Refinancing our term loans during the second quarter of 2018, and local labor, employment and benefit law compliance, risk mitigation, expense and time management, and other human capital consulting services. Our proprietary, cloud-based HR software systems are used by
Continuing to invest in improving our clients and their WSEs to efficiently store and manage their core HR-related information and conduct a variety of HR-related transactions anytime and anywhere. In addition, our expert teams of in-house HR professionals also provide additional services upon requestinternal control environment to support various stagesour ongoing compliance with the requirements of our clients’ growth, including talent management, recruiting and training, performance management consulting or other consulting services (with an incremental charge for such services)the Sarbanes-Oxley Act of 2002 (SOX).
As of December 31, 2015, we served over 12,700 clientsThese operational achievements drove the financial performance improvements noted below in all 50 states,2018 when compared to the District of Columbia and Canada, co-employed more than 324,000prior year:
|
| | | | | | | | | | | |
| | $3.5B | | $251M | | $893M |
| | Total revenues | | Operating income | | Net Service Revenue * |
| | 7 | % | increase | | 15 | % | increase | | 10 | % | increase |
| | | | | | | | | |
| | $192M | | $2.65 | | $218M |
| | Net income | | Diluted EPS | | Adjusted Net income * |
| | 8 | % | increase | | 6 | % | increase | | 53 | % | increase |
| | | | | | | | | |
| * | Non-GAAP measure
| | | | | | |
Our results for WSEs and had processed over $31 billion in payroll and payroll tax payments in 2018 when compared to the prior year were:
|
| | | | | | | | | | |
| | 325,616 | | 317,104 | | $37.7B |
| | Total WSE | | Average WSE | | Payroll and payroll tax payments |
| | | Flat | | 2 | % | reduction | | 1 | % | increase |
| | | | | | | | | |
We experienced a decline in Average WSEs (defined as average monthly WSEs paid during the period) during 2018 as compared to 2017 primarily due to client attrition, including attrition from our Main Street vertical due to our planned migration of our Main Street clients from our legacy (SOI) platform onto our single technology platform, partially offset by growth in our other verticals.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Results of Operations
The following table summarizes our results of operations for our clients in 2015. Our clients are distributed across a variety of industries, including technology, life sciences, not-for-profit, professional services, financial services, property management, retail, manufacturing,the three years ended December 31, 2018, 2017 and hospitality. Our sales and marketing, client services and product development teams are increasingly focused on specific industry verticals. This verticalized approach gives us a deeper understanding2016. For details of the HR needs facing SMBscritical accounting judgments and estimates that could affect the Results of Operations, see the Critical Accounting Judgments and Estimates section within MD&A.
|
| | | | | | | | | | | | | |
| | Year Ended December 31, | % Change |
| (in millions, except operating metrics data) | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 |
| Income Statement Data: | | | | | |
| Professional service revenues | $ | 487 |
| $ | 458 |
| $ | 447 |
| 6 | % | 3 | % |
| Insurance service revenues | 3,016 |
| 2,817 |
| 2,613 |
| 7 |
| 8 |
|
| Total revenues | 3,503 |
| 3,275 |
| 3,060 |
| 7 |
| 7 |
|
| Insurance costs | 2,610 |
| 2,466 |
| 2,414 |
| 6 |
| 2 |
|
| Operating expenses | 642 |
| 592 |
| 522 |
| 8 |
| 13 |
|
| Total costs and operating expenses | 3,252 |
| 3,058 |
| 2,936 |
| 6 |
| 4 |
|
| Operating income | 251 |
| 217 |
| 124 |
| 15 |
| 75 |
|
| Other income (expense) | (10 | ) | (17 | ) | (20 | ) | 48 |
| 10 |
|
| Income before provision for income taxes | 241 |
| 200 |
| 104 |
| 21 |
| 91 |
|
| Income tax expense | 49 |
| 22 |
| 43 |
| 128 |
| (50 | ) |
| Net income | $ | 192 |
| $ | 178 |
| $ | 61 |
| 8 | % | 190 | % |
| | | | | | |
Non-GAAP measures (1): | | | | | |
| Net Service Revenues | $ | 893 |
| $ | 809 |
| $ | 646 |
| 10 | % | 25 | % |
| Net Insurance Service Revenues | 406 |
| 351 |
| 199 |
| 16 |
| 76 |
|
| Adjusted EBITDA | 347 |
| 285 |
| 185 |
| 22 |
| 53 |
|
| Adjusted Net income | 218 |
| 142 |
| 87 |
| 53 |
| 62 |
|
| | | | | | |
| Operating Metrics: | | | | | |
| Total WSEs payroll and payroll taxes processed (in millions) | $ | 37,666 |
| $ | 37,115 |
| $ | 34,281 |
| 1 | % | 8 | % |
| Average WSEs | 317,104 |
| 324,679 |
| 326,850 |
| (2 | ) | (1 | ) |
| Total WSEs | 325,616 |
| 325,370 |
| 337,885 |
| — |
| (4 | ) |
| |
| (1) | Refer to Non-GAAP measures definitions and reconciliations from GAAP measures in Part II, Item 6. Selected Financial Data. |
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Operating Metrics
Worksite Employees (WSE)
Average WSE growth is a volume measure we use to monitor the performance of our business. Average WSEs decreased 2% and 1% in particular industries, which better enables us2018 and 2017, respectively. Throughout 2018, we experienced elevated attrition, including attrition due to provideour planned migration of our Main Street clients from our legacy (SOI) platform onto our single technology platform, partially offset by an improvement in new sales growth in our other verticals.
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 tailoredand 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, product participation and product differentiation to expand our revenue opportunities. We report the specific needsimpact of clientsclient and WSE participation differences as a change in these verticals. mix.
We conductare focused on growing our business primarily inWSE base, including by pursuing strategic acquisitions where appropriate, while we improve our customer service experience and continue to manage attrition, including attrition arising from the United States, with more than 99%migration of our total revenues for each of 2015, 2014 and 2013 being attributablelegacy SOI clients to WSEs in the U.S. and the remainder being attributable to WSEs in Canada.our single technology platform.
For 2015, 2014 and 2013, our total revenues were $2.7 billion, $2.2 billion, and $1.6 billion respectively. 
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Total Revenues
Our total revenues consist of professional service revenues (PSR) and insurance service revenues. For 2015 and 2014, 15% and 16%revenues (ISR). PSR represents fees charged to clients for processing payroll-related transactions on behalf of our total revenues, respectively, consistedclients, access to our HR expertise, employment and benefit law compliance services, and other HR-related services. ISR consists of professional service revenues, and 85% and 84% of our total revenues, respectively, consisted of insurance service revenues. We recognize as professional service revenues the fees we earn for providing our clients with a comprehensive suite of HR professional services, but do not include amounts paid to us by clients as payroll that are paid out to WSEs or amounts withheld and remitted to authorities as taxes. We recognize as insurance service revenues all insurance-related billings and administrative fees collected from clients and withheld from WSEs. We pay premiums toWSEs for workers' compensation insurance and health benefit insurance plans provided by third-party insurance carriers for clientcarriers.
Monthly total revenues per Average WSE is a measure we use to monitor the success of our product and WSE insurance benefitsservice pricing strategies. This measure increased 9% during 2018 compared to 2017, and reimburseincreased 8% during 2017 compared to 2016.
We also use the insurance carriers and third-party administrators for claims payments made onfollowing measures to further analyze changes in total revenue:
Volume - the percentage change in period over period Average WSEs,
Mix - the change in composition of Average WSEs within our behalfverticals combined with the composition of our enrolled WSEs within our insurance deductible layer, where applicable. These premiumsofferings, and reimbursements are classified as
Rate - the combined percentage changes in service fees for each vertical product and changes in service fees associated with each insurance costs on our statements of operations.service offering.
We sell our services
The changes attributed to mix and rate during 2018 and 2017, when compared to the respective prior year periods, were primarily through our direct sales organization, whichdriven by ISR.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Operating Income
Our operating income consists of sales representatives who focus on serving clients in specific industry vertical markets. For 2015, 2014 and 2013, our sales and marketing expenses were $166.8 million, $140.0 million and $109.2 million, respectively, or 6%, 6% and 7% of our total revenues and 30%, 28% and 26% of our Net Service Revenues, respectively.
We have made significant investments in our proprietary, cloud-based HR systems, including implementing client information and management software to provide our clients with enhanced features and functionality. For 2015, 2014 and 2013, our systems development and programming costs were $27.6 million, $26.1 million and $19.9 million, or 1%, 1% and 1% of our total revenues and 5%, 5% and 5% of our Net Service Revenues, respectively. We plan to continue to invest to upgrade and improve our technology offerings, including enhancements of our solutions to address specific needs of clients in our key vertical markets, as we believe the continued improvement of our technology provides TriNet with the ability to drive operating efficiencies while improving our clients’ experience. We will leverage our existing online technology offerings to build additional products and features, including a full-service mobile platform, standard APIs for selected third party offerings,
improved client experience for key processes, and retirement of legacy software systems from acquisitions and migration of clients to the primary TriNet software system.
Strategic Acquisitions
Historically, we have pursued strategic acquisitions to both expand our product capabilities and supplement our growth across geographies and certain industry verticals. Our acquisition targets have included other bundled HR providers as well as technology companies or technology product offerings to supplement or enhance our existing HR solutions. We intend to continue to pursue strategic acquisitions that will enable us to add new clients and WSEs, expand our presence in certain geographies or industry verticals and offer our clients and WSEs more comprehensive and attractive products and services.
Key Financial and Operating Metrics
We regularly review certain key financial and operating metrics to evaluate growth trends, measure our performance and make strategic decisions. These key financial and operating metrics may change over time. Our key financial and operating metrics at December 31, 2015, 2014 and 2013, were as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| Key Financial and Operating Metrics: | 2015 | | 2014 | | 2013 |
| Net Insurance Service Revenues (in thousands) | $ | 145,625 |
| | $ | 165,142 |
| | $ | 145,318 |
|
| Net Service Revenues (in thousands) | $ | 546,912 |
| | $ | 507,216 |
| | $ | 417,690 |
|
| Total WSEs | 324,399 |
| | 288,312 |
| | 231,203 |
|
| Total Sales Representatives | 481 |
| | 385 |
| | 300 |
|
Net Insurance Service Revenues and Net Service Revenues
We define Net Insurance Service Revenues as insurance service revenues less insurance costs. We define Net Service Revenues as the sum of professional service revenuescosts and Net Insurance Service Revenues. Our total revenues on a GAAP basis represent the total amount invoiced by us to our clients, net of direct pass-through costs such as payroll and payroll tax payments, for the services we provide to our clients.OE. Our insurance costs include theinsurance premiums we pay to third-partyfor coverage provided by insurance carriers, for the insurance coverage provided to our clients and WSEs and the reimbursements we pay to the insurance carriers and third-party administrators forreimbursement of claims payments made on our behalf within our insurance deductible layer, where applicable. We act principally as the service provider to add value in the execution and procurement of these services to our clients. Historically, Net Insurance Service Revenues has served as the primary indicator of our ability to source, add value and offer benefit services to our clients and WSEs through third-partyby insurance carriers or third-party administrators, and has been considered by managementchanges in accrued costs related to be a key performance measure. Historically, Net Service Revenues has also served as a key performance measure as itcontractual obligations with our workers' compensation and health benefit carriers. Our OE consists primarily of corporate payroll.
The table below provides a useful measureview of total revenues for the two mainchanges in components of our revenues calculatedoperating income on a consistentyear-over-year basis. In addition, management believes measuring operating costs as a function of Net Service Revenues has historically provided a useful metric, as we believe it has enabled evaluation of the performance of our business.
We define Total WSEs at the end of a given fiscal period as the total number of WSEs paid in the last calendar month of the fiscal period. Historically, comparing our Total WSEs at the end of a fiscal period to that of prior periods has served as an indicator of our success in growing our business, both organically and through the integration of acquired businesses, and retaining clients. Our Total WSEs paid in the last calendar month of the fiscal period has also historically been a leading indicator of our anticipated revenues for future fiscal periods. |
| | |
| (in millions) | |
| $124 | 2016 Operating Income |
| +$215 | Higher total revenues primarily as a result of an increase in ISR related to health plan participation combined with an increase in fees per service offering. |
| -$52 | Higher insurance costs primarily as a result of an increase in health plan participation. |
| -$70 | Higher OE primarily as a result of an increase in our corporate employees and an increase in the costs associated with internal control remediation. |
| $217 | 2017 Operating Income |
| +$228 | Higher total revenues primarily as a result of a change in the PSR mix of our vertical products, an increase in participation in our insurance services and an increase in fees per service offering. |
| -$144 | Higher insurance costs primarily as a result of an increase in health plan participation. |
| -$50 | Higher OE primarily as a result of an increase in our corporate employees, an increase in costs associated with a marketing campaign and an increase in our investment in operational and process improvements. |
| $251 | 2018 Operating Income |
Total Sales Representatives
Our direct sales force consists of sales representatives who focus on serving clients in specific industry vertical markets. We define Total Sales Representatives at the end of a given fiscal period as the total number of our direct sales force employees at that date. Historically, comparing our Total Sales Representatives at the end of a fiscal period to our Total Sales Representatives at the end of a prior fiscal period has served as an indicator of our success in growing our business. Our Total Sales Representatives at the end of recent fiscal periods has also historically been a key indicator of our ability to increase our revenues in the following fiscal periods.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Impact of Health Care Reform
The Affordable Care Act, or the Act, entails sweeping health care reforms with staggered effective dates from 2010 through 2020, and many provisions of the Act require the issuance of additional guidance from the U.S. Departments of Labor and Health and Human Services, the IRS and the states. A number of key provisions of the Act have begun to take effect over the past three years, including the establishment of state and federal insurance exchanges, insurance market reforms, “play or pay” penalties on applicable large employers and the imposition and assessment of excise taxes on the health insurance industry and reinsurance taxes on insurers and third-party administrators. Collectively, these items have the potential to significantly change the insurance marketplace for employers and how employers offer or provide insurance to employees. We are not yet able to determine the full impact to our business, and to our clients, resulting from the Act. In future periods, the Act may result in increased costs to us and our clients and could affect our ability to attract and retain clients. Additionally, we may be limited or delayed in our ability to increase service fees to offset any associated potential increased costs resulting from compliance with the Act. Furthermore, the uncertainty surrounding the terms and application of the Act may delay or inhibit the decisions of potential clients to outsource their HR needs. As a result, these changes could have a negative impact on our operating results.
Seasonality and Insurance Variability
Our business is affected by cyclicality in business activity and WSE behavior. Historically, we have experienced our highest monthly addition of WSEs, as well as our highest monthly levels of client attrition, in the month of January, primarily because clients that change their payroll service providers tend to do so at the beginning of a calendar year. We also experience higher levels of client attrition in connection with renewals of the health insurance we sponsor for our WSEs, in the event that such renewals result in higher costs to our clients. We have also historically experienced higher insurance claim volumes in the second and third quarters of a fiscal year than in the first and fourth quarters of a fiscal year, as WSEs typically access their health care providers more often in the second and third quarters of a fiscal year, which has negatively impacted our insurance costs in these quarters. We have also experienced variability on a quarterly basis in the amount of our health and workers compensation insurance costs due to the number and severity of insurance claims being unpredictable. These historical trends may change, and other seasonal trends and variability may develop, which would make it more difficult for us to manage our business.
Basis of Presentation and Key Components of Our Results of Operations
TotalProfessional Service Revenues
Our total revenues consist of professional service revenues and insurance service revenues. For 2015 and 2014, 15% and 16% of our total revenues, respectively, consisted of professional service revenues, and 85% and 84% of our total revenues, respectively, consisted of insurance service revenues.
We recognize as professional service revenues the fees we earn for providing our clients with a comprehensive suite of HR professional services, but do not include amounts paid to us by clients as payroll that are paid out to WSEs or amounts withheld and remitted to authorities as taxes. Our clients generally pay us these feesbilled either based on either a fixed fee per WSE per month or per transaction or on a percentage of the WSE’s payroll cost, pursuant to written services agreementsWSEs’ payroll. For those clients that are generally cancelable bybilled on a percentage of WSEs' payroll, as our clients' payrolls increase, our fees also increase. As such, payroll and payroll taxes processed may also be an indicator of our PSR growth.
Our vertical approach provides us orthe flexibility to offer our clients upon 30 days’ prior written notice.in different industries with varied services at different prices. We believe our vertical approach will improve our ability to retain our customers, and potentially reduce the value of using Average WSE and Total WSE counts as indicators of future potential revenue performance. During the year ended December 31, 2018, we experienced a change in mix of our client base due to an increase in client attrition from our Main Street vertical as a result of our planned migration from our legacy (SOI) platform onto our single technology platform, partially offset by new sales in our other verticals, primarily our Technology and Financial Services verticals.
We recognize asalso use the following measure to further analyze changes in PSR:
Volume - the percentage change in period over period Average WSEs,
Mix - the change in composition of Average WSEs within our verticals, and
Rate - the percentage changes in fees for each vertical.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Insurance Service Revenues
ISR consists of insurance service revenues all insurance-relatedservices-related billings and administrative fees collected from clients and withheld from WSEs. We pay premiums toWSE payroll for health benefits and workers' compensation insurance provided by third-party insurance carriers for client and WSE insurance benefits and reimbursecarriers.
We use the insurance carriers and third-party administrators for claims payments made onfollowing measures to analyze changes in ISR:
Volume - the percentage change in period over period Average WSEs,
Mix - all other changes including the composition of our behalfenrolled WSEs within our insurance deductible layer, where applicable, as further described belowservice offerings, and
Rate - the percentage changes in “Insurance Costs”. These premiumsfees associated with each of our insurance service offerings.
Changes attributed to mix in ISR during 2018 and reimbursements2017, when compared to the respective prior year periods, are classified as insurance costs on our statementsprimarily attributed to an increase of operations.health plan participants.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Insurance Costs
Insurance costs include theinsurance premiums we pay to third-partyfor coverage provided by insurance carriers, for insurance coverage provided to clients and WSEs and the reimbursements we pay to the insurance carriers and third-party administrators forreimbursement of claims payments made on our behalf within the insurance deductible layer for those plans that have such a deductible.
Our insurance costs are, in part, a function of the type and terms of agreements that we enter into with the third-partyby insurance carriers that provide TriNet-sponsored insurance plans for our clients and WSEs. Approximately 38% of our 2015
health insurance premiums were for fully-insured policies with respect to which our carriers set the premiums and for which we were not responsible for any deductible, which are referred to as ‘guaranteed cost’ policies. Our future premiums under these guaranteed cost policies will be influenced by the WSE claims activity in prior periods and rate increases by our insurance carriers. The remaining 62% of our 2015 group health insurance premiums, and all of our workers compensation insurance premiums, were for fully-insured policies with respect to which we agree to reimburse our carriers for any claims paid within our agreed-upon deductible layer. Under these policies, WSEs file claims with the carriers, which are responsible for paying the claims up to the maximum coverage under the policies. The carriers andor third-party administrators, then seek reimbursement from us for payments of claims made onand changes in accrued costs related to contractual obligations with our behalf up to our deductible per incident for workers compensation claims, or up to limits to our exposure for individual claims and limits to our maximum aggregate exposure for claims in a given policy year in accordance with the terms of the underlying health insurance policies. In no event are we liable to pay claims directly to WSEs. As we evaluate the claims experience for each fiscal period, we adjust, as we deem necessary, our workersworkers' compensation and health benefits reserves,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 percentage changes in cost trend associated with each of our insurance service offerings, and this
Mix - all other changes including the composition of our enrolled WSEs within our insurance offerings.
Changes in turn hasmix during 2018 and 2017, when compared to the respective prior year periods, are primarily a corresponding impactresult of an increase in health plan participants.
Changes in rate during 2018 and 2017, when compared to the respective prior year periods, are driven by:
higher per enrollee medical costs (medical cost trend) of 7.0% - 8.0% in 2018 and 3.2% in 2017, as a result of higher medical utilization and prescription drug price increases,
administrative cost reductions from insurance carriers, and
favorable prior year development on our insurance costs. Asaccrued workers' compensation costs of $28 million in 2018 and $6 million in 2017, primarily as a result of lower than expected severity development.
In addition, we benefited when we changed one of our carrier contracts from a guaranteed cost contract to a risk-based contract.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Net Service Revenues
NSR provides us with a comparable basis of revenues on a net basis, acts as the basis to allocate resources to different functions and helps us evaluate the effectiveness of our business strategies by each business function.
The primary drivers to the changes in our NSR are presented below.
| |
(1) | Change in NISR during 2017 comprised of an increase in ISR of $204, partially offset by an increase in insurance costs of $52. |
| |
(2) | Change in NISR during 2018 comprised of an increase in ISR of $199, partially offset by an increase in insurance costs of $144. |
NISR margin was 13%, 12% and 8% for 2018, 2017 and 2016, respectively. NISR margin expanded during 2018 and 2017, when compared to the respective prior year periods, as we managed our insurance costs fluctuatewhile we benefited from periodincreased health plan participation. In addition, NSR benefited during 2018 and 2017, when compared to period dependingthe respective prior year periods, from improvements in both PSR and NISR.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
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 manage our operating expenses and allocate resources across different business functions based on percentage of NSR which has decreased to 72% in 2018 from 73% and 81% in 2017 and 2016, respectively.
We had approximately 3,100 corporate employees as of December 31, 2018 in 58 offices across the numberU.S. 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 severityother payroll- and benefits-related costs. Compensation-related expense represented 61% of the claims incurredour OE in 2018, 61% in 2017 and 62% in 2016. Compensation expense for internal employees was and is primarily driven by our WSEs in that periodcontinued efforts to improve our customer service experience, and prior periods. our systems, processes, and internal controls.
We expect our insurance costs to continueOE to increase in absolute dollars on an annual basis for the foreseeable future due to expected growth in WSEs, which will likely mean an increase in the absolute number of claims, and an increase in the cost of claims due to inflation or other factors.
Cost of Providing Services
Cost of providing services consists primarily of costs incurred by us associated with direct client support, such as payroll and benefits processing, professional HR consultants, employee liability insurance and costs associated with assisting clients in managing, processing and responding to employment-related legal claims, benefits and risk management, postage and shipping expenses and consulting expenses. We expect our cost of providing services to continue to increase in absolute dollars on an annual basis for the foreseeable future due to expected growth in WSEs, although as we improve our systems and processes, we expect to gain efficiencies and we expect our cost of providing services as a percentage of total revenues to decline. In addition, our costs of providing services may fluctuate as a percentage of our total revenues from period to period depending on the timing of those expenses.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries, commissions and related variable compensation expenses, commission payments to partners and the cost of marketing programs. Marketing programs consist of advertising, lead generation, marketing events, corporate communications, brand building and product marketing activities, as well as various incentivized partnership and referral programs. We expect our sales and marketing expenses to increase in absolute dollars at a slower rate than in the past three years as we reduce our rate of growth in our direct sales force offset by increased investmentscontinued strategy to improve our sales productivity. In addition,customer service experience, and our salessystems, processes, and marketinginternal controls. These expenses may fluctuate as a percentage of our total revenues from period to periodperiod-to-period depending on the timing of those expenses.when expenses are incurred.
General
We analyze and Administrative Expensespresent our OE based upon the business functions COPS, S&M, G&A and SD&P and depreciation and amortization. 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.
General
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
COPS increased in 2018 and administrative expenses consist2017, when compared to the respective prior year periods, primarily due to increased initiatives to improve the customer experience, enhancing our product offerings and internal control remediation efforts.
S&M decreased in 2018, when compared to the prior year period, primarily driven by $31 million in net capitalized costs related to adoption of compensation-related expenses, legal, accounting and other professional services fees and other general corporate expenses. We expectASC Topic 606, offset by implementation of our general and administrative expensesnew branding campaign. S&M increased in 2017, when compared to continuethe prior year period, primarily due to an increase in absolute dollars forsales-related compensation costs associated with a new sales performance incentive program.
G&A increased in 2018 and 2017, when compared to the foreseeable futurerespective prior year periods, primarily driven by increased headcount supporting our internal control remediation efforts.
SD&P increased in 2018, when compared to the prior year period, primarily due to increasesan increase in expenses associated with enhancing our legalproduct offerings. SD&P increased in 2017, when compared to the prior year period, primarily due to expenses related to investments in technology to support product delivery and financial compliance costs in connection with being a newly public company. As we improve our systems, processesplatform integration and internal controls we expect to gain efficiencies and expect our general and administrative costs as a percentageresult of total revenuesour internal control remediation efforts.
Depreciation expense increased in 2018 and 2017, when compared to decline. In addition, these expenses may fluctuatethe respective prior year periods, as a percentageresult of our total revenues from period to period depending onadditional investment in technology products and platforms and the timingassociated depreciation of those expenses.
Systems Development and Programming Costs
Systems development and programming costs consist primarily of compensation-related expenses for our employees and contractors dedicated to systems development and programming, as well as fees that we pay to third-party consulting firms. We expect our systems development and programming costs to continue to increase in absolute dollars for the foreseeable future as we continue to invest in and improve our technology platform. Over time, we expect our systems development and programming costs to remain relatively consistent as a percentage of our total revenues on an annual basis. In addition, our systems development and programming costs may fluctuate as a percentage of our total revenues from period to period depending on when we incur those costs.
Amortization of Intangible Assetsassets.
Amortization of intangible assets represents costs associated with an acquired company’scompanies' developed technologies, client lists, trade names and contractual agreements. We amortize these intangibles over their respective estimated useful lives using eitherAmortization expense remained consistent in 2018 and decreased 67% to $5 million in 2017, when compared to the straight-line method or the accelerated method.
Depreciation
Depreciation consists primarily of amortizationprior year period, as a result of the cost2016 revision to the expected useful life of softwarecertain client lists and furniture, fixtures and equipment.trademarks primarily related to our previous acquisitions.
We break out the expenses that make up our OE in the chart below:
Other Income (Expense)
Other income (expense) consists primarily of interest expense under our credit facility and capital leases, debt issuance cost amortization,interest and dividend income from investments.
Interest expense, bank fees and other, remained consistent for the years ended 2018, 2017 and 2016.
Interest income increased to $12 million in 2018 from $3 million in 2017. The increase in 2018, when compared to the prior year period, was primarily due to a prepayment premium.change in our investment strategy initiated in the second quarter of 2018.
We intend to continue our new investment strategy, which we expect will improve our future interest income, net income, and our Adjusted EBITDA, accordingly.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Provision for Income Taxes
We are subject to taxation in the United States and Canada. We conduct our business primarily in the United States, and almost all of our clients are U.S. employers with a small percentage of Canadian employers. We also provide services with respect to certain of our U.S. clients’ employees in Canada. The percentage of our total revenues attributable to WSEs in Canada was less than 1% for each of 2015 and 2014. Our effective tax rate differs from the statutory rate primarily due to state taxes, tax credits, non-deductible charges, changes in uncertain tax positions,(ETR) was 20%, 11% and other discrete items. We make estimates and judgments about our future taxable income based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially affected.
Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Changes in valuation allowances are reflected as a component of provision for income taxes.
Results of Operations
The following tables set forth our results of operations for the periods presented and as a percentage of our total revenues and Net Service Revenues for those periods. Period-to-period comparisons of our financial results are not necessarily indicative of financial results to be achieved in future periods.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| | (in thousands) |
| Consolidated Statement of Operations: | | | | | |
| Professional service revenues | $ | 401,287 |
| | $ | 342,074 |
| | $ | 272,372 |
|
| Insurance service revenues | 2,258,001 |
| | 1,851,457 |
| | 1,371,903 |
|
| Total revenues | 2,659,288 |
| | 2,193,531 |
| | 1,644,275 |
|
| Costs and operating expenses: | | | | | |
| Insurance costs | 2,112,376 |
| | 1,686,315 |
| | 1,226,585 |
|
Cost of providing services (exclusive of depreciation and
amortization of intangible assets) (1) | 150,694 |
| | 134,256 |
| | 106,661 |
|
Sales and marketing (1) | 166,759 |
| | 139,997 |
| | 109,183 |
|
General and administrative (1) | 69,626 |
| | 53,926 |
| | 52,455 |
|
Systems development and programming costs (1) | 27,558 |
| | 26,101 |
| | 19,948 |
|
| Amortization of intangible assets | 39,346 |
| | 52,302 |
| | 51,369 |
|
| Depreciation | 14,612 |
| | 13,843 |
| | 11,737 |
|
| Total costs and operating expenses | 2,580,971 |
| | 2,106,740 |
| | 1,577,938 |
|
| Operating income | 78,317 |
| | 86,791 |
| | 66,337 |
|
| Other income (expense): | | | | | |
| Interest expense and bank fees | (19,449 | ) | | (54,193 | ) | | (45,724 | ) |
| Other, net | 1,142 |
| | 478 |
| | 471 |
|
| Income before provision for income taxes | 60,010 |
| | 33,076 |
| | 21,084 |
|
| Provision for income taxes | 28,315 |
| | 17,579 |
| | 7,937 |
|
| Net income | $ | 31,695 |
| | $ | 15,497 |
| | $ | 13,147 |
|
| |
(1) | Includes stock-based compensation expense as follows: |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| | (in thousands) |
| Cost of providing services | $ | 4,244 |
| | $ | 2,658 |
| | $ | 1,193 |
|
| Sales and marketing | 4,490 |
| | 2,755 |
| | 1,284 |
|
| General and administrative | 7,501 |
| | 4,517 |
| | 3,220 |
|
| Systems development and programming costs | 1,688 |
| | 1,030 |
| | 416 |
|
| Total stock-based compensation expense | $ | 17,923 |
| | $ | 10,960 |
| | $ | 6,113 |
|
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Percentage of total revenues: | | | | | |
| Professional service revenues | 15 | % | | 16 | % | | 17 | % |
| Insurance service revenues | 85 | % | | 84 | % | | 83 | % |
| Total revenues | 100 | % | | 100 | % | | 100 | % |
| Costs and operating expenses: | | | | | |
| Insurance costs | 79 | % | | 77 | % | | 75 | % |
| Cost of providing services (exclusive of depreciation and amortization of intangible assets) | 6 | % | | 6 | % | | 6 | % |
| Sales and marketing | 6 | % | | 6 | % | | 7 | % |
| General and administrative | 3 | % | | 2 | % | | 3 | % |
| Systems development and programming costs | 1 | % | | 1 | % | | 1 | % |
| Amortization of intangible assets | 1 | % | | 2 | % | | 3 | % |
| Depreciation | 1 | % | | 1 | % | | 1 | % |
| Total costs and operating expenses | 97 | % | | 96 | % | | 96 | % |
| Operating income | 3 | % | | 4 | % | | 4 | % |
| Other income (expense): | | | | | |
| Interest expense and bank fees | (1 | )% | | (2 | )% | | (3 | )% |
| Other, net | 0 | % | | 0 | % | | 0 | % |
| Income before provision for income taxes | 2 | % | | 2 | % | | 1 | % |
| Provision for income taxes | 1 | % | | 1 | % | | 0 | % |
| Net income | 1 | % | | 1 | % | | 1 | % |
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Percentage of Net Service Revenues: | | | | | |
| Professional service revenues | 73 | % | | 67 | % | | 65 | % |
| Net Insurance Service Revenues | 27 | % | | 33 | % | | 35 | % |
| Net Service Revenues | 100 | % | | 100 | % | | 100 | % |
| Other operating expenses: | | | | | |
| Cost of providing services (exclusive of depreciation and amortization of intangible assets) | 28 | % | | 26 | % | | 26 | % |
| Sales and marketing | 30 | % | | 28 | % | | 26 | % |
| General and administrative | 13 | % | | 11 | % | | 13 | % |
| Systems development and programming costs | 5 | % | | 5 | % | | 5 | % |
| Amortization of intangible assets | 7 | % | | 10 | % | | 12 | % |
| Depreciation | 3 | % | | 3 | % | | 3 | % |
| Total other operating expenses | 86 | % | | 83 | % | | 84 | % |
| Operating income | 14 | % | | 17 | % | | 16 | % |
| Other income (expense): | | | | | |
| Interest expense and bank fees | (4 | )% | | (11 | )% | | (11 | )% |
| Other, net | 0 | % | | 0 | % | | 0 | % |
| Income before provision for income taxes | 11 | % | | 7 | % | | 5 | % |
| Provision for income taxes | 5 | % | | 3 | % | | 2 | % |
| Net income | 6 | % | | 3 | % | | 3 | % |
Years EndedDecember 31, 2015, 2014 and 2013
Total Revenues and Key Operating Metrics
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Change
2015 vs. 2014 | | Change
2014 vs. 2013 |
| | 2015 | | 2014 | | 2013 | | $ | | % | | $ | | % |
| | (in thousands, except percentages) |
| Professional service revenues | $ | 401,287 |
| | $ | 342,074 |
| | $ | 272,372 |
| | $ | 59,213 |
| | 17 | % | | $ | 69,702 |
| | 26 | % |
| Insurance service revenues | 2,258,001 |
| | 1,851,457 |
| | 1,371,903 |
| | 406,544 |
| | 22 | % | | 479,554 |
| | 35 | % |
| Total revenues | $ | 2,659,288 |
| | $ | 2,193,531 |
| | $ | 1,644,275 |
| | $ | 465,757 |
| | 21 | % | | $ | 549,256 |
| | 33 | % |
| | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Change
2015 vs. 2014 | | Change
2014 vs. 2013 |
| | 2015 | | 2014 | | 2013 | | $ | | % | | $ | | % |
| | (in thousands, except percentages) |
| Key operating metrics: | | | | | | | | | | | | | |
| Total WSEs | 324,399 |
| | 288,312 |
| | 231,203 |
| | 36,087 |
| | 13 | % | | 57,109 |
| | 25 | % |
| Total Sales Representatives | 481 |
| | 385 |
| | 300 |
| | 96 |
| | 25 | % | | 85 |
| | 28 | % |
Total revenues for 2015 increased by $465.8 million, or 21%, compared to 2014. Professional service revenues and insurance service revenues represented 15% and 85%, respectively, of total revenues for 2015, compared to 16% and 84%, respectively, of total revenues for 2014.
Professional service revenues increased by $59.2 million, or 17%, compared to 2014. The increase was mainly attributable to our increase in Total WSEs and an increase in WSEs from verticals with higher average revenue per WSE.
Insurance service revenues for 2015 increased by $406.5 million, or 22%, compared to 2014. The increase was primarily due to our increase in Total WSEs and an increase of 5% in average insurance service revenues per WSE.
Total WSEs at December 31, 2015 increased by approximately 36,000, or 13%, compared to Total WSEs at December 31, 2014, which was primarily driven by a net increase in total clients. Our Total Sales Representatives increased from 385 at December 31, 2014 to 481 at December 31, 2015, primarily due to our efforts to grow our sales force.
Total revenues for 2014 increased by $549.3 million, or 33%, compared to 2013. Professional service revenues and insurance service revenues represented 16% and 84%, respectively, of total revenues for 2014, compared to 17% and 83%, respectively, of total revenues for 2013. The increase in total revenues was attributable to the significant growth of our Total WSEs and revenues from our acquisition of Ambrose Employer Group, LLC, or Ambrose, in the third quarter of 2013, as further described below.
Professional service revenues for 2014 increased $69.7 million, or 26%, compared to 2013. The increase was mainly attributable to our increase in Total WSEs and our acquisition of Ambrose in third quarter of 2013, which contributed $15.4 million of professional service revenues during the first half of 2014.
Insurance service revenues for 2014 increased by $479.6 million, or 35%, compared to 2013. The increase was primarily due to our increase in Total WSEs. Additionally, our acquisition of Ambrose contributed $130.4 million of insurance service revenues during the first half of 2014.
Total WSEs at December 31, 2014 increased by approximately 57,000, or 25%, compared to Total WSEs at December 31, 2013. Our Total Sales Representatives increased from 300 at December 31, 2013 to 385 at December 31, 2014.
Insurance Costs
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Change
2015 vs. 2014 | | Change
2014 vs. 2013 |
| | 2015 | | 2014 | | 2013 | | $ | | % | | $ | | % |
| | (in thousands, except percentages) |
| Insurance costs | $ | 2,112,376 |
| | $ | 1,686,315 |
| | $ | 1,226,585 |
| | $ | 426,061 |
| | 25 | % | | $ | 459,730 |
| | 37 | % |
Insurance costs for 2015 increased $426.1 million, or 25%, compared to 2014. The increase resulted from an increase in Total WSEs, the volume and severity of medical claims being unexpectedly higher than our WSE growth, experience and available information would have suggested and, to a lesser extent, increased workers compensation costs per WSE.
Insurance costs for 2014 increased $459.7 million, or 37% compared to 2013, $118.6 million of which was due to our acquisition of Ambrose. The remaining increase resulted from an increase in Total WSEs other than those acquired from Ambrose and a 3% increase in average insurance costs per WSE other than those acquired from Ambrose.
Net Insurance Service Revenues and Net Service Revenues
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Change
2015 vs. 2014 | | Change
2014 vs. 2013 |
| | 2015 | | 2014 | | 2013 | | $ | | % | | $ | | % |
| | (in thousands, except percentages) |
| Insurance service revenues | $ | 2,258,001 |
| | $ | 1,851,457 |
| | $ | 1,371,903 |
| | $ | 406,544 |
| | 22 | % | | $ | 479,554 |
| | 35 | % |
| Less: Insurance costs | 2,112,376 |
| | 1,686,315 |
| | 1,226,585 |
| | 426,061 |
| | 25 | % | | 459,730 |
| | 37 | % |
| Net Insurance Service Revenues | $ | 145,625 |
| | $ | 165,142 |
| | $ | 145,318 |
| | $ | (19,517 | ) | | (12 | )% | | $ | 19,824 |
| | 14 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Change
2015 vs. 2014 | | Change
2014 vs. 2013 |
| | 2015 | | 2014 | | 2013 | | $ | | % | | $ | | % |
| | (in thousands, except percentages) |
| Total revenues | $ | 2,659,288 |
| | $ | 2,193,531 |
| | $ | 1,644,275 |
| | $ | 465,757 |
| | 21 | % | | $ | 549,256 |
| | 33 | % |
| Less: Insurance costs | 2,112,376 |
| | 1,686,315 |
| | 1,226,585 |
| | 426,061 |
| | 25 | % | | 459,730 |
| | 37 | % |
| Net Service Revenues | $ | 546,912 |
| | $ | 507,216 |
| | $ | 417,690 |
| | $ | 39,696 |
| | 8 | % | | $ | 89,526 |
| | 21 | % |
Our Net Insurance Service Revenues for 2015 decreased by $19.5 million, or 12%, as compared to 2014. This decrease resulted from an increase in insurance costs due to the number and size of medical claims being unexpectedly higher than our growth in insurance revenues and unexpectedly higher than our WSE growth, experience and available information would have suggested, and, to a lesser extent, increased workers compensation costs per WSE, offset in part by the increases in our insurance service revenues.
For the reasons set forth above with respect to the increase in our total revenues, offset in part by the increase in our insurance costs, our Net Service Revenues for 2015 increased by $39.7 million, or 8%, as compared to 2014.
Also for the reasons set forth above with respect to total revenues, our Net Insurance Service Revenues for 2014 increased by $19.8 million, or 14%, as compared to 2013, and our Net Service Revenues for 2014 increased by $89.5 million, or 21%, as compared to 2013.
Other Operating Expenses
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Change
2015 vs. 2014 | | Change
2014 vs. 2013 |
| | 2015 | | 2014 | | 2013 | | $ | | % | | $ | | % |
| | (in thousands, except percentages) |
| Cost of providing services | $ | 150,694 |
| | $ | 134,256 |
| | $ | 106,661 |
| | $ | 16,438 |
| | 12 | % | | $ | 27,595 |
| | 26 | % |
| Sales and marketing | 166,759 |
| | 139,997 |
| | 109,183 |
| | 26,762 |
| | 19 | % | | 30,814 |
| | 28 | % |
| General and administrative | 69,626 |
| | 53,926 |
| | 52,455 |
| | 15,700 |
| | 29 | % | | 1,471 |
| | 3 | % |
| Systems development and programming costs | 27,558 |
| | 26,101 |
| | 19,948 |
| | 1,457 |
| | 6 | % | | 6,153 |
| | 31 | % |
| Amortization of intangible assets | 39,346 |
| | 52,302 |
| | 51,369 |
| | (12,956 | ) | | (25 | )% | | 933 |
| | 2 | % |
| Depreciation | 14,612 |
| | 13,843 |
| | 11,737 |
| | 769 |
| | 6 | % | | 2,106 |
| | 18 | % |
| Total operating expenses | $ | 468,595 |
| | $ | 420,425 |
| | $ | 351,353 |
| | $ | 48,170 |
| | 11 | % | | $ | 69,072 |
| | 20 | % |
Cost of Providing Services
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Change
2015 vs. 2014 | | Change
2014 vs. 2013 |
| | 2015 | | 2014 | | 2013 | | $ | | % | | $ | | % |
| | (in thousands, except percentages) |
| Compensation-related costs | $ | 110,658 |
| | $ | 97,423 |
| | $ | 75,941 |
| | $ | 13,235 |
| | 14 | % | | $ | 21,482 |
| | 28 | % |
| Facilities | 7,585 |
| | 7,149 |
| | 5,615 |
| | 436 |
| | 6 | % | | 1,534 |
| | 27 | % |
Information technology and
communication | 9,693 |
| | 8,948 |
| | 8,482 |
| | 745 |
| | 8 | % | | 466 |
| | 5 | % |
| Other expenses | 22,758 |
| | 20,736 |
| | 16,623 |
| | 2,022 |
| | 10 | % | | 4,113 |
| | 25 | % |
| Total cost of providing services | $ | 150,694 |
| | $ | 134,256 |
| | $ | 106,661 |
| | $ | 16,438 |
| | 12 | % | | $ | 27,595 |
| | 26 | % |
Cost of providing services for 2015 increased by $16.4 million, or 12%, compared to 2014. The increase was primarily attributable to a $13.2 million increase in compensation-related costs due to increased headcount to support our growth, which includes a $1.6 million increase in stock-based compensation expense. Other expenses increased $2.0 million, or 10%, mainly in consulting costs incurred to enhance our product offering. Cost of providing services represented 6% of total revenues in each of the years ended December 31, 2015 and 2014. Cost of providing services increased to 28% of Net Service Revenues in 2015 from 26% in 2014.
Cost of providing services for 2014 increased by $27.6 million, or 26%, compared to 2013, primarily due to an increase in compensation-related costs. Compensation-related costs increased by $21.5 million, or 28%, due to increased headcount, including $4.0 million from our acquisition of Ambrose and a $1.5 million increase in stock-based compensation not related to Ambrose. Facilities-related costs increased by $1.5 million, or 27%, due to the growth of our business. Other expenses increased $4.1 million, or 25%, mainly due to increased consulting costs incurred to enhance our product offering. Cost of providing services as a percentage of total revenues and Net Service Revenues remained unchanged at 6% of total revenues and 26% of Net Service Revenues41% for the years ended December 31, 20142018, 2017 and 2013.2016, respectively. The primary drivers to the changes in our ETR are presented below.
43Our ETR increased 9% in 2018 from 11% in 2017 primarily due to the following:
Sales7% net increase due to current year impact and Marketingprior year non-recurring discrete tax benefits resulting from federal legislative changes,
4% increase from a decrease in excess tax benefits and disqualifying dispositions from SBC,
2% increase resulting from the repeal of Section 199 benefits and other non-deductible expenses, |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Change
2015 vs. 2014 | | Change
2014 vs. 2013 |
| | 2015 | | 2014 | | 2013 | | $ | | % | | $ | | % |
| | (in thousands, except percentages) |
| Compensation-related costs | $ | 113,718 |
| | $ | 96,903 |
| | $ | 73,901 |
| | $ | 16,815 |
| | 17 | % | | $ | 23,002 |
| | 31 | % |
| Marketing and advertising | 22,097 |
| | 19,667 |
| | 15,863 |
| | 2,430 |
| | 12 | % | | 3,804 |
| | 24 | % |
| Facilities | 4,511 |
| | 3,832 |
| | 3,155 |
| | 679 |
| | 18 | % | | 677 |
| | 21 | % |
| Other expenses | 26,433 |
| | 19,595 |
| | 16,264 |
| | 6,838 |
| | 35 | % | | 3,331 |
| | 20 | % |
| Total sales and marketing | $ | 166,759 |
| | $ | 139,997 |
| | $ | 109,183 |
| | $ | 26,762 |
| | 19 | % | | $ | 30,814 |
| | 28 | % |
Sales and marketing expenses for 2015 increased by $26.8 million, or 19%,2% decrease in uncertain tax positions (UTP) recorded compared to 2014. Of this increase, $16.8 million was due to compensation-related costs from our growthprior year, and
2% decrease in direct sales channels, primarily the addition of new sales representatives, which includes a $1.7 million increase in stock-based compensation expense. Marketing and advertising expenses increased $2.4 million, or 12%, primarilyother as a result of our effort3% decrease due to focus on market verticals and penetration. In orderchanges related to support the growthongoing litigation, partially offset by a 1% increase due to apportionment changes in sales force, other expenses including travel expenses, meetings, recruiting, training and consulting increased $6.8 million for 2015, or 35% compared to 2014. Sales and marketing represented 6% of total revenues in each of the years ended December 31, 2015 and 2014. As a percentage of Net Service Revenues, sales and marketing expenses increased tohigher tax jurisdictions.
Our ETR decreased 30% in 20152017 from 28%41% in 2014 as a result of lower Net Service Revenues.
Sales and marketing expenses for 2014 increased by $30.8 million, or 28%, compared to 2013. Of this increase, $23.0 million was due to compensation-related costs, including $2.9 million from our acquisition of Ambrose and $18.3 million from our growth in direct sales channels, primarily the addition of new sales representatives, as well as a $1.5 million increase in stock based compensation. Marketing and advertising expenses increased $3.8 million, or 24%, primarily due to our acquisition of Ambrose and as a result of our effort to focus on market verticals and penetration. Other expenses increased $3.3 million, or 20%, primarily due to increased sales travel, meeting and conference activities, as well as other expenses associated with recruiting efforts and information technology. Sales and marketing expenses as a percentage of total revenues decreased to 6% for the year ended December 31, 2014 compared to 7% for the year ended December 31, 2013. As a percentage of Net Service Revenues, sales and marketing expenses increased to 28% for the year ended December 31, 2014 compared to 26% for the year ended December 31, 2013.
General and Administrative
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Change
2015 vs. 2014 | | Change
2014 vs. 2013 |
| | 2015 | | 2014 | | 2013 | | $ | | % | | $ | | % |
| | (in thousands, except percentages) |
| Compensation-related costs | $ | 36,694 |
| | $ | 32,697 |
| | $ | 31,934 |
| | $ | 3,997 |
| | 12 | % | | $ | 763 |
| | 2 | % |
| Legal, accounting and other professional fees | 16,798 |
| | 6,969 |
| | 6,910 |
| | 9,829 |
| | 141 | % | | 59 |
| | 1 | % |
| Other expenses | 16,134 |
| | 14,260 |
| | 13,611 |
| | 1,874 |
| | 13 | % | | 649 |
| | 5 | % |
| Total general and administrative | $ | 69,626 |
| | $ | 53,926 |
| | $ | 52,455 |
| | $ | 15,700 |
| | 29 | % | | $ | 1,471 |
| | 3 | % |
General and administrative expenses for 2015 increased by $15.7 million, or 29%, compared to 2014. Compensation-related costs increased $4.0 million compared to 2014 primarily due to a $3.0 million increase in stock-based compensation expenses. Legal, accounting and other professional fees increased $9.8 million primarily due to costs associated with the implementation of Section 404 of the Sarbanes-Oxley Act, which amounted to $5.7 million for 2015. General and administrative expenses increased to 3% as a percentage of total revenues in 2015 from 2% in 2014. As a percentage of Net Service Revenues, general and administrative expenses increased to 13% for 2015 from 11% in 2014 as a result of lower Net Service Revenues.
General and administrative expenses for 2014, increased by $1.5 million, or 3%, compared to 2013. Of these expenses, compensation-related costs increased $0.8 million compared to 2013. General and administrative expenses decreased to 2% of total revenues, or 11% of Net Service Revenues, for the year ended December 31, 2014, from 3% of total revenues, or 13% of Net Service Revenues, in the same period of the prior year as a result of efficiencies realized subsequent to our acquisitions.
Systems Development and Programming
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Change
2015 vs. 2014 | | Change
2014 vs. 2013 |
| | 2015 | | 2014 | | 2013 | | $ | | % | | $ | | % |
| | (in thousands, except percentages) |
| Compensation-related costs | $ | 18,826 |
| | $ | 20,766 |
| | $ | 15,493 |
| | $ | (1,940 | ) | | (9 | )% | | $ | 5,273 |
| | 34 | % |
| Other expenses | 8,732 |
| | 5,335 |
| | 4,455 |
| | 3,397 |
| | 64 | % | | 880 |
| | 20 | % |
Total systems development and
programming costs | $ | 27,558 |
| | $ | 26,101 |
| | $ | 19,948 |
| | $ | 1,457 |
| | 6 | % | | $ | 6,153 |
| | 31 | % |
Our systems development and programming costs for 2015 increased by $1.5 million, or 6%, compared to 2014. The increase was primarily due to an increase in consulting expenses to support and enhance our technology product delivery, offset by decreased compensation-related costs. Despite the increase, systems development and programming costs represented 1% of total revenues in each of the years ended December 31, 2015 and 2014. As a percentage of Net Service Revenues, systems development and programming costs represented 5% in each of the years ended December 31, 2015 and 2014.
Systems development and programming costs for 2014 increased by $6.2 million, or 31%, compared to 2013. The increase was mainly due to an increase in compensation-related costs resulting from the increase in headcount to support and enhance our technology product delivery. Despite these increases, systems development and programming costs remained unchanged at 1% of total revenues, or 5% of Net Service Revenues, for the years ended December 31, 2014 and 2013.
Amortization of Intangible Assets and Depreciation
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Change
2015 vs. 2014 | | Change
2014 vs. 2013 |
| | 2015 | | 2014 | | 2013 | | $ | | % | | $ | | % |
| | (in thousands, except percentages) |
| Amortization of intangible assets | $ | 39,346 |
| | $ | 52,302 |
| | $ | 51,369 |
| | $ | (12,956 | ) | | (25 | )% | | $ | 933 |
| | 2 | % |
| Depreciation | $ | 14,612 |
| | $ | 13,843 |
| | $ | 11,737 |
| | $ | 769 |
| | 6 | % | | $ | 2,106 |
| | 18 | % |
In 2015, amortization of intangible assets decreased by $13.0 million, or 25%, as a result of the expiration of useful lives of certain client lists and trademarks related to our previous acquisitions. Depreciation expense was relatively flat compared to 2014.
In 2014, amortization of intangible assets expense increased by $0.9 million, or 2%, primarily attributable to our acquisition of Ambrose in the third quarter of 2013, offset by expiration of useful lives of certain client lists and non-compete agreements related to our previous acquisitions. Depreciation expense increased by $2.1 million, or 18%, compared to 2013, primarily attributable to depreciation from our acquisition of Ambrose.
We accelerated depreciation expenses of $0.4 million, $0.9 million, and $0.8 million in the years ended December 31, 2015, 2014, and 2013, respectively, due to significant changes in the extent and manner in which certain assets were expected to be used.
Other Income (Expense)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Change
2015 vs. 2014 | | Change
2014 vs. 2013 |
| | 2015 | | 2014 | | 2013 | | $ | | % | | $ | | % |
| | (in thousands, except percentages) |
| Interest expense and bank fees | $ | (19,449 | ) | | $ | (54,193 | ) | | $ | (45,724 | ) | | $ | 34,744 |
| | (64 | )% | | $ | (8,469 | ) | | 19 | % |
| Other, net | $ | 1,142 |
| | $ | 478 |
| | $ | 471 |
| | $ | 664 |
| | 139 | % | | $ | 7 |
| | 1 | % |
Other income (expense) was primarily the result of interest expense under our credit facilities. In March 2014, we repaid $216.6 million of these facilities from the proceeds of our initial public offering, or IPO, which led to lower interest expense in the year ended December 31, 2015 as a result of the lower debt level compared to the same period of the prior year. For the year ended December 31, 2015 interest expense decreased by $12.6 million and amortization of deferred issuance costs decreased by $6.2 million. Additionally, the year ended December 31, 2014 included $12.1 million in deferred issuance cost write-offs and a $3.8 million debt prepayment premium.
Provision for Income Taxes
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Change
2015 vs. 2014 | | Change
2014 vs. 2013 |
| | 2015 | | 2014 | | 2013 | | $ | | % | | $ | | % |
| | (in thousands, except percentages) |
| Provision for income taxes | $ | 28,315 |
| | $ | 17,579 |
| | $ | 7,937 |
| | $ | 10,736 |
| | 61 | % | | $ | 9,642 |
| | 121 | % |
| Effective Income Tax Rate | 47.2 | % | | 53.2 | % | | 37.6 | % | | | | | | | | |
Our provision for income taxes for 2015 increased by $10.7 million compared to 20142016 primarily due to the increase in our pre-tax income. Our effective tax rate decreased from 53.2% for 2014following:
20% decrease attributable to 47.2% in 2015 due to disqualifying dispositions on previously non-deductible stock-based compensation and tax credits offset in part by increased state taxes of 2.8% due to state legislative changes. Of the $10.7 million increase, approximately $3.1 million in discrete tax expense representing 5.2% of pre-tax income is attributed to the revaluation of deferred taxes resulting from federal legislative changes pursuant to the TCJA passed in December 2017,
8% decrease due to a discrete tax benefit from recognizing excess tax benefits from SBC,
4% decrease resulting from the recognition of Section 199 benefits and decreased non-deductible expenses, and
3% decrease related to tax credits and excludable income for state legislative change enacted in the second quarter ended June 30, 2015.tax purposes.
Our provision for income taxes for 2014 increased by $9.6 million compared to 2013 primarily due to the increase in our pre-tax income and our effective tax rate increased from 37.6% for 2013 to 53.2% in 2014, primarily due to non-deductible stock-based compensation, and the revaluation of deferred taxes, based on regulatory state legislative changes enacted during the first quarter ended March 31, 2014. Of the $9.6 million increase, $2.6 million in discrete tax expense representing 7.8% of pretax income is attributed to the revaluation of deferred taxes due to a state legislative change. The remainder of the increase is primarily due to a release of uncertain tax positions recognized for the first quarter ended March 31, 2013.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Liquidity and Capital Resources
Our principal source ofLiquidity
We believe that we have sufficient liquidity for operations is derived from cash provided by operating activities. We rely on cash provided by operating activitiesand capital resources to satisfy future requirements and meet our short-term liquidity requirements, which primarily relateobligations to the payment of corporateour 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 operating costs,benefit programs. Although we are not subject to regulatory restrictions, 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:
|
| | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2018 | 2017 |
| (in millions) | Corporate | WSE | Total | Corporate | WSE | Total |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 228 |
| $ | — |
| $ | 228 |
| $ | 336 |
| $ | — |
| $ | 336 |
|
| Investments | 54 |
| — |
| 54 |
| — |
| — |
| — |
|
| Restricted cash, cash equivalents and investments | 15 |
| 927 |
| 942 |
| 15 |
| 1,265 |
| 1,280 |
|
| Other current assets | 36 |
| 386 |
| 422 |
| 15 |
| 360 |
| 375 |
|
| Total current assets | $ | 333 |
| $ | 1,313 |
| $ | 1,646 |
| $ | 366 |
| $ | 1,625 |
| $ | 1,991 |
|
| Total current liabilities | $ | 112 |
| $ | 1,313 |
| $ | 1,425 |
| $ | 139 |
| $ | 1,618 |
| $ | 1,757 |
|
| Working capital | $ | 221 |
| $ | — |
| $ | 221 |
| $ | 227 |
| $ | 7 |
| $ | 234 |
|
Working capital expenditures. Our credit facilities have been usedfor WSEs activities
We designate funds to fund acquisitions and special dividends, andensure that we have not relied on these facilitiesadequate current assets to provide liquidity forsatisfy our operations. Our cash flow related tocurrent obligations associated with WSEs. We manage our WSE payroll and benefits is generally matched by advance collectionobligations through collections of payments from our clients. To minimize the credit riskclients which generally occurs two to three days in advance of client payroll dates. We regularly review our short-term obligations associated with remitting the payroll and associated taxes and benefits costs, we require clients to prefund theour WSEs (such as payroll and related payroll taxes, insurance premium and benefits costs. Toclaim 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 extent this does not occur, our resultsbeginning of operationseach plan year and cash flowwe may be negatively impacted.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 payment of claims.
WSE-related liabilities can fluctuate significantly due to various factors, including the day of the week on which a client payroll period ends, the existence of holidays at or immediately following a client payroll period-end and various federal and state compliance calendars. Working capital for corporate purposes
We report the advance collection fromuse our clients as payroll funds collected within WSE-related assets on our balance sheet. Ouravailable cash and cash equivalents reported onto satisfy our balance sheet represent our corporate cash available
to meet corporate liquidity requirements, capital spendingoperational and expansion plans, potential acquisitions, debt serviceregulatory requirements and other corporate operating cash needs.
The following table shows ourto fund capital resources for the stated periods:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 |
| | (in thousands) |
| Cash and cash equivalents | $ | 166,178 |
| | $ | 134,341 |
|
| Working capital: |
|
| |
|
|
Corporate working capital(1) | 108,539 |
| | 116,709 |
|
| WSE-related assets, net of WSE-related liabilities | 3,889 |
| | 4,581 |
|
(1) In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. We elected to early adopt and retrospectively apply the provisions of the amendment. Historical amounts above are conformed to the current presentation. See Note 11 for further details.
We had cash and cash equivalents of $166.2 million and $134.3 million as of December 31, 2015 and 2014, respectively. The increase was primarily due to the cash generated from operations during the year ended December 31, 2015.expenditures. We believe that our existing corporate cash and cash equivalents and positive working capital and cash provided by operating activities will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.
WSE-relatedCapital Resources
Sources of Funds
We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments through existing liquid assets, consist of cash and investments restricted for current workers compensation deductible payments, payroll funds collected, accounts receivable, unbilled revenues and refundable or prepaid amounts related to our sponsored workers compensation and health plan programs. WSE-related liabilities consist of client prepayments, wages and payroll taxes accrued and payable and liabilities related to our sponsored workers compensation and health plan programs resulting from deductible reserves and premium amounts due to providers for enrolled employees expected to be disbursed within the next 12 months.
Our working capital asset accounts consist of cash and cash equivalents, accounts receivables, prepaid assets, WSE-related assets and other current assets. Liabilities included within working capital include accounts payable, accrued expenses, WSE-related liabilities and other current liabilities and the current portion of our notes payable. As of December 31, 2015, we had $108.5 million in corporate working capital and $3.9 million in WSE-related assets net of WSE-related liabilities. Corporate working capital decreased by $8.2 million as compared to December 31, 2014 primarily due to recording a $12.7 million anticipated debt prepayment as a result of excesscontinuing cash flows requirements in accordance withfrom corporate operating activities, our credit facility. Included in WSE-related assets as of December 31, 2015 is $0.9 billion of payroll funds collected from clients, which represents cash available to settle short-term WSE-related operating liabilities. Changes in WSE-related assets and liabilities are included in operating cash flow in our consolidated statement of cash flows.
Under the terms of the agreements with our workers compensation insurance carriers, we are required to maintain collateral accounts to fund the carriers’ claim payments within our deductible layer. The collateral amount is determined at the beginning of each plan year based on estimated workers compensation wages and claim histories and the insurance carrier may adjust the balance when facts and circumstances change. As of December 31, 2015, we had $92.9 million of restricted cash included in WSE-related assets and $101.8 million of marketable securities designated as long-term restricted cash and investments on the consolidated balance sheet. Our restricted marketable securities investment portfolio represents U.S. long-term treasuries and mutual funds. We regularly review the collateral balances with our insurance carriers, and anticipate funding further collateral as needed based on program development.
At December 31, 2015, we had approximately $499.6 million of outstanding debtborrowing capacity under our credit facility. On July 9, 2014, we amended and restated our first lien credit facility pursuant to an amended and restated first lien credit agreement, or the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement provides for: (i) $375 million principal amount of “tranche A term loans,” (ii) $200 million principal amount of “tranche B term loans,” and (iii) a revolving credit facility and the potential issuance of $75 million. The tranchedebt or equity securities.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
In June 2018 we refinanced approximately $415 million of, and repaid in full, our outstanding A and A-2 term loans and the(together, our 2014 Term Loans) under our previous credit agreement (our 2014 Credit Agreement). Our 2014 Term Loans were replaced with a $425 million term loan A (our 2018 Term Loan) under our new credit agreement (our 2018 Credit Agreement). We also replaced our previous $75 million revolving credit facility will mature on July 9, 2019. The tranche B term loans will mature on July 9, 2017. Loansestablished under the revolving credit facility are expected to be used for working capital and other general corporate purposes. The repayment of obligations under the Amended and Restatedour 2014 Credit Agreement could adversely affect our liquidity if we have not generated sufficient cash from our operations to meet these obligations when they are due.
Cash Flows
We generated positive cash flows from operating activities during 2015, 2014 and 2013. We also have the ability to generate cash through our financing arrangements under our credit facility to meet short-term funding requirements related to WSE-related obligations. The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| | (in thousands) |
| Net cash provided by (used in): | | | | | |
| Operating activities | $ | 130,599 |
| | $ | 151,899 |
| | $ | 100,721 |
|
| Investing activities | (37,689 | ) | | (45,427 | ) | | (212,438 | ) |
| Financing activities | (60,752 | ) | | (66,372 | ) | | 142,377 |
|
| Effect of exchange rates on cash and cash equivalents | (321 | ) | | (115 | ) | | (53 | ) |
| Net increase in cash and cash equivalents | $ | 31,837 |
| | $ | 39,985 |
| | $ | 30,607 |
|
Cash Flows from Operating Activities
Net cash provided by operating activities was $130.6with a $250 million $151.9 million and $100.7 million for the years ended December 31, 2015, 2014 and 2013, respectively. Historically, cash provided by operating activities has been affected by our net income, adjusted for non-cash expense items (such as depreciation, amortization of intangible assets, deferred income taxes, and expense associated with stock-based compensation) and changes in working capital accounts. The fluctuation in our working capital accounts was primarily driven by WSE-related assets and liabilities, deferred taxes and increased workers compensation liabilities.
Cash Flows from Investing Activities
Net cash used in investing activities was $37.7 million in 2015, as compared to $45.4 million in 2014 and $212.4 million in 2013. In 2015, we invested $41.9 million in debt securities and collected $27.6 million on maturing of debt securities, compared to investing $24.9 million in debt securities in 2014. Investments to purchase property and equipment were $18.6 million for 2015 compared to $20.6 million for the same period of 2014. In 2015, we used $4.8 million for an acquisition of a business, while there were no such acquisitions in 2014. In 2013, we used $195.0 million (net of cash acquired) for the acquisition of Ambrose.
Cash Flows from Financing Activities
Net cash used in financing activities was $60.8 million in 2015, compared to $66.4 million in 2014 and $142.4 million provided by financing activities in 2013. Net cash used in financing activities during 2015 consisted of $45.3 million in loan repayments and $48.4 million in stock repurchases, offset by excess tax benefit of $20.7 million from equity incentive plan activity, $7.2 million received in connection with the exercise of stock options and $5.3 million in proceeds from issuance of our common stock for the employee stock purchase plan. Net cash used in financing activities during 2014 was largely attributable to $273.6 million in loan repayments, $15.0 million in common stock repurchases and $11.1 million in payments for debt issuance costs, offset by $217.8 million of net proceeds received from the issuance of common stock in our IPO, $2.2 million received in connection with the exercise of stock options and $3.4 million in proceeds from issuance of our common stock for the employee stock purchase plan. Net cash provided by financing activities during 2013 was largely attributable to our borrowing of $970.0 million under our credit facility and receipt of $7.1 million in proceeds from stock option exercises, offset by $451.7 million in repayments of notes payable, the payment of a $357.6 million special dividend, $6.0 million in common stock repurchases and the payment of $25.7 million in debt issuance costs.
2014 Credit Facility
In August 2013, we, as guarantor, our subsidiary TriNet HR Corporation, as borrower, and certain of our other subsidiaries as subsidiary guarantors entered into two senior secured credit facilities: (i) a $705.0 million first lien credit facility with JPMorgan Chase Bank, N.A., as administrative agent, and (ii) a $190.0 million second lien credit facility with Wilmington Trust, National Association, as administrative agent. Proceeds from our IPO were used to fully repay the $190.0 million second lien credit facility, which resulted in a prepayment premium of $3.8 million, and to repay $25.0 million of the first lien credit
tranche B-1 term loan. Additionally, the remaining balance of the loan fees associated with the second lien credit facility and a portion of the loan fees associated with the first lien credit facility were fully amortized in March 2014 for a charge of $5.0 million. In July 2014, we amended and restated our first lien credit facility pursuant to an amended and restated first lien credit agreement, or the Amended and Restated Credit Agreement.
The Amended and Restated Credit Agreement provides for: (i) $375 million principal amount of “tranche A term loans,” (ii) $200 million principal amount of “tranche B term loans,” and (iii) a revolving credit facility of $75 million, which we refer to as the revolving credit facility. The proceeds of the tranche A term loans were used to refinance in part the tranche B-2 term loans outstanding under the original first lien credit facility. The proceeds of the tranche B term loans were used to (i) refinance the remaining tranche B-2 term loans outstanding under the original first lien credit facility, (ii) refinance other amounts outstanding under the original first lien credit facility and (iii) pay fees and expenses related thereto. The revolving credit facility replaced the revolving credit facility under the original first lien credit facility. The $75.0 million revolving credit facility includes capacity for a $40.0 million letter of credit facility and a $10.0 million swingline facility. The total unused portion of the revolving credit facility was $59.5 million as of December 31, 2015. As of December 31, 2015, we had $499.6 million in outstanding indebtedness under the Amended and Restatedour 2018 Credit Agreement all of(our 2018 Revolver), which was secured indebtedness of our subsidiary, TriNet HR Corporation, guaranteed on a senior secured basis by us and certain of our subsidiaries.
In connection with the Amended and Restated Credit Agreement, we incurred $11.1 million of debt issuance costs. We deferred $8.0 million of the costs, which are being amortized over the term of the credit facility. The remaining $3.1 million of costs were recorded to interest expense and bank fees. Additionally, we recorded a $9.0 million loss on extinguishment of debt to write-off deferred issuance costs associated with the original first lien credit facility, which was also recorded to interest expense and bank fees. The remaining $6.1 million of loan fees associated with the previous facility were deemed towill be modified and continue to be amortized over the revised remaining term of the Amended and Restated Credit Agreement.
The tranche A term loans and the revolving credit facility will mature on July 9, 2019. The tranche B term loans will mature on July 9, 2017. Loans under the revolving credit facility are expected to be used solely for working capital and other general corporate purposes.
The tranche A term loansEach of our 2018 Term Loan and loans under the revolving credit facilityour 2018 Revolver mature in June 2023 and bear interest, at our option, either at a rate equal to either the LIBOR rate, plus an applicable margin equal to 2.75% per annum, or the prime lending rate, plus an applicable margin equal to 1.75% per annum. The applicable margins for the tranche A term loans and loans under the revolving credit facility are subject to specified rate adjustments of 0.25% based upon our total leverage ratio. The tranche B term loans bear interest, at our option, at a rate equal to eitherchange in the LIBOR rate, plus an applicable margin equal to 2.75% per annum or the prime lending rate, plus an applicable margin equal to 1.75% per annum. We are required to pay a commitment fee of 0.50%, subject to decrease to 0.375%future based on our total leverage ratio, on the daily unused amount of the commitments under the revolving credit facility, as well as fronting fees and other customary fees for letters of credit issued under the revolving credit facility.
We are permitted to make voluntary prepayments at any time without payment of a premium, except that a 1% premium would apply to a repricing of the tranche B term loans effected on or prior to the six-month anniversary of the effective date for the amendment and restatement of our credit facility. We are required to make mandatory prepayments of term loans (without payment of a premium) with (i) net cash proceeds from issuances of debt (other than certain permitted debt), (ii) net cash proceeds from certain non-ordinary course asset sales and casualty and condemnation proceeds (subject to reinvestment rights and other exceptions), and (iii) beginning with the fiscal year ending December 31, 2015, 50% of our excess cash flow (subject to decrease to (x) 25% if our total leverage ratio, as of the last day of such fiscal year is less than 3.75 to 1.0 and equal to or greater than 3.00 to 1.0, and (y) 0% ifset forth in our total leverage ratio as2018 Credit Agreement. As of the last day of such fiscal year is less than 3.00 to 1.0), provided that we may defer prepayments based on excess cash flow to the extent such payments would result our GAAP working capital being less than $10 million (after giving effect to such prepayments). We recorded a current liability of $12.7 million at December 31, 2015 in anticipation of this prepayment.
The tranche A term loans will be repaid in equal quarterly installments in an aggregate annual amount equal to: (i) beginning on December 31, 2014 to December 31, 2016, 5% of the original principal amount thereof, (ii) beginning on December 31, 2016 to December 31, 2018, 7.5%$414 million was outstanding under our 2018 Term Loan and the full amount of our 2018 Revolver, less approximately $16 million representing an undrawn letter of credit, was available.
Cash Flows
In January 2018, we adopted ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash, which significantly impacted our net cash provided by (used in) operating activities as changes in our restricted cash and cash equivalents balances are no longer included within operating cash activities.
The following table presents our cash flow activities for the stated periods:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 |
| | Corporate | WSE | Total | Corporate | WSE | Total | Corporate | WSE | Total |
| Net cash provided by (used in): | | | | | | | | | |
Operating activities (1) | $ | 234 |
| $ | (338 | ) | $ | (104 | ) | $ | 299 |
| $ | 307 |
| $ | 606 |
| $ | 189 |
| $ | 3 |
| $ | 192 |
|
| Investing activities | (200 | ) | — |
| (200 | ) | (24 | ) | — |
| (24 | ) | (27 | ) | — |
| (27 | ) |
| Financing activities | (85 | ) | — |
| (85 | ) | (77 | ) | — |
| (77 | ) | (104 | ) | — |
| (104 | ) |
| Net increase (decrease) in cash and cash equivalents, unrestricted and restricted | $ | (51 | ) | $ | (338 | ) | $ | (389 | ) | $ | 198 |
| $ | 307 |
| $ | 505 |
| $ | 58 |
| $ | 3 |
| $ | 61 |
|
| Cash and cash equivalents, unrestricted and restricted: | | | | | | | | | |
| Beginning of period | $ | 476 |
| $ | 1,262 |
| $ | 1,738 |
| $ | 278 |
| $ | 955 |
| $ | 1,233 |
| $ | 220 |
| $ | 952 |
| $ | 1,172 |
|
| End of period | $ | 425 |
| $ | 924 |
| $ | 1,349 |
| $ | 476 |
| $ | 1,262 |
| $ | 1,738 |
| $ | 278 |
| $ | 955 |
| $ | 1,233 |
|
| | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents: | | | | | | | | | |
| Unrestricted | $ | (108 | ) | $ | — |
| $ | (108 | ) | $ | 152 |
| $ | — |
| $ | 152 |
| $ | 18 |
| $ | — |
| $ | 18 |
|
| Restricted | 57 |
| (338 | ) | (281 | ) | 46 |
| 307 |
| 353 |
| 40 |
| 3 |
| 43 |
|
| |
| (1) | Prior year balances were retrospectively adjusted for ASU 2016-18. |
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Operating Activities
Components of net cash provided by operating activities are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 |
| | Corporate | WSE | Total | Corporate | WSE | Total | Corporate | WSE | Total |
| Net income | $ | 192 |
| $ | — |
| $ | 192 |
| $ | 178 |
| $ | — |
| $ | 178 |
| $ | 61 |
| $ | — |
| $ | 61 |
|
| Depreciation and amortization | 46 |
| — |
| 46 |
| 35 |
| — |
| 35 |
| 39 |
| — |
| 39 |
|
| Stock-based compensation expense | 44 |
| — |
| 44 |
| 32 |
| — |
| 32 |
| 26 |
| — |
| 26 |
|
| Payment of interest | (17 | ) | — |
| (17 | ) | (16 | ) | — |
| (16 | ) | (15 | ) | — |
| (15 | ) |
| Income tax payments, net | (49 | ) | — |
| (49 | ) | (2 | ) | — |
| (2 | ) | (39 | ) | — |
| (39 | ) |
| Collateral (paid to) refunded from insurance carriers, net | — |
| 26 |
| 26 |
| — |
| (3 | ) | (3 | ) | — |
| (25 | ) | (25 | ) |
| Changes in deferred taxes | 1 |
| — |
| 1 |
| (25 | ) | — |
| (25 | ) | 42 |
| — |
| 42 |
|
| Changes in other operating assets | (44 | ) | (27 | ) | (71 | ) | 36 |
| (36 | ) | — |
| (38 | ) | 92 |
| 54 |
|
| Changes in other operating liabilities | 61 |
| (337 | ) | (276 | ) | 61 |
| 346 |
| 407 |
| 113 |
| (64 | ) | 49 |
|
Net cash provided by (used in) operating activities (1) | $ | 234 |
| $ | (338 | ) | $ | (104 | ) | $ | 299 |
| $ | 307 |
| $ | 606 |
| $ | 189 |
| $ | 3 |
| $ | 192 |
|
| |
| (1) | Prior year balances were retrospectively adjusted for ASU 2016-18, where applicable. |
Year-over-year fluctuation in net cash used in operating activities for WSE purposes was primarily driven by timing of client payments, payments of payroll and payroll taxes, and collateral funding 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.
Corporate operating cash flows decreased in 2018 as compared to 2017 primarily due to an increase in income tax payments in 2018, partially offset by 8% increase in our net income.
Corporate operating cash flows increased in 2017 as compared to 2016 due to a 190% increase in our net income, decrease in income tax payments, partially offset by changes in deferred tax liabilities primarily associated with the revaluation of deferred taxes resulting from the passage of the original principal amount thereof,TCJA in 2017.
Investing Activities
Net cash used in investing activities for the periods presented below primarily consisted of purchases of investments and (iii) beginning oncapital expenditures, partially offset by proceeds from the sale and maturity of investments.
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 |
| Investments: | | | |
| Purchases of marketable securities | $ | (258 | ) | $ | — |
| $ | (15 | ) |
| Proceeds from sale and maturity of marketable securities | 101 |
| 14 |
| 28 |
|
| Cash (used in) provided by investments | $ | (157 | ) | $ | 14 |
| $ | 13 |
|
| | | | |
| Capital expenditures: | | | |
| Software and hardware | $ | 30 |
| $ | 28 |
| $ | 31 |
|
| Office furniture, equipment and leasehold improvements | 13 |
| 10 |
| 9 |
|
| Cash used in capital expenditures | $ | 43 |
| $ | 38 |
| $ | 40 |
|
Investments
During the year ended December 31, 2018, we invested a portion of available cash in investment-grade securities with effective maturities less than five years that are classified on our balance sheet as investments. As of December 31, 2018, we had approximately $189 million in investments.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
We also invest funds held as collateral to June 30, 2019, 10%satisfy our long-term obligation towards workers' compensation liabilities in U.S. long-term treasuries. 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.
As of December 31, 2018, we held approximately $1.5 billion in cash, cash equivalents and investments. Refer to Note 2 in Part II, Item 8. Financial Statements and Supplemental Data, in this Form 10-K for a summary of these funds.
Capital Expenditures
During the original principal amount thereofyears ended December 31, 2018, 2017 and 2016 we continued to make investments in software and hardware, enhanced existing products and technology platform, and implemented legacy platform migrations. We also incurred expenses related to the build out of our corporate headquarters and our technology and client service centers. We expect capital investments in our software and hardware to continue in the future.
Financing Activities
Net cash used in financing activities in the years ended December 31, 2018, 2017 and 2016 consisted of our debt and equity-related activities.
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 |
| Financing activities | | | |
| Repurchase of common stock, net of issuance | $ | 69 |
| $ | 39 |
| $ | 67 |
|
| Repayment of borrowings | 22 |
| 38 |
| 37 |
|
| Net proceeds from issuance of debt | (6 | ) | — |
| — |
|
| Cash used in financing activities | $ | 85 |
| $ | 77 |
| $ | 104 |
|
In the year ended December 31, 2018 we refinanced our 2014 Term Loans with any remaining balance payable on the final maturity dateour 2018 Term Loan, as discussed above in this MD&A. For additional information refer to Note 7 in Part II, Item 8. Financial Statements and Supplementary Data, of the tranche A term loans. The tranche B term loans will be repaid in equal quarterly installments in an aggregate annual amount equal to 1% of the principal amount thereof, with any remaining balance payable on the final maturity date of the tranche B term loans.this Form 10-K.
Our credit facilityboard of directors authorizes common stock repurchases through an ongoing program initiated in May 2014, primarily to offset dilution from the issuance of stock under our equity-based incentive plan and employee stock purchase plan. During the year ended December 31, 2018, we repurchased 1,190,995 shares of our common stock for approximately $61 million through our stock repurchase program. As of December 31, 2018, approximately $75 million remained available for repurchase under all authorizations by our board of directors.
On February 6, 2019, our board of directors authorized a $300 million incremental increase to our ongoing stock repurchase program initiated in May 2014. We use this program to return value to our stockholders and to offset dilution from the issuance of stock under our equity-based incentive plan and employee purchase plan. We plan to use current cash and cash generated from ongoing operating activities to fund this share repurchase program.
Covenants
Our 2018 Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to us, and our subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers,
dispositions, prepayment of other indebtedness (other than our 2018 Term Loan and our 2018 Revolver), dividends, distributions and other distributions. Our credit facilitytransactions with affiliates. It also contains financial covenants thatrequiring us to maintain certain minimum interest coverage and maximum total leverage ratios, as set forth in our 2018 Credit Agreement. These covenants took effect on June 30, 2018 and require us to maintain a minimum consolidated interest coverage ratio of at least 3.50 to 1.00 at each quarter end and a maximum total leverage ratio.ratio of 3.50 to 1.00. In the event of an acquisition the maximum ratio can be raised to 4.00 to 1.00 for four consecutive quarters. We were in compliance with these financial covenants under the credit facilities at December 31, 2018. For more details on the covenants under our 2018 Credit Agreement, refer to Note 7 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
In order to meet various U.S state licensing requirements and maintain accreditation by the ESAC, we are subject to various minimum working capital and net worth requirements. As of December 31, 2018 and 2017, we believe we have fully complied in all material respects with all applicable state regulations regarding minimum net worth, working capital and all other financial and legal requirements. Further, we have maintained positive working capital throughout each of the periods covered by the financial statements.
Contractual Obligations and Commitments
The following table summarizes our significant contractual obligations and commercial commitments as of December 31, 2015, and the effect they are expected to have on our liquidity and capital resources (in thousands):2018:
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| Long-term debt obligations | $ | 499,563 |
| | $ | 35,289 |
| | $ | 192,399 |
| | $ | 271,875 |
| | $ | — |
|
| Interest on debt obligations | 53,078 |
| | 17,597 |
| | 29,144 |
| | 6,337 |
| | — |
|
| Workers compensation liabilities | 198,274 |
| | 70,888 |
| | 46,218 |
| | 23,077 |
| | 58,091 |
|
| Capital lease obligations | 268 |
| | 82 |
| | 145 |
| | 41 |
| | — |
|
| Operating lease obligations | 50,323 |
| | 11,882 |
| | 20,072 |
| | 15,762 |
| | 2,607 |
|
| Purchase obligations | 14,116 |
| | 8,587 |
| | 5,529 |
| | — |
| | — |
|
| Uncertain tax positions | 616 |
| | 18 |
| | 598 |
| | — |
| | — |
|
| Total | $ | 816,238 |
| | $ | 144,343 |
| | $ | 294,105 |
| | $ | 317,092 |
| | $ | 60,698 |
|
|
| | | | | | | | | | | | | | | |
| | Payments Due by Period |
| (in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years |
Debt obligations (1) | $ | 483 |
| $ | 39 |
| $ | 75 |
| $ | 369 |
| $ | — |
|
Workers' compensation obligations (2) | 241 |
| 73 |
| 57 |
| 37 |
| 74 |
|
Operating lease obligations (3) | 88 |
| 18 |
| 28 |
| 17 |
| 25 |
|
Purchase obligations (4) | 42 |
| 31 |
| 11 |
| — |
| — |
|
Uncertain tax positions (5) | 6 |
| 1 |
| 5 |
| — |
| — |
|
| Total | $ | 860 |
| $ | 162 |
| $ | 176 |
| $ | 423 |
| $ | 99 |
|
Long-term debt obligations(1) Includes principal and interest on debt obligations reflect the terms of the Amended and Restated Credit Agreement discussed above. The projected interest payments incorporate the forward LIBOR curve as of December 31, 2015.our term loans, see Note 7 in Part II, Item 8. Financial Statements and Supplementary Data of this Form 10-K, for details.
Workers compensation liabilities represented in the table above are considered contractual obligations because they represent the(2) Represents estimated payments that willare expected to be made to carriers for various workers' compensation program under the various workers compensation programs.contractual obligations. These obligations include the costs of reimbursing the carriers for paying claims within the deductible layer in accordance with workersthe workers' compensation insurance policiespolicy as well as premiumsother liabilities.
(3) Includes various facilities and other liabilities. Workers compensation claim liabilities include estimates for reported claims, plus estimates for claims incurred but not reported, and estimates of certain expenses associated with processing and settling the claims. These estimates are subject to significant uncertainty. The actual amount to be paid is not finally determined until we reach a settlement with the insurance carrier. Final claim settlements may vary significantly from the present estimates, particularly because many claims will not be settled until well into the future. In estimating the timing of future payments by year, we have assumed that our historical payment patterns will continue. However, the actual timing of future payments could vary materially from these estimates due to, among other things, changes in claim reporting and payment patterns and large unanticipated settlements.equipment leases under various operating lease agreements.
(4) Our purchase obligations primarily consist of software licenses, consulting and maintenance agreements, and sales and marketing events pertaining to various contractual agreements.
(5) Our uncertain tax positions primarily pertain to tax credits and professionalother related reserves, including interest and consulting fees. These are associated with agreements that we believe are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the transaction.
To support our growth and expansion, we may lease additional office space. Many of our operating lease agreements provide us with the option to renew. Our future operating lease obligations would change if we exercised these options and if we entered into additional operating lease agreements as we expand our operations.penalties.
In the normal course of business, we make representations and warranties that guarantee the performance of services under service arrangements with clients. Historically, there hashave been no material losses related to such guarantees. In addition, in connection with our initial public offering, we have entered into indemnification agreements with our officers and directors, which require us to defend and, if necessary, indemnify these individuals for certain pending or future legal claims as they relate to their services provided to us. Such indemnification obligations are not included in the table above.
The uncertain tax positions disclosed inOff-Balance Sheet Arrangements
As of December 31, 2018, we did not have any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources within the table above exclude certain tax credit related reserves that we net with tax credit carryforwards. The reserve on these tax credits does not represent a contractual obligation or commitment because the associated tax credits have not been utilized to offset our tax liability.meaning of Item 303(a)(4) of Regulation S-K.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Critical Accounting Policies,Judgments and Estimates and Judgments
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of financial statements in conformity withU.S. GAAP, requires managementwhich require us to make estimates, judgments, and assumptions that affect certain reported amounts of assets, liabilities, revenues and disclosures. These estimates include, but are not limited to, allowances for accounts receivable, workers compensationexpenses, and the related disclosures of contingent assets and liabilities, health plan assets and liabilities, recoverability of goodwill and other intangible assets, income taxes, stock-based compensation and other contingent liabilities. SuchThese estimates are based on historical experience and on various other assumptions that Company management believeswe believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates.Some of the assumptions are highly uncertain at the time of estimation. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
The following accounting policies are critical and/or require significant judgments and estimates inexperience differs from the preparation ofassumptions used, our consolidated financial statements.statements could be materially affected. For additional information about our accounting policies, refer to Note 1 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K.
Revenue RecognitionRecent Accounting Pronouncements
Professional service revenues represent fees chargedRefer to clientsNote 1 in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K for co-employment services including processing HR transactions such as payroll payments and remitting employment tax withholding amounts, providing accessadditional information related to our HR expertise, including HR templates, best practices, and interactions with our HR professionals, providing labor, employment and benefit law compliance services to assist clients in avoiding or reducing liability and exposure and providing additional services, including recruiting or other services, to support various stages of our clients’ growth based on either a fixed fee per WSE per month or per transaction, or a percentage of WSEs’ payroll. We recognize professional service revenues in the period the services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectability is reasonably assured.recent accounting pronouncements.
Insurance service revenues consistCosts
We purchase fully insured workers' compensation and health benefits coverage for our employees and WSEs. As part of insurance-related billingsthese insurance policies, we bear claims costs up to a defined deductible amount and administrative fees collected from clientsas a result, we establish accrued insurance costs including both known and withheld from WSEsincurred but not reported (IBNR) costs.
As workers' compensation costs for TriNet-sponsored, risk-based, fully-insured insurance plans provided through third-party insurance carriers, primarily employee health benefit plans and workers compensation insurance. We recognize insurance service revenues ina particular period are not known for many years after the period amounts are due and collectability is reasonably assured.
The professional service revenues and insurance service revenues are each considered separate units of accounting and the associated fees and insurance premiums are billed as such for the majority oflosses have occurred these costs represent our clients. For clients billed through a bundled invoice, the selling price of significant deliverables is determined based on the best estimate of selling price.
We are not the primary obligor for payrollunpaid claim losses and payroll tax payments and therefore these payments are not reflected as either revenue or expense. The gross payroll and payroll tax payments made on behalf of our clients, combined, were $30.6 billion, $25.6 billion and $17.6 billion for the years ended December 31, 2015, 2014, and 2013, respectively.
We record a liability relating to work performed by WSEs but unpaid at the end of each period in the period in which the WSE performs work along with the related receivable for the same period. We generally charge an upfront non-refundable set-up fee for which the performance of such services is not a discrete earnings event and therefore the revenue is recognized on a straight-line basis over the estimated average client tenure.
Insurance Costs
Insurance costs include insurance premiums paid to the third-party insurance carriers for insurance coverage for our clients and WSEs and the reimbursements paid to the insurance carriers and/or third-party administrators for claims payments made by them on our behalf within our insurance deductible layer, where applicable.
Workers Compensation Insurance Reserves
We establish workers compensation insurance reserves to provide for our estimated ultimate costs of reimbursing our workers compensation insurance carriers and third-party administrators for paying claims on our behalfloss adjustment expenses within the deductible layer in accordance with workers compensationour insurance policies. These reserves include estimates for reported losses, plus amounts for those claims not yet reported,
We use external actuaries to evaluate, review and recommend estimates of certain expenses incurredour workers' compensation and health insurance costs. The accrued costs studies performed by our carriers and third-party administrators in the course of processing and settling the claims. In establishing our workers compensation insurance reserves, we use an independent actuarial estimate of undiscounted future cash payments that would be madethese qualified actuaries analyze historical claims data to settle the claims.
In estimating these reserves, we utilize our historical loss experience, exposure data and actuarial judgment, together withdevelop a range of potential ultimate losses using loss development, expected loss ratio and frequency/severity methods in accordance with Actuarial Standards of Practice. These loss methods are applied to classes or segments of the loss data organized by policy year and risk class.
Key judgments and evaluations in arriving at loss estimates by segment and the accrued costs selection overall include:
the selection of method used and the relative weights given to selecting the method used for each policy year,
the underlying assumptions of LDF used in these models,
the effect of any changes to claims handling and payment processes,
evaluation of loss (medical and indemnity) cost trends, costs from changes in the risk exposure being evaluated and any applicable changes in legal, regulatory or judicial environment.
We review and evaluate these judgments and the associated recommendations in concluding the adequacy of accrued costs. Where adjustments are necessary these are recorded in the period in which the adjustments are identified.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Accrued Workers' Compensation Costs
Under our policies, we are responsible for reimbursing the insurance carriers for workers' compensation losses up to $1 million per claim occurrence (Deductible Layer). We use external actuaries to evaluate, review and recommend accrued workers' compensation costs on a quarterly basis. The data is segmented by class and state and analyzed by policy year; states where we have small exposure are aggregated into a single segment.
We use a combination of loss development, expected loss ratio and frequency/severity methods which include the following inputs, that are primarily based upon the WSEs’ job responsibilities, their location, theassumptions and analytical techniques:
TriNet's historical frequency and severity of workersworkers' compensation claims experience, exposure data and an estimateindustry loss experience,
inputs of WSEs’ job responsibilities and location,
estimates of future cost trends. Alltrends to establish expected loss ratios for subsequent accident years,
expected loss ratios for the latest accident year or prior accident years, adjusted for the loss trend, the effect of these components can materially impact the reserves as reported in our consolidated financial statements. For each reporting period, we incorporaterate changes in the actuarial assumptions resulting from changes in our actual claims experience and other trends into our workers compensation claims cost estimates. Accordingly, finalquantifiable factors, and
LDFs to project the reported losses for each accident year to an ultimate basis.
Final claim settlements may vary materially from the present estimates, particularly when those payments may not occur until well into the future.
We review the adequacy of In our workersexperience, plan years related to workers' compensation insurance reserves on a quarterly basis. We reflect adjustmentsprograms may take 10 years or more to previously established reservesbe fully settled. Certain assumptions used in ourestimating these accrued costs are highly judgmental. Our accrued costs, results of operations and financial condition can be materially impacted if actual experience differs from the assumptions used in establishing these accrued costs.
We believe that our estimate of accrued workers' compensation costs are most sensitive to LDFs given the long reporting and paid development patterns for our workers' compensation loss costs. Our methods of estimating accrued workers' compensation costs rely on these LDFs and an estimate of future cost trend.
The following table illustrates the periodsensitivity of changes in the LDFs on our year end estimate of insurance costs (in millions of dollars):
|
| |
| Change in loss development factor | Change in insurance costs |
| -5.0% | ($33) |
| -2.5% | ($18) |
| +2.5% | $20 |
| +5.0% | $39 |
Accrued Health Insurance Costs
We sponsor and administer a number of fully insured, risk-based employee benefit plans, including group health, dental, vision and life insurance as an employer plan sponsor under section 3(5) of the ERISA. Approximately 81% of our 2018 group health insurance costs relate to risk-based plans in which the adjustments are identified. These adjustments can be significant, reflectingwe agree to reimburse our carriers for any variety of new and adverse or favorable trends. Any unexpected increases in the severity or frequency of claims could harm our operating results.
We do not discount loss reserves accrued under these programs. We record claim costs that we expect to be paid within one year as accrued workers compensation costs and include them in worksite employee related liabilities or short term worksite related assets if funds are held by third parties to cover the claims, and we include costs that we expect to be paid beyond one year in long-term liabilities or long term workers compensation receivables if funds are held by third parties to cover the claims on our consolidated balance sheets. Assets held by third parties to cover claim liabilities remain restricted until the plan year to which they relate are settled.
At policy inception, we estimate annual workers compensation costs based on projected wages over the duration of the policy period. As actual wages are realized, the amounts paid for premiums may differ from the estimates we record, creating an asset or liability throughout the policy year. These differences can have a material effect on our consolidated financial position and results of operations.
Health Benefits Insurance Reserves
We establish health benefits insurance reserves to provide for our estimated costs of reimbursing our health benefits insurance carriers and third-party administrators for paying claims within ouragreed-upon per-person deductible layer in accordance withup to a maximum aggregate exposure limit per policy. These deductible dollar limits and maximum limits vary by carrier and year.
Costs covered by these insurance plans generally develop on average within three to six months so accrued health insurance policies. These reservescosts include estimates forof reported losses plus amounts for thoseand claims incurred but not yet paid. We determine ourpaid (IBNP). Data is segmented and analyzed by insurance carrier.
To estimate accrued health benefits insurance reserves based uponcosts we use a number of factors, including actuarial calculations, our currentinputs, assumptions and analytical techniques:
TriNet historical loss claims payment patterns plan enrollment and medical cost trend rates. We record these reserves within health benefits payable and include them in WSE-related liabilities on our consolidated balance sheets.rates,
Under certain contracts, based on plan performance, we may be entitled to receive refunds of premiums that we pay to our health benefits insurance carriers. We estimate these refunds based on our premiumcurrent period claims costs and claims datareporting patterns (completion factors), and record
plan enrollment.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
These accrued costs may vary in subsequent quarters from the prepaid health plan assets within WSE-related assets on our consolidated balance sheets. These prepaid health plan assets require our management to make assumptions and to apply judgment based on actuarial assumptions, claim history, medical trends and other industry-specific factors. If actual results are not consistent with our estimates or assumptions, it could harm our financial condition and results of operations.
We review the adequacy of our health benefits insurance reserves on a quarterly basis. We reflect adjustments to previously established reserves in ouramount estimated. Our accrued costs, results of operations for the period in which the adjustments are identified. These adjustmentsand financial condition can be significant, reflecting any variety of new and adverse or favorable trends. Any unexpected increases in the severity or frequency of claims could harm our operating results.
Goodwill and Other Intangible Assets
Our goodwill and identifiable intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment annually in the fourth quarter or when an event occurs or circumstances change in a way to indicate that there has been a potential decline in the fair value of the reporting unit. Impairment is determined by comparing the estimated fair value of the reporting unit to its carrying amount, including goodwill. Our business is largely homogeneous and, as a result, all the goodwill is associated with one reporting unit. Annually, we perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit has declined below carrying value. This assessment requires significant management judgment to evaluate the impact of various financial, macroeconomic, industry, and reporting unit specific qualitative factors.
Intangible assets with finite useful lives include purchased client lists, trade names, developed technologies and contractual agreements. Fair value of our intangible assets acquired in business combinations are corroborated using appraisals that are performed by independent third-party valuation firms. The assumptions utilized to determine the fair value of our intangible assets requires management’s assessment of various factors including business strategies and future expectations. Intangible assets are amortized over their respective estimated useful lives using either the straight-line method or an accelerated method, ranging from two to five years. Intangible assets are reviewed for indicators of impairment at least annually and evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
These types of analyses contain uncertainties requiring management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as our future expectations. We do not believe that there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment losses for goodwill and other intangible assets. However,materially impacted if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.
Impairment of Long-Lived Assets
Long-lived assets, such as property, equipment and capitalized internal use software subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable such as: (i) a significant adverse change in the extent or manner in which it is being used or in its physical condition, (ii) a significant adverse change in legal factors or in business climate that could affect its value, or (iii) a current-period operation or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with its use.
An asset is considered impaired if the carrying amount exceeds the undiscounted future net cash flows the asset is expected to generate. An impairment charge is recognized for the amount by which the carrying amount of the assets exceeds its fair value. The adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated or amortized over the remaining useful life of that asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less selling costs.
Our impairment loss calculations contain uncertainties which require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.
Stock-Based Compensation
We have historically issued two types of stock-based awards to employees: restricted stock units and stock options. Compensation expense associated with restricted stock units is based on the fair value of our common stock on the grant date. Compensation expense associated with stock options is based on the estimated grant date fair value method using the Black-Scholes valuation model. Expense is recognized, net of estimated forfeitures, using a straight-line amortization method over the respective vesting period for awards during which the employee is required to perform service in exchange for such award.
Our option-pricing model requires the input of highly subjective assumptions, including the fair value of our common stock (prior to our IPO), the expected term of the option, the expected volatility of the price of our common stock, risk-free interest rates and the expected dividend yield of our common stock as follows:
Prior to our IPO in March 2014, because our common stock was not publicly traded, we estimated the fair value of our common stock. Our board of directors considered numerous objective and subjective factors to determine the fair market value of our common stock at each meeting at which awards were granted and approved. These factors included, but were not limited to: (i) contemporaneous third-party valuations of our common stock; (ii) our performance, growth rate, financial condition and future financial projections; (iii) the value of our peer companies; (iv) changes to our business and our prospects; (v) lack of marketability of our common stock; (vi) the likelihood of achieving a liquidity event; and (vii) the rights, preferences and privileges of our preferred stock relative to those of our common stock. After the completion of our IPO, the fair value of our common stock has been based on the closing price of our common stock on the New York Stock Exchange.
Risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term of the options.
Expected term represents the period that our share-based awards are expected to be outstanding. We estimated the expected term for a “plain vanilla” option using the simplified method allowed under current guidance, which uses the midpoint between the graded vesting period and the contractual termination date.
Expected volatility is determined by taking the average historical volatilities of our peer group based on daily price observations over a period equivalent to the expected term of the option. Our peer group consists of public companies primarily in HR service industry and are similar to us in size, stage of life cycle, and financial leverage. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.
We declared special dividends in May 2011, March 2012, August 2013 and December 2013. These dividends are considered extraordinary and non-recurring. Consequently, we used an expected dividend yield of zero.
We estimate forfeitures based on historical forfeitures of equity awards and adjust the rate to reflect voluntary termination behaviors as well as trends of actual forfeitures. We will continue to evaluate our estimated forfeiture rate if actual forfeitures differexperience differs from our initial estimates. Quarterly changeskey assumptions used in the estimated forfeiture rate can have a significant impact on our share-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed.
The following table sets forth the assumptions made with respect toestablishing these assumptions for the periods presented:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Expected volatility | 39 | % | | 58 | % | | 48 | % |
| Expected term (in years) | 6.08 |
| | 6.05 |
| | 6.04 |
|
| Risk-free interest rate | 1.73 | % | | 1.80 | % | | 1.26 | % |
| Expected dividend yield | — | % | | — | % | | — | % |
| Weighted-average grant-date fair value of stock options | $ | 12.73 |
| | $ | 7.18 |
| | $ | 4.11 |
|
These assumptions represent management’s best estimates which involve inherent uncertainties and the application of management’s judgment. If facts and circumstances change and different assumptions are used, our share-based compensation expense could be materially different in the future. As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future share-based compensation expense.
Income Taxes
We are subject to income taxes in the United States and Canada and we conduct our business primarily in the United States. Significant judgments are required in determining our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws.
We use the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
For transactions and calculations for which the ultimate tax determination is uncertain, we recognize tax liabilities based on estimates of whether additional taxes and interest will be due. These tax liabilities are recognized when, despite the belief that our tax return positions are supportable, we believe that certain positions may not be more likely than not of being sustained upon review by tax authorities. As of December 31, 2015 and 2014, we had recognized tax liabilities of approximately $3.3 million and $3.2 million, respectively, related to uncertain income tax positions.
We periodically evaluate if it is more likely than not that some or all of the deferred tax assets will be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax planning strategies and recent financial performance. In order to support a conclusion that a valuation allowance is not needed, positive evidence of sufficient quantity and quality (objective compared to subjective) is necessary to overcome negative evidence. Because certain federal and state net operating loss carryforwards may not be utilized prior to expiration, a valuation allowance on our deferred tax asset balance was recognized as of December 31, 2015.accrued costs.
We believe that our accruals for tax liabilitiesyear end estimate of accrued health insurance costs are adequate for all open audit years based on our assessment of many factors, including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. We do not anticipate any adjustments would resultmost sensitive to changes in a material change to our financial position. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax expensemedical claim costs in the periodmarkets in which such determination is made. Weparticipating WSEs reside (medical cost trend) and our estimate of paid Noticescosts to carriers as a percentage of Proposed Assessments outstanding as of December 31, 2014 relatedthe expected ultimate costs to the disallowance of employment tax credits totaling $10.5 million in connection with the IRS examination of Gevity HR, Inc. and its subsidiaries, which was acquired by TriNet in June 2009. The Company plans to exhaust all administrative efforts to resolve this matter, however, it is likely that the matter will ultimately be resolved through litigation. With regard to these employment tax credits, the Company believes it is more likely than not that the Company will prevail. Therefore, no reserve has been recognized related to this matter. carriers (completion factors).
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board, or (FASB), issued Accounting Standards Update (ASU) 2016-02—Leases. The amendment requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. The amendment is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2018. Early adoption is permitted. We are currentlyA 250 basis point increase in the process of evaluating the impact of the adoption of this standard onmedical cost trend would increase our consolidated financial statements.year end accrued health insurance costs by approximately $13 million, and a 50 basis point decrease in completion factors would increase our year end accrued health insurance costs by approximately $8 million.
In January 2016, the FASB issued ASU 2016-01—Recognition and Measurement of Financial Assets and Financial Liabilities. The amendment addresses various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. The amendment is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption by public entities is permitted only for certain provisions. We are currently in the process of evaluating the impact of the adoption of this standard on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17—Balance Sheet Classification of Deferred Taxes, as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The amendment requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. We adopted this guidance in 2015 with retrospective application. See Note 11 for further details.
In April 2015, the FASB issued ASU 2015-05—Intangibles—Goodwill and Other—Internal-Use Software, as part of the Simplification Initiative. The amendment provides guidance to clarify the customer’s accounting for fees paid in a cloud computing arrangement. The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. We expect to adopt this guidance in 2016. We do not expect this guidance to have a material effect on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03— Interest—Imputation of Interest, as part of its Simplification Initiative. The amendment requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. We expect to adopt this guidance in 2016. We do not expect this guidance to have a material effect on our consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15—Presentation of Financial Statements — Going Concern (Subtopic 205-40), which addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. We do not expect to adopt this guidance early and do not believe that the adoption of this guidance will have a material effect on our consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12—Compensation - Stock Compensation, which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for annual reporting periods, and interim periods within those years, beginning after December 15,
|
| |
| QUANTITATIVE AND QUALITATIVE DISCLOSURES | |
2015. Early adoption is permitted. The amendments may be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented. We do not expect this guidance to have a material effect on our consolidated financial statements. We expect to adopt this guidance in 2016.
In May 2014, the FASB issued ASU 2014-09—Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance under GAAP. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard provides a five-step analysis of transactions to determine when and how revenue is recognized. In July 2015, the FASB deferred the effective date to annual reporting periods, and interim periods within those years, beginning after December 15, 2017. Early adoption at the original effective date of December 15, 2016 is permitted. The amendments may be applied retrospectively or as a cumulative-effect adjustment as of the date of adoption. We have not yet selected a method of adoption and are currently evaluating the effect that the amendments will have on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposedOur exposure to certain market riskschanges in interest rates relates primarily to our investment portfolio and outstanding floating rate debt. Changes in U.S. interest rates affect the ordinary course of our business. These risks primarily include interest rate sensitivities as follows.
We hadearned on the Company’s cash, and cash equivalents restricted cash, restrictedand investments payroll funds collected, and interest bearing receivables in connection with workers compensation premiums totaling $1.3 billion at December 31, 2015. Included in this amount were $66.4 million in time deposits and U.S. Treasuries. Such interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in interest income have not been significant. Fluctuations in the fair value of the investments, as well as interest costs associated with our debt.
Our board of directors approved a corporate investment policy that defines our investable cash in instruments that meet certain credit quality, liquidity, diversification and other requirements. Under our investment securities causedpolicy, the Company's investment portfolio must maintain a minimum average credit quality of AA minus by Standard & Poor's (or an equivalent nationally recognized statistical rating organization), maintain average effective maturity durations of less than 36 months (or less than 24 months in some cases), and satisfy diversification requirements intended to reduce overall investment consolidating. We believe that our exposure to losses resulting from credit risk is not significant. We performed a sensitivity analysis to determine the impact a change in interest rates (gains or losseswould have on the carrying value) are recordedvalue of the investment portfolio assuming a 100 basis point parallel shift in other comprehensive income, and are realized only if we sell the underlying securities. Our investments are made for capital preservation purposes. The cash and cash equivalents, restricted cash, payroll funds collected and workers compensation premium receivable are held for working capital purposes.
Our cash equivalents, payroll funds collected, workers compensation receivable and our investments are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely impacted due toyield curve. Based on investment positions as of December 31, 2018, a risehypothetical 100 basis point increase or decrease in interest rates while floating rate securities may produce less income than expected if interest rates fall. Dueacross all maturities would result in part to these factors, our future investment income may fall shorta $2 million incremental increase or decrease in the fair market value of expectations due to changes in interest rates or we may sufferthe portfolio, respectively. Such losses in principalwould only be realized if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our debt securities as “available for sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold the investments prior to maturity or declinesmaturity. The risk of rate changes on investment balances was not significant at December 31, 2018.
In June 2018, we refinanced our term loans which would have matured in fair value are determined to be other-than-temporary. Our fixed-income portfolio is subject to interest rate risk.
We alsoJuly 2019 and replaced them with a term loan maturing in 2023. At December 31, 2018, after this refinancing, we had total outstanding indebtedness of $499.6$414 million, as of December 31, 2015, of which $35.3$22 million is due within 12 months. Amounts outstanding under our credit facility carry variableA 100 basis point increase or decrease in market interest rates of LIBOR + 2.75% over the term of the facility, subject to specified rate adjustments under certain circumstances. As a result ofwould cause interest expense on our credit facility, we are exposed to changes in interest rates. With an increase in interest rates in effect atdebt as of December 31, 2015 of 1002018 to increase or decrease by $4 million on an annualized basis, points, our interest expense for 2016 through 2020 would be $66.5 million. On the other hand, with a decrease in interest rates in effect at December 31, 2015 of 100 basis points, our interest expense for 2016 through 2020 would be $39.7 million.respectively.
Item 8. Financial Statements and Supplementary Data.Data
TRINET GROUP, INC.
Consolidated Financial Statements of TriNet Group, Inc. and Subsidiaries |
| | |
Report | | |
| | |
| | |
| | |
| | |
| | |
Consolidated Balance Sheets | | |
Consolidated Statements of Operations | | |
Consolidated Statements of Comprehensive Income | | |
Consolidated Statements of Stockholders’ Equity (Deficit) | | |
Consolidated Statements of Cash Flows | | |
Notes to Consolidated Financial Statements | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Stockholders and the Board of Directors and Stockholders of
TriNet Group, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TriNet Group, Inc. and Subsidiariessubsidiaries (the "Company") as of December 31, 20152018 and 2014,2017, and the related consolidated statements of operations,income and comprehensive income, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included2018, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statement schedule listed at Item 15(a). Thesestatements present fairly, in all material respects, the financial statements and schedule are the responsibilityposition of the Company’s management. Our responsibility is to express an opinion on these financial statementsCompany as of December 31, 2018 and schedule based on our audits.2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We conducted our auditshave also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 14, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion,/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 14, 2019
We have served as the Company's auditor since 2016.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of TriNet Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial statements referred to above present fairly, in all material respects, the consolidated financial positionreporting of TriNet Group, Inc. and Subsidiaries atsubsidiaries (the "Company”) as of December 31, 2015 and 2014, and2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the consolidated resultsCommittee of their operations and their cash flows for eachSponsoring Organizations of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, inTreadway Commission (COSO). In our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairlyCompany maintained, in all material respects, the information set forth therein.effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), TriNet Group, Inc.the consolidated financial statements and Subsidiaries’financial statement schedule as of and for the year ended December 31, 2018, of the Company and our report dated February 14, 2019, expressed an unqualified opinion on those financial statements and financial statement schedule.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting asand for its assessment of December 31, 2015,the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on criteria establishedour audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in Internal Control-Integrated Framework issued byaccordance with the Committee of Sponsoring OrganizationsU.S. federal securities laws and the applicable rules and regulations of the TreadwaySecurities and Exchange Commission (2013 framework) and the PCAOB.
We conducted our report dated March 31, 2016 expressedaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an adverse opinion thereon.understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ErnstDELOITTE & YoungTOUCHE LLP
San Francisco, California
March 31, 2016February 14, 2019
TriNet Group, Inc. and SubsidiariesTRINET GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
|
| | | | | | | |
| | December 31, 2015 | | December 31, 2014 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 166,178 |
| | $ | 134,341 |
|
| Restricted cash | 14,557 |
| | 14,543 |
|
| Prepaid income taxes | 4,105 |
| | 26,711 |
|
| Prepaid expenses | 8,579 |
| | 9,336 |
|
| Deferred loan costs and other current assets | 3,715 |
| | 4,271 |
|
| Worksite employee related assets | 1,373,386 |
| | 1,635,136 |
|
| Total current assets | 1,570,520 |
| | 1,824,338 |
|
| Workers compensation receivable | 29,204 |
| | 31,905 |
|
| Restricted cash and investments | 101,806 |
| | 69,447 |
|
| Property and equipment, net | 37,844 |
| | 32,298 |
|
| Goodwill | 289,207 |
| | 288,857 |
|
| Other intangible assets, net | 46,772 |
| | 81,718 |
|
| Deferred loan costs and other assets | 22,877 |
| | 12,017 |
|
| Total assets | $ | 2,098,230 |
| | $ | 2,340,580 |
|
| Liabilities and stockholders’ equity (deficit) | |
| | |
| Current liabilities: | |
| | |
| Accounts payable | $ | 12,904 |
| | $ | 12,273 |
|
| Accrued corporate wages | 28,963 |
| | 29,179 |
|
| Current portion of notes payable and borrowings under capital leases | 35,326 |
| | 20,738 |
|
| Other current liabilities | 11,402 |
| | 10,303 |
|
| Worksite employee related liabilities | 1,369,497 |
| | 1,630,555 |
|
| Total current liabilities | 1,458,092 |
| | 1,703,048 |
|
| Notes payable and borrowings under capital leases, less current portion | 464,390 |
| | 524,412 |
|
| Workers compensation liabilities | 105,481 |
| | 75,448 |
|
| Deferred income taxes | 54,641 |
| | 58,529 |
|
| Other liabilities | 7,545 |
| | 4,902 |
|
| Total liabilities | 2,090,149 |
| | 2,366,339 |
|
| Commitments and contingencies (Note 12) |
|
| |
|
|
| Stockholders’ equity (deficit): | | | |
Preferred stock, $.000025 per share stated value; 20,000,000 shares authorized; no shares issued and outstanding at December 31, 2015 and December 31, 2014 | — |
| | — |
|
Common stock, $.000025 per share stated value; 750,000,000 shares authorized; 70,371,425 and 69,811,326 shares issued and outstanding at December 31, 2015 and December 31, 2014, respectively | 494,397 |
| | 442,682 |
|
| Accumulated deficit | (485,595 | ) | | (468,127 | ) |
| Accumulated other comprehensive loss | (721 | ) | | (314 | ) |
| Total stockholders’ equity (deficit) | 8,081 |
| | (25,759 | ) |
| Total liabilities and stockholders’ equity (deficit) | $ | 2,098,230 |
| | $ | 2,340,580 |
|
|
| | | | | | | | |
| | | December 31, | | December 31, |
| (in millions, except share and per share data) | | 2018 | | 2017 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 228 |
| | $ | 336 |
|
| Investments | | 54 |
| | — |
|
| Restricted cash, cash equivalents and investments | | 942 |
| | 1,280 |
|
| Accounts receivable, net | | 11 |
| | 21 |
|
| Unbilled revenue, net | | 304 |
| | 297 |
|
| Prepaid expenses | | 48 |
| | 38 |
|
| Other current assets | | 59 |
| | 19 |
|
| Total current assets | | 1,646 |
| | 1,991 |
|
| Restricted cash, cash equivalents and investments, noncurrent | | 187 |
| | 162 |
|
| Investments, noncurrent | | 135 |
| | — |
|
| Property & equipment, net | | 79 |
| | 70 |
|
| Goodwill | | 289 |
| | 289 |
|
| Other intangible assets, net | | 21 |
| | 26 |
|
| Other assets | | 78 |
| | 55 |
|
| Total assets | | $ | 2,435 |
| | $ | 2,593 |
|
| Liabilities and stockholders' equity | | | | |
| Current liabilities: | | | | |
| Accounts payable and other current liabilities | | $ | 45 |
| | $ | 59 |
|
| Long-term debt, current portion | | 22 |
| | 40 |
|
| Client deposits | | 56 |
| | 52 |
|
| Accrued wages | | 352 |
| | 329 |
|
| Accrued health insurance costs, net | | 135 |
| | 151 |
|
| Accrued workers' compensation costs, net | | 67 |
| | 67 |
|
| Payroll tax liabilities and other payroll withholdings | | 729 |
| | 1,034 |
|
| Insurance premiums and other payables | | 19 |
| | 25 |
|
| Total current liabilities | | 1,425 |
| | 1,757 |
|
| Long-term debt, less current portion | | 391 |
| | 383 |
|
| Accrued workers' compensation costs, less current portion, net | | 158 |
| | 165 |
|
| Deferred taxes | | 68 |
| | 68 |
|
| Other non-current liabilities | | 18 |
| | 14 |
|
| Total liabilities | | 2,060 |
| | 2,387 |
|
| Commitments and contingencies (see Note 8) | | | | |
| Stockholders' equity: | | | | |
| Preferred stock | | — |
| | — |
|
| ($0.000025 par value per share; 20,000,000 shares authorized; no shares issued or outstanding at December 31, 2018 and 2017) | | | | |
| Common stock and additional paid-in capital | | 641 |
| | 583 |
|
| ($0.000025 par value per share; 750,000,000 shares authorized; 70,596,559 and 69,818,392 shares issued and outstanding at December 31, 2018 and 2017, respectively) | | | | |
| Accumulated deficit | | (266 | ) | | (377 | ) |
| Total stockholders' equity | | 375 |
| | 206 |
|
| Total liabilities & stockholders' equity | | $ | 2,435 |
| | $ | 2,593 |
|
See accompanying notes.
TriNet Group, Inc. and SubsidiariesTRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
INCOME AND COMPREHENSIVE INCOME
| | | | Year Ended December 31, | Year Ended December 31 |
| | 2015 | | 2014 | | 2013 | |
| (in millions, except share and per share data) | | 2018 | 2017 | 2016 |
| Professional service revenues | $ | 401,287 |
| | $ | 342,074 |
| | $ | 272,372 |
| $ | 487 |
| $ | 458 |
| $ | 447 |
|
| Insurance service revenues | 2,258,001 |
| | 1,851,457 |
| | 1,371,903 |
| 3,016 |
| 2,817 |
| 2,613 |
|
| Total revenues | 2,659,288 |
| | 2,193,531 |
| | 1,644,275 |
| 3,503 |
| 3,275 |
| 3,060 |
|
| Costs and operating expenses: | | | | | | |
| Insurance costs | 2,112,376 |
| | 1,686,315 |
| | 1,226,585 |
| 2,610 |
| 2,466 |
| 2,414 |
|
Cost of providing services (exclusive of depreciation and amortization of intangible assets) | 150,694 |
| | 134,256 |
| | 106,661 |
| 229 |
| 213 |
| 190 |
|
| Sales and marketing | 166,759 |
| | 139,997 |
| | 109,183 |
| 182 |
| 187 |
| 174 |
|
| General and administrative | 69,626 |
| | 53,926 |
| | 52,455 |
| 142 |
| 114 |
| 92 |
|
| Systems development and programming costs | 27,558 |
| | 26,101 |
| | 19,948 |
| |
| Amortization of intangible assets | 39,346 |
| | 52,302 |
| | 51,369 |
| |
| Depreciation | 14,612 |
| | 13,843 |
| | 11,737 |
| |
| Systems development and programming | | 49 |
| 45 |
| 31 |
|
| Depreciation and amortization of intangible assets | | 40 |
| 33 |
| 35 |
|
| Total costs and operating expenses | 2,580,971 |
| | 2,106,740 |
| | 1,577,938 |
| 3,252 |
| 3,058 |
| 2,936 |
|
| Operating income | 78,317 |
| | 86,791 |
| | 66,337 |
| 251 |
| 217 |
| 124 |
|
| Other income (expense): | | | | | | |
| Interest expense and bank fees | (19,449 | ) | | (54,193 | ) | | (45,724 | ) | |
| Other, net | 1,142 |
| | 478 |
| | 471 |
| |
| Interest expense, bank fees and other | | (22 | ) | (20 | ) | (20 | ) |
| Interest income | | 12 |
| 3 |
| — |
|
| Income before provision for income taxes | 60,010 |
| | 33,076 |
| | 21,084 |
| 241 |
| 200 |
| 104 |
|
| Provision for income taxes | 28,315 |
| | 17,579 |
| | 7,937 |
| |
| Income tax expense | | 49 |
| 22 |
| 43 |
|
| Net income | $ | 31,695 |
| | $ | 15,497 |
| | $ | 13,147 |
| $ | 192 |
| $ | 178 |
| $ | 61 |
|
| Other comprehensive income, net of tax | | — |
| — |
| 1 |
|
| Comprehensive income | | $ | 192 |
| $ | 178 |
| $ | 62 |
|
| | | |
| Net income per share: | | | | | | |
| Basic | $ | 0.45 |
| | $ | 0.24 |
| | $ | 0.26 |
| $ | 2.72 |
| $ | 2.57 |
| $ | 0.88 |
|
| Diluted | $ | 0.44 |
| | $ | 0.22 |
| | $ | 0.24 |
| $ | 2.65 |
| $ | 2.49 |
| $ | 0.85 |
|
| Weighted average shares: | | | | | | |
| Basic | 70,228,159 |
| | 56,160,539 |
| | 12,353,047 |
| 70,385,639 |
| 69,175,377 |
| 70,159,696 |
|
| Diluted | 72,618,069 |
| | 59,566,773 |
| | 15,731,807 |
| 72,300,663 |
| 71,385,280 |
| 71,972,486 |
|
See accompanying notes.
TriNet Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Net income | $ | 31,695 |
| | $ | 15,497 |
| | $ | 13,147 |
|
| Other comprehensive income (loss), net of tax | | | | | |
| Unrealized losses on investments | (86 | ) | | (8 | ) | | (9 | ) |
| Unrealized gains on interest rate cap | — |
| | — |
| | 66 |
|
| Foreign currency translation adjustments | (321 | ) | | (115 | ) | | (53 | ) |
| Total other comprehensive income (loss), net of tax | (407 | ) | | (123 | ) | | 4 |
|
| Comprehensive income | $ | 31,288 |
| | $ | 15,374 |
| | $ | 13,151 |
|
See accompanying notes.
TriNet Group, Inc. and SubsidiariesTRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share data)
| | | | | | | | | | | | | | | | | Accumulated | | |
Common Stock and Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity (Deficit) |
| | Preferred Stock– | | Preferred Stock– | | | | | | | | Other | | Total | |
| | Series G | | Series H | | Common Stock | | Accumulated | | Comprehensive | | Stockholders’ | |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Deficit | | Loss | | Equity (Deficit) | |
| Balance at December 31, 2012 | 5,391,441 |
| | $ | 59,059 |
| | 4,124,986 |
| | $ | 63,819 |
| | 10,709,224 |
| | $ | 45,488 |
| | $ | (110,851 | ) | | $ | (195 | ) | | $ | (65,558 | ) | |
| (in millions, except share data) | | Shares | Amount | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity (Deficit) |
| Balance at December 31, 2015 | | 70,371,425 |
| $ | 494 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 13,147 |
| | — |
| | 13,147 |
| — |
| — |
| 61 |
| — |
| 61 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | 4 |
| — |
| — |
| — |
| 1 |
| 1 |
|
| Issuance of common stock from vested restricted stock units | — |
| | — |
| | — |
| | — |
| | 36,512 |
| | — |
| | — |
| | — |
| | — |
| |
| Issuance of common stock for vested restricted stock units | | 695,253 |
| — |
| — |
| — |
| — |
|
| Issuance of common stock under employee stock purchase plan | | 283,644 |
| 4 |
| — |
| — |
| 4 |
|
| Issuance of common stock from exercise of stock options | — |
| | — |
| | — |
| | — |
| | 5,730,544 |
| | 7,109 |
| | — |
| | — |
| | 7,109 |
| 1,297,812 |
| 5 |
| — |
| — |
| 5 |
|
| Stock-based compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | 5,953 |
| | — |
| | — |
| | 5,953 |
| — |
| 26 |
| — |
| — |
| 26 |
|
| Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | (407,728 | ) | | — |
| | (3,342 | ) | | — |
| | (3,342 | ) | (3,414,675 | ) | — |
| (72 | ) | — |
| (72 | ) |
| Awards effectively repurchased for required employee withholding taxes | — |
| — |
| — |
| | — |
| | — |
| | (809,012 | ) | | — |
| | (8,643 | ) | | — |
| | (8,643 | ) | (217,769 | ) | — |
| (4 | ) | — |
| (4 | ) |
| Excess tax benefit from equity incentive plan activity | — |
| | — |
| | — |
| | — |
| | — |
| | 15,610 |
| | — |
| | — |
| | 15,610 |
| — |
| 6 |
| — |
| — |
| 6 |
|
| Special dividend | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (357,520 | ) | | — |
| | (357,520 | ) | |
| Balance at December 31, 2013 | 5,391,441 |
| | 59,059 |
| | 4,124,986 |
| | 63,819 |
| | 15,259,540 |
| | 74,160 |
| | (467,209 | ) | | (191 | ) | | (393,240 | ) | |
| Balance at December 31, 2016 | | 69,015,690 |
| 535 |
| (500 | ) | — |
| 35 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 15,497 |
| | — |
| | 15,497 |
| — |
| — |
| 178 |
| — |
| 178 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (123 | ) | | (123 | ) | |
| Issuance of common stock from vested restricted stock units | — |
| | — |
| | — |
| | — |
| | 4,250 |
| | — |
| | — |
| | — |
| | — |
| |
| Issuance of common stock for employee stock purchase plan | — |
| | — |
| | — |
| | — |
| | 249,494 |
| | 3,393 |
| | — |
| | — |
| | 3,393 |
| |
| Conversion of preferred stock | (5,391,441 | ) | | (59,059 | ) | | (4,124,986 | ) | | (63,819 | ) | | 38,065,708 |
| | 122,878 |
| | — |
| | — |
| | 122,878 |
| |
| Issuance of common stock from exercise of stock options | — |
| | — |
| | — |
| | — |
| | 1,712,278 |
| | 2,193 |
| | — |
| | — |
| | 2,193 |
| |
| Issuance of common stock, net of initial public offering cost | — |
| | — |
| | — |
| | — |
| | 15,091,074 |
| | 217,796 |
| | | | | | 217,796 |
| |
| Stock-based compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | 10,660 |
| | — |
| | — |
| | 10,660 |
| |
| Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | (490,419 | ) | | — |
| | (15,009 | ) | | — |
| | (15,009 | ) | |
| Awards effectively repurchased for required employee withholding taxes | — |
| | — |
| | — |
| | — |
| | (80,599 | ) | | — |
| | (1,431 | ) | | — |
| | (1,431 | ) | |
| Excess tax benefit from equity incentive plan activity | — |
| | — |
| | — |
| | — |
| | — |
| | 9,663 |
| | — |
| | — |
| | 9,663 |
| |
| Realized tax benefit of deductible IPO transaction costs | — |
| | — |
| | — |
| | — |
| | — |
| | 1,939 |
| | — |
| | — |
| | 1,939 |
| |
| Special dividend | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 25 |
| | — |
| | 25 |
| |
| Balance at December 31, 2014 | — |
| | — |
| | — |
| | — |
| | 69,811,326 |
| | 442,682 |
| | (468,127 | ) | | (314 | ) | | (25,759 | ) | |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 31,695 |
| | — |
| | 31,695 |
| |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (407 | ) | | (407 | ) | |
| Issuance of common stock from vested restricted stock units | — |
| | — |
| | — |
| | — |
| | 106,136 |
| | — |
| | — |
| | — |
| | — |
| 1,020,352 |
| — |
| — |
| — |
| — |
|
| Issuance of common stock for employee stock purchase plan | — |
| | — |
| | — |
| | — |
| | 272,836 |
| | 5,315 |
| | — |
| | — |
| | 5,315 |
| 224,928 |
| 5 |
| — |
| — |
| 5 |
|
| Issuance of common stock from exercise of stock options | — |
| | — |
| | — |
| | — |
| | 2,112,131 |
| | 7,166 |
| | — |
| | — |
| | 7,166 |
| 1,441,957 |
| 11 |
| — |
| — |
| 11 |
|
| Stock-based compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | 17,742 |
| | — |
| | — |
| | 17,742 |
| — |
| 32 |
| — |
| — |
| 32 |
|
| Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | (1,895,625 | ) | | — |
| | (48,364 | ) | | — |
| | (48,364 | ) | (1,549,434 | ) | — |
| (44 | ) | — |
| (44 | ) |
| Awards effectively repurchased for required employee withholding taxes | — |
| | — |
| | — |
| | — |
| | (35,379 | ) | | — |
| | (799 | ) | | — |
| | (799 | ) | (335,101 | ) | — |
| (11 | ) | — |
| (11 | ) |
| Excess tax benefit from equity incentive plan activity | — |
| | — |
| | — |
| | — |
| | — |
| | 20,670 |
| | — |
| | — |
| | 20,670 |
| |
| Realized tax benefit of deductible IPO transaction costs | — |
| | — |
| | — |
| | — |
| | — |
| | 822 |
| | — |
| | — |
| | 822 |
| |
| Balance at December 31, 2015 | — |
| | $ | — |
| | — |
| | $ | — |
| | 70,371,425 |
| | $ | 494,397 |
| | $ | (485,595 | ) | | $ | (721 | ) | | $ | 8,081 |
| |
| Balance at December 31, 2017 | | 69,818,392 |
| 583 |
| (377 | ) | — |
| 206 |
|
| Net income | | — |
| — |
| 192 |
| — |
| 192 |
|
| Cumulative effect of accounting change | | — |
| — |
| 2 |
| — |
| 2 |
|
| Issuance of common stock from restricted stock units and restricted stock awards | | 1,634,271 |
| — |
| — |
| — |
| — |
|
| Issuance of common stock for employee stock purchase plan | | 175,966 |
| 7 |
| — |
| — |
| 7 |
|
| Issuance of common stock from exercise of stock options | | 617,157 |
| 7 |
| — |
| — |
| 7 |
|
| Stock-based compensation expense | | — |
| 44 |
| — |
| — |
| 44 |
|
| Repurchase of common stock | | (1,190,995 | ) | — |
| (61 | ) | — |
| (61 | ) |
| Awards effectively repurchased for required employee withholding taxes | | (458,232 | ) | — |
| (22 | ) | — |
| (22 | ) |
| Balance at December 31, 2018 | | 70,596,559 |
| 641 |
| (266 | ) | — |
| 375 |
|
See accompanying notes.
TriNet Group, Inc. and SubsidiariesTRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Operating activities | | | | | |
| Net income | $ | 31,695 |
| | $ | 15,497 |
| | $ | 13,147 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 52,817 |
| | 84,403 |
| | 73,838 |
|
| Deferred income taxes | 14,954 |
| | 43,842 |
| | (6,680 | ) |
| Stock-based compensation | 17,923 |
| | 10,960 |
| | 6,113 |
|
| Excess tax benefit from equity incentive plan activity | (20,670 | ) | | (9,663 | ) | | (15,610 | ) |
| Accretion of workers compensation and leases fair value adjustment | (639 | ) | | (1,090 | ) | | (1,427 | ) |
| Changes in operating assets and liabilities: | | | | | |
| Restricted cash and investments | (17,991 | ) | | (6,880 | ) | | (6,118 | ) |
| Prepaid expenses and other current assets | 1,313 |
| | (7,389 | ) | | (7,723 | ) |
| Workers compensation receivables | 3,152 |
| | (5,413 | ) | | 9,876 |
|
| Other assets | (14,527 | ) | | 8,004 |
| | 4,052 |
|
| Accounts payable | 287 |
| | 5,212 |
| | 976 |
|
| Prepaid income taxes | 24,494 |
| | (23,387 | ) | | 6,394 |
|
| Other current liabilities | 5,616 |
| | 7,749 |
| | 13,186 |
|
| Other liabilities | 31,483 |
| | 29,822 |
| | 4,149 |
|
| Worksite employee related assets | 261,750 |
| | (862,699 | ) | | (304,265 | ) |
| Worksite employee related liabilities | (261,058 | ) | | 862,931 |
| | 310,813 |
|
| Net cash provided by operating activities | 130,599 |
| | 151,899 |
| | 100,721 |
|
| Investing activities | | | | | |
| Acquisitions of businesses | (4,750 | ) | | — |
| | (194,998 | ) |
| Purchase of debt securities | (41,939 | ) | | (24,875 | ) | | (7,750 | ) |
| Proceeds from maturity of debt securities | 27,557 |
| | — |
| | 1,000 |
|
| Purchase of property and equipment | (18,557 | ) | | (20,552 | ) | | (10,690 | ) |
| Net cash used in investing activities | (37,689 | ) | | (45,427 | ) | | (212,438 | ) |
| Financing activities | | | | | |
| Proceeds from issuance of common stock, net of issuance costs | — |
| | 217,796 |
| | — |
|
| Realized tax benefit of deductible IPO transaction costs | 822 |
| | 1,939 |
| | — |
|
| Proceeds from issuance of common stock on exercised options | 7,166 |
| | 2,193 |
| | 7,109 |
|
| Proceeds from issuance of common stock on employee stock purchase plan | 5,315 |
| | 3,393 |
| | — |
|
| Excess tax benefit from equity incentive plan activity | 20,670 |
| | 9,663 |
| | 15,610 |
|
| Borrowings under notes payable | — |
| | — |
| | 970,000 |
|
| Repayment of notes payable | (45,312 | ) | | (273,550 | ) | | (451,679 | ) |
| Payment of debt issuance costs | — |
| | (11,060 | ) | | (25,697 | ) |
| Payments of special dividend | — |
| | — |
| | (357,582 | ) |
| Repayments under capital leases | (250 | ) | | (306 | ) | | (778 | ) |
| Repurchase of common stock | (48,364 | ) | | (15,009 | ) | | (5,963 | ) |
| Awards effectively repurchased for required employee withholding taxes | (799 | ) | | (1,431 | ) | | (8,643 | ) |
| Net cash provided by (used in) financing activities | (60,752 | ) | | (66,372 | ) | | 142,377 |
|
| Effect of exchange rate changes on cash and cash equivalents | (321 | ) | | (115 | ) | | (53 | ) |
| Net increase in cash and cash equivalents | 31,837 |
| | 39,985 |
| | 30,607 |
|
| Cash and cash equivalents at beginning of period | 134,341 |
| | 94,356 |
| | 63,749 |
|
| Cash and cash equivalents at end of period | $ | 166,178 |
| | $ | 134,341 |
| | $ | 94,356 |
|
| | | | | | |
| Supplemental disclosures of cash flow information | | | | | |
| Cash paid for interest | $ | 15,224 |
| | $ | 32,051 |
| | $ | 30,534 |
|
| Cash paid for income taxes, net | $ | 2,005 |
| | $ | (3,809 | ) | | $ | 8,070 |
|
| Supplemental schedule of noncash investing and financing activities | | | | | |
| Payable for purchase of property and equipment | $ | 344 |
| | $ | 1,290 |
| | $ | 1,302 |
|
| Allowance for tenant improvements | $ | 1,257 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 |
| Operating activities | | | |
| Net income | $ | 192 |
| $ | 178 |
| 61 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 46 |
| 35 |
| 39 |
|
| Stock-based compensation | 44 |
| 32 |
| 26 |
|
| Deferred income taxes | 1 |
| (25 | ) | 42 |
|
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | 10 |
| (14 | ) | — |
|
| Unbilled revenue | (14 | ) | (4 | ) | (79 | ) |
| Prepaid expenses | (9 | ) | 28 |
| (45 | ) |
| Accounts payable and other current liabilities | (8 | ) | 23 |
| 11 |
|
| Client deposits | 4 |
| (4 | ) | (2 | ) |
| Accrued wages | 23 |
| 26 |
| 73 |
|
| Accrued health insurance costs | (16 | ) | 22 |
| 16 |
|
| Accrued workers' compensation costs | (7 | ) | 9 |
| 60 |
|
| Payroll taxes payable and other payroll withholdings | (305 | ) | 294 |
| (175 | ) |
| Other assets | (64 | ) | (11 | ) | 174 |
|
| Other liabilities | (1 | ) | 17 |
| (9 | ) |
| Net cash (used in) provided by operating activities | (104 | ) | 606 |
| 192 |
|
| Investing activities | | | |
| Purchases of marketable securities | (258 | ) | — |
| (15 | ) |
| Proceeds from sale and maturity of marketable securities | 101 |
| 14 |
| 28 |
|
| Acquisitions of property and equipment | (43 | ) | (38 | ) | (40 | ) |
| Net cash used in investing activities | (200 | ) | (24 | ) | (27 | ) |
| Financing activities | | | |
| Repurchase of common stock | (61 | ) | (44 | ) | (72 | ) |
| Proceeds from issuance of common stock | 14 |
| 16 |
| 9 |
|
| Awards effectively repurchased for required employee withholding taxes | (22 | ) | (11 | ) | (4 | ) |
| Proceeds from issuance of debt, net | 210 |
| — |
| 58 |
|
| Payments for extinguishment of debt | (204 | ) | — |
| (58 | ) |
| Repayment of debt | (22 | ) | (38 | ) | (37 | ) |
| Net cash used in financing activities | (85 | ) | (77 | ) | (104 | ) |
| Net (decrease) increase in unrestricted and restricted cash and cash equivalents | (389 | ) | 505 |
| 61 |
|
| Cash and cash equivalents, unrestricted and restricted: | | | |
| Beginning of period | 1,738 |
| 1,233 |
| 1,172 |
|
| End of period | $ | 1,349 |
| $ | 1,738 |
| $ | 1,233 |
|
| | | | |
| Supplemental disclosures of cash flow information | | | |
| Interest paid | $ | 17 |
| $ | 16 |
| 15 |
|
| Income taxes paid, net | 49 |
| 2 |
| 39 |
|
| Supplemental schedule of noncash investing and financing activities | | | |
| Payable for purchase of property and equipment | $ | 3 |
| $ | 2 |
| 1 |
|
See accompanying notes.
TriNet Group, Inc. and SubsidiariesTRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
TriNet Group Inc. (the(TriNet, or the Company, or TriNet)we, our and us), a Delaware corporation incorporated in January 2000,professional employer organization (PEO), provides comprehensive human resources or HR,(HR) solutions for small to midsize businesses or SMBs, across a number of industries(SMBs) under a co-employment model. The Company’s HR solutions are designed to manage an increasingly complex set of HR regulations, costs, risks and responsibilities for its clients, allowing them to focus on operating and growing their core businesses. These HR solutions include bundled services, such as multi-state payroll processing and tax administration, employee benefits programs, including health insurance and retirement plans, workersworkers' compensation insurance and claims management, federal, state and local labor, employment and benefit law compliance, risk mitigation, expense and time management, human capital consulting and other services.
The Company provides its services through Through the co-employment relationships with its clients, under which the Company and its clients each take responsibility for certain portions of the employer-employee relationship, for worksite employees (WSEs). The Company iswe are the employer of record for most administrative and regulatory purposes, including the following: (i) including:
compensation through wages and salaries; (ii) salaries,
employer payroll-related taxes payment; (iii) tax payments,
employee payroll-related taxes withholdingtax withholdings and payment; (iv) payments,
employee benefit programs including health and life insurance, and others;others, and (v) workers
workers' compensation coverage. The client is
Our clients are responsible for responsibilities not assumed by the Company, including the day-to-day job responsibilities of the WSEs.worksite employees (WSEs).
Segment Information
The Company operatesWe operate in one reportable segment in accordance with Accounting Standard Codification (ASC) 280 – Segment Reporting, issued by the Financial Accounting Standards Board (FASB).segment. All of the Company’sour service revenues are generated from external clients. Less than 1% of revenue is generated outside of the United States of America (U.S.). Substantially all of the Company’s long-lived assets are located in the U.S.
Basis of Presentation
The accompanyingOur consolidated financial statements and footnotes thereto of the Company and its wholly owned subsidiaries have beenare prepared in accordanceconformity with U.S. generally accepted accounting principles in the United States of America (GAAP). All intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications and Impact of Recently Adopted Accounting Guidance
Certain prior periodyear amounts in the consolidated balance sheets, the consolidated statement of stockholders’equity (deficit), the consolidated statement of cash flows and Note 3 have been reclassified to conform to the current period presentation.
The accompanying consolidated balance sheets presentBalance sheet reclassifications are summarized in the current assets and current liabilities directly related totables below:
|
| | | | | | | | | | | | |
| | | December 31, 2017 |
| | | As previously | | Reclassification | | As |
| (in millions) | | Reported | | Amounts | | Revised |
| Assets | | | | | | |
| Restricted cash, cash equivalents, and investments | | $ | 15 |
| | $ | 1,265 |
| | $ | 1,280 |
|
| Accounts receivable, net | | — |
| | 21 |
| | 21 |
|
| Unbilled revenue, net | | — |
| | 297 |
| | 297 |
|
| Prepaid income taxes | | 5 |
| | (5 | ) | | — |
|
| Prepaid expenses | | 8 |
| | 30 |
| | 38 |
|
| Other current assets | | 2 |
| | 17 |
| | 19 |
|
| Worksite employee related assets | | 1,625 |
| | (1,625 | ) | | — |
|
| Workers' compensation collateral receivable | | 39 |
| | (39 | ) | | — |
|
| Deferred and other long term income taxes | | 2 |
| | (2 | ) | | — |
|
| Other assets | | 14 |
| | 41 |
| | 55 |
|
|
| | | | | | | | | | | | |
| | | December 31, 2017 |
| | | As previously | | Reclassification | | As |
| (in millions) | | Reported | | Amounts | | Revised |
| Liabilities and stockholders' equity | | | | | | |
| Accounts payable & other current liabilities | | $ | 45 |
| | $ | 14 |
| | $ | 59 |
|
| Accrued wages | | 40 |
| | 289 |
| | 329 |
|
| Client deposits | | — |
| | 52 |
| | 52 |
|
| Accrued health insurance costs, net | | — |
| | 151 |
| | 151 |
|
| Accrued workers' compensation costs, net | | — |
| | 67 |
| | 67 |
|
| Payroll tax liabilities and other payroll withholdings | | — |
| | 1,034 |
| | 1,034 |
|
| Insurance premiums and other payables | | — |
| | 25 |
| | 25 |
|
| Other current liabilities | | 14 |
| | (14 | ) | | — |
|
| Worksite employee related liabilities | | 1,618 |
| | (1,618 | ) | | — |
|
Effects on the processing of human resources transactions as WSE-related assets and WSE-related liabilities, respectively. WSE-related assets consist of cash and investments restricted for current workers compensation claim payments, payroll funds collected, accounts receivable, unbilled service revenues, and refundable or prepaid amounts related to the Company-sponsored workers compensation and health plan programs. WSE-related liabilities consist of client prepayments, wages and payroll taxes accrued and payable, and liabilities related to the Company-sponsored workers compensation and health plan programs resulting from workers compensation case reserves, premium amountsflow statement due to providers for enrolled employees,adoption of ASU 2016-18 and workers compensationeffects due to reclassifications are summarized below:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | 2016 |
| (in millions) | As previously reported | Effect of ASU adoption | Reclassified amounts | As revised | As previously reported | Effect of ASU adoption | Reclassified amounts | As revised |
| Operating activities | | | | | | | | |
| Changes in operating assets and liabilities: | | |
| | | | | |
| Accounts receivable | $ | — |
| $ | — |
| $ | (14 | ) | $ | (14 | ) | $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Restricted cash, cash equivalents, and investments | (46 | ) | 46 |
| — |
| — |
| (42 | ) | 42 |
| — |
| — |
|
| Unbilled revenue | — |
| — |
| (4 | ) | (4 | ) | — |
| — |
| (79 | ) | (79 | ) |
| Prepaid income taxes | 37 |
| — |
| (37 | ) | — |
| (38 | ) | — |
| 38 |
| — |
|
| Prepaid expenses | 1 |
| — |
| 27 |
| 28 |
| (2 | ) | — |
| (43 | ) | (45 | ) |
| Workers' compensation collateral receivable | (7 | ) | — |
| 7 |
| — |
| (3 | ) | — |
| 3 |
| — |
|
| Accounts payable | 22 |
| — |
| 1 |
| 23 |
| 9 |
| — |
| 2 |
| 11 |
|
| Client deposits | — |
| — |
| (4 | ) | (4 | ) | — |
| — |
| (2 | ) | (2 | ) |
| Accrued wages | 11 |
| — |
| 15 |
| 26 |
| 4 |
| — |
| 69 |
| 73 |
|
| Accrued health insurance costs | — |
| — |
| 22 |
| 22 |
| — |
| — |
| 16 |
| 16 |
|
| Accrued workers' compensation costs | 12 |
| — |
| (3 | ) | 9 |
| 55 |
| — |
| 5 |
| 60 |
|
| Payroll taxes payable and other payroll withholdings | — |
| — |
| 294 |
| 294 |
| — |
| — |
| (175 | ) | (175 | ) |
| Worksite employee related assets | (343 | ) | 307 |
| 36 |
| — |
| 92 |
| 1 |
| (93 | ) | — |
|
| Worksite employee related liabilities | 342 |
| — |
| (342 | ) | — |
| (94 | ) | — |
| 94 |
| — |
|
| Other assets | 4 |
| — |
| (15 | ) | (11 | ) | — |
| — |
| 174 |
| 174 |
|
| Other liabilities | — |
| — |
| 17 |
| 17 |
| — |
| — |
| (9 | ) | (9 | ) |
| Net cash provided by operating activities | 253 |
| 353 |
| — |
| 606 |
| 149 |
| 43 |
| — |
| 192 |
|
| Financing activities | | | | | | | | |
| Proceeds from issuance of common stock on exercised options | 11 |
| — |
| (11 | ) | — |
| 5 |
| — |
| (5 | ) | — |
|
| Proceeds from issuance of common stock on employee stock purchase plan | 5 |
| — |
| (5 | ) | — |
| 4 |
| — |
| (4 | ) | — |
|
| Proceeds from issuance of common stock | — |
| — |
| 16 |
| 16 |
| — |
| — |
| 9 |
| 9 |
|
| Net increase in cash and cash equivalents | $ | 152 |
| $ | 353 |
| $ | — |
| $ | 505 |
| $ | 18 |
| $ | 43 |
| $ | — |
| $ | 61 |
|
Interest income previously classified in other income (expense), net is now presented in a new line item. Depreciation expense and health reserves thatamortization of intangible assets previously reported separately, are expected to be disbursed within the next 12 months.now presented together as depreciation and amortization of intangible assets.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires managementus to make estimates and assumptions that affect certain reported amounts and related disclosures. TheseSignificant estimates include, but are not limitedinclude:
liability for unpaid losses and loss adjustment expenses (accrued workers' compensation costs) related to allowancesworkers' compensation and workers' compensation collateral receivable,
accrued health insurance costs,
liability for accounts receivable, workers compensation-related assets and liabilities, health plan assets and liabilities, recoverabilityinsurance premiums payable,
impairments of goodwill and other intangible assets,
income taxes, stock-based compensationtax assets and other contingent liabilities. Suchliabilities, and
liability for legal contingencies.
These estimates are based on historical experience and on various other assumptions that Company management believeswe believe to be reasonable underfrom the circumstances. Actual resultsfacts available to us. Some of the assumptions are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial statements could differ from those estimates.be materially affected.
Revenue Recognition
Professional service revenues represent fees chargedOn January 1, 2018, we adopted Accounting Standards Codification Topic 606 (ASC Topic 606) using the modified retrospective method applied to clientsthose contracts which were not completed as of January 1, 2018. Results for processing HR transactions on behalfreporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while the comparative prior period amounts are not restated and continue to be reported in accordance with statements previously accounted for under Accounting Standards Codification Topic 605.
Upon adoption of ASC Topic 606, we recorded a $2 million cumulative effect adjustment to opening retained earnings as of January 1, 2018. Impacts from adoption of the Company’s clients, such as payroll payments and remitting employment tax withholding amounts, providing access to the Company’s HR expertise, including HR templates, best practices, and interactionsnew standard on our revenue recognition include:
Our annual service contracts with our HR professionals, providing labor, employment and benefit law compliance services to assist clients in avoiding or reducing liability and exposure and providing additional services, including recruiting or other services, to support various stages of clients’ growth. that are cancellable with 30 days' notice are initially considered 30-day contracts under the new standard;
Professional service revenues are recognized on an output basis which results in recognition at the period the services are rendered and earned under service arrangements with clients where servicetime payroll is processed;
Our non-refundable set up fees are fixed or determinableno longer deferred but accounted for as part of our transaction price and collectability is reasonably assured.
Insurance service revenues consist of insurance-related billings and administrative fees collected from clients and withheld from WSEs for Company-sponsored, risk-based, fully-insured insurance plans provided through third-party insurance carriers, primarily employee health benefit insurance and workers compensation insurance. Insurance service revenues are recognized in the period amounts are due and collectability is reasonably assured.
Theallocated among professional service revenues and insurance services revenues; and
The majority of sales commissions related to onboarding new clients that were previously expensed are capitalized as contract assets and amortized over the estimated client life.
Revenues are recognized when control of the promised services are transferred to our clients, in an amount that reflects the consideration that we expect to receive in exchange for services. We generate all of our revenue from contracts with clients. We disaggregate revenues into professional services revenues and insurance services revenues as reported on the consolidated statements of income and comprehensive income. Generally, both the client and the Company may terminate the contract without penalty by providing a 30-day notice.
Performance Obligations
At contract inception, we assess the services promised in our contracts with clients and identify a performance obligation for each distinct promise to transfer to the client a service or bundle of services. We determined that the following distinct services represent separate performance obligations:
Payroll and payroll tax processing,
Health benefits services, and
Workers’ compensation services.
Payroll and payroll tax processing performance obligations include services to process payroll and payroll tax-related transactions on behalf of our clients. Revenues associated with this performance obligation are reported as professional service revenues and recognized using an output method in which the control of the promised services is considered transferred when a client's payroll is processed by us and WSEs are paid. Professional service revenues are each considered separate unitsstated net of accounting and the associated fees and insurance premiums are billed as such for the majority of the Company’s clients. For clients billed through a bundled invoice, the selling price of significant deliverables is determined based on the best estimate of the selling price.
The Company is not the primary obligor for payroll and payroll tax payments and, therefore, these payments are not reflected as either revenue or expense. The gross payroll and payroll tax payments made on behalfamounts funded by our clients. Although we assume the responsibilities to process and remit the payroll and payroll related obligations, we do not assume employment-related responsibilities such as determining the amount of the payroll and related payroll obligations. As a result, we are the agent in this arrangement for revenue recognition purposes.
Health benefits and workers' compensation services include performance obligations to provide TriNet-sponsored health benefits and workers' compensation insurance coverage through insurance policies provided by third-party insurance carriers and settle high deductible amounts on those policies. Revenues associated with these performance obligations are reported as insurance services revenues and are recognized using the output method over the period of time that the client and WSEs are covered under TriNet-sponsored insurance policies.
We control the selection of health benefits and workers' compensation coverage made available. As a result, we are the principal in this arrangement for revenue recognition purposes and insurance services revenues are reported gross.
We generally charge new customers a nominal upfront non-refundable fee to recover our costs to set them up on our TriNet platform for payroll processing and other administrative services, such as benefit enrollments. These fees are accounted for as part of our transaction price and are allocated among the performance obligations based on their relative standalone selling prices.
Variable Consideration and Pricing Allocation
Our contracts with customers generally do not include any variable consideration. However, from time to time, we may offer incentive credits to our clients combined, were $30.6 billion, $25.6 billionconsidered to be variable consideration including incentive credits issued related to contract renewals. Incentive credits are recorded as a reduction to revenue as part of the transaction price at contract inception when there is a basis to reasonably estimate the amount of the incentive credit and $17.6 billionwe reduce the full amount of the credit only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. These incentive credits are allocated among the performance obligations based on their relative standalone selling prices.
We allocate the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised services underlying each performance obligation. The transaction price for the years ended December 31, 2015, 2014,payroll and 2013, respectively.payroll tax processing performance obligations is determined upon establishment of the contract that contains the final terms of the arrangement, including the description and price of each service purchased. The estimated service fee is calculated based on observable inputs and include the following key assumptions: target profit margin, pricing strategies including the mix of services purchased and competitive factors, and client and industry specifics.
The Company recordstransaction price for health benefits insurance and worker’s compensation insurance performance obligations is determined during the new client on-boarding and enrollment processes based on the types of benefits coverage the clients and WSEs have elected and the applicable risk profile of the client. We estimate our service fees based on actuarial forecasts of our expected insurance premiums and claim costs, and amounts to cover our costs to administer these programs.
We require our clients to prefund payroll and related taxes and other withholding liabilities before payroll is processed or due for payment. Under the provision of our contracts with clients, we generally will process the payment of a liability relatingclient’s payroll only when the client successfully funds the amount required. As a result, there is no financing arrangement for the contracts, however, certain contracts to work performed by WSEs but unpaid atprovide payroll and payroll tax processing services permit the end of eachclient to pay certain payroll tax components ratably over a 12-month period inrather than as payroll tax is determined on wages paid, which may be considered a significant financing arrangement under ASC Topic 606. However, as the period in whichbetween our performing the WSEs perform work, along withservice under the related receivablecontract and when the client pays for the same period. The Company generally charges an upfront non-refundable set-up feeservice is less than one year, we have elected, as a practical expedient, not to adjust the transaction price.
Contract Costs
We recognize as deferred commission expense the incremental cost to obtain a contract with a client for which the performance of onboarding services is not a discrete earnings event,certain components under our commission plans for sales representatives and therefore the revenue is recognized on a straight-line basischannel partners that are directly related to new customers onboarded as we expect to recover these costs through future service fees. Such assets will be amortized over the estimated average client tenure. These commissions are earned on the basis of the revenue generated from payroll and payroll tax processing performance obligations. When the commission on a renewal contract is not commensurate with the commission on the initial contract, such incremental commission will be capitalized and amortized over the estimated average client tenure. If the commission for both initial contract and renewal contracts are commensurate, such commissions are expensed in the contract period. When the amortization period is less than one year, we apply practical expedient to expense sales commissions in sales and marketing expenses in the period incurred. The below table summarizes the amounts capitalized and amortized during the year ended December 31, 2018:
|
| | | | | | |
| | Year Ended December 31, 2018 |
| (in millions) | Capitalized | Amortized |
| Deferred commission costs | $ | 33 |
| $ | 2 |
|
Certain commission plans will pay a commission on estimated professional service revenues over the first 12 months of the contract with clients. The portion of commission paid in excess of the actual commission earned in that period is recorded as prepaid commission. When the prepaid commission is considered earned, it is classified as a deferred commission expense and subject to amortization. We do not have material contract liabilities as of December 31, 2018.
Insurance Costs
Insurance premiums paid to theOur fully insured insurance plans are provided by third-party insurance carriers under risk-based or guaranteed-cost insurance policies. Under risk-based policies, we agree to reimburse our carriers for any claims paid within an agreed-upon per-person deductible layer up to a maximum aggregate exposure limit per policy. These deductible dollar limits and maximum limits vary by carrier and year. Under guaranteed-cost policies, our carriers establish the premiums and we are not responsible for any deductible.
Insurance costs include insurance premiums for coverage for clients and WSEs and the reimbursements paid to theprovided by insurance carriers, reimbursement of claims payments made by insurance carriers or third-party administrators, for claims payments madeand changes in accrued costs related to our workers' compensation and health benefit insurance.
At policy inception, annual workers' compensation premiums are estimated by the insurance carriers based on projected wages over the Company’s behalf within itsduration of the policy period and the risk categories of the WSEs. As actual wages are realized, premium expense recorded may differ from estimated premium expense, creating an asset or liability throughout the policy year. Such asset or liability is reported on our consolidated balance sheets as prepaid expenses or insurance deductible layer, where applicable, are included in costpremiums and operating expenses as insurance costs.other payables, respectively.
WorkersAccrued Workers' Compensation Insurance ReservesCosts
WorkersWe have secured fully insured workers' compensation insurance reservespolicies with insurance carriers to administer and pay claims for our clients and WSEs. We are responsible for reimbursing the insurance carriers for losses up to $1 million per claim occurrence (deductible layer). Insurance carriers are responsible for administering and paying claims. We are responsible for reimbursing each carrier up to a deductible limit per occurrence. Accrued workers' compensation costs represent our liability for unpaid losses and loss adjustment expenses. These accrued costs are established to provide for the estimated ultimate costs of paying claims within the deductible layer in accordance with workersworker's compensation insurance policies. These reservesaccrued costs include estimates for reported losses, plus amounts for those claimsand incurred but not paid,reported (IBNR) losses, accrued costs on reported claims, and estimates of certain expenses associated with processing and settling the claims. In establishing the workers compensation insurance reserves, the Company usesthese accrued costs, we use an independent actuarialactuary to provide an estimate of undiscounted future cash payments that would be made to settle the claims. In the Company's experience, plan years related to workers compensation programs may take up to 10 years or more to be settled.claims based upon:
In estimating these reserves, the Company utilizesTriNet's historical loss experience, exposure data, and actuarial judgment, together with a range of industry loss experience,
inputs which are primarily based upon theincluding WSE job responsibilities theirand location, the
historical frequency and severity of workersworkers' compensation claims, and
an estimate of future cost trends. Alltrends to establish expected loss ratios for subsequent accident years,
expected loss ratios for the latest accident year or prior accident years, adjusted for the loss trend, the effect of these components could materially impactrate changes and other quantifiable factors, and
loss development factors to project the reserves as reported inlosses for each accident year to an ultimate basis.
We assess the consolidated financial statements.accrued workers' compensation costs on a quarterly basis. For each reporting period, changes in the actuarial methods and assumptions resulting from changes in actual claims experience and other trends are incorporated into the workersaccrued workers' compensation claims cost estimates. Accordingly, final claim settlements may vary materially from the present estimates, particularly when those payments may not occur until well into the future.
The Company regularly reviews the adequacy of workers compensation insurance reserves.costs. Adjustments to previously established reservesaccrued costs estimate are reflected in the results of operations for the period in which the adjustment is identified. Such adjustments could be significant, reflecting any variety of new and adverse or favorable trends. Any unexpected increases inAccordingly, final claim settlements may vary materially from the severitypresent estimates, particularly when those payments may not occur until well into the future. In our experience, plan years related to workers' compensation programs may take ten years or frequency of claims could result in material adverse effectsmore to the operating results.be settled.
The Company doesWe do not discount loss reserves accrued under these programs.workers' compensation costs. Claim costs expected to be paid within one year are recorded as accrued workersworkers' compensation costs and included in short-term worksite employee related liabilities or
short term worksite related assets if funds are held by third parties to cover the claims, whilecosts. Claim costs expected to be paid beyond one year are included in long-term liabilitiesaccrued workers' compensation costs, less current portion.
We have collateral agreements with various insurance carriers where either we retain custody of funds in trust accounts which we record as restricted cash and cash equivalents, or remit funds to carriers. Collateral whether held by us, or the carriers, is used to settle our insurance and claim deductible obligations to them. Collateral requirements are established at the policy year and are re-assessed by each carrier annually. Based on the results of each assessment, additional collateral may be required for or paid to the carrier or collateral funds may be released or returned to the Company. Collateral paid to carriers, by agreement permits net settlement of obligations against collateral held, which we record net of our accrued costs (Carrier Collateral Offset). We offset Carrier Collateral Offset against our obligation due within the next 12 months before applying against long term workers compensation receivables if fundsobligations. Collateral balances in excess of accrued costs are held by third parties to cover the claims on the consolidated balance sheets. Assets held by third parties to cover claim liabilities remain restricted until therecorded as accounts receivable or in other assets.
Accrued Health Insurance Costs
We sponsor and administer a number of fully insured, risk-based employee benefit plans, including group health, dental, and vision as an employer plan year to which they relate are settled.
At policy inception, annual premiums are estimated based on projected wages over the durationsponsor under section 3(5) of the policy period. As actual wages are realized, the amounts paidERISA. In 2018, a majority of our group health insurance costs related to risk-based plans. Our remaining group health insurance costs were for premiums may differ from the estimates recorded by the Company, creating an asset or liability throughout the policy year. Such differences could have a material effect on the Company’s consolidated financial position and results of operations.guaranteed-cost policies.
Health Benefits
Health benefitsAccrued health insurance reservescosts are established to provide for the estimated unpaid costs of reimbursing the carriers for paying claims within the deductible layer in accordance with risk-based health insurance policies. These reservesaccrued costs include estimates for reported losses, plus estimates for claims incurred but not reported. Reserves are determinedpaid. We assess accrued health insurance costs regularly by the Company based upon a number ofindependent actuarial studies that include other relevant factors including but not limited to actuarial calculations,such as current and historical claims payment patterns, plan enrollment and medical trend rates. Ultimate
In certain carrier contracts we are required to prepay the expected claims activity for the subsequent period. These prepaid balances by agreement permit net settlement of obligations and offset the accrued health insurance reserves may varycosts or when the prepaid is in subsequent years fromexcess of our recorded liability the amounts estimated.net asset position is included in prepaid expenses. As of December 31, 20152018 and 2014, liability reserves of $113.22017, prepayments included in accrued health insurance costs were $33 million and $82.1$19 million, respectively, were recorded within health benefits payable and are included in WSE-related liabilities in the accompanying consolidated balance sheets.respectively.
Under certain contracts,policies, based on plan performance, the Companywe may be entitled to receive refunds of premiums.premiums which we recognize in accordance with the policy terms. We estimate these refunds based on premium and claims data and record these withinas a reduction in the insurance costs on the consolidated statements of income and comprehensive income and prepaid health plan expenses and are included in WSE-related assets on the consolidated balance sheet.sheets. As of December 31, 2015 and 2014, the Company had $6.82018, there were no prepaid insurance premiums. As of December 31, 2017, there was $11 million and $4.9 million, respectively,included within prepaid expenses as prepaid health plan expenses included within WSE-related assets.insurance premiums.
Cash and Cash Equivalents
Cash and cash equivalents include bank deposits and short-term, highly liquid investments. Investments with original maturity dates of three months or less are considered cash equivalents.
Restricted Cash, Cash Equivalents and Investments
The Company classifies itsRestricted cash, cash equivalents and investments presented on our consolidated balance sheets include:
cash and cash equivalents in trust accounts functioning as security deposits for our insurance carriers,
payroll funds collected representing cash collected in advance from clients which we designate as restricted for the purpose of funding WSE payroll and payroll taxes and other payroll related liabilities, and
amounts held in trust for current and future premium and claim obligations with our insurance carriers, which amounts are held in trust according to the terms of the relevant insurance policies and by the local insurance regulations of the jurisdictions in which the policies are in force.
Investments
Our investments are primarily classified as available-for-sale and are carried at estimated fair value.
Unrealized gains and losses are reported as a component of accumulated other comprehensive income.income, net of deferred income taxes. The amortized cost of debt securitiesinvestments is adjusted for amortization of premiums and accretion of discounts from the date of purchase to the earliest call date for premiums or the maturity or sale.date for discounts. Such amortization is included in interest income as an addition to or deduction from the coupon interest earned on the investments. The Company usesWe use the specific identification method of determiningto determine the cost basis in computing realized gains and losses on the sale of its available-for-sale securities. Realized gains and losses are included in otherinterest income in the accompanying consolidated statementstatements of operations.income and comprehensive income.
The Company assesses whetherWe assess our investments for an other-than-temporary impairment loss has occurred due to declinesa decline in fair value or other market conditions. With respectWe review several factors to debt securities, this assessment takes into account our currentdetermine whether a loss is other than temporary, such as the length and extent of the fair value decline, the financial condition and near-term prospects of the issuer and whether we have the intent to sell or not sell, the security, and whether it iswill more likely than not that we will not be required to sell before the securities' anticipated recovery, which may be at maturity. If management determines that a security before recoveryis impaired under these circumstances, the impairment recognized in earnings is measured as the entire difference between the amortized cost and the then-current fair value.
We have investments within our unrestricted and our restricted accounts. Unrestricted investments are recorded on the balance sheet as current or noncurrent based upon the remaining time to maturity, and investments subject to restrictions are classified as current or noncurrent based on the expected payout of the related liability.
Fair Value of Financial Instruments
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
Our financial assets recorded at fair value on a recurring basis are comprised of cash equivalents, available-for-sale marketable securities and certificates of deposits. We measure certain financial assets at fair value for disclosure purposes, as well as on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. Our other current financial assets and liabilities have fair values that approximate their carrying value due to their short-term nature.
Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market to measure fair value, summarized as follows:
Level 1—observable inputs for identical assets or liabilities, such as quoted prices in active markets,
Level 2—inputs other than the quoted prices in active markets that are observable either directly or indirectly,
Level 3—unobservable inputs in which there is little or no market data, which requires that we develop our own assumptions.
The fair value hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. We classify our cash equivalents, debt securities and debt payable in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its amortized cost.entirety.
Unbilled Revenue
We recognize WSE payroll and payroll tax liabilities in the period in which the WSEs perform work. When clients' pay periods cross reporting periods, we accrue the portion of the unpaid WSE payroll where we assume, under state regulations, the obligation for the payment of wages and the corresponding payroll tax liabilities associated with the work performed prior to period-end. These estimated payroll and payroll tax liabilities are recorded in accrued wages. The associated receivables, including estimated revenues, offset by advance collections from clients, are recorded as unbilled revenue. As of December 31, 2018 and 2017, advance collections included in unbilled revenue were $23 million and $12 million respectively.
Accounts Receivable
The Company’sOur accounts receivable which representrepresents outstanding gross billings to clients, are reported net of an allowance for doubtful accounts. The Company establishesWe require our clients to prefund payroll and related liabilities before payroll is processed or due for payment. If a client fails to fund payroll or misses the funding cut-off, at our sole discretion, we may pay the payroll and the resulting unfunded payroll is recognized as accounts receivable. When client payment is received in advance of our performance under the contract, such amount is recorded as client deposits. We establish an allowance for doubtful accounts based on historical experience, the age of the accounts receivable balances, credit quality of clients, current economic conditions and other factors that may affect clients’ ability to pay, and charges offcharge-off amounts when they are deemed uncollectible.
Property and Equipment
The Company recordsWe record property and equipment at historical cost and computescompute depreciation using the straight-line method over the estimated useful lives of the assets or the lease terms, generally three to five years for software and office
equipment, five to seven years for furniture and fixtures, and the shorter of the asset life or the remaining lease term for leasehold improvements. The Company expensesWe expense the cost of maintenance and repairs as incurred and capitalizes betterments.capitalize leasehold improvements.
Internal Use Software
The Company capitalizesWe capitalize internal and external costs incurred to develop internal-use computer software during the application development stage. Application development stage costs include license feesfee paid to third-parties for software use, software configuration, coding, and installation. Capitalized costs are amortized on a straight-line basis over the estimated useful life, typically ranging from three to five years, commencing when the software is placed into service. The Company expensesWe expense costs incurred during the preliminary project stage, as well as general and administrative, overhead, maintenance and training costs, and costs that do not add functionality to existing systems. For the years ended December 31, 2015, 20142018, 2017 and 2013,2016, internally developed software costs capitalized were $11.2$33 million, $6.3$29 million and $3.3$21 million respectively.
We periodically assess the likelihood of unsuccessful completion of projects in progress, as well as monitor events or changes in circumstances, which might suggest that impairment has occurred and recoverability should be evaluated. An impairment loss is recognized if the carrying amount of the asset is not recoverable and exceeds the future net cash flows expected to be generated by the asset.
Goodwill and Other Intangible Assets
The Company’sOur goodwill and identifiable intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment on an annual basis or when an event occurs or circumstances change in a way to indicate that there has been a potential decline in the fair value of the reporting unit. ImpairmentGoodwill impairment is determined by comparing the estimated fair value of the reporting unit to its carrying amount, including goodwill. The Company’s business is largely homogeneous and, as a result, allAll goodwill is associated with the Company’sone reporting unit within our one reportable segment.
Annually, we perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit has declined below carrying value. This assessment considers various financial, macroeconomic, industry, and reporting unit specific qualitative factors. We perform our annual impairment testing in the fourth quarter. Based on the results of our reviews, no impairment loss was recognized in the results of operations for the years ended December 31, 2018, 2017 and 2016.
Intangible assets with finite useful lives include purchased client lists, trade names, developed technologies, and contractual agreements. Intangible assets are amortized over their respective estimated useful lives ranging from two to sixten years using either the straight-line method or an accelerated method. Intangible assets are reviewed for indicators of impairment at least annually and evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on the results of the Company’sour reviews, no impairment loss was recognized in the results of operations for the years ended December 31, 2015, 20142018, 2017 and 2013.
Annually, the Company performs a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit has declined below carrying value. This assessment considers various financial, macroeconomic, industry, and reporting unit specific qualitative factors. The Company performs its annual impairment testing in its fiscal fourth quarter. Based on the results of the Company’s reviews, no impairment loss was recognized in the results of operations for the years ended December 31, 2015, 2014 and 2013.2016.
Impairment of Long-Lived Assets
The Company evaluates itsWe evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is considered impaired if the carrying amount exceeds the undiscounted future net cash flows the asset is expected to generate. An impairment charge is recognized for the amount by which the carrying amount of the assets exceeds its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less selling costs.
Advertising Costs
The Company expensesWe expense the costs of producing advertisements at the time production occurs, and expensesexpense the cost of running advertisements in the period in which the advertising space or airtime is used as sales and marketing expense. Advertising costs were $8.2$17 million, $7.3$8 million, and $7.5$6 million for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively.
Stock-Based Compensation
The Company has issued three types ofOur stock-based awards to employees:employees include time-based and performance-based restricted stock units and restricted stock awards, stock options and an employee stock purchase plan. Compensation expense associated with restricted stock units and restricted stock awards is based on the fair value of common stock on the date of grant. Compensation expense associated with stock options and employee stock purchase plan are based on the estimated grant date fair value method using the Black-Scholes valuationoption pricing model. Expense is recognized using a straight-line amortization method over the respective vesting period for awards that are ultimately expected to vest. Accordingly, stock-based compensation has been reduced for estimated forfeitures. When estimating forfeitures, the Company
considers voluntary termination behaviors as well as trends of actual option forfeitures. A tax benefit from stock-based compensation isvest, with adjustments to expense recognized in equity to the extent that an incremental tax benefit is realized.period in which forfeitures occur.
Income Taxes
The Company recognizesWe account for our provision for income taxes using the asset and liability method, under which we recognize income taxes payable or refundable for current year and deferred tax assets and liabilities for estimated future tax effectseffect of events that have been recognized in our financial statements or tax returns. We measure our current and deferred tax assets and liabilities based on provision of enacted tax laws of those jurisdictions in which we operate. The effect of changes in tax laws and regulations, or interpretations, is recognized in our consolidated financial statements in the period that includes the enactment date.
We recognize deferred tax assets and liabilities based on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes, under currentas well as the expected benefits of using net operating loss and other carryforwards. We are required to establish a valuation allowance when it is determined more likely than not that the deferred tax laws. Deferred tax expense results fromassets will not be realized. Provision for income taxes may change when estimates used in determining valuation allowances change or when receipt of new information indicates the need for adjustment in valuation allowances. Changes in valuation allowances are reflected as a component of provision for income taxes in the period the change in the net liability for deferred income taxes between periods.is enacted.
The Company maintainsWe recognize a reserve for uncertain tax positions. The Company evaluates tax positions taken or expected to be taken in a tax return for recognition in its consolidated financial statements. Prior to recording the related tax benefit in the consolidated financial statements, the Company must concludewhen it is concluded that tax positions are not more likely than not to be sustained assuming those positions will be examinedupon examination by taxing authorities, with full knowledgeincluding resolution of all relevant information. The benefit recognized inany related appeals or litigation processes, based on the consolidated financial statements istechnical merits of the amount the Company expects to realize after examination by taxing authorities. If a tax position drops below the more likely than not standard, the benefit can no longer be recognized.positions. Assumptions, judgment and the use of estimates are required in determining if the more likely than not standard has been met when developing the provision for income taxes and in determining the expected benefit. A changeThe tax benefits of the position recognized in the assessmentfinancial statements are then measured based on the largest amount of benefit that is greater than 50% likely to be realized upon settlement with a taxing authority. Unrecognized tax benefits due to tax uncertainties that do not meet the more likely than not standard could materially impactminimum probability threshold are included as other liabilities and are charged to earnings in the Company’s results of operations or financial position. The Company recognizesperiod that such determination is made. We recognize interest and penalties related to uncertain tax positions as a component of income tax expense. Accrued interest and penalties are included in other liabilities on the consolidated balance sheet.
Concentrations of Credit Risk
Financial instruments that subject the Company to concentrations of credit risk include cash, and cash equivalents and investments restricted cash(unrestricted and restricted investments (including payroll funds collected)restricted), accounts receivable, and amounts due from insurance carriers. The Company maintains its cash and cash equivalents, investments, restricted cash and restricted investments (including payroll funds collected)We maintain these financial assets principally in domestic financial institutions and performsinstitutions. We perform periodic evaluations of the relative credit standing of these institutions. The Company’sOur exposure to credit risk in the event of default by the financial institutions holding these funds is limited to amounts currently held by the institution in excess of insured amounts.
Under the terms of professional services agreements, clients agree to maintain sufficient funds or other satisfactory credit at all times to cover the cost of itstheir current payroll, all accrued paid time off, vacation or sick leave balances, and other vested wage and benefit obligations for all their work site employees. The CompanyWe generally requiresrequire payment from itsour clients on or before the applicable payroll date.
For certain clients, the Company requireswe require an indemnity guarantee payment (IGP) supported by a letter of credit, bond, or a certificate of deposit from certain financial institutions. The IGP typically equals the total payroll and service fee for one average payroll period.
As of December 31, 2015 and December 31, 2014, one2018, no client accounted for 12%over 10% of total accounts receivable. One client accounted for more than 47% of accounts receivable.receivable as of December 31, 2017. No client accounted for more than 10% of total revenues in the years ended December 31, 2015, 20142018, 2017 and 2013.2016. Bad debt expense, net of recoveries was $2.0$1 million, $1.4 million and $0.6 million for each of the years ended December 31, 2015, 20142018, 2017 and 2013, respectively.2016.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board, or (FASB), issued Accounting Standards Update (ASU) 2016-02—Leases. The amendment requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. The amendment is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2018. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption of this standard on its consolidated financial statements.Recently adopted accounting guidance
In January 2016, the FASB issued ASU 2016-01—Revenue Recognition and Measurement of Financial Assets and Financial Liabilities- . The amendment addresses various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. The amendment is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption by public entities is permitted only for certain provisions. The Company is currently in the process of evaluating the impact of the adoption of this standard on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17—Balance Sheet Classification of Deferred Taxes, as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The amendment requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendment is effective for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company adopted this guidance in 2015 with retrospective application. See Note 11 for further details.
In April 2015, the FASB issued ASU 2015-05—Intangibles—Goodwill and Other—Internal-Use Software, as part of the Simplification Initiative. The amendment provides guidance to clarify the customer’s accounting for fees paid in a cloud computing arrangement. The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company expects to adopt this guidance in 2016. The Company does not expect this guidance to have a material effect on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03—Interest—Imputation of Interest, as part of its Simplification Initiative. The amendment requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The Company expects to adopt this guidance in 2016. The Company does not expect this guidance to have a material effect on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15—Presentation of Financial Statements—Going Concern (Subtopic 205-40), which addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect to adopt this guidance early and does not believe that the adoption of this guidance will have a material effect on its consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12—Compensation—Stock Compensation, which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. The amendments may be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented. The Company does not expect this guidance to have a material effect on its consolidated financial statements. The Company expects to adopt this guidance in 2016.
In May 2014, the FASB issued ASU 2014-09—2014-09-Revenue from Contracts with Customers, which will replacereplaces most existing revenue recognition guidance under GAAP. The core principle of the guidance is that an entity should recognize revenue to depictfor the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard provides a five-step analysis of transactions to determine when and how revenue is recognized.
We have adopted the new standard effective January 1, 2018 using the modified retrospective method. For further discussion of our adoption of ASC Topic 606, including our operating results under the new standard, see Revenue Recognition section above.
The impact from the adoption of ASC Topic 606 to our consolidated income statements and balance sheets is as follows:
|
| | | | | | | | | |
| | December 31, 2018 |
| (in millions) | As reported | Balance Using Previous Standard | Increase (Decrease) |
| Balance sheet | | | |
| Assets | | | |
| Cash and cash equivalents | $ | 228 |
| $ | 235 |
| $ | (7 | ) |
| Restricted cash, cash equivalents and investments, current | 942 |
| 935 |
| 7 |
|
| Unbilled revenue, net | 304 |
| 311 |
| (7 | ) |
| Prepaid expenses | 48 |
| 44 |
| 4 |
|
| Other current assets | 59 |
| 49 |
| 10 |
|
| Other assets | 78 |
| 67 |
| 11 |
|
| Liabilities | | | |
| Accounts payable and other current liabilities | $ | 45 |
| $ | 48 |
| $ | 3 |
|
| Deferred taxes | 68 |
| 67 |
| $ | (1 | ) |
| Other non-current liabilities | 18 |
| 22 |
| $ | 4 |
|
| Equity | | | |
| Accumulated deficit | $ | (266 | ) | $ | (290 | ) | $ | (24 | ) |
|
| | | | | | | | | |
| | Year Ended December 31, 2018 |
| (in millions, except per share data) | As Reported | Balance Using Previous Standard | Increase (Decrease) |
| Income statement | | | |
| Revenue | | | |
| Professional service revenues | $ | 487 |
| $ | 485 |
| $ | 2 |
|
| Total revenues | 3,503 |
| 3,501 |
| 2 |
|
| Expense | | | |
| Sales and marketing expense |
|
|
|
| Commissions expense | 22 |
| 53 |
| (31 | ) |
| Total expense | 3,252 |
| 3,283 |
| (31 | ) |
| Income before provision for income taxes | 241 |
| 208 |
| 33 |
|
| Income tax expense | 49 |
| 40 |
| 9 |
|
| Net income | $ | 192 |
| $ | 168 |
| $ | 24 |
|
| Basic earnings per share | $ | 2.72 |
| $ | 2.40 |
| $ | 0.32 |
|
| Diluted earnings per share | $ | 2.65 |
| $ | 2.34 |
| $ | 0.31 |
|
Statement of Cash Flows - In July 2015,November 2016, the FASB deferredissued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 addresses diversity in practice from entities classifying and presenting transfers between cash and restricted cash as operating, investing or financing activities or as a combination of those activities in the statement of cash flows. The ASU requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, transfers between such categories are no longer be presented in the statement of cash flows. We adopted ASU 2016-18 on January 1, 2018 using the retrospective method. See the effects of this adoption under the Impact of Reclassifications and Recently Adopted Accounting Guidance section above.
Recent issued accounting pronouncements
Lease arrangements -In February 2016, the FASB issued ASU 2016-02-Leases (Topic 842) and subsequent amendments to the initial guidance (collectively, ASC Topic 842) to supersede existing guidance on accounting for leases in ASC 840, Leases (ASC 840). ASC Topic 842 requires us to recognize on our balance sheet a lease liability representing the present value of future lease payments and a right-of-use asset representing our right to use, or control the use of, a specified asset for the lease term for any operating lease with a term greater than one year. This standard is effective date tofor annual reporting periods, and interim reporting periods within those years, beginning after December 15, 2017. Early2018. Our leases primarily consist of leases for office space. We have an immaterial amount of capitalized leases.
We will adopt the new standard effective January 1, 2019 using the optional transition method, under which we will recognize the cumulative effects of initially applying the standard as an adjustment to the opening balance of retained earnings on January 1, 2019 with unchanged comparative periods.
Additionally, we will elect the practical expedient approach and will not reassess whether any contracts that existed prior to adoption athave or contain leases or the original effective dateclassification of December 15, 2016 is permitted. The amendments may be applied retrospectively orour existing leases. We will continue to classify initial indirect costs of existing leases as a cumulative-effect adjustment aspart of our existing leases and not separate any non-lease components.
On the date of adoption. adoption, the consolidated balance sheet will be adjusted by the following amounts:
|
| | | |
| (in millions) | Increase Under New Guidance |
Recognizing right-of-use asset
| |
Long-term right-of-use assets
| $ | 53 |
|
Recognizing lease liability and derecognizing deferred rent
| |
| Accounts payable and other current liabilities | $ | 16 |
|
Other non-current liabilities
| 37 |
|
The Company has not yet selected a method of adoption and is currently evaluating the effect that the amendments will haveimpact on the consolidated financial statements.statements of income is expected to be immaterial.
In addition, ASC Topic 842 requires significant new disclosures, including significant judgments regarding our leasing activities. We have completed our implementation, including a review of the processes and controls to ensure we meet the reporting and disclosure requirements.
NOTE 2. WORKSITE EMPLOYEE-RELATED ASSETSCASH, CASH EQUIVALENTS AND LIABILITIES
The following schedule presents the components of the Company’s WSE-related assets and WSE-related liabilities (in thousands):
|
| | | | | | | |
| | December 31, 2015 | | December 31,
2014 |
| Worksite employee-related assets: | | | |
| Restricted cash | $ | 92,917 |
| | $ | 64,890 |
|
| Restricted investments | 3,819 |
| | 4,555 |
|
| Payroll funds collected | 859,322 |
| | 1,336,994 |
|
Unbilled revenue, net of advance collections of $11,875 and $113,190 at December 31, 2015 and December 31, 2014, respectively | 213,837 |
| | 203,599 |
|
Accounts receivable, net of allowance for doubtful accounts of $1,158 and $388 at December 31, 2015 and December 31, 2014, respectively | 5,060 |
| | 5,193 |
|
| Prepaid health plan expenses | 8,088 |
| | 4,932 |
|
| Refundable workers compensation premiums | 2,428 |
| | 7,975 |
|
| Prepaid workers compensation expenses | 744 |
| | 1,256 |
|
| Other payroll assets | 187,171 |
| | 5,742 |
|
| Total worksite employee-related assets | $ | 1,373,386 |
| | $ | 1,635,136 |
|
| Worksite employee-related liabilities: | | | |
|
| Unbilled wages accrual | $ | 202,396 |
| | $ | 292,906 |
|
| Payroll taxes payable | 883,608 |
| | 1,119,427 |
|
| Health benefits payable | 128,028 |
| | 104,220 |
|
| Customer prepayments | 57,758 |
| | 53,770 |
|
| Workers compensation payable | 66,174 |
| | 36,778 |
|
| Other payroll deductions | 31,533 |
| | 23,454 |
|
| Total worksite employee-related liabilities | $ | 1,369,497 |
| | $ | 1,630,555 |
|
Other payroll assets and payroll taxes payable above include a receivable due from one client at December 31, 2015 for $181 million related to an end of year payroll tax liability for which funding was received in January 2016.
Payroll taxes payable, workers compensation payable and health benefits payable also include the related amounts of approximately 2,500 Company employees.
NOTE 3. WORKERS COMPENSATION
The Company has agreements with various insurance carriers to provide workers compensation insurance coverage for worksite employees, including programs where either the Company or the carrier retains custody of claim deposits paid by the Company. Insurance carriers are responsible for administrating and paying claims. The Company is responsible for reimbursing each carrier up to a deductible limit per occurrence. In cases where the carriers retain custody, any excess deposits held by the carrier can be returned to the Company over time, based on terms defined within the respective agreements.
The following summarizes the activities in the balance sheet for unpaid claims and claims adjustment expenses within workers compensation assets and liabilities (in thousands):
|
| | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 |
Programs where assets are held by the Company to cover claims liabilities
| | | |
| Liability for unpaid claims and claims adjustment at beginning of period | $ | 92,406 |
| | $ | 58,610 |
|
| | | | |
| Incurred related to: | | | |
| Current year | 88,438 |
| | 61,669 |
|
| Prior years | 4,880 |
| | (4,725 | ) |
| Total incurred | 93,318 |
| | 56,944 |
|
| Paid related to: | | | |
| Current year | (16,076 | ) | | (11,003 | ) |
| Prior years | (30,453 | ) | | (12,145 | ) |
| Total paid | (46,529 | ) | | (23,148 | ) |
| | | | |
Reclassification from workers compensation receivable
| 5,045 |
| | — |
|
| Liability for unpaid claims and claims adjustment at end of period | $ | 144,240 |
| | $ | 92,406 |
|
| | | | |
Programs where assets are held by third parties to cover claims liabilities
| | | |
| Liability for unpaid claims and claims adjustment at the beginning of period | $ | 55,628 |
| | $ | 62,129 |
|
| Incurred related to: | | | |
| Current year | 699 |
| | 1,708 |
|
| Prior years | 21,511 |
| | 20,126 |
|
| Total incurred | 22,210 |
| | 21,834 |
|
| Paid related to: | | | |
| Current year | (300 | ) | | (2,083 | ) |
| Prior years | (26,631 | ) | | (26,252 | ) |
| Total paid | (26,931 | ) | | (28,335 | ) |
| | | | |
Reclassification to workers compensation liability
| (5,045 | ) | | — |
|
| Liability for unpaid claims and claims adjustment at end of period | $ | 45,862 |
| | $ | 55,628 |
|
| | | | |
| Total liability for unpaid claims and claims adjustment at end of period | 190,102 |
| | 148,034 |
|
| | | | |
| Assets held by third parties to cover claim liabilities | (58,522 | ) | | (95,372 | ) |
| Workers compensation premiums and other liabilities | 9,455 |
| | 19,820 |
|
| Other workers compensation assets | (1,012 | ) | | (136 | ) |
| Total net workers compensation liabilities | $ | 140,023 |
| | $ | 72,346 |
|
| | | | |
| Location on Consolidated Balance Sheet: | | | |
| Workers compensation liabilities | | | |
| Current portion included in worksite employee-related liability | $ | 66,174 |
| | $ | 36,778 |
|
| Long term portion | 105,481 |
| | 75,448 |
|
| Total | $ | 171,655 |
| | $ | 112,226 |
|
| | | | |
| Workers compensation receivables | | | |
| Current portion included in worksite employee-related asset | $ | 2,428 |
| | $ | 7,975 |
|
| Long term portion | 29,204 |
| | 31,905 |
|
Incurred claims related to prior years represent changes in estimates for ultimate losses on workers compensation claims.
INVESTMENTS
Under the terms of certainthe agreements with workerscertain of our workers' compensation and health benefit insurance carriers, we are required to maintain collateral in trust accounts for the Company collectsbenefit of specified insurance carriers and holds premiumsto reimburse the carriers’ claim payments within our deductible layer. We invest a portion of the collateral amounts in marketable securities. We report the current and noncurrent portions of these trust accounts as restricted cash, cash equivalents and investments on the consolidated balance sheets.
We require our clients to prefund their payroll and related taxes and other withholding liabilities before payroll is processed or due for payment. This prefund is included in restricted accountscash, cash equivalents and investments as payroll funds collected, which is designated to pay pending claims payments bypayrolls, payroll tax liabilities and other payroll withholdings.
We also invest available corporate funds, primarily in fixed income securities which meet the claims administrator. Asrequirements of our corporate investment policy and are classified as available for sale (AFS).
Our total cash, cash equivalents and investments are summarized in the table below:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | December 31, 2017 |
| (in millions) | Cash and cash equivalents | Available-for-sale marketable securities | Certificate of deposits | Total | Cash and cash equivalents | Available-for-sale marketable securities | Certificate of deposits | Total |
| Cash and cash equivalents | $ | 228 |
| $ | — |
| $ | — |
| $ | 228 |
| $ | 336 |
| $ | — |
| $ | — |
| $ | 336 |
|
| Investments | — |
| 54 |
| — |
| 54 |
| — |
| — |
| — |
| — |
|
| Restricted cash, cash equivalents and investments | | | | | | | | |
| Insurance carriers security deposits | 15 |
| — |
| — |
| 15 |
| 15 |
| — |
| — |
| 15 |
|
| Payroll funds collected | 783 |
| — |
| — |
| 783 |
| 1,095 |
| — |
| — |
| 1,095 |
|
| Collateral for health benefits claims | 75 |
| — |
| — |
| 75 |
| 69 |
| — |
| — |
| 69 |
|
| Collateral for workers' compensation claims | 66 |
| 1 |
| — |
| 67 |
| 98 |
| 1 |
| — |
| 99 |
|
| Collateral to secure standby letter of credit | — |
| — |
| 2 |
| 2 |
| — |
| — |
| 2 |
| 2 |
|
| Total restricted cash, cash equivalents and investments, current | 939 |
| 1 |
| 2 |
| 942 |
| 1,277 |
| 1 |
| 2 |
| 1,280 |
|
| Investments, noncurrent | — |
| 135 |
| — |
| 135 |
| — |
| — |
| — |
| — |
|
| Restricted cash, cash equivalents and investments, noncurrent | | | | | | | | |
| Collateral for workers' compensation claims | 182 |
| 5 |
| — |
| 187 |
| 125 |
| 37 |
| — |
| 162 |
|
| Total | $ | 1,349 |
| $ | 195 |
| $ | 2 |
| $ | 1,546 |
| $ | 1,738 |
| $ | 38 |
| $ | 2 |
| $ | 1,778 |
|
NOTE 3. INVESTMENTS
All of our investment securities that have a contractual maturity date greater than three months are classified as AFS. The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of our investments as of December 31, 20152018 and December 31, 2014, such restricted amounts of $49.8 million and $36.5 million, respectively,2017 are presented below:
|
| | | | | | | | | | | | |
| | December 31, 2018 |
| (in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| Asset-backed securities | $ | 33 |
| $ | — |
| $ | — |
| $ | 33 |
|
| Corporate bonds | 99 |
| — |
| — |
| 99 |
|
| U.S. government agencies and government-sponsored agencies | 7 |
| — |
| — |
| 7 |
|
| U.S. treasuries | 46 |
| — |
| — |
| 46 |
|
| Exchange traded fund | 1 |
| — |
| — |
| 1 |
|
| Other debt securities | 9 |
| — |
| — |
| 9 |
|
| Total | $ | 195 |
| $ | — |
| $ | — |
| $ | 195 |
|
|
| | | | | | | | | | | | |
| | December 31, 2017 |
| (in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| U.S. treasuries | $ | 37 |
| $ | — |
| $ | — |
| $ | 37 |
|
| Exchange traded fund | 1 |
| — |
| — |
| 1 |
|
| Total | $ | 38 |
| $ | — |
| $ | — |
| $ | 38 |
|
Investments in a continuous unrealized loss position as restricted cash and restricted investments within WSE-related assets in the accompanying consolidated balance sheets. In addition, atof December 31, 20152018 and December 31, 2014, $101.8 million and $69.4 million, respectively,2017 are presented as restricted long-term cashbelow.
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Less than 12 months | 12 months or more | Total |
| (in millions) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses |
| Asset-backed securities | $ | 25 |
| $ | — |
| $ | — |
| $ | — |
| $ | 25 |
| $ | — |
|
| Corporate bonds | 84 |
| — |
| — |
| — |
| 84 |
| — |
|
| U.S. government agencies and government-sponsored agencies | 4 |
| — |
| — |
| — |
| 4 |
| — |
|
| U.S. treasuries | 21 |
| — |
| — |
| — |
| 21 |
| — |
|
| Other debt securities | 7 |
| — |
| — |
| — |
| 7 |
| — |
|
| Total | $ | 141 |
| $ | — |
| $ | — |
| $ | — |
| $ | 141 |
| $ | — |
|
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Less than 12 months | 12 months or more | Total |
| (in millions) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses |
| U.S. treasuries | $ | 5 |
| $ | — |
| $ | 24 |
| $ | — |
| $ | 29 |
| $ | — |
|
| Total | $ | 5 |
| $ | — |
| $ | 24 |
| $ | — |
| $ | 29 |
| $ | — |
|
Unrealized losses on fixed income securities are principally caused by changes in interest rates and investments. Assets heldthe financial condition of the issuer. In analyzing an issuer's financial condition, we consider whether the securities are issued by third partiesthe federal government or its agencies, whether downgrades by credit rating agencies have occurred, and industry analysts' reports. As we have the ability to cover claim liabilities represents prefunded claimhold these investments until maturity, or for the foreseeable future, no decline was deemed to be other-than-temporary. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations paid to carriers in excesswith or without prepayment penalties.
The fair value of estimated total claim liabilities, which will be applied to incurred claims. The funds remain restricted until the plan year to which they relatedebt investments by contractual maturity are settled.shown below:
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 |
| (in millions) | One year or less | Over One Year Through Five Years | Over Five Years Through Ten Years | Over Ten Years | Fair Value |
| Asset-backed securities | $ | 4 |
| $ | 26 |
| $ | 3 |
| $ | — |
| $ | 33 |
|
| Corporate bonds | 42 |
| 57 |
| — |
| — |
| 99 |
|
| U.S. government agencies and government-sponsored agencies | 1 |
| 2 |
| — |
| 4 |
| 7 |
|
| U.S. treasuries | 12 |
| 34 |
| — |
| — |
| 46 |
|
| Other debt securities | — |
| 1 |
| — |
| 8 |
| 9 |
|
| Total | $ | 59 |
| $ | 120 |
| $ | 3 |
| $ | 12 |
| $ | 194 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 |
| (in millions) | One year or less | Over One Year Through Five Years | Over Five Years Through Ten Years | Over Ten Years | Fair Value |
| U.S. treasuries | $ | — |
| $ | 37 |
| $ | — |
| $ | — |
| $ | 37 |
|
| Total | $ | — |
| $ | 37 |
| $ | — |
| $ | — |
| $ | 37 |
|
The reclassificationgross proceeds from workers compensation receivable to workers compensation liability resulted fromsales and maturities of AFS securities for the return of collateral to the Company following a negotiated amendment of the underlying contract with a carrier.
NOTE 4. BUSINESS COMBINATIONS
Periodically, as part of the Company’s strategic objectives, the Company may acquire other companies or may acquire strategic technologies which may be considered an acquisition of a business. During the yearyears ended December 31, 2015,2018, 2017 and 2016 are shown below. We had immaterial gross realized gains and losses from sales of investments for the Company’s strategic acquisition activity resulted in the payment of aggregate purchase consideration of approximately $4.8 million, consisting solely of cash. The purchase price for each business combination is allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on the fair value at the date of purchase. Purchase price in excess of the identifiable assets and liabilities is recorded as goodwill. The allocation of the aggregate purchase consideration resulted in intangible assets of $4.4 million and goodwill of $0.4 million. The intangible assets have a useful life of 5 years. The consolidated financial statements include the operating results of strategic acquisitions considered to be a business since the respective date of the acquisition. Pro forma results of operations have not been presented as the acquisition activity is not material to the Company. All acquisition-related costs are expensed as incurred and recorded in operating expenses. The Company includes operations associated with acquisitions from the date of acquisition.
The Company made no acquisitions during 2014. In 2013, the Company acquired 100% of the outstanding equity of Ambrose Employer Group, LLC (Ambrose) for $195.0 million. Ambrose contributed revenues of $134.5 million and net income of $1.6 million to the Company from July 1, 2013 toyears ended December 31, 2013.2018, 2017 and 2016.
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 |
| Gross proceeds from sales | $ | 54 |
| $ | — |
| $ | — |
|
| Gross proceeds from maturities | 47 |
| 14 |
| 28 |
|
| Total | $ | 101 |
| $ | 14 |
| $ | 28 |
|
Our asset-backed securities include auto loan/lease, credit card, and equipment leases with investment-grade ratings.
Our corporate bonds include investment-grade debt securities from a wide variety of issuers, industries, and sectors.
Our U.S. government agencies and government-sponsored agency securities primarily include mortgage-backed securities consisting of Federal Home Loan Mortgage Corporation and Federal National Mortgage Association securities with investment-grade ratings.
Our other debt securities primarily include mortgage-backed securities with investment-grade ratings issued by institutions without federal backing.
NOTE 5.4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consistconsists of the following (in thousands):following:
| | | | December 31,
2015 | | December 31,
2014 | |
| (in millions) | | December 31, 2018 | December 31, 2017 |
| Software | $ | 64,727 |
| | $ | 53,349 |
| $ | 144 |
| $ | 114 |
|
| Office equipment, including data processing equipment | 20,044 |
| | 18,550 |
| 27 |
| 23 |
|
| Leasehold improvements | 9,874 |
| | 7,092 |
| 21 |
| 15 |
|
| Furniture, fixtures, and equipment | 7,911 |
| | 6,450 |
| 15 |
| 15 |
|
| Projects in progress | 7,407 |
| | 6,786 |
| 2 |
| 7 |
|
| | 109,963 |
| | 92,227 |
| |
| Accumulated depreciation | (72,119 | ) | | (59,929 | ) | |
| Total | | 209 |
| 174 |
|
| Less: Accumulated depreciation | | (130 | ) | (104 | ) |
| Property and equipment, net | $ | 37,844 |
| | $ | 32,298 |
| $ | 79 |
| $ | 70 |
|
SoftwareDepreciation expense for the years ended December 31, 2018, 2017 and furniture, fixtures, and equipment include amounts for assets under capital leases of $0.22016 was $35 million, $28 million and $1.4$19 million, at December 31, 2015 and December 31, 2014, respectively. Accumulated depreciation of these assets was de minimis and $0.9 million at December 31, 2015 and December 31, 2014, respectively. Amortization of assets held under capital leases is included with depreciation expense in the accompanying consolidated statements of operations.
Projects in progress consist primarily of software development costs. The Company capitalizes software development costs intended for internal use. The Companyinternally developed software, which we capitalize and amortize on a straight-line basis over the estimated useful life. We recognized depreciation expense for capitalized internally developed software of $5.4$24 million, $5.2$17 million, and $4.5$10 million for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively. Accumulated depreciation for these assets was $34.5 million and $29.4 million at December 31, 2015 and 2014, respectively. The Company periodically assesses the likelihood of unsuccessful completion of projects in progress, as well as monitoring events or changes in circumstances, which might suggest that impairment has occurred and recoverability should be evaluated. An impairment
loss is recognized if the carrying amount of the asset is not recoverable and exceeds the future net cash flows expected to be generated by the asset. Due to significant changes in the extent and manner in which assets were expected to be used, the Company recognized losses of $0.4 million, $0.9 million and $0.8 million for the years ended December 31, 2015, 2014 and 2013, respectively, and included these charges in depreciation expense in the accompanying consolidated statements of operations.
NOTE 6.5. GOODWILL AND OTHER INTANGIBLE ASSETS
The following schedule summarizes goodwill and other intangible assets (in thousands):assets:
|
| | | | | | | | | | | | | |
| | December 31, 2015 |
| | Weighted Average Amortization Period | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Goodwill |
| | $ | 289,207 |
| | $ | — |
| | $ | 289,207 |
|
| Amortizable intangibles: | | | | | | | |
| Customer contracts | 5 years | | 209,850 |
| | (167,968 | ) | | 41,882 |
|
| Trademark | 3 years | | 16,900 |
| | (16,467 | ) | | 433 |
|
| Developed technology | 5 years | | 5,400 |
| | (1,173 | ) | | 4,227 |
|
| Noncompete agreements | 3 years | | 1,940 |
| | (1,710 | ) | | 230 |
|
| | 5 years | | 234,090 |
| | (187,318 | ) | | 46,772 |
|
| Total | | | $ | 523,297 |
| | $ | (187,318 | ) | | $ | 335,979 |
|
| | | | December 31, 2014 | | December 31, 2018 | December 31, 2017 |
| | Weighted Average Amortization Period | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | |
| (in millions) | | Weighted Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
| Goodwill | — | | $ | 288,857 |
| | $ | — |
| | $ | 288,857 |
| | $ | 289 |
| $ | — |
| $ | 289 |
| $ | 289 |
| $ | — |
| $ | 289 |
|
| Amortizable intangibles: | | | | | | | | |
| Customer contracts | 5 years | | 209,850 |
| | (134,454 | ) | | 75,396 |
| 10 years | 90 |
| (71 | ) | 19 |
| 210 |
| (187 | ) | 23 |
|
| Trademark | 3 years | | 16,900 |
| | (11,761 | ) | | 5,139 |
| |
| Developed technology | 5 years | | 1,000 |
| | (533 | ) | | 467 |
| 5 years | 5 |
| (3 | ) | 2 |
| 6 |
| (3 | ) | 3 |
|
| Noncompete agreements | 3 years | | 1,940 |
| | (1,224 | ) | | 716 |
| |
| | 5 years | | 229,690 |
| | (147,972 | ) | | 81,718 |
| |
| Total | | $ | 518,547 |
| | $ | (147,972 | ) | | $ | 370,575 |
| | $ | 95 |
| $ | (74 | ) | $ | 21 |
| $ | 216 |
| $ | (190 | ) | $ | 26 |
|
Amortization expenseof intangible assets during the years ended December 31, 2018, 2017 and 2016 was $5 million, $5 million and $16 million, respectively. As of December 31, 2018, we had $120 million of fully amortized customer contracts and $1 million of fully amortized developed technology. We evaluate the remaining useful life of intangible assets annually to determine whether events and circumstances warrant a revision to the estimated remaining useful life.
Expense related to amortizable intangibles amortization in future periods as of December 31, 20152018 is expected to be as follows (in thousands):follows:
|
| | | |
| Year ending December 31: | |
| 2016 | $ | 19,255 |
|
| 2017 | 17,497 |
|
| 2018 | 8,700 |
|
| 2019 | 880 |
|
| 2020 and thereafter | 440 |
|
| Total | $ | 46,772 |
|
|
| | | |
| Year ending December 31: | Amount
(in millions) |
| 2019 | $ | 5 |
|
| 2020 | 5 |
|
| 2021 | 4 |
|
| 2022 | 4 |
|
| 2023 | 3 |
|
| Total | $ | 21 |
|
NOTE 7. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS6. ACCRUED WORKERS' COMPENSATION COSTS
The Company’s noncurrent restricted cash and investments include $63.1 million of available-for-sale marketable securities and $38.7 million of cash collateral atfollowing table summarizes the accrued workers’ compensation cost activity for the years ended December 31, 2015. The Company’s restricted investments within WSE-related assets include $2.3 million of certificates of deposit2018, 2017 and $1.5 million of available-for-sale marketable securities as of December 31, 2015. The available-for-sale marketable securities as of December 31, 2015 and December 31, 2014 consist of the following (in thousands):2016:
|
| | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| December 31, 2015: | | | | | | | |
| U.S. treasuries | $ | 64,226 |
| | $ | 9 |
| | $ | (144 | ) | | $ | 64,091 |
|
| Mutual funds | 500 |
| | 4 |
| | — |
| | 504 |
|
| Total investments | $ | 64,726 |
| | $ | 13 |
| | $ | (144 | ) | | $ | 64,595 |
|
| December 31, 2014: | | | | | | | |
| U.S. treasuries | $ | 50,075 |
| | $ | 22 |
| | $ | (15 | ) | | $ | 50,082 |
|
| Mutual funds | 500 |
| | 6 |
| | — |
| | 506 |
|
| Total investments | $ | 50,575 |
| | $ | 28 |
| | $ | (15 | ) | | $ | 50,588 |
|
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 |
| Total accrued costs, beginning of year | $ | 255 |
| $ | 255 |
| $ | 190 |
|
| Incurred | | | |
| Current year | 80 |
| 98 |
| 113 |
|
| Prior years | (28 | ) | (6 | ) | 28 |
|
| Total incurred | 52 |
| 92 |
| 141 |
|
| Paid | | | |
| Current year | (12 | ) | (14 | ) | (14 | ) |
| Prior years | (57 | ) | (78 | ) | (62 | ) |
| Total paid | (69 | ) | (92 | ) | (76 | ) |
| Total accrued costs, end of year | $ | 238 |
| $ | 255 |
| $ | 255 |
|
The following table summarizes workers' compensation liabilities on the consolidated balance sheets:
There were no realized gains or
|
| | | | | | | |
| (in millions) | | December 31, 2018 | December 31, 2017 |
| Total accrued costs, end of year |
| $ | 238 |
| $ | 255 |
|
| Collateral paid to carriers and offset against accrued costs | | (13 | ) | (23 | ) |
| Total accrued costs, net of carrier collateral offset |
| $ | 225 |
| $ | 232 |
|
| | | | |
Payable in less than 1 year (net of collateral paid to carriers of $3 and $6 as of December 31, 2018 and 2017, respectively) | | 67 |
| 67 |
|
Payable in more than 1 year (net of collateral paid to carriers of $10 and $17 as of December 31, 2018 and 2017, respectively) | | 158 |
| 165 |
|
Total accrued costs, net of carrier collateral offset
|
| $ | 225 |
| $ | 232 |
|
Incurred claims related to prior years represent changes in estimates for ultimate losses foron workers' compensation claims. For the year ended December 31, 2015 and 2014. As of2018, the favorable development was primarily due to lower than expected severity development on claims that had previously been reported, as well as a lower than expected reported claim frequency during 2018. For the year ended December 31, 2015 and2017, the favorable development was primarily due to lower than expected severity of reported claims associated with office worker WSEs in recent accident years. For the year ended December 31, 2014,2016, the contractual maturitiesadverse development was primarily due to higher than expected severity of the U.S. treasuries were one to fourreported claims associated with non-office WSEs in recent accident years.
As of December 31, 2015, certain of the Company’s U.S. treasuries were in an unrealized loss position. Unrealized losses are principally due to changes in interest rates. In analyzing an issuer’s financial condition, the Company considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred,2018 and industry analysts’ reports. The fair value of these securities in an unrealized loss position represented 81% and 59% of the total fair value of all securities available for sale as of December 31, 2015 and December 31, 2014, respectively, and their unrealized losses were $0.12017, we had $57 million and de minimis$63 million, respectively, of collateral held by insurance carriers of which $13 million and $23 million was offset against accrued workers' compensation costs as the agreements permit and are net settled of December 31, 2015 and December 31, 2014. As the Company has the ability and intent to hold debt securities until maturity, or for the foreseeable future as classified as available for sale, no decline was deemed to be other-than-temporary.insurance obligations against collateral held.
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.As a basis for considering such assumptions, the Company uses a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level I—observable inputs such as quoted prices in active markets
Level II—inputs other than the quoted prices in active markets that are observable either directly or indirectly
Level III—unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions
This hierarchy requires the Company to use observable market data when available and to minimize the use of unobservable inputs when determining fair value.
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis (in thousands):
|
| | | | | | | | | | | | | | | |
| | Total Fair Value | | Level I | | Level II | | Level III |
| December 31, 2015: | | | | | | | |
| Certificates of deposit | $ | 2,319 |
| | $ | 2,319 |
| | $ | — |
| | $ | — |
|
| U.S. treasuries | 64,091 |
| | 64,091 |
| | — |
| | — |
|
| Mutual funds | 504 |
| | 504 |
| | — |
| | — |
|
| Total | $ | 66,914 |
| | $ | 66,914 |
| | $ | — |
| | $ | — |
|
| December 31, 2014: | | | | | | | |
| Certificates of deposit | $ | 2,318 |
| | $ | 2,318 |
| | $ | — |
| | $ | — |
|
| U.S. treasuries | 50,082 |
| | 50,082 |
| | — |
| | — |
|
| Mutual funds | 506 |
| | 506 |
| | — |
| | — |
|
| Interest rate cap | 1 |
| | — |
| | 1 |
| | — |
|
| Total | $ | 52,907 |
| | $ | 52,906 |
| | $ | 1 |
| | $ | — |
|
There were no transfers between Level I and Level II assets during the years December 31, 2015 or December 31, 2014.NOTE 7. LONG-TERM DEBT
As of December 31, 20152018 and December 31, 2014, certificates of deposit2017, long-term debt consisted of certificates of deposit held by domestic financial institutions, which are presented as restricted investments within WSE-related assets in the accompanying consolidated balance sheets.
The carrying value of the Company’s financial instruments not measured at fair value, including cash, restricted cash, WSE-related assets and liabilities, line of credit and accrued corporate wages, approximates fair value due to the relatively short maturity, cash repayments or market interest rates of such instruments. The fair value of such financial instruments, other than cash and restricted cash, is determined using the income approach based on the present value of estimated future cash flows. The fair value of all of these instruments would be categorized as Level II of the fair value hierarchy, with the exception of cash and cash equivalents, which would be categorized as Level I.
At December 31, 2015 and December 31, 2014, the carrying value of the Company’s notes payable of $499.6 million and $544.9 million, respectively, approximated fair value. The estimated fair values of the Company’s notes payable are considered a Level II valuation in the hierarchy for fair value measurement and are based on a cash flow model discounted at market interest rates that considers the underlying risks of unsecured debt.
NOTE 8. NOTES PAYABLE AND BORROWINGS UNDER CAPITAL LEASES
The following schedule summarizes the components of the Company’s notes payable and borrowings under capital leases balances (in thousands):following:
|
| | | | | | | |
| | December 31,
2015 | | December 31,
2014 |
| Notes payable under credit facility | $ | 499,563 |
| | $ | 544,875 |
|
| Capital leases | 153 |
| | 275 |
|
| Less current portion | (35,326 | ) | | (20,738 | ) |
| | $ | 464,390 |
| | $ | 524,412 |
|
|
| | | | | | | | | | | | |
| (in millions) | December 31,
2018 | December 31,
2017 | Annual
Contractual
Interest Rate | Effective Interest Rate | Maturity
Date |
| Term Loan A | $ | — |
| $ | 303 |
| 3.95 | % | (1) | 4.07 | % | July 2019 |
| Term Loan A-2 | — |
| 122 |
| 3.83 | % | (2) | 3.90 | % | July 2019 |
| 2018 Term Loan A | 414 |
| — |
| 4.15 | % | (3) | 4.25 | % | June 2023 |
| Total term loans | 414 |
| 425 |
| | | | |
| Deferred loan costs | (1 | ) | (2 | ) | | | | |
| Less: current portion | (22 | ) | (40 | ) | | | | |
| Long-term debt, noncurrent | $ | 391 |
| $ | 383 |
| | | | |
| |
| (1) | Bears interest at LIBOR plus 2.25% or the prime rate plus 1.25% at our option, subject to certain rate adjustments based upon our total leverage ratio. |
| |
| (2) | Bears interest at LIBOR plus 2.125% or the prime rate plus 1.125% at our option, subject to certain rate adjustments based upon our total leverage ratio. |
| |
| (3) | Bears interest at LIBOR plus 1.625% or the prime rate plus 0.625% at our option in the first full fiscal quarter of the term loan, thereafter subject to certain rate adjustments based on our total leverage ratio. As of December 31, 2018, the interest rate was based on LIBOR plus 1.625%. |
In March 2014, the proceeds from the Company’s initial public offering (IPO) were used to fully repay its existing $190.0 million second lien credit facility, which resulted in a prepayment premium of $3.8 million, and to repay $25.0June 2018 we refinanced approximately $415 million of, its existing first lien tranche B-1and repaid in full, our outstanding A and A-2 term loan. Additionally, the remaining balance of the loan fees associated with the second lien credit facility and a portion of the loan fees associated with the first lien credit facility were fully amortized in Marchloans (together, our 2014 for a charge of $5.0 million. In May 2014, the Company repaid $25.0 million of the first lien tranche B-1 term loan. As a result, a portion of the loan fees associated with the first lien credit facility was fully amortized in May 2014 for a charge of $0.5 million.
In July 2014, the Company amended and restated its first lien credit facility pursuant to an amended and restated first lienTerm Loans) under our previous credit agreement (the Amended and Restated(our 2014 Credit Agreement). The Amended and RestatedOur 2014 Term Loans were replaced with a $425 million term loan A (our 2018 Term Loan) under our new credit agreement (our 2018 Credit Agreement provides
for: (i) $375Agreement). We also replaced our previous $75 million principal amount of tranche A term loans, (ii) $200 million principal amount of tranche B term loans, and (iii) a revolving credit facility of $75 million. The proceeds of the tranche A term loans were used to refinance in part the tranche B-2 term loans outstandingestablished under the original first lien credit facility. The proceeds of the tranche B term loans were used to (i) refinance the remaining tranche B-2 term loans outstanding under the original first lien credit facility, (ii) refinance other amounts outstanding under the original first lien credit facility and (iii) pay fees and expenses related thereto. The revolving credit facility replaced theour 2014 Credit Agreement with a $250 million revolving credit facility under the original first lien credit facility.
The tranche A term loans and the revolving credit facilityour 2018 Credit Agreement (our 2018 Revolver), which will mature on July 9, 2019. The tranche B term loans will mature on July 9, 2017. Loans under the revolving credit facility are expected to be used solely for working capital and other general corporate purposes. As part of this approximately $415 million refinancing transaction, $204 million was recorded as an extinguishment, and $211 million was rolled over into the 2018 Term Loan and was treated as a debt modification. As of December 31, 2018, $414 million was outstanding under
The tranche A term loans
our 2018 Term Loan and loans under the revolvingfull amount of our 2018 Revolver, less approximately $16 million representing an undrawn letter of credit, facility bear interest, at the Company’s option, atwas available.
We incurred approximately $4 million in fees and acquisition costs related to our June 2018 refinancing, of which we capitalized approximately $3 million allocated proportionally between our 2018 Term Loan and 2018 Revolver. As a rate equal to either the LIBOR rate, plus an applicable margin equal to 2.75% per annum, or the prime lending rate, plus an applicable margin equal to 1.75% per annum. The applicable margins for the tranche A term loansresult of this modification, we expensed approximately $2 million in new and loans under the revolving credit facilityexisting fees.
Interest on our 2018 Term Loan is payable quarterly. We are subject to specified rate adjustments of 0.25%, based upon the Company’s total leverage ratio. The tranche B term loans bear interest, at the Company’s option, at a rate equal to either the LIBOR rate, plus an applicable margin equal to 2.75% per annum or the prime lending rate, plus an applicable margin equal to 1.75% per annum. The Company is required to pay a quarterly commitment fee of 0.50%, subject to decrease to 0.375% based on its total leverage ratio, on the daily unused amount of the commitments under the revolving credit facility,our 2018 Revolver, as well as fronting fees and other customary fees for letters of credit issued under the revolving credit facility.our 2018 Revolver, which is subject to adjustments based on our total leverage ratio.
The Company isBorrowings under our 2018 Term Loan and 2018 Revolver are secured by substantially all of our assets, other than excluded assets as defined in our 2018 Credit Agreement, which includes certain customary assets, assets held in trusts as collateral and WSE related assets.
We are permitted to make voluntary prepayments at any time without payment of a premium. The Company isWe are required to make mandatory prepayments of term loans (without payment of a premium) with (i) net cash proceeds from issuances of debt (other than certain permitted debt), and (ii) net cash proceeds from certain non-ordinary course asset sales and casualty and condemnation proceeds (subject to reinvestment rights and other exceptions), and (iii) beginning with the fiscal year ending December 31, 2015, 50% of its excess cash flow (subject to decrease to (x) 25% if its total leverage ratio as of the last day of such fiscal year is less than 3.75 to 1.0 and equal to or greater than 3.00 to 1.0, and (y) 0% if the total leverage ratio as of the last day of such fiscal year is less than 3.00 to 1.0), provided that the Company may defer prepayments based on excess cash flow to the extent such payments would result in the working capital being less than $10 million (after giving effect to such prepayments).
The tranche A term loansremaining balance of our 2018 Term Loan will be repaid in equal quarterly installments in an aggregate annual amount equal to: (i) beginning on December 31, 2014 to December 31, 2016, 5% of the original principal amount thereof, (ii) beginning on December 31, 2016 to December 31,amounts as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Year ending December 31, | |
| (in millions) | 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter |
| Term loan repayments | $ | 22 |
| $ | 22 |
| $ | 22 |
| $ | 22 |
| $ | 326 |
| $ | — |
|
Our 2018 7.5% of the original principal amount thereof, and (iii) beginning on December 31, 2018 to June 30, 2019, 10% of the original principal amount thereof with any remaining balance payable on the final maturity date of the tranche A term loans. The tranche B term loans will be repaid in equal quarterly installments in an aggregate annual amount equal to 1% of the principal amount thereof, with any remaining balance payable on the final maturity date of the tranche B term loans.
The $75.0 million revolving credit facility includes capacity for a $40.0 million letter of credit facility and a $10.0 million swingline facility. The total unused portion of the revolving credit facility was $59.5 million as of December 31, 2015. In connection with the Amended and Restated Credit Agreement, the Company incurred $11.1 million of debt issuance costs. The Company deferred $8.0 million of the costs, which are being amortized over the term of the credit facility. The remaining $3.1 million of costs were recorded to interest expense and bank fees. Additionally, the Company recorded a $9.0 million loss on extinguishment of debt to write-off deferred issuance costs associated with the original first lien credit facility, which was also recorded to interest expense and bank fees. The remaining $6.1 million of loan fees associated with the previous facility that was deemed to be modified continues to be amortized over the revised remaining term of the Amended and Restated Credit Agreement.
In March 2015, the Company repaid $25.0 million of the tranche B term loan. As a result, a portion of the loan fees associated with the first lien credit facility was fully amortized in March 2015 for a charge of $0.4 million.
The Amended and Restated Credit Agreement contains customary representations and warranties, and customary affirmative and negative covenants applicable to the Company and its subsidiaries,us, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness (other than our 2018 Term Loan and our 2018 Revolver), dividends, distributions and transactions with affiliates.
Our 2018 Credit Agreement restricts our ability to make certain types of payments, including dividends and stock repurchases and other distributions. similar distributions, though such payments may generally be made as long as our total leverage ratio remains below 3.00 to 1.00 after the effect of these payments and there exists no default under the 2018 Credit Agreement.
The Amended and Restatedfinancial covenants under our 2018 Credit Agreement also contains financial covenants that require the Companyus to maintain a minimum consolidated interest coverage ratio of at least 3.50 to 1.00 at each quarter end and a maximum total leverage ratio of 4.253.50 to 1.00. In the event of an acquisition the maximum ratio can be raised to 4.00 to 1.00 at December 31, 2015. The Company wasfor four consecutive quarters. We were in compliance with the restrictivethese financial covenants under the credit facilities at
December 31, 2015. Despite extensive efforts, we were unable to file our Annual Report on Form 10-K for the year ended December 31, 2015 within the time frame required by the SEC (including the extension permitted by Rule 12b-25 under the Exchange Act). As a result, we were not in compliance with our restrictive covenant to have timely filed financial statements, but have cured this deficiency within the thirty day cure period upon filing our Annual Report. In addition to these covenants, the Amended and Restated Credit Agreement requires, beginning with the fiscal year ending December 31, 2015, the Company to prepay the tranche B term loan in an amount which is based on the specified excess cash flow percentage determined by the current leverage ratio. The Company recorded a current liability of $12.7 million at December 31, 2015 in anticipation of this prepayment. The credit facility is secured by substantially all of the Company’s assets and the assets of the borrower and of the subsidiary guarantors, other than specifically excluded assets.2018.
NOTE 9: STOCKHOLDERS’ EQUITY
Convertible Preferred Stock
On June 7, 2005, the Company issued 5,391,441 shares of Series G convertible preferred stock (Series G) at $11.00 per share for an aggregate cash purchase price of $59.3 million. The Company recorded the issuance of Series G at $59.1 million, net of issuance costs of $0.2 million. On June 1, 2009, the Company issued 4,124,986 shares of Series H convertible preferred stock (Series H) at $16.69 per share for an aggregate cash purchase price of $68.8 million. The Company recorded the issuance of Series H at $63.8 million, net of issuance costs of $5.0 million. Upon the issuance of Series H, certain terms related to Series G were amended. In March 2014, upon completion of the Company’s IPO, all of the outstanding shares of Series H and Series G were converted into 38,065,708 shares of common stock.
Common Stock
Upon closing of the IPO on March 31, 2014, the Company issued 15,000,000 shares of common stock at a public offering price $16 per share, for an aggregate offering price of $240.0 million, resulting in net proceeds to us of $216.8 million, after deducting underwriting discounts and commissions of approximately $16.8 million and offering expenses of approximately $5.6 million.
In February 2014, the Company issued 91,074 shares to a member of the Board of Directors at $10.98 per share, which was the then estimated fair market value, for an aggregate of $1.0 million in cash.
Equity-Based Incentive Plans
In 2000, the Company established the 2000 Equity Incentive Plan (the 2000 Plan), which provided for granting incentive stock options, nonstatutory stock options, bonus awards and restricted stock awards to eligible employees, directors, and consultants of the Company. In December 2009, the Board of Directors approved the 2009 Equity Incentive Plan (the 2009 Plan) as the successor to and continuation of the 2000 Plan. As of the 2009 Plan effective date, remaining shares available for issuance under the 2000 Plan were cancelled and became available for issuance under the 2009 Plan. No additional stock awards will be granted under the 2000 Plan. The 2009 Plan provides for the grant of the following awards to eligible employees, directors, and consultants: incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other stock awards. Incentive stock options may only be granted to employees. Non-employee directors are eligible to receive nonstatutory stock options automatically at designated intervals over their period of continuous service on the Board. The 2009 Plan, as amended, provides that the number of shares reserved for issuance under the 2009 Plan will increase on January 1 of each year for a period of up to five years by 4.5% of the total number of shares of capital stock outstanding on December 31 of the preceding calendar year, which will begin on January 1, 2015 and continue through January 1, 2019. On January 1, 2015, an additional 3,141,509 shares were automatically reserved for issuance under the amended 2009 Plan.
The exercise price per share of all incentive stock options granted under the 2000 Plan and the 2009 Plan must be at least equal to the fair market value of the shares at the date of grant as determined by the Board of Directors. Options generally have a maximum contractual term of 10 years. Incentive stock options granted at 110% of the fair market value to stockholders who have greater than 10% ownership have a maximum term of five years. Options granted to non-employee directors in connection with an initial election or appointment generally vest at the rate of 33% of the total options one year after the grant date and 1/36 of the total options granted monthly thereafter. All other options granted to non-employee directors generally vest 100% one year from grant date. Before 2015, options granted to employees generally vest over four years with a one year cliff and monthly thereafter. Starting in 2015, the options granted to newly hired employees generally vest at a rate of 25% of the total options a year after the grant date and then 1/16 of the total options granted on the 15th day of the second month of each
calendar quarter thereafter. All other options granted to employees generally vest at a rate of 1/16 of the total options granted on the 15th day of the second month of each calendar quarter following the grant date.
The Company has granted restricted stock units (RSUs) to members of the Board of Directors, certain executives and employees. These RSUs represent rights to receive shares of the Company’s common stock on satisfaction of applicable vesting conditions. The fair value of RSUs is equal to the fair value of the Company’s common stock on the date of grant. RSUs granted to newly elected or appointed non-employee directors generally vest on the first anniversary of the Company’s most recent annual grants. RSUs granted to non-employee directors in connection with an annual grant generally vest 100% one year from the grant date. RSUs granted to newly hired employees generally vest at a rate of 25% of the total RSUs one year after the grant date and then 1/16 of the total RSUs granted on the 15th day of the second month of each calendar quarter thereafter. All other RSUs granted to employees generally vest at a rate of 1/16 of the total RSUs granted on the 15th day of the second month of each calendar quarter following the grant date.
In March 2015, the Company granted performance-based restricted stock units (PSUs) to its executives intended to represent 33.3% of each executive’s annual long-term incentive compensation award value in fiscal 2015. These PSUs vest over three years based on the Company’s attainment of annual financial performance goals as well as the executive’s continued employment through each vesting date. The number of shares that ultimately vest each year will range from 0 to 200% of the annual target amount, based on the Company’s performance. Cumulative financial performance metrics and goals are established for these awards at the grant date and the tranche of each award related to that period’s performance goal is treated as a separate grant for accounting purposes. The financial performance metric established for the performance awards is cumulative annual growth rate in the Company’s net service revenues. These values are being recognized over the tranches’ 12-month, 24-month and 36-month service periods. The Company began recording stock-based compensation expense for these tranches in March 2015, when the financial performance goals were established.
Equity incentive plan activity under the 2000 Plan and the 2009 Plan is summarized as follows:
|
| | |
Equity Incentive Plan Activity | Shares Available for Grant | |
|
Balance at December 31, 2014 | 2,708,524 |
|
AuthorizedFINANCIAL STATEMENTS | 3,141,509 |
|
Granted | (1,569,865 | ) |
Forfeited | 674,786 |
|
Expired | 1,250 |
|
Shares withheld for taxes and not issued | 35,379 |
|
Balance at December 31, 2015 | 4,991,583 |
|
NOTE 8. COMMITMENTS AND CONTINGENCIES
Lease Commitments
We lease office facilities, including our headquarters and other facilities under non-cancelable operating leases. The following table summarizes stock option activityschedule of minimum future rental payments under the Company’s equity-based plans for thenon-cancelable operating leases having initial terms in excess of one year endedat December 31, 2015:2018, is as follows:
|
| | | | | | | | | | | | |
| Stock Options Activity | Number
of Shares | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value
(in thousands) |
| Balance at December 31, 2014 | 6,892,810 |
| | $ | 6.13 |
| | 8.22 | | $ | 173,338 |
|
| Granted | 312,200 |
| | 31.66 |
| | | | |
| Exercised | (2,112,131 | ) | | 3.44 |
| | | | |
| Forfeited | (645,480 | ) | | 7.84 |
| | | | |
| Expired | (1,250 | ) | | 10.98 |
| | | | |
| Balance at December 31, 2015 | 4,446,149 |
| | $ | 8.96 |
| | 7.56 | | $ | 52,108 |
|
| | | | | | | | |
| Exercisable at December 31, 2015 | 2,100,591 |
| | $ | 6.20 |
| | 7.16 | | $ | 28,922 |
|
| Vested and expected to vest at December 31, 2015 | 4,257,065 |
| | $ | 8.70 |
| | 7.53 | | $ | 50,675 |
|
|
| | | |
| (in millions) | Operating Leases |
| Year ending December 31: | |
| 2019 | $ | 18 |
|
| 2020 | 17 |
|
| 2021 | 11 |
|
| 2022 | 9 |
|
| 2023 | 8 |
|
| Thereafter | 25 |
|
| Minimum lease payments | $ | 88 |
|
The weighted-average grant date fair value of stocklease agreements generally provide for rental payments on a graduated basis and for options granted into renew, which could increase future minimum lease payments if exercised. We recognize rent expense on a straight-line basis over the years ended December 31, 2015, 2014lease period and 2013 was $12.73, $7.18 and $4.11 per share, respectively. The total fair value of options vestedaccrue for the years ended December 31, 2015, 2014 and 2013 was $12.2 million, $7.5 million and $4.0 million, respectively.
The total intrinsic value of options exercised for the years ended December 31, 2015, 2014 and 2013 was $53.3 million, $35.1 million and $52.6 million, respectively. Cash received from options exercised during the years ended December 31, 2015, 2014 and 2013 was $7.3 million, $2.2 million and $7.1 million, respectively. The exercise price of all options granted was equal to the fair value of the common stock on the date of grant.
As of December 31, 2015, unrecognized compensationrent expense net of forfeitures, associated with nonvested options outstanding was $13.9 million and is expected to be recognized over a weighted-average period of 2.19 years.
The following table summarizes RSU activity under the Company’s equity-based plans for the year ended December 31, 2015:
|
| | | | | | |
| Restricted Stock Unit Activity | Number of Units | | Weighted-Average Grant Date Fair Value |
| Nonvested at December 31, 2014 | 7,750 |
| | $ | 13.21 |
|
| Granted | 1,084,379 |
| | 28.73 |
|
| Vested | (106,136 | ) | | 32.83 |
|
| Forfeited | (29,306 | ) | | 32.70 |
|
| Nonvested at December 31, 2015 | 956,687 |
| | $ | 28.03 |
|
The total grant date fair value of RSUs granted in the year ended December 31, 2015 was $31.2 million. The total grant date fair value of RSUs vested in the years ended December 31, 2015, 2014 and 2013 was $3.5 million, $0.1 million and $0.1 million, respectively. As of December 31, 2015, unrecognized compensation expense, net of forfeitures, associated with the nonvested RSUs outstanding was $23.3 million, and is expected to be recognized over a weighted-average period of 3.05 years.
During the years 2015, 2014 and 2013, the Company withheld 35,379, 80,599 and 809,012 shares, respectively, to settle payroll tax liabilities resulting from the exercises of stock options and vesting of RSUs held by the employees.
The following table summarizes PSU activity under the Company’s equity-based plans for the year ended December 31, 2015:
|
| | | | | | |
| Performance Based Restricted Stock Unit Activity | Number of Units | | Weighted-Average
Grant Date
Fair Value |
| Outstanding units at December 31, 2014 | — |
| | $ | — |
|
| Granted | 173,286 |
| | 33.51 |
|
| Units converted | — |
| | — |
|
| Forfeited | — |
| | — |
|
| Outstanding units at December 31, 2015 | 173,286 |
| | $ | 33.51 |
|
The maximum total grant date fair value of PSUs granted in the year ended December 31, 2015 was $5.8 million, assuming maximum 200% performance target is met. As of December 31, 2015, unrecognized compensation expense, net of forfeitures, was $0.8 million, and is expected to be recognized over a weighted-average period of 2 years.
Employee Stock Purchase Plan
The Company adopted the 2014 Employee Stock Purchase Plan (ESPP) in February 2014, which became effective on March 26, 2014. The ESPP was approved with a reserve of 1.1 million shares of common stock for future issuance under various terms provided for in the ESPP, which will automatically increase on January 1 of each year from 2015 through 2024 by the lesser of 1% of the total number of shares outstanding on December 31 of the preceding calendar year or 1,800,000 shares. On January 1, 2015, an additional 698,113 shares were automatically reserved for issuance under the ESPP. The Company commenced its first purchase period under the ESPP on March 26, 2014 with a purchase price equal to the lesser of 85% of the fair market value of the common stock on the offering date and 85% of the fair market value of the common stock on the applicable purchase date. Offering periods are six months in duration and will end on or about May 15 and November 15 of each year, with the exception of the initial offering period, which commenced on March 26, 2014 and ended on November 14, 2014. Employees may contribute a minimum of 1% and a maximum of 15% of their earnings. During the year ended December 31, 2015, employees purchased 272,836 shares under the ESPP at a price of $25.25 per share for the first
offering period ending in 2015 and $15.71 per share for the second offering period ending in 2015 for total cash proceeds of $5.3 million.
Stock-Based Compensation
Stock-based compensation expense of $17.9 million, $11.0 million and $6.1 million was recognized for the years ended December 31, 2015, 2014 and 2013, respectively. Income tax benefit of $5.7 million, $2.0 million and $4.4 million was recognized relating to stock-based compensationincurred but not paid. Rent expense for the years ended December 31, 2015, 20142018, 2017 and 2013, respectively. The actual tax benefit realized from stock options exercised2016 was $19.6$20 million, $13.5$18 million and $19.9$17 million, for 2015, 2014 and 2013, respectively.
The fair valueCredit Facilities
We maintain a $250 million revolving credit facility which includes capacity for a $20 million swingline facility. Letters of stock-based awards is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
| | | | | | | | |
| Stock Option Assumptions | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Expected term (in years) | 6.08 |
| | 6.05 |
| | 6.04 |
|
| Expected volatility | 39 | % | | 58 | % | | 48 | % |
| Risk-free interest rate | 1.73 | % | | 1.80 | % | | 1.26 | % |
| Expected dividend yield | 0 | % | | 0 | % | | 0 | % |
|
| | | | | | | |
| ESPP Assumptions | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Expected term (in years) | 0.50 |
| | 0.50 |
| | n/a |
| Expected volatility | 34-76% |
| | 33-58% |
| | n/a |
| Risk-free interest rate | 0.07-0.33% |
| | 0.06-0.07% |
| | n/a |
| Expected dividend yield | 0 | % | | 0 | % | | n/a |
Stock-based compensation expense for stock-based awards made to the Company’s employeescredit issued pursuant to the equity plans was as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Cost of providing services | $ | 4,244 |
| | $ | 2,658 |
| | $ | 1,193 |
|
| Sales and marketing | 4,490 |
| | 2,755 |
| | 1,284 |
|
| General and administrative | 7,501 |
| | 4,517 |
| | 3,220 |
|
| Systems development and programming costs | 1,688 |
| | 1,030 |
| | 416 |
|
| | $ | 17,923 |
| | $ | 10,960 |
| | $ | 6,113 |
|
Earnings per Share
Prior to its IPO,revolving credit facility reduce the Company’s basic and diluted earnings per share (EPS) were computed usingamount available for borrowing under the two-class method, an earnings allocation method that determines earnings per share for common stock and participating securities. Shares of convertible preferred stock are considered participating securities and are entitled to dividend, on a pro rata basis, upon redemption, as if these had been converted to common stock.revolving credit facility. The undistributed earnings are allocated between common stock and participating securities as if all earnings had been distributed during the period.
Basic EPS is calculated by taking net income, less earnings available to participating securities, divided by the basic weighted average common stock outstanding.
Diluted EPS is calculated using the more dilutivetotal unused portion of the if-converted method and the two-class method. Because the preferred stock participates in dividends on a pro rata basis as if the shares had been converted, the diluted earnings per share are the same under both methods. The two-class method has been presented below.
The following table sets forth the computation of the Company’s basic and diluted net income per share attributable to common stock (in thousands, except per share data):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Numerator (basic) | | | | | |
| Net income | $ | 31,695 |
| | $ | 15,497 |
| | $ | 13,147 |
|
| Less net income allocated to participating securities | — |
| | (2,224 | ) | | (9,926 | ) |
| Net income attributable to common stock | $ | 31,695 |
| | $ | 13,273 |
| | $ | 3,221 |
|
| Denominator (basic) | | | | | |
| Weighted average shares of common stock outstanding | 70,228 |
| | 56,161 |
| | 12,353 |
|
| Basic EPS | $ | 0.45 |
| | $ | 0.24 |
| | $ | 0.26 |
|
| Numerator (diluted) | | | | | |
| Net income | $ | 31,695 |
| | $ | 15,497 |
| | $ | 13,147 |
|
| Less net income allocated to participating securities | — |
| | (2,114 | ) | | (9,303 | ) |
| Net income attributable to common stock | $ | 31,695 |
| | $ | 13,383 |
| | $ | 3,844 |
|
| Denominator (diluted) | | | | | |
| Weighted average shares of common stock | 70,228 |
| | 56,161 |
| | 12,353 |
|
| Dilutive effect of stock options and restricted stock units | 2,390 |
| | 3,406 |
| | 3,379 |
|
| Weighted average shares of common stock outstanding | 72,618 |
| | 59,567 |
| | 15,732 |
|
| Diluted EPS | $ | 0.44 |
| | $ | 0.22 |
| | $ | 0.24 |
|
| | | | | | |
Common stock equivalents excluded from income per diluted
share because of their anti-dilutive effect | 1,004 |
| | 526 |
| | 1,389 |
|
Special Dividend
In August 2013, the Board of Directors declared a special dividend of $5.88 per common-equivalent share for holders of record of the Company’s preferred stock as of August 21, 2013, or a total of $223.6 million, and $5.88 per share for holders of record of the Company’s common stock as of August 30, 2013, or a total of $87.1 million. These dividends were fully paid in August 2013 and September 2013. Dividends have also been declared to holders of restricted stock units at $5.88 per share, or a total of $0.1 million, and are payable as the restricted stock units vest.
In December 2013, the Board of Directors declared a special dividend of $0.88 per common-equivalent share for holders of record of the Company’s preferred stock as of December 25, 2013, or a total of $33.3 million, and $0.88 per share for holders of record of the Company’s common stock as of December 25, 2013, or a total of $13.4 million. These dividends were fully paid in December 2013. Dividends have also been declared to holders of restricted stock units at $0.88 per share and are payable as the restricted stock units vest.
As a result of the August 2013 special dividend and in accordance with the provisions of the 2009 Plan, the Company adjusted the exercise prices on all outstanding options downward by $5.88, exactly equal to the amount of the dividend, except in three instances in which: i) the exercise pricerevolving credit facility was lower than $6.38, ii) the holder of the incentive stock option under the 2009 Plan did not consent to the adjustment when consent was required, or iii) the incentive stock option was under the 2000 Plan. For options that were priced lower than $6.38, the Company adjusted the exercise price to $0.50.
As a result of the December 2013 special dividend and in accordance with the provisions of the 2009 Plan, the Company adjusted the exercise prices on all outstanding options downward by $0.88, exactly equal to the amount of the dividend, except in three instances in which: i) the exercise price was lower than $1.38, ii) the holder of the incentive stock option under the 2009 Plan did not consent to the adjustment when consent was required, or iii) the incentive stock option was under the 2000 Plan. For options that were priced lower than $2.75, the Company adjusted the exercise price to $0.50.
No changes were made to the original option grant-date fair value for the purpose of recognizing ongoing stock-based compensation cost. No changes were made to nonvested restricted stock units.
Stock Repurchases
In May 2014, the Board of Directors authorized a stock repurchase program that provided for the repurchase of up to $15 million of our outstanding common stock, with no expiration from the date of authorization. In November 2014, the Board of Directors authorized an additional $30 million stock repurchase program, with no expiration from the date of authorization. These stock repurchase programs are intended to offset dilution resulting from the issuance of shares under the Company’s ESPP and upon exercise of stock options. During 2014, the Company repurchased 490,419 shares of outstanding common stock for $15 million.
On June 29, 2015, the Board of Directors approved a $50.0 million incremental increase to the Company’s stock repurchase program. During the year ended December 31, 2015, the Company repurchased 1,895,625 shares of outstanding common stock for $48.4 million. Accordingly, as of December 31, 2015, a total of approximately $31.6 million remained available for further repurchases of the Company’s common stock under the Company’s stock repurchase program.
Stock Split
On March 7, 2014, the Company’s board of directors and stockholders approved and effected an amendment to the amended and restated certificate of incorporation providing for a 2-for-1 stock split of the outstanding common stock, which has been retroactively adjusted for all periods presented.
NOTE 10. 401(k) PLAN
Under the Company’s 401(k) plan, corporate participants may direct the investment of contributions to their accounts among certain investments. The Company matches individual employee 401(k) plan contributions at the rate of $0.50 for every dollar contributed by employees subject to a cap. The Company recorded matching contributions to the 401(k) plan of $4.6 million, $3.5 million, and $2.7 million during the years ended December 31, 2015, 2014, and 2013, respectively, which are reflected in various operating expense lines within the accompanying consolidated statements of operations.
The Company also maintains a multiple employer defined contribution plan, which covers WSEs for client companies electing to participate in the plan and for its internal staff employees. The Company contributes, on behalf of each participating client, varying amounts based on the clients’ policies and serviced employee elections.
NOTE 11. INCOME TAXES
The Company is subject to income taxation in the United States and Canada. However, business is conducted primarily in the United States. The effective income tax rate differs from the statutory rate primarily due to state taxes, non-deductible stock-based compensation, and tax credits. The Company makes estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s plans and estimates. Should the actual amounts differ from these estimates, the amount of the valuation allowance could be materially affected.
Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Changes in valuation allowances are reflected as a component of provision for income taxes.
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
|
| | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 |
| Deferred tax assets: | | | |
| Net operating losses (federal and state) | $ | 2,508 |
| | $ | 2,996 |
|
| Accrued expenses | 9,908 |
| | 9,381 |
|
| Accrued workers compensation costs | 18,823 |
| | 13,964 |
|
| Stock-based compensation | 4,643 |
| | 2,508 |
|
| Tax benefits relating to uncertain positions | 29 |
| | 20 |
|
| Tax credits (federal and state) | 6,272 |
| | 9,865 |
|
| Other | 113 |
| | 354 |
|
| Total | 42,296 |
| | 39,088 |
|
| Valuation allowance | (5,276 | ) | | (6,945 | ) |
| Total deferred tax assets | 37,020 |
| | 32,143 |
|
| Deferred tax liabilities: | | | |
| Depreciation and amortization | (3,277 | ) | | (10,643 | ) |
| Deferred service revenues | (85,263 | ) | | (77,827 | ) |
| Prepaid health plan expenses | (3,121 | ) | | (2,202 | ) |
| Total deferred tax liabilities | (91,661 | ) | | (90,672 | ) |
| Net non-current deferred tax liabilities | $ | (54,641 | ) | | $ | (58,529 | ) |
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The Company elected to early adopt and retrospectively apply the provisions of the amendment which resulted in reclassification of the previously reported current deferred tax liability of $65.7 million and noncurrent deferred tax asset of $7.2 million to net against the noncurrent deferred tax liability for a total noncurrent deferred tax liability of $58.5 million for 2014.
The deferred tax assets and liabilities presented above are classified in the accompanying consolidated balance sheets as follows (in thousands):
|
| | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 |
| Net current deferred tax liabilities | $ | — |
| | $ | — |
|
| Net non-current deferred tax liabilities | (54,641 | ) | | (58,529 | ) |
| Net current deferred tax assets | — |
| | — |
|
| Net non-current deferred tax assets | — |
| | — |
|
| Net deferred tax liabilities | $ | (54,641 | ) | | $ | (58,529 | ) |
The provision for income taxes consists of the following (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Current: | | | | | |
| Federal | $ | 9,189 |
| | $ | (31,111 | ) | | $ | 11,319 |
|
| Foreign | 378 |
| | 230 |
| | 217 |
|
| State | 3,794 |
| | 4,618 |
| | 3,081 |
|
| | 13,361 |
| | (26,263 | ) | | 14,617 |
|
| Deferred: | | | | | |
| Federal | 11,528 |
| | 38,297 |
| | (5,659 | ) |
| Foreign | (24 | ) | | — |
| | — |
|
| State | 320 |
| | 2,951 |
| | (1,344 | ) |
| Revaluation due to state legislative changes | 3,130 |
| | 2,594 |
| | 323 |
|
| | 14,954 |
| | 43,842 |
| | (6,680 | ) |
| | $ | 28,315 |
| | $ | 17,579 |
| | $ | 7,937 |
|
The U.S. federal statutory income tax rate reconciled to the Company’s effective tax rate is as follows:
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| U.S. federal statutory tax rate | 35.00 | % | | 35.00 | % | | 35.00 | % |
| State income taxes, net of federal benefit | 6.6 |
| | 3.8 |
| | 3.8 |
|
| Tax rate change | 5.2 |
| | 7.8 |
| | 1.5 |
|
| Nondeductible transaction costs | — |
| | 0.9 |
| | — |
|
| Nondeductible meals, entertainment and penalties | 3.3 |
| | 4.3 |
| | 4.1 |
|
| Stock-based compensation | 1.3 |
| | 4.5 |
| | (0.1 | ) |
| Uncertain tax positions | 0.2 |
| | 0.8 |
| | (2.3 | ) |
| Tax credits | (2.2 | ) | | (3.6 | ) | | (4.3 | ) |
| Other | (2.2 | ) | | (0.3 | ) | | (0.1 | ) |
| | 47.20 | % | | 53.20 | % | | 37.60 | % |
Our effective income tax rate decreased from 53.2% for 2014 to 47.2% for 2015. The decrease is primarily due to disqualifying dispositions on previously non-deductible stock-based compensation and tax credits offset in part by increased state taxes of 2.8% due to state legislative changes. Revaluation of deferred taxes due to state legislative changes resulted in discrete tax expense representing 5.2%, 7.8% and 1.5% of the effective tax rate for the years ended December 31, 2015, 2014 and 2013, respectively. The benefit in other tax expense of 2.2% is primarily attributable to adjustments to state net operating losses resulting from state legislative changes.
The Company records a valuation allowance to reduce reported deferred tax assets if, based on the weight of available evidence, both positive and negative, for each respective tax jurisdiction, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company recorded a valuation allowance of $0.6 million and $1.9$234 million as of December 31, 2015 and 2014, respectively, related2018.
The terms of the credit agreement governing the revolving credit facility require us to maintain certain federal and state net operating loss carryforwards that may not be utilized prior to expiration. The Company has federal and multiple state net operating loss carryforwards of approximately $0.1 million and $60.8 million, respectively,financial ratios at each quarter end. We were in compliance with these covenants as of December 31, 2015. The federal net operating loss carryforward will begin expiring in 2031 and2018.
We also have a $5 million line of credit facility to secure standby letters of credit related to our workers' compensation obligation. At December 31, 2018, the state net operating loss carryforward will begin expiring in 2016. The Internal Revenue Codetotal unused portion of 1986,the credit facility was $3 million.
Standby Letters of Credit
We have two standby letters of credit up to an aggregate of $18 million provided as amended, imposes substantial restrictions oncollateral for our workers’ compensation obligations. At December 31, 2018, the utilizationfacilities were not drawn down.
Contingencies
In August 2015, Howard Welgus, a purported stockholder, filed a putative securities class action lawsuit, Welgus v. TriNet Group, Inc., et. al., under the Securities Exchange Act of net operating losses1934 in the eventUnited States District Court for the Northern District of an “ownership change”California. The complaint was later amended in April 2016 and again in March 2017. On December 18, 2017, the district court granted TriNet’s motion to dismiss the amended complaint in its entirety, without leave to amend. Plaintiff filed a notice of appeal of the district court’s order on January 17, 2018. Plaintiff-Appellant filed his opening appeal brief before the Ninth Circuit Court of Appeals on April 27, 2018. TriNet filed a corporation. Accordingly,responsive brief on June 28, 2018. Plaintiff-Appellant filed his reply brief on August 20, 2018. The Ninth Circuit has scheduled a company’s abilityhearing date for March 14, 2019. We see no basis for a reversal of the district court’s decision. We are unable to use net operatingreasonably estimate the possible loss or expense, or range of losses and expenses, if any, arising from this litigation.
We are and, from time to time, have been and may be limited as prescribed under Internal Revenue Code Section 382 (“IRC Section 382”). Events which may cause limitations in the amountfuture become involved in various litigation matters, legal proceedings, and claims arising in the ordinary course of our business, including disputes with our clients or various class action, collective action, representative action, and other proceedings arising from the net operating losses that the Company may usenature of our co-employment relationship with our clients and WSEs in any one year include, butwhich we are not limited to,named as a cumulative ownership change of more than 50% over a
three-year period. Duedefendant. In addition, due to the effectsnature of historical equity issuances, the Company has determined that the future utilization of a portion of its net operating losses is limited annually pursuant to IRC Section 382. As of December 31, 2015, the Company has determined that a portion of its state net operating losses in the amount of $2.7 million, will expire because of the annual limitation.
The Company has excluded excess windfall tax benefits resulting from stock option exercises as components of the Company’s gross deferred tax assets, as tax attributes related to such windfall tax benefits should not be recognized until they result in a reduction of taxes payable. The gross amount of unrealized net operating loss carryforwards for state resulting from stock option exercises was $14.1 million at December 31, 2015. When realized, excess windfall tax benefits are credited to additional paid-in capital. The provision for income taxes for the year ended December 31, 2015 included $20.7 million of excess tax benefit resulting from stock option exercisesour co-employment relationship with our clients and net operating loss carryforward utilization. The Company follows the tax law ordering method to determine when such net operating loss carryforwards have been realized.
The Company has $6.5 million (net of federal benefit) state tax credit carryforwards available that will begin expiring in 2021, which are partially offset by a valuation allowance of $4.7 million and $5.0 million as of December 31, 2015 and 2014, respectively. Provision for income taxes for the years ended December 31, 2015 and 2014 included a tax benefit from operating loss carryforwards of $3.9 million and $24.3 million, respectively. The valuation allowance decreased by $1.7 million as of December 31, 2015. The valuation allowance increased by $1.8 million and $3.7 million as of December 31, 2014 and 2013, respectively.
The Company is subject to tax in U.S. federal and various state and local jurisdictions, as well as Canada. The Company is not subject to any material income tax examinations in federal or state jurisdictions for tax years beginning prior to January 1, 2011. The Company paid Notices of Proposed Assessments disallowing employment tax credits totaling $10.5 million in connection with the IRS examination of Gevity HR, Inc. and its subsidiaries, which was acquired by TriNet in June 2009. The Company plans to exhaust all administrative efforts to resolve this matter, however, it is likely that the matter will ultimately be resolved through litigation. With regard to these employment tax credits, the Company believes it is more likely than not that the Company will prevail. Therefore, no reserve has been recognized related to this matter.
As of December 31, 2015 and 2014, the total unrecognized tax benefits related to uncertain income tax positions, which would affect the effective tax rate if recognized, were $3.3 million and $3.2 million, respectively. As of December 31, 2015, the amount of the total unrecognized tax benefits for which it was reasonably possible such benefitsWSEs, we could settle within the next year was de minimis.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Unrecognized tax benefits at January 1 | $ | 2,471 |
| | $ | 2,300 |
| | $ | 2,710 |
|
| Additions for tax positions of prior periods | — |
| | 25 |
| | — |
|
| Additions for tax positions of current period | 167 |
| | 182 |
| | 286 |
|
| Reductions for tax positions of prior period: | | | | | |
| Settlements with taxing authorities | — |
| | — |
| | (406 | ) |
| Lapse of applicable statute of limitations | — |
| | — |
| | (290 | ) |
| Adjustments to tax positions | (20 | ) | | (36 | ) | | — |
|
| Unrecognized tax benefits at December 31 | $ | 2,618 |
| | $ | 2,471 |
| | $ | 2,300 |
|
The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of December 31, 2015 and December 31, 2014, the total amount of gross interest and penalties accrued was $0.8 million and $0.8 million, respectively. In connection with tax matters, the Company recognized de minimis interest and penalty expense related to its uncertain tax positions as a component of income tax expense in the accompanying consolidated statements of operations for the years ended December 31, 2015, 2014 and 2013, respectively.
The Company has not provided for U.S. federal income and foreign withholding taxes on its Canadian subsidiary’s undistributed earnings of $2.6 million as of December 31, 2015, because the Company intends to reinvest such earnings
indefinitely. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. income taxes (subject to an adjustmentliability for foreign tax credits). Determining the unrecognized deferred tax liabilityfederal and
state law violations, even if we do not participate in such violations. While our agreements with our clients contain indemnification provisions related to the Company's investmentconduct of our clients, we may not be able to avail ourselves of such provisions in its Canadian subsidiaryevery instance. We have accrued our current best estimates of probable losses with respect to these matters, which are individually and in aggregate immaterial to our consolidated financial statements.
While the outcome of the matters described above cannot be predicted with certainty, management currently does not believe that are indefinitely reinvested is not practicable. We currently intend to indefinitely reinvest those earnings and other basis differencesany such claims or proceedings or the above mentioned securities class action will have a materially adverse effect on our consolidated financial position, results of operations, or cash flows. However, the unfavorable resolution of any particular matter or our reassessment of our exposure for any of the above matters based on additional information obtained in the future could have a material impact on our consolidated financial position, results of operations, outside the U.S.or cash flows.
NOTE 12. COMMITMENTS AND CONTINGENCIES9. STOCKHOLDERS' EQUITY
Lease CommitmentsEquity-Based Incentive Plans
The Company leases office facilities,Our 2009 Equity Incentive Plan (the 2009 Plan) provides for the grant of stock awards, including its headquartersstock options, RSUs, RSAs, and other facilities,stock awards. Shares available for grant as of December 31, 2018 were12 million.
Stock Options
Stock options are granted to employees under the 2009 Plan at exercise prices equal to the fair market value of our common stock on the dates of grant. Options generally have a maximum contractual term of 10 years. Options are generally vested over four years, based on continued service. Stock options are forfeited if the employee ceases to be employed by us prior to vesting.
The following table summarizes stock option activity under our equity-based plan for the year ended December 31, 2018:
|
| | | | | | | | | |
| | Number
of Shares | Weighted
Average
Exercise
Price | Weighted
Average
Remaining
Contractual
Term (in years) | Aggregate
Intrinsic
Value
(in millions) |
| Balance at December 31, 2017 | 1,296,863 |
| $ | 12.27 |
| 5.87 | $ | 41 |
|
| Exercised | (617,157 | ) | 11.00 |
| | |
| Forfeited | (15,694 | ) | 32.81 |
| | |
| Canceled | (8,497 | ) | 32.02 |
| | |
| Balance at December 31, 2018 | 655,515 |
| $ | 12.90 |
| 4.91 | $ | 19 |
|
| Exercisable at December 31, 2018 | 642,631 |
| $ | 12.65 |
| 4.94 | $ | 19 |
|
| Vested and expected to vest at December 31, 2018 | 655,515 |
| $ | 12.90 |
| 4.91 | $ | 19 |
|
|
| | | | | | | | | |
| | Year Ended December 31, |
| Additional Disclosures for Stock Options (in millions) | 2018 | 2017 | 2016 |
| Total fair value of options vested | $ | 4 |
| $ | 7 |
| $ | 7 |
|
| Total intrinsic value of options exercised | 24 |
| 36 |
| 21 |
|
| Cash received from options exercised | 7 |
| 11 |
| 5 |
|
Restricted Stock Units and equipmentRestricted Stock Awards
In 2018, the Company granted time-based and performance-based restricted stock awards to the Company's named executive officers. A recipient of RSAs owns the underlying shares of common stock upon grant and some of the benefits of ownership, such as voting and dividend rights, but the recipient may not sell those shares and realize any value on a sale, until all time-based and performance-based restrictions have been satisfied or lapsed.
Time-based RSUs and RSAs generally vest over a four-year term. Performance-based RSUs and RSAs are subject to vesting requirements based on certain financial performance metrics as defined in the grant notice. Actual number of shares earned may range from 0% to 200% of the target award. Awards granted in 2017 and 2018 are based on single-year performance period subject to subsequent multi-year vesting with 50% of the shares earned will vest in one year after the performance period and the remaining shares in the year after.
Compensation expense is recognized ratably over the vesting period based on the probability of the number of awards expected to vest at each reporting date.
The following table summarizes RSU and RSA activity under non-cancelable operating leases.our equity-based plans for the year ended December 31, 2018:
|
| | | | | | | | | | |
| | RSUs | RSAs |
| | Number of Units | Weighted-Average Grant Date Fair Value | Number of Shares | Weighted-Average Grant Date Fair Value |
| Nonvested at December 31, 2017 | 2,703,335 |
| $ | 25.82 |
| — |
| $ | — |
|
| Granted | 714,358 |
| 47.07 |
| 372,783 |
| 49.02 |
|
| Vested | (1,273,796 | ) | 27.26 |
| (13,683 | ) | 47.61 |
|
| Forfeited | (406,343 | ) | 28.68 |
| (12,308 | ) | 47.61 |
|
| Nonvested at December 31, 2018 | 1,737,554 |
| $ | 32.83 |
| 346,792 |
| $ | 49.13 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | RSUs | | RSAs |
| | Year Ended December 31, | | Year Ended December 31, |
| Additional Disclosures for equity-based plans | 2018 | 2017 | 2016 | | 2018 | 2017 | 2016 |
| Total grant date fair value of shares granted (in millions) | $ | 34 |
| $ | 46 |
| $ | 42 |
| | $ | 18 |
| $ | — |
| $ | — |
|
| Total grant date fair value of shares vested (in millions) | $ | 35 |
| $ | 21 |
| $ | 16 |
| | $ | 1 |
| $ | — |
| $ | — |
|
| Shares withheld to settle payroll tax liabilities related to vesting of shares held by employees | 451,875 |
| 335,101 |
| 217,769 |
| | 6,357 |
| — |
| — |
|
Employee Stock Purchase Plan
Our 2014 Employee Stock Purchase plan (ESPP) offers eligible employees an option to purchase shares of our common stock through a payroll deduction. The Company also leasespurchase price is equal to the lesser of 85% of the fair market value of our common stock on the offering date or 85% of the fair market value of our common stock on the applicable purchase date. Offering periods are approximately six months in duration and will end on or about May 15 and November 15 of each year. Employees may contribute a minimum of 1% and a maximum of 15% of their earnings. The plan is considered to be a compensatory plan. We issued 175,966, 224,928, and 283,644 shares under the ESPP during 2018, 2017, and 2016, respectively. As of December 31, 2018, approximately 3 million shares were reserved for future issuances under the ESPP.
Equity-Based Compensation
|
| | | | | |
| | ESPP Assumptions |
| Year Ended December 31, | Expected Term (in Years) | Expected Volatility | Risk-Free Interest Rate | Expected Dividend Yield |
| 2018 | 0.50 | 27-37% | 1.42-2.5% | 0 | % |
| 2017 | 0.50 | 28-37% | 0.62-1.42% | 0 | % |
| 2016 | 0.50 | 32-76% | 0.33-0.62% | 0 | % |
Stock-based compensation expense and other disclosures for stock-based awards made to our employees pursuant to the equity plans was as follows:
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 |
| Cost of providing services | $ | 10 |
| $ | 8 |
| $ | 7 |
|
| Sales and marketing | 8 |
| 6 |
| 6 |
|
| General and administrative | 22 |
| 14 |
| 11 |
|
| Systems development and programming costs | 4 |
| 4 |
| 2 |
|
| Total stock-based compensation expense | $ | 44 |
| $ | 32 |
| $ | 26 |
|
| Income tax benefit related to stock-based compensation expense | $ | 11 |
| $ | 7 |
| $ | 9 |
|
| Tax benefit realized from stock options exercised and similar awards | $ | 23 |
| $ | 28 |
| $ | 7 |
|
The table below summarizes unrecognized compensation expense for the year ended December 31, 2018 associated with the following:
|
| | | | |
| | Amount
(in millions) | Weighted-Average Period (in Years) |
| Nonvested stock options | $ | — |
| 0.11 |
| Nonvested RSUs | 49 |
| 2.07 |
| Nonvested RSAs | 12 |
| 2.44 |
Stock Repurchases
During 2018, the board of directors did not authorize additional repurchases. During 2017 and 2016, the board of directors authorized $120 million and $100 million, respectively, of outstanding common stock to be repurchased with no expiration from the date of authorization. As of December 31, 2018, approximately $75 million remained available for repurchase pursuant to our stock repurchase program. During 2018, 2017, and 2016, we repurchased 1,190,995 shares, 1,549,434 shares and 3,414,675 shares, respectively.
On February 6, 2019, our board of directors authorized a $300 million incremental increase to our ongoing stock repurchase program initiated in May 2014.
NOTE 10. INCOME TAXES
Provision for Income Taxes
The provision for income taxes consists of the following:
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 |
| Current: | | | |
| Federal | $ | 41 |
| $ | 46 |
| $ | 1 |
|
| State | 7 |
| 1 |
| — |
|
| Total Current | 48 |
| 47 |
| 1 |
|
| Deferred: | | | |
| Federal | (3 | ) | 12 |
| 38 |
|
| State | 4 |
| 3 |
| 5 |
|
| Revaluation due to legislative changes | — |
| (40 | ) | (1 | ) |
| Total Deferred | 1 |
| (25 | ) | 42 |
|
| Total | $ | 49 |
| $ | 22 |
| $ | 43 |
|
The U.S. federal statutory income tax rate reconciled to our effective tax rate is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | 2017 | 2016 |
| (in millions, except percent) | Pre-Tax Income | Tax Expense/(Benefit) | Percent of Pre-Tax Income (Loss) | Pre-Tax Income | Tax Expense/(Benefit) | Percent of Pre-Tax Income (Loss) | Pre-Tax Income | Tax Expense/(Benefit) | Percent of Pre-Tax Income (Loss) |
| | $ | 241 |
| | | $ | 200 |
| | | $ | 104 |
| | |
| U.S. federal statutory tax rate | | $ | 51 |
| 21 | % | | $ | 70 |
| 35 | % | | $ | 37 |
| 35 | % |
| State income taxes, net of federal benefit | | 18 |
| 8 |
| | 10 |
| 5 |
| | 4 |
| 4 |
|
| Tax rate change | | — |
| — |
| | (40 | ) | (20 | ) | | (1 | ) | (1 | ) |
| Nondeductible meals, entertainment and penalties | | 1 |
| 1 |
| | 1 |
| — |
| | 4 |
| 4 |
|
| Stock-based compensation | | (9 | ) | (4 | ) | | (15 | ) | (7 | ) | | 1 |
| 1 |
|
| Uncertain tax positions | | 1 |
| — |
| | 4 |
| 2 |
| | — |
| — |
|
| Tax credits | | (4 | ) | (2 | ) | | (3 | ) | (1 | ) | | (1 | ) | (1 | ) |
| State and tax return to provision adjustment | | (7 | ) | (3 | ) | | (5 | ) | (3 | ) | | (1 | ) | (1 | ) |
| Sec 199 benefits | | — |
| — |
| | (3 | ) | (1 | ) | | — |
| — |
|
| Other | | (2 | ) | (1 | ) | | 3 |
| 1 |
| | — |
| — |
|
| Total | | $ | 49 |
| 20 | % | | $ | 22 |
| 11 | % | | $ | 43 |
| 41 | % |
Our effective income tax rate increased by 9% to 20% in 2018 from 11% in 2017. The increase was primarily attributable to federal legislative changes enacted in the prior year resulting from non-recurring discrete tax benefits and apportionment changes. The remaining increase consisted of a reduction from excess tax benefits related to stock-based compensation and a one-time qualified production activities deduction for certain software
offerings recorded in the prior year. These increases were partially offset by decreases due to changes related to the ongoing litigation and
furniture, fixtures, and equipment under capital leases. The schedule of minimum future rental payments under non-cancelable operating and capital leases having initial termschanges in
excess of one year at December 31, 2015, is as follows (in thousands): |
| | | | | | | |
| | Capital
Leases | | Operating Leases |
| Year ending December 31: | | | |
| 2016 | $ | 82 |
| | $ | 11,882 |
|
| 2017 | 80 |
| | 10,466 |
|
| 2018 | 65 |
| | 9,606 |
|
| 2019 | 41 |
| | 8,119 |
|
| 2020 | — |
| | 7,643 |
|
| Thereafter | — |
| | 2,607 |
|
| Minimum lease payments | 268 |
| | $ | 50,323 |
|
| Less current portion of minimum lease payments | (37 | ) | | |
| Less interest | (115 | ) | | |
| Long term portion of capital leases | $ | 116 |
| | |
The lease agreements generally provide for rental payments onrevaluation of deferred taxes resulted in a graduated basisdiscrete tax benefit representing an immaterial amount in 2018, and for options to renew, which could increase future minimum lease payments if exercised. The Company recognizes rent expense on a straight-line basis over the lease period20% and accrues for rent expense incurred but not paid. Rent expense1% for the years ended December 31, 2015, 20142017 and 2013 was $12.92016, respectively.
Deferred Income Taxes
Significant components of our deferred tax assets and liabilities are as follows:
|
| | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 |
| Deferred tax assets: | | |
| Net operating losses (federal and state) | $ | 3 |
| $ | 4 |
|
| Accrued expenses | 8 |
| 6 |
|
| Accrued workers' compensation costs | 9 |
| 8 |
|
| Stock-based compensation | 8 |
| 8 |
|
| Tax benefits relating to uncertain positions | — |
| 1 |
|
| Tax credits (federal and state) | 7 |
| 9 |
|
| Total | 35 |
| 36 |
|
| Valuation allowance | (7 | ) | (7 | ) |
| Total deferred tax assets | 28 |
| 29 |
|
| Deferred tax liabilities: | | |
| Depreciation and amortization | (24 | ) | (13 | ) |
| Deferred service revenues | (62 | ) | (79 | ) |
| Prepaid health plan expenses | — |
| (3 | ) |
| Prepaid commission expenses | (9 | ) | — |
|
| Total deferred tax liabilities | (95 | ) | (95 | ) |
| Net deferred tax liabilities | $ | (67 | ) | $ | (66 | ) |
We recorded an immaterial change to the valuation allowance in 2018, related to certain state net operating loss and state tax credit carryforwards. We have $61 million $11.9 millionin state net operating loss carryforwards as of December 31, 2018 and $9.9 million, respectively. Subleasehave utilized all of the federal net operating loss carryforwards. The state net operating loss carryforwards will begin expiring in 2019.
Excess tax benefits or deficiencies from equity-based award activities are now reflected as a component of the provision for income to be received under non-cancelable subleasestaxes instead of equity. The provision for income taxes for the years endingyear ended December 31, 20162018 included $10 million of excess tax benefits resulting from equity incentive plan activities.
We have $7 million state tax credit carryforwards (net of federal benefit) available that will begin expiring in 2021, which are offset by a valuation allowance of $6 million as of December 31, 2018 and 2017, is $0.3 million and de minimis, respectively.
Operating Covenants
To meet various states’ licensing requirements and maintain accreditation by the Employer Services Assurance Corporation, the Company isWe are subject to tax in U.S. federal and various minimum working capitalstate and net worth requirements. local jurisdictions, as well as Canada. We are not subject to any material income tax examinations in federal or state jurisdictions for tax years prior to January 1, 2012. We previously paid Notices of Proposed Assessments disallowing employment tax credits totaling $11 million, plus interest of $4 million in connection with the IRS examination of Gevity HR, Inc. and its subsidiaries, which was acquired by TriNet in June 2009. TriNet filed suit in June 2016 to recover the disallowed credits, and the issue is being resolved through the litigation process. TriNet and the IRS filed cross motions for summary judgment in this matter in federal district court on February 27, 2018. On September 17, 2018, the district court granted our motion for summary judgment and denied the IRS' motion. On January 18, 2019, the district court entered judgment in favor of TriNet in the amount of $15 million, plus interest. The IRS has 60 days to appeal the district court’s decision. We will continue to vigorously defend our position through the litigation process, including the appeal, if necessary. Given the uncertainty of the outcome of any appeal, it remains possible that our recovery of the refund will be less than the total amount in dispute.
Uncertain Tax Positions
As of December 31, 20152018 and 2014,2017, the Company believes it has fully compliedtotal unrecognized tax benefits related to uncertain income tax positions, which would affect the effective tax rate if recognized, were $6 million.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is presented in all material respects with all applicable state regulations regarding minimumthe table below:
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in millions) | 2018 | 2017 | 2016 |
| Unrecognized tax benefits at January 1 | $ | 6 |
| $ | 1 |
| $ | 3 |
|
| Additions for tax positions of prior periods | 1 |
| 4 |
| — |
|
| Additions for tax positions of current period | — |
| 1 |
| — |
|
| Reductions for tax positions of prior period: | | | |
| Settlements with taxing authorities | — |
| — |
| (2 | ) |
| Lapse of applicable statute of limitations | (1 | ) | — |
| — |
|
| Unrecognized tax benefits at December 31 | $ | 6 |
| $ | 6 |
| $ | 1 |
|
As of December 31, 2018 and 2017, the total amount of gross interest and penalties accrued were immaterial. The unrecognized tax benefit, including accrued interest and penalties are included in other liabilities on the consolidated balance sheet.
It is reasonably possible the amount of the unrecognized benefit could increase or decrease within the next twelve months, which would have an impact on net worth, working capitalincome.
NOTE 11. EARNINGS PER SHARE
Basic EPS is computed based on the weighted average shares of common stock outstanding during the period. Diluted EPS is computed based on those shares used in the basic EPS computation, plus potentially dilutive shares issuable under our equity-based compensation plans using the treasury stock method. Shares that are potentially anti-dilutive are excluded.
The following table presents the computation of our basic and alldiluted EPS attributable to our common stock:
|
| | | | | | | | | |
| | Year Ended December 31, |
| (in millions, except per share data) | 2018 | 2017 | 2016 |
| Net income | $ | 192 |
| $ | 178 |
| $ | 61 |
|
| Weighted average shares of common stock outstanding | 70 |
| 69 |
| 70 |
|
| Basic EPS | $ | 2.72 |
| $ | 2.57 |
| $ | 0.88 |
|
| | | | |
| Net income | $ | 192 |
| $ | 178 |
| $ | 61 |
|
| Weighted average shares of common stock outstanding | 70 |
| 69 |
| 70 |
|
| Dilutive effect of stock options and restricted stock units | 2 |
| 2 |
| 2 |
|
| Weighted average shares of common stock outstanding | 72 |
| 71 |
| 72 |
|
| Diluted EPS | $ | 2.65 |
| $ | 2.49 |
| $ | 0.85 |
|
| | | | |
Common stock equivalents excluded from income per diluted share because of their anti-dilutive effect | 1 |
| 2 |
| 1 |
|
NOTE 12. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
We use an independent pricing source to determine the fair value of our available-for-sale securities included as Level 1 and Level 2. For purposes of valuing our securities, the independent pricing source utilizes the following market approach by investment class:
Money market mutual funds are valued on a spread or discount rate basis,
Asset-backed securities are valued using historical and projected prepayments speed and loss scenarios and spreads obtained from the new issue market, dealer quotes and trade prices,
U.S. treasuries, corporate bonds, and other financialdebt securities are priced based on dealer quotes from multiple sources, and legal requirements. Further,
US government agencies and government sponsored agencies are priced using LIBOR/swap curves, credit spreads and interest rate volatilities.
We have not adjusted the Company has maintained positive working capital throughoutprices obtained from the period covered byindependent pricing service and we believe the financial statements.
Contingencies prices received from the independent pricing service are representative of the prices that would be received to sell the assets at the measurement date (exit price).
On or about August 7, 2015, Howard Welgus, a purported stockholderrecurring basis, we did not have any Level 3 financial instruments as of December 31, 2018 and December 31, 2017. There were transfers between levels as of December 31, 2018 and December 31, 2017.
Fair Value Measurements on a Recurring Basis
The following tables summarize our financial instruments by significant categories and fair value measurement on a recurring basis as of December 31, 2018 and 2017:
|
| | | | | | | | | |
| (in millions) | Level 1 | Level 2 | Total |
| December 31, 2018 | | | |
| Cash equivalents: | | | |
| Money market mutual funds | $ | 4 |
| $ | — |
| $ | 4 |
|
| U.S. treasuries | — |
| 1 |
| 1 |
|
| Total cash equivalents | 4 |
| 1 |
| 5 |
|
| Investments: | | | |
| Asset-backed securities | — |
| 33 |
| 33 |
|
| Corporate bonds | — |
| 99 |
| 99 |
|
| U.S. government agencies and government-sponsored agencies | — |
| 7 |
| 7 |
|
| U.S. treasuries | — |
| 41 |
| 41 |
|
| Other debt securities | — |
| 9 |
| 9 |
|
| Total investments | — |
| 189 |
| 189 |
|
| Restricted cash equivalents: | | | |
| Money market mutual funds | 48 |
| — |
| 48 |
|
| Commercial paper | 20 |
| — |
| 20 |
|
| Total restricted cash equivalents | 68 |
| — |
| 68 |
|
| Restricted investments: | | | |
| U.S. treasuries | — |
| 5 |
| 5 |
|
| Exchange traded fund | 1 |
| — |
| 1 |
|
| Certificate of deposit | — |
| 2 |
| 2 |
|
| Total restricted investments | 1 |
| 7 |
| 8 |
|
| Total investments and restricted cash equivalents and investments | $ | 73 |
| $ | 197 |
| $ | 270 |
|
|
| | | | | | | | | |
| (in millions) | Level 1 | Level 2 | Total |
| December 31, 2017 | | | |
| Restricted cash equivalents: | | | |
| Money market mutual funds | $ | 199 |
| $ | — |
| $ | 199 |
|
| Commercial paper | 21 |
| — |
| 21 |
|
| Total restricted cash equivalents | 220 |
| — |
| 220 |
|
| Restricted investments: | | | |
| U.S. treasuries | 37 |
| — |
| 37 |
|
| Exchange traded fund | 1 |
| — |
| 1 |
|
| Certificate of deposit | — |
| 2 |
| 2 |
|
| Total restricted investments | 38 |
| 2 |
| 40 |
|
| Total restricted cash equivalents and investments | $ | 258 |
| $ | 2 |
| $ | 260 |
|
Restricted Cash Equivalents
The Company's restricted cash equivalents include money market mutual funds and commercial paper. The carrying value of cash equivalents approximate their fair values due to the Company, filed a putative securities class action lawsuit arising under the Securitiesshort-term maturities and Exchange Act of 1934are classified as Level 1 in the United States District Courtfair value hierarchy because we use quoted market prices that are readily available in an active market to determine the fair value.
Restricted Investments
The Company's restricted investments include U.S. treasuries, an exchange traded fund and a certificate of deposit. The exchange traded fund is classified as Level 1 in the fair value hierarchy as we use active quoted market prices that are readily available in an active market to determine fair value. The U.S. treasuries are classified as Level 2 in the fair value hierarchy as their prices are based on dealer quotes from multiple sources. The certificate of deposit is classified as Level 2 in the fair value hierarchy as we use a market approach that compares the fair values on certificates with similar maturities.
Fair Value of Financial Instruments Disclosure
Long-Term Debt
The carrying value of our long-term debt at December 31, 2018 and 2017 was $414 million and $425 million, respectively. The estimated fair values of our debt payable at December 31, 2018 and 2017 were $414 million and $428 million, respectively. On September 30, 2018 we changed our methodology of estimating the fair values of our debt payable to a discounted cash flow, which incorporates credit spreads and market interest rates to estimate the fair value and is considered Level 3 in the hierarchy for fair value measurement. The valuation at December 31, 2017 is considered Level 2 in the Northern Districthierarchy for fair value measurement.
NOTE 13. 401(k) PLAN
Under our 401(k) plan, participants may direct the investment of California. The case has not been certified ascontributions to their accounts among certain investments. Effective July 1, 2018, we matched 100% of individual employee 401(k) plan contributions, up to 4% of cash compensation per the calendar year, and made a class action, although it purportsone-time contribution to be filedcertain employees. Prior to July 1, 2018 and in the years ended December 31, 2017 and 2016, we matched individual employee 401(k) plan contributions at the rate of $0.50 for every dollar contributed by employees subject to a cap. We recorded matching contributions to the 401(k) plan of $11 million, $6 million, and $5 million during the years ended December 31, 2018, 2017, and 2016, respectively, which are reflected in various operating expense lines within the accompanying consolidated statements of income and comprehensive income.
We also maintain multiple employer defined contribution plans, which cover WSEs for client companies electing to participate in the plan and for their internal staff employees. We contribute, on behalf of purchasers ofeach participating client, varying amounts based on the Company’s common stock between May 5, 2014clients’ policies and August 3, 2015, inclusive. The name of the case is Welgus v. TriNet Group, Inc. et al., Case No. 3:15-cv-03625. No stockholder other than Mr. Welgus submitted a motion for appointment as lead plaintiff to represent the putative class, and, on December 3, 2015, the Court appointed Mr. Welgus as lead plaintiff. On February 1, 2016, Mr. Welgus filed an amended complaint. The defendants named in the case are the Company and certain of its officers and directors, as well as General Atlantic, LLC, a significant shareholder, and formerly majority shareholder, of the Company. The amended complaint generally alleges that the Company caused damage to stockholders of the Company by misrepresenting and/or failing to disclose facts generally pertaining to alleged trends affecting health insurance and workers compensation claims. Under a stipulated briefing schedule approved by the Court, the Company intends to move to dismiss the amended complaint no later than April 11, 2016. The Company believes that it has meritorious defenses against this action and intends to continue to defend itself vigorously against the allegations of Mr. Welgus.serviced employee elections.
The Company is and, from time to time, has been and may in the future become involved in various litigation matters, legal proceedings and claims arising in the ordinary course of its business, including disputes with its clients or various class action, collective action, representative action and other proceedings arising from the nature of its co-employment relationship with its clients and WSEs in which the Company is named as a defendant. In addition, due to the nature of the Company’s co-employment relationship with its clients and WSEs, the Company could be subject to liability for federal and state law violations, even if the Company does not participate in such violations. While the Company’s agreements with its clients contain indemnification provisions related to the conduct of its clients, the Company may not be able to avail itself of such provisions in every instance.
While the outcome of the matters described above cannot be predicted with certainty, management currently does not believe that any such claims or proceedings or the above mentioned securities class action will have a materially adverse effect on the Company’s consolidated financial position, results of operations or cash flows. However, the unfavorable resolution of any particular matter or the Company’s reassessment of its exposure for any of the above matters based on additional information obtained in the future could have a material impact on the Company’s consolidated financial position, results of operations or cash flows. In addition, regardless of the outcome, the above matters, individually and in the aggregate, could have an adverse impact on the Company because of diversion of management resources and other factors.
NOTE 13.14. RELATED PARTY TRANSACTIONS
The Company entersWe have service agreements with certain stockholders that we process their employees' payrolls and payroll taxes. From time to time, we also enter into sales and purchases agreements with various companies that have a relationship with the Company’sour executive officers or members of the Company’sour board of directors. The relationships are typically an equity investment by the executive officer or board member in the customer / vendor company or the Company’sour executive officer or board member is a member of the customer / vendor company’scompany's board of directors. The Company hasWe have received $6.1$20 million, $3.9$22 million, and $3.2$10 million in gross revenuetotal revenues from such related parties during the years ended December 31, 2015, 20142018, 2017 and 2013,2016, respectively.
The Company hasWe have also entered into various software license agreements with Oracle Corporation. H. Raymond Bingham,software service providers who ishave board members in common with us. We paid the Chairman of the Board of the Company, is also a director of Oracle Corporation. The Company paid Oracle Corporation $4.1software service providers $5 million, $5.9$6 million, and $4.7$7 million during the years ended December 31, 2015, 20142018, 2017 and 2013,2016, for services itwe received, respectively.
Additionally, the company has entered into indemnity agreements with the directors and officers that provide, among other things, that TriNet will indemnify such officer or director, under the circumstances and to the extent provided for therein, for expenses, damages, judgments, fines and settlements he or she may be required to pay in actions or proceedings to which he or she is or may be made a party by reason of his or her position as a director, officer or other agent of TriNet, and otherwise to the fullest extent permitted under Delaware law and the Company’s Bylaws.
NOTE 14. RESTRUCTURING COSTS
In 2011, the Company conducted reductions in force affecting approximately 11% of its workforce. The restructuring costs consist of severance and placement costs, lease termination costs and other exit costs. The activity and balance of the restructuring liability account excluding impairment charges is as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| Beginning balance | $ | 644 |
| | $ | 1,374 |
| | $ | 2,200 |
|
| Provision | — |
| | — |
| | — |
|
| Change in estimate | — |
| | — |
| | — |
|
| Payments | (644 | ) | | (730 | ) | | (826 | ) |
| Ending Balance | $ | — |
| | $ | 644 |
| | $ | 1,374 |
|
The restructuring liability account was included in other current liabilities in the accompanying consolidated balance sheets as of December 31, 2014.
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
| | | | Quarter ended | Quarter ended |
| | March 31 | | June 30 | | September 30 | | December 31 | |
| 2015 | | | | | | | | |
| (in millions, except per share data) | | March 31 | June 30 | September 30 | December 31 |
| 2018 | | |
| Total revenues | $ | 625,578 |
| | $ | 640,007 |
| | $ | 668,008 |
| | $ | 725,695 |
| $ | 861 |
| $ | 850 |
| $ | 875 |
| $ | 917 |
|
| Insurance costs | $ | 483,203 |
| | $ | 517,994 |
| | $ | 534,481 |
| | $ | 576,698 |
| 641 |
| 630 |
| 647 |
| 692 |
|
| Operating income | $ | 31,041 |
| | $ | 5,985 |
| | $ | 11,682 |
| | $ | 29,609 |
| 71 |
| 76 |
| 62 |
| 42 |
|
| Net income (loss) | $ | 15,811 |
| | $ | (1,308 | ) | | $ | 3,097 |
| | $ | 14,095 |
| |
| Basic net income (loss) per share | $ | 0.23 |
| | $ | (0.02 | ) | | $ | 0.04 |
| | $ | 0.20 |
| |
| Diluted net income (loss) per share | $ | 0.22 |
| | $ | (0.02 | ) | | $ | 0.04 |
| | $ | 0.20 |
| |
| 2014 | | | | | | | | |
| Net income | | 54 |
| 58 |
| 51 |
| 29 |
|
| Basic net income per share | | $ | 0.77 |
| $ | 0.82 |
| $ | 0.73 |
| $ | 0.41 |
|
| Diluted net income per share | | $ | 0.75 |
| $ | 0.80 |
| $ | 0.71 |
| $ | 0.40 |
|
| 2017 | | |
| Total revenues | $ | 508,912 |
| | $ | 525,006 |
| | $ | 555,951 |
| | $ | 603,662 |
| $ | 808 |
| $ | 801 |
| $ | 818 |
| $ | 848 |
|
| Insurance costs | $ | 381,157 |
| | $ | 400,195 |
| | $ | 428,184 |
| | $ | 476,779 |
| 609 |
| 600 |
| 613 |
| 644 |
|
| Operating income | $ | 25,277 |
| | $ | 20,029 |
| | $ | 21,246 |
| | $ | 20,239 |
| 49 |
| 57 |
| 63 |
| 48 |
|
Net income | $ | 1,540 |
| | $ | 6,221 |
| | $ | 725 |
| (1) | $ | 7,011 |
| 29 |
| 40 |
| 43 |
| 66 |
|
Basic net income per share | $ | 0.03 |
| | $ | 0.09 |
| | $ | 0.01 |
| | $ | 0.10 |
| $ | 0.42 |
| $ | 0.58 |
| $ | 0.62 |
| $ | 0.95 |
|
Diluted net income per share | $ | 0.03 |
| | $ | 0.09 |
| | $ | 0.01 |
| | $ | 0.10 |
| $ | 0.41 |
| $ | 0.56 |
| $ | 0.60 |
| $ | 0.92 |
|
(1) Included in the resultsResults of the third quarter of 2014 is the write-off of debt issuance costs and pre-payment premiumended December 31, 2017 included a $40 million benefit due to tax rate change as a result of the Company’s amended and restated first lien credit facility. Please read Note 8, “Notes Payable and Borrowings Under Capital Leases,” for additional information.TCJA enactment on December 22, 2017.
|
| |
| DISCLOSURE CONTROLS AND PROCEDURES | |
Item 9. Changes in and Disagreements Withwith Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management,We have, with the participation of our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2015. The term “disclosure controls and procedures,”2018, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, meansAct.
Based on the evaluation of our disclosure controls and other procedures as of a companyDecember 31, 2018, our Chief Executive Officer and Chief Financial Officer have concluded that are designed to ensurethe Company’s disclosure controls and procedures were effective as of December 31, 2018 in ensuring that (i) information required to be disclosed by a companythe Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’sCompany’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 31, 2015, our Chief Executive Officer and Chief Financial Officer, concluded that, as ofto allow timely decisions regarding required disclosure and (ii) such date, our disclosure controlsinformation is recorded, processed, summarized and procedures were not effective as a result ofreported within the material weaknessestime periods specified in our internal control over financial reporting described below.
However, giving full consideration to these weaknesses,the Securities and the additional analysesExchange Commissions rules and other procedures we performed to ensure that our consolidated financial statements included in this Annual Report on Form 10-K were prepared in accordance with U.S. generally accepted accounting principles (GAAP), our management has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods disclosed in conformity with GAAP.forms.
Management’s Report on Internal Control Over Financial Reporting
Our management isWe are responsible for establishing and maintaining adequate internal control over financial reporting (asas defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act). Internal control over financial reporting is designedAct to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that:
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with appropriate authorizations; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
Because of its inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
Our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria established in “Internal Control - Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, our management has concluded that our internal control over financial reporting as of December 31, 2015 was not effective due to the material weaknesses described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Ernst & Young LLP, an independent registered public accounting firm, has audited our internal control over financial reporting, as stated in their report dated March [15], 2016, which is included in this Annual Report on Form 10-K.
Ineffective information technology (IT) general controls
Our management determined that several control deficiencies aggregating to a material weakness exist related to the design and operating effectiveness of our IT general controls (ITGCs) for certain of our key information systems, including our enterprise resource planning (ERP) systems and payroll systems, that are relevant to the preparation of our consolidated financial statements and system of internal control over financial reporting. In addition, these deficiencies also impact the ability to rely on related interfaces, application controls and reports generated by the systems with ineffective ITGCs. The ineffective design and operation of our ITGCs impacts all of our significant financial statement accounts and disclosures. The deficiencies related to the design and operating effectiveness of our ITGCs fell into the three main categories listed below:
Computer Operations
Design and operating effectiveness of our system of controls related to the monitoring of batch processing and system interfaces to ensure the completeness and accuracy of data movement involving our ERP system and certain payroll systems that process revenue transactions were identified as having deficiencies.
Access Controls
Design and operating effectiveness of our controls to ensure that access to applications and data were adequately restricted to appropriate personnel were identified as having deficiencies. These deficiencies impact a number of our systems that process internal and revenue-generating payroll transactions, fixed assets, stock option and restricted stock unit information, procurement authorizations, insurance expenses, insurance reserves and payroll taxes.
Change Management
Design and operating effectiveness of controls to monitor program change management procedures, including monitoring the activities of individuals who have authority and have been granted access to make changes to programs, were identified as having deficiencies. These deficiencies impacted systems that process procurement authorizations and accumulate claims data that is utilized to estimate worker’s compensation liabilities.
Ineffective control environment and risk assessment
Our management determined that a material weakness exists due to a lack of a sufficient complement of personnel with an appropriate level of knowledge, experience and training commensurate with our structure, internal control, and financial reporting requirements. Additionally, we did not have an adequate process in place to complete our testing and assessment of the design and operating effectiveness of internal control over financial reporting in a timely manner.
Ineffective management review controls and controls over system-generated reports
Our management determined that several control deficiencies aggregating to a material weakness exist related to the design and operating effectiveness of our controls to ensure that key spreadsheets and system-generated reports were properly reviewed for completeness and accuracy. For certain management review controls, controls verifying the accuracy of underlying data used to perform these reviews were not performed or adequately documented. In addition, certain management review controls were not performed at a sufficiently precise level to identify errors that could aggregate to a material misstatement of the financial statements. These deficiencies impact substantially all of our significant financial statement accounts.
Ineffective controls over payroll operations
Our management determined that several control deficiencies aggregating to a material weakness exist related to the design and operating effectiveness of our controls over the accuracy of certain information that we manually input into the payroll systems and that is used in the processing of payroll for customers. Manually input information includes contractual terms, bill rates, benefit elections and other wage data. Controls identified to prevent or detect inappropriate changes to payroll information and resolve payroll processing errors were not effectively designed to detect material errors. Additionally, management identified deficiencies related to the design and operating effectiveness of controls over the reconciliation of benefit enrollment data between the Company’s payroll systems and the insurance carriers’ records. The deficiencies impact amounts recorded as professional and insurance service revenues, operating expenses, accrued corporate wages, and worksite employee related assets and liabilities.
Ineffective controls over health and workers compensation liabilities and related expenses
Our management determined that several control deficiencies aggregating to a material weakness exist related to the design and operating effectiveness of our controls to validate the completeness and accuracy of data utilized in calculating health and workers compensation liabilities and related expenses, including premium expenses and administrative fees. Data utilized includes enrollment counts, cost rates, wage data, claim counts and incurred and paid claim amounts. Certain reconciliations of claim payments per the Company’s actuarial analyses to actual amounts paid were not operating effectively. Additionally, controls over the review of health premium expenses did not operate at a level of precision that would detect material errors. These deficiencies impact insurance costs, workers compensation receivables, workers compensation liabilities, and worksite employee related assets and liabilities.
Ineffective controls over validating accuracy of payroll tax liabilities
Our management determined that several control deficiencies aggregating to a material weakness exist related to the design and operating effectiveness of our controls to validate the accuracy and completeness of tax rates input into our payroll systems, including reconciliation to the general ledger of the payroll taxes payable account at a sufficient level of detail. In addition, due to the ineffective ITGCs over the system that calculates payroll tax withholdings, compensating controls identified are not sufficiently precise to prevent or detect errors in the amounts recorded as payroll tax liabilities for internal employees and WSEs.
Ineffective authorization controls over procurement processes
Our management determined that a material weakness exists related to the design and operating effectiveness of our controls over the initial set up and changes to designated approvers over corporate purchases, including purchasing card limits, expense reimbursements or approving new vendors added to the procurement system.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
TriNet Group, Inc. and Subsidiaries
We have audited TriNet Group, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). TriNet Group, Inc. and Subsidiaries management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertainGAAP.
Due to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting mayis not preventintended to provide absolute assurance that a misstatement of our financial statements would be prevented or detect misstatements.detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatementWe have performed an assessment of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses have been identified in the following categories and included in management’s assessment:
Ineffective information technology (IT) general controls
Ineffective control environment and risk assessment
Ineffective management review controls and controls over system-generated reports
Ineffective controls over payroll operations
Ineffective controls over health and workers compensation liabilities and related expenses
Ineffective controls over validating accuracyeffectiveness of payroll tax liabilities
Ineffective authorization controls over procurement processes
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2015 consolidated financial statements. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2015 financial statements, and this report does not affect our report dated March 31, 2016 which expressed an unqualified opinion on those financial statements.
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, TriNet Group, Inc. and Subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2015,2018 based onupon criteria set forth in Internal Control - Integrated Framework (2013) issued by the COSO criteria.
/s/ Ernst & Young LLP
San Francisco, California
March 31, 2016
Additional Analyses and Procedures and Remediation Plan
As a resultCommittee of Sponsoring Organizations of the material weaknesses described above,Treadway Commission.
Based on this assessment, we performed additional analyses and other procedures in order to prepare the financial statements included in this Annual Report on Form 10-K. While the material weaknesses described above create a reasonable possibilitydetermined that an error in financial reporting may go undetected, after extensive review and the performance of additional analysis and other procedures, no material adjustments, restatement or other revisions to our previously issued financial statements were required.
In addition, we are taking specific steps, as further described below, to remediate the material weaknesses identified by management and described in greater detail in the preceding section. Although we intend to complete the remediation process with respect to these material weaknesses as quickly as possible, we cannot at this time estimate how long it will take, and our remediation plan may not prove to be successful.
With respect to the remediation of our ineffective IT general controls, we are taking a number of steps, which include, but are not limited to:
designing, adopting or implementing IT governance policies, procedures and general controls across all technology platforms;
improving the design and operation of control activities and procedures associated with monitoring of batch processing and system interfaces to ensure the completeness and accuracy of data movement;
establishing a more comprehensive review and approval process for authorizing user access to IT systems , including both preventive and detective control activities;
improving the design and operation of program change management control activities such as change management control setting configurations across the affected IT systems, including tracking of access and history of change; and
augmenting and hiring additional IT resources and professionals.
We are also working to integrate our technology platforms and ERP systems to reduce the number of redundant business processes. For example, we completed the integration of our Ambrose technology platform as of February 29, 2016 and we currently expect to complete the integration of our Accord technology platform by the end of 2016.
With respect to the remediation in other areas, we are taking a number of steps, which include, but are not limited to:
defining and assessing the control deficiency for each of the material weaknesses to ensure a thorough understanding of the “as-is” state, identify relevant process owners, and define and address gaps in the control deficiency;
designing and evaluating a remediation plan for each of the material weaknesses to validate or improve the related policy and procedures, assess and improve skills of the process owners with regards to the policy and make necessary adjustments as required;
implementing the remediation plan for each of the material weaknesses and training process owners, evaluating process adoption and monitoring results;
testing and measuring the design and effectiveness of the remediation plan, and the updated controls;
management review and acceptance of the remediation effort; and
augmenting and hiring additional accounting, actuarial, finance and internal audit resources and professionals.
We believe that the foregoing efforts will effectively remediate the material weaknesses identified above. Because the reliability of the internal control process requires repeatable execution, the successful remediation of these material weaknesses will require review and evidence of effectiveness prior to concluding that the controls are effective and there is no assurance that additional remediation steps will not be necessary. As such, as we continue to evaluate and work to improve our internal control over financial reporting was effective as of December 31, 2018.
Deloitte & Touche LLP, our management may decide to take additional measures to addressindependent registered public accounting firm, has issued an audit report on the material weaknesses or modify the remediation steps described above. As noted above, although we plan to complete the remediation process as quickly as possible, we cannot at this time estimate how long it will take, and our initiatives may not prove to be successful. Accordingly, until these weaknesses are remediated, we plan to perform additional analyses and other procedures to ensure that our consolidated financial statements are prepared in accordance with GAAP.
Changes in Internal Control Over Financial Reporting
Other than the identificationeffectiveness of the material weaknesses described above, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d)as of the Exchange Act that occurred during the quarter ended December 31, 2015,2018. This audit report appears in Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K.
Changes in Internal Control over Financial Reporting
Throughout 2018, we implemented enhanced review procedures and documentation standards to remediate the control deficiencies aggregating to a material weakness related to the operating effectiveness of controls over professional service and workers' compensation insurance services revenues as of December 31, 2017. As of December 31, 2018, our testing of both the design and operating effectiveness of these controls was completed, and we have concluded that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.the material weakness existing at December 31, 2017 has been remediated.
Item 9B. Other Information.
Not applicable.
|
| |
| MANAGEMENT AND CERTAIN SECURITY HOLDERS | |
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information required by this item is incorporated by reference to TriNet Group Inc.’s Proxy Statement for its 20162019 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2015.2018.
Item 11. Executive Compensation.
Information required by this item is incorporated by reference to TriNet Group Inc.’s Proxy Statement for its 20162019 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2015.2018.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required by this item is incorporated by reference to TriNet Group Inc.’s Proxy Statement for its 20162019 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2015.2018.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required by this item is incorporated by reference to TriNet Group Inc.’s Proxy Statement for its 20162019 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2015.2018.
Item 14. Principal Accounting Fees and Services.
Information required by this item is incorporated by reference to TriNet Group Inc.’s Proxy Statement for its 20162019 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2015.2018.
|
| |
| FINANCIAL STATEMENT SCHEDULES | |
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as a part of the report:
(1) The financial statements filed as part of this report are listed in the “Index to Financial Statements” under Part II, Item 8 of this report.8. Financial Statements and Supplementary Data.
(2) Financial statement schedules.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
|
| | | | | | | | | | | | | | | | | | | | |
| | | Balance at | | Credited/ | | | | Charges | | Balance at |
| | | Beginning of | | Charged to | | Balance | | Utilized/ | | End of |
| (in thousands) | | Period | | Net Income | | Acquired | | Write-Offs | | Period |
| Allowances for Doubtful Accounts and Authorized Credits | | | | | | | | | | |
| Year ended December 31, 2015 | | $ | 388 |
| | $ | 2,085 |
| | $ | — |
| | $ | (1,315 | ) | | $ | 1,158 |
|
| Year ended December 31, 2014 | | $ | 865 |
| | $ | 947 |
| | $ | — |
| | $ | (1,424 | ) | | $ | 388 |
|
| Year ended December 31, 2013 | | $ | 819 |
| | $ | 839 |
| | $ | — |
| | $ | (793 | ) | | $ | 865 |
|
| Tax Valuation Allowance | | | | | | | | | | |
| Year ended December 31, 2015 | | $ | 6,945 |
| | $ | — |
| | $ | — |
| | $ | (1,669 | ) | | $ | 5,276 |
|
| Year ended December 31, 2014 | | $ | 5,194 |
| | $ | 1,751 |
| | $ | — |
| | $ | — |
| | $ | 6,945 |
|
| Year ended December 31, 2013 | | $ | 1,547 |
| | $ | 2,451 |
| | $ | 1,196 |
| | $ | — |
| | $ | 5,194 |
|
|
| | | | | | | | | | |
| | Balance at | Credited/ | Charges | Balance at |
| | Beginning of | Charged to | Utilized/ | End of |
| (in millions) | Period | Net Income | Write-Offs | Period |
| Allowances for Doubtful Accounts and Authorized Credits | | | | |
| Year ended December 31, 2018 | $ | — |
| 2 |
| (1 | ) | $ | 1 |
|
| Year ended December 31, 2017 | $ | — |
| 1 |
| (1 | ) | $ | — |
|
| Year ended December 31, 2016 | $ | 1 |
| 1 |
| (2 | ) | $ | — |
|
| Tax Valuation Allowance | | | | |
| Year ended December 31, 2018 | $ | 7 |
| — |
| — |
| $ | 7 |
|
| Year ended December 31, 2017 | $ | 6 |
| 1 |
| — |
| $ | 7 |
|
| Year ended December 31, 2016 | $ | 5 |
| 1 |
| — |
| $ | 6 |
|
Item 16. Form 10-K Summary.
None.
EXHIBIT INDEX
|
| | | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
Exhibit No. | | Description of Exhibit | | Form | | File No. | | Exhibit | | Filing | | Filed Herewith |
| | | | | | | |
| 3.1 | | | | 8-K | | 001-36373 | | 3.1 |
| | 4/1/2014 | | |
| | | | | | | | | | | | | |
| 3.2 | | | | 10-Q | | 001-36373 | | 3.1 |
| | 11/2/2017 | | |
| | | | | | | |
| 3.3 | | | | S-1/A | | 333-192465 | | 3.4 |
| | 3/4/2014 | | |
| | | | | | | |
| 4.1 | | | | 8-K | | 001-36373 | | 4.1 |
| | 2/2/2017 | | |
| | | | | | | | | | | | | |
| 10.1* | | | | S-1/A | | 333-192465 | | 10.3 |
| | 3/14/2014 | | |
| | | | | | | |
| 10.2* | | | | 10-Q | | 001-36373 | | 10.1 |
| | 5/8/2015 | | |
| | | | | | | | | | | | | |
| 10.3* | | | | S-1/A | | 333-192465 | | 10.4 |
| | 3/4/2014 | | |
| | | | | | | |
| 10.4* | | | | S-1/A | | 333-192465 | | 10.6 |
| | 3/4/2014 | | |
| | | | | | | |
| 10.5* | | | | 10-Q | | 001-36373 | | 10.1 |
| | 4/30/2018 | | |
| | | | | | | | | | | | | |
| 10.6* | | | | 10-Q | | 001-36373 | | 10.2 |
| | 4/30/2018 | | |
| | | | | | | | | | | | | |
| 10.7* | | | | 10-Q | | 001-36373 | | 10.3 |
| | 4/30/2018 | | |
| | | | | | | | | | | | | |
| 10.8* | | | | 10-Q | | 001-36373 | | 10.4 |
| | 4/30/2018 | | |
| | | | | | | | | | | | | |
| 10.9* | | | | S-1/A | | 333-192465 | | 10.7 |
| | 3/14/2014 | | |
| | | | | | | |
| 10.10* | | | | 8-K | | 001-36373 | | N/A |
| | 3/11/2015 | | |
| | | | | | | | | | | | | |
| 10.11* | | | | 10-K | | 001-36373 | | 10.7 |
| | 2/27/2018 | | |
| | | | | | | | | | | | | |
| 10.12* | | | | 10-K | | 001-36373 | | 10.10 |
| | 4/1/2016 | | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
Exhibit No. | | Description of Exhibit | | Form | | File No. | | Exhibit | | Filing | | Filed Herewith |
| 10.13* | | | | 8-K | | 001-36373 | | 10.1 |
| | 5/23/2017 | | |
| | | | | | | | | | | | | |
| 10.14* | | | | 10-Q | | 001-36373 | | 10.5 |
| | 4/30/2018 | | |
| | | | | | | | | | | | | |
| 10.15 | | | | S-1/A | | 333-192465 | | 10.8 |
| | 3/4/2014 | | |
| | | | | | | | | | | | | |
| 10.16* | | | | S-1/A | | 333-192465 | | 10.9 |
| | 2/13/2014 | | |
| | | | | | | | | | | | | |
| 10.17* | | | | 10-Q | | 001-36373 | | 10.1 |
| | 8/1/2017 | | |
| | | | | | | | | | | | | |
| 10.18* | | | | 10-Q | | 001-36373 | | 10.2 |
| | 8/6/2015 | | |
| | | | | | | | | | | | | |
| 10.19* | | | | 10-Q | | 001-36373 | | 10.2 |
| | 8/1/2017 | | |
| | | | | | | | | | | | | |
| 10.20* | | | | 10-K | | 001-36373 | | 10.15 |
| | 2/27/2018 | | |
| | | | | | | | | | | | | |
| 10.21* | | | | S-1/A | | 333-192465 | | 10.11 |
| | 2/13/2014 | | |
| | | | | | | | | | | | | |
| 10.22* | | | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 10.23* | | | | 8-K | | 001-36373 | | 10.1 |
| | 10/3/2016 | | |
| | | | | | | | | | | | | |
| 10.24* | | | | 10-K | | 001-36373 | | 10.19 |
| | 2/27/2018 | | |
| | | | | | | | | | | | | |
| 10.25* | | | | 10-Q | | 001-36373 | | 10.1 |
| | 10/29/2018 | | |
| | | | | | | | | | | | | |
| 10.26* | | | | 8-K | | 001-36373 | | 10.1 |
| | 12/22/2016 | | |
| | | | | | | | | | | | | |
| 10.27* | | Credit Agreement, dated as of June 22, 2018, among TriNet Group, Inc., TriNet USA, Inc., as borrower, the lenders party thereto, and Bank of America, N.A., as administrative agent. | | 8-K | | 001-36373 | | 10.1 |
| | 6/22/2018 | | |
|
| | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit No. | | Description of Exhibit | | Form | | File No. | | Exhibit | | Filing | | Filed Herewith |
| | | | | | | | | | | | |
| 21.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 23.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 24.1 | | | | | | | | | | | | |
| | | | | | | | | | | | |
| 31.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 31.2 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 32.1** | | | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.INS | | XBRL Instance Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | | | X |
| | | | | | | | | | | | |
| * | Constitutes a management contract or compensatory plan or arrangement. |
| ** | Document has been furnished, is deemed not filed and is not to be incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Leandro,Dublin, State of California, on the 31st day of March, 2016.14th February, 2019.
|
| | | |
| | TRINET GROUP, INC. |
| | |
Date: March 31, 2016February 14, 2019 | | By: | /s/ Burton M. Goldfield |
| | | | Burton M. Goldfield |
| | | | Chief Executive Officer |
| | | |
| Date: February 14, 2019 | | By: | /s/ Richard Beckert |
| | | Richard Beckert |
| | | Chief Financial Officer |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Burton M. Goldfield, William PorterRichard Beckert and Brady Mickelsen,Samantha Wellington, and each of them, as his or her true and lawful attorneys-in-fact and agents, each with the full power of substitution, for him or her and in his or her name, place or stead, in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that any of said attorneys-in-fact and agents, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature | | Title | | Date |
| | | | | |
/s/ BURTONBurton M. GOLDFIELD Goldfield | | Chief Executive Officer (principal executive officer) | | March 31, 2016February 14, 2019 |
| Burton M. Goldfield | | |
| | | | | |
/s/ WILLIAM PORTER Richard Beckert | | Chief Financial Officer ((principal financial andofficer) | | February 14, 2019 |
| Richard Beckert | | |
| | | | |
| /s/ Michael P. Murphy | | Chief Accounting Officer (principal accounting officer)officer) | | March 31, 2016February 14, 2019 |
William PorterMichael P. Murphy | | |
| | | | |
| /s/ Michael J. Angelakis | | Director | | February 14, 2019 |
| Michael J. Angelakis | | |
| | | | | |
| /s/ Katherine August-deWilde | | Director | | March 31, 2016February 14, 2019 |
| Katherine August-deWilde | | |
| | | | | |
| /s/ Martin Babinec | | Director | | March 31, 2016February 14, 2019 |
| Martin Babinec | | |
| | | | | |
| /s/ H. Raymond Bingham | | Director | | March 31, 2016February 14, 2019 |
| H. Raymond Bingham | | |
| | | | | |
| /s/ Paul Chamberlain | | Director | | March 31, 2016February 14, 2019 |
| Paul Chamberlain | | |
| | | | | |
| /s/ Kenneth Goldman | | Director | | March 31, 2016February 14, 2019 |
| Kenneth Goldman | | |
| | | | | |
| /s/ David C. Hodgson | | Director | | March 31, 2016February 14, 2019 |
| David C. Hodgson | | |
| | | | |
/s/ John H. Kispert | | Director | | March 31, 2016 |
John H. Kispert | | |
| | | | | |
| /s/ Wayne B. Lowell | | Director | | March 31, 2016February 14, 2019 |
| Wayne B. Lowell | | |
EXHIBIT INDEX
|
| | | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
Exhibit No. | | Description of Exhibit | | Form | | File No. | | Exhibit | | Filing | | Filed Herewith |
| | | | | | | |
| 2.1 | | Equity Purchase Agreement by and among TriNet Group, Inc., Ambrose Employer Group, LLC and Gregory Slamowitz, John Iorillo and Marc Dwek, dated July 1, 2013. | | S-1 | | 333-192465 | | 2.1 |
| | 11/21/2013 | | |
| | | | | | | |
| 2.2 | | Agreement and Plan of Merger by and among TriNet Group, Inc., Champ Acquisition Corporation, SOI Holdings, Inc. and SOI Stockholder Representative, LLC, dated August 24, 2012. | | S-1 | | 333-192465 | | 2.2 |
| | 11/21/2013 | | |
| | | | | | | |
| 3.1 | | Amended and Restated Certificate of Incorporation of TriNet Group, Inc. | | 8-K | | 001-36373 | | 3.1 |
| | 4/1/2014 | | |
| | | | | | | |
| 3.2 | | Amended and Restated Bylaws of TriNet Group, Inc. | | S-1/A | | 333-192465 | | 3.4 |
| | 3/4/2014 | | |
| | | | | | | |
| 4.1 | | Amended and Restated Registration Rights Agreement, by and among TriNet Group, Inc., GA TriNet LLC and HR Acquisitions, LLC, dated June 1, 2009. | | S-1 | | 333-192465 | | 4.2 |
| | 11/21/2013 | | |
| | | | | | | |
| 10.1* | | Amended and Restated 2000 Equity Incentive Plan. | | S-1 | | 333-192465 | | 10.1 |
| | 11/21/2013 | | |
| | | | | | | |
| 10.2* | | Forms of Option Agreement and Option Grant Notice under the Amended and Restated 2000 Equity Incentive Plan. | | S-1 | | 333-192465 | | 10.2 |
| | 11/21/2013 | | |
| | | | | | | |
| 10.3* | | Amended and Restated 2009 Equity Incentive Plan. | | S-1/A | | 333-192465 | | 10.3 |
| | 3/14/2014 | | |
| | | | | | | |
| 10.4* | | Form of Performance-Based Restricted Stock Unit Award Agreement and Performance-Based Restricted Stock Unit Grant Notice under the Amended and Restated 2009 Equity Incentive Plan. | | 10-Q | | 001-36373 | | 10.X |
| | 5/8/2015 | | |
| | | | | | | | | | | | | |
| 10.5* | | Form of Option Agreement and Option Grant Notice under the Amended and Restated 2009 Equity Incentive Plan. | | S-1/A | | 333-192465 | | 10.4 |
| | 3/4/2014 | | |
| | | | | | | |
| 10.6* | | Form of Restricted Stock Unit Agreement and Restricted Stock Unit Award Notice under the Amended and Restated 2009 Equity Incentive Plan. | | S-1/A | | 333-192465 | | 10.6 |
| | 3/4/2014 | | |
| | | | | | | |
| 10.7* | | 2014 Employee Stock Purchase Plan. | | S-1/A | | 333-192465 | | 10.7 |
| | 3/14/2014 | | |
| | | | | | | |
| 10.8* | | 2015 Executive Bonus Plan. | | 8-K | | 001-36373 | | N/A |
| | 3/11/2015 | | |
| | | | | | | | | | | | | |
| 10.9* | | Amended and Restated Non-Employee Director Compensation Policy. | | DEF 14A | | 001-36373 | | N/A |
| | 4/2/2015 | | |
| | | | | | | | | | | | | |
| 10.10* | | Severance Benefit Plan. | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 10.11* | | Form of Indemnification Agreement made by and between TriNet Group, Inc. and each of its directors and executive officers. | | S-1/A | | 333-192465 | | 10.8 |
| | 3/4/2014 | | |
| | | | | | | | | | | | | |
| 10.12* | | Employment Agreement, dated November 9, 2009, between Burton M. Goldfield and TriNet Group, Inc. | | S-1/A | | 333-192465 | | 10.9 |
| | 2/13/2014 | | |
| | | | | | | | | | | | | |
| 10.13* | | Letter Agreement, dated June 22, 2015, between Gregory Hammond and TriNet Group, Inc. | | 10-Q | | 001-36373 | | 10.1 |
| | 8/6/2015 | | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
Exhibit No. | | Description of Exhibit | | Form | | File No. | | Exhibit | | Filing | | Filed Herewith |
| 10.14* | | Employment Agreement, dated November 9, 2009, between Gregory Hammond and TriNet Group, Inc. | | S-1/A | | 333-192465 | | 10.10 |
| | 2/13/2014 | | |
| | | | | | | | | | | | | |
| 10.15* | | Employment Agreement, dated August 23, 2010, between William Porter and TriNet Group, Inc. | | S-1/A | | 333-192465 | | 10.11 |
| | 2/13/2014 | | |
| | | | | | | | | | | | | |
| 10.16* | | Employment Agreement, dated March 5, 2012, between John Turner and TriNet Group, Inc. | | S-1/A | | 333-192465 | | 10.12 |
| | 2/13/2014 | | |
| | | | | | | | | | | | | |
| 10.17* | | Employment Agreement, dated May 8, 2015, between Brady Mickelsen and TriNet Group, Inc. | | 10-Q | | 001-36373 | | 10.2 |
| | 08/06/2015 | | |
| | | | | | | | | | | | | |
| 10.18* | | Amended and Restated First Lien Credit Agreement, dated as of August 20, 2013, as amended and restated as of July 9, 2014, among TriNet HR Corporation, as borrower, TriNet Group, Inc., the lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as administrative agent. | | 8-K | | 001-36373 | | 10.1 |
| | 7/10/2014 | | |
| | | | | | | | | | | | | |
| 10.19 | | Creekside Plaza Office Lease between Creekside Associates, LLC and TriNet Group, Inc., dated April 24, 2001. | | S-1 | | 333-192465 | | 10.15 |
| | 11/21/2013 | | |
| | | | | | | | | | | | | |
| 10.20 | | First Amendment to Creekside Plaza Office Lease between Creekside Associates, LLC and TriNet Group, Inc., dated June 21, 2012. | | S-1 | | 333-192465 | | 10.16 |
| | 11/21/2013 | | |
| | | | | | | | | | | | | |
| 21.1 | | List of Subsidiaries. | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 23.1 | | Consent of Ernst & Young LLP, independent registered public accounting firm. | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 24.1 | | Power of Attorney (included on the signature page of this report). | | | | | | | | | | |
| | | | | | | | | | | | | |
| 31.1 | | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 31.2 | | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 32.1** | | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.INS | | XBRL Instance Document. | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document. | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | | | X |
| | | | | | | | | | | | | |
| * | Constitutes a management contract or compensatory plan or arrangement. |
| ** | Document has been furnished, is deemed not filed and is not to be incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing. |
