We recognize as insurance service revenues all insurance-related billings and administrative fees collected from clients and withheld from WSEs for risk-based insurance plans provided through third-party insurance carriers, primarily employee health insurance and workers compensation insurance.WSEs. We in turn pay premiums to third-party insurance carriers for theseclient and WSE insurance benefits as well asand reimburse themthe insurance carriers and third-party administrators for claimclaims payments made on our behalf within our insurance deductible layer.layer, where applicable. These premiums and reimbursements are classified as insurance costs on our statements of operations.
By offering a proprietary, cloud-based HR
information system. Oursystem, our clients
receivegain the efficiencies of an enterprise-level
platformsoftware 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 platform;
|
5
·
| redundant processing centers to protect client data from loss; and
|
multi-tenant system enabling multiple clients and WSEs to share one version of our system while isolating each client’s and WSE’s data;·
| integrated benefits and payroll processing for faster, more accurate data; and flexible and extensible platform architecture.
|
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 20102013 through 2014,2015, we invested approximately $125.5$111.3 million in our technology platform.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.
We sell our solutions primarily through our direct sales organization. We have aligned our sales organization which consistsby industry vertical with the goal of driving 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 representatives, sales managementteam to work with our product development and sales operations and support personnel. Our sales representatives focus on servingclient service teams to build bundled solutions of services that are tailored to the specific needs of clients in specific vertical markets. these industries.
The number of sales representatives
in the field has grown substantially in recent years,
through both internal hiring and through onboarding sales representatives from
114 Total Sales Representativesacquired businesses, from 80 sales representatives as of December 31,
20102011 to
385 Total Sales Representatives481 sales representatives as of December 31,
2014. We2015. In our direct sales organization, we recruit and
seek to hire sales professionals who have experience in a specific industry vertical market, and
we also seek sales professionals with a background in selling business services such as accounting, HR or sales solutions. As of December 31,
2014,2015, we had approximately
6050 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.
Our marketing, inside sales, lead generation, and lead incubation efforts support the success of our direct sales representatives. We
also employ a broad range of
vertically focused awareness and demand-generation marketing programs, including
billboards, 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. We sponsor and participate in associations and events around the country and utilize these forums to target specific vertical and geographic markets.
Clients
We serve thousands ofalso 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, venture capital firms, incubators, insurance brokers, and other vertical market industry associations.
We drive sales representative productivity in a varietynumber of industries,ways, including technology, life sciences, property management, professional services, bankingby improving the quality of leads generated by our marketing and financial services, retail, manufacturinginside sales teams, and hospitality services,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 non-profit entities. Wedirect support through providing reference calls in regards to our products and services.
Strategic Acquisitions
Historically, we have
grown our number of clients from approximately 5,600 as of December 31, 2010 to over 10,000 clients as of December 31, 2014. We have also grown our number of WSEs from approximately 97,000 in 46 states and the District of Columbia as of December 31, 2010 to approximately 288,000 in all 50 states, the District of Columbia and Canada as of December 31, 2014.The Co-Employment Model
We deliver our services through a co-employment model, pursuant to which both we and our clients are employers of our clients’ workforce. Our co-employment model affords us a close and embedded relationship with our clients and their employees. In this arrangement, we assume certain aspects of the employer/employee relationship, according to a contract between us and our client. Each of our clients enters into a client service agreement with us that defines the bundled suite of services and benefits to be provided by us, the fees payable to us, and the division of responsibilities between us and our client as co-employers. We currently co-employ employees only in the United States and Canada, but in some cases also provide payroll processing services for our clients’ employees outside these countries utilizing third-party vendors. Each of our customer services agreements has a one-year term that guarantees its pricing terms and typically may be terminated by either party upon 30 days’ prior written notice. The division of responsibilities under our client service agreements is typically as follows:
TriNet Responsibilities
·
| Payment to WSEs of salaries, commissions, bonuses, vacations, paid time off, sick pay, paid leaves of absence and severance payments as reported by the client, related tax reporting and remittance and processing of garnishment and wage deduction orders;
|
·
| maintenance of workers compensation insurance and workers compensation claims processing;
|
·
| provision and administration of employee benefits that we provide to the WSEs;
|
·
| compliance with applicable law for employee benefits offered to WSEs;
|
·
| processing of unemployment claims;
|
·
| provision and promulgation of HR policies, including an employee handbook describing the co-employment relationship; and
|
6
Client Responsibilities
·
| Compliance with laws associated with the classification of employees as exempt or non-exempt, such as overtime pay and minimum wage law compliance;
|
·
| accurate and timely reporting to TriNet of compensation and deduction information, including information relating to salaries, commissions, bonuses, vacations, paid time off, sick pay, paid leaves of absence and severance payments;
|
·
| accurate and timely reporting to TriNet of information relating to workplace injuries, employee hires and termination, and other information relevant to TriNet’s services;
|
·
| provision and administration of any employee benefits not provided by TriNet (e.g., equity incentive plans);
|
·
| compliance with all laws and regulations applicable to the client’s 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; 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/or services provided.
|
As a result of our co-employment relationship with each of our WSEs, we are liable for payment of salary, wages and other compensation to the WSEs as reported by the client and are responsible for providing specified employee benefits to such persons, regardless of whether the client pays the associated amounts to us. In most instances, clients are required to remit payment prior to the applicable payroll date by wire transfer or automated clearinghouse transaction. Although we are ultimately liable under the terms of our client service agreements, as the employer for payroll purposes, to pay employees 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, 2014, our bad debt expense was approximately $1.4 million.
We also assume responsibility for payment and liability for the withholding and remittance of federal and state income and employment taxes with respect to wages and salaries paid to WSEs. In the event we fail to meet these obligations, the client may be held ultimately liable for those obligations. We secure insurance to ensure that our clients are not required to be responsible for taxes in the event we fail to meet these obligations.
Strategic Acquisitions
We operate in a highly fragmented industry and have completed numerouspursued strategic acquisitions over the course of the past decade.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 employees toWSEs, expand our existing businesspresence in certain geographies or industry verticals and offer our clients and their employeesWSEs more comprehensive and attractive products and services.
Clients
We approach the market with a vertical, or industry-based, focus. Our
recent acquisitions are listed below:·
| In July 2013, we acquired Ambrose Employer Group, LLC, which we refer to as, Ambrose, a New York-based company that provides premium HRclients span a variety of industries, including technology, life sciences, not-for-profit, professional services, primarily to WSEs in the financial services industry in the New York area. Through our acquisition of Ambrose, we acquired approximately 13,000 WSEs, approximately 1,000 clients and 12 sales representatives.
|
·
| In October 2012, we acquired South Carolina-based SOI Holdings, Inc., which we refer to as, SOI, which expanded our presence in the property management and food services industry vertical markets. Through our acquisition of SOI, we acquired approximately 66,000 WSEs, approximately 1,500 clients and 92 sales representatives.
|
·
| In May 2012, we acquired Los Angeles-based technology company App7, Inc., which does business under the name of, and which we refer to as, ExpenseCloud, which enabled us to enhance our technology platform with additional expense management capabilities.
|
·
| In April 2012, we acquired Oklahoma-based 210 Park Avenue Holding, Inc., which does business under the name of, and which we refer to as, Accord, through which we expanded our presence in the hospitality and manufacturing industry vertical markets. Through our acquisition of Accord, we acquired approximately 14,000 WSEs, approximately 500 clients and 8 sales representatives.
|
·
| In June 2009, we acquired Florida-based Gevity HR Inc., which we refer to as, Gevity, which has provided us with insurance and risk-management expertise and a national presence through its East Coast processing facility. Through our acquisition of Gevity, we acquired approximately 92,000 WSEs and approximately 6,000 clients. Following our acquisition of Gevity, we elected to change the pricing terms with certain of Gevity’s clients, terminate Gevity’s relationships with certain of its clients, significantly restructure Gevity’s and our combined sales forces and migrate all of Gevity’s WSEs to our technology platform. As a result of these actions, our revenues fell short of our expectations in 2010 and declined in 2011, and we incurred restructuring charges of $2.4 million, $5.9 million and $6.2 million in the years ended December 31, 2011, 2010 and 2009, respectively.
|
7
Because many of the companies we have acquired were focused on specific industries, our acquisitions have allowed us to expand our vertical service offerings into areas such as financial services, property management, retail, manufacturing and food services, hospitalityhospitality. 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 manufacturing in which we did not previously have a significant presence. In addition, we have acquired sales representatives with experience in these vertical markets. Our acquisitions have provided us with additional clients and WSEs to allow us to continue to leverage our operations over a larger client base.
Our Growth Strategies
Our goal is to become the leading HR solutions provider to SMBs. Our strategies to achieve that goal include the following:
·
| Continue to Penetrate the SMB Market Using Our Vertical Market Approach. Our focus on serving clients in specific industry vertical markets has given us deep, substantive knowledge of the HR needs facing SMBs in those industries. This enables us to provide a bundled solution of services to each client that is tailored to its specific needs and better enables us to attract sales professionals with industry expertise. We intend to continue this focus on industry vertical markets. We also regularly assess additional and new industry vertical markets and intend to add them, either through acquisition or internal development, selectively based on what we believe the market opportunity is.
|
Canada as of December 31, 2015.·
| Expand Our Direct Sales Force. We believe that the SMB market remains significantly underpenetrated for a bundled HR solution such as ours. We intend to continue to invest in our direct sales force to enable us to identify and acquire new clients across our target vertical markets, in addition to expanding our sales force to target new vertical markets.
|
·
| Grow With Our Clients by Enhancing the Breadth and Quality of Our Services. We intend to continue to expand the breadth and quality of our HR solution. We believe that this will allow us to continue to enhance the value proposition for our clients, as well as grow and retain them longer by providing additional high-quality service offerings.
|
·
| Continue to Enhance Our Technology Platform. We intend to continue to invest in and improve our proprietary, cloud-based technology platform, including mobile applications, in order to provide our clients with enhanced features and functionality with which to conduct their HR transactions, manage employees and analyze employee benefits data. This may include acquiring or developing additional functionality or technology.
|
·
| Continue to Grow Through Strategic Acquisitions. We have successfully completed numerous strategic acquisitions over the course of the past decade, which has allowed us to enhance and expand our presence in both existing and new target industries, as well as expand our solution and technology platform. We intend to continue to pursue strategic acquisitions that will enable us to leverage our existing assets and offer our clients more comprehensive and attractive services.
|
We believe that if effectively pursued, these strategies represent opportunities for us to increase the demand for our services. We also face challenges to our growth strategy. We must be able to convince SMBs of the benefits of outsourcing their HR function, effectively execute our strategies and minimize client attrition, in addition to addressing or responding to other issues identified below under “Risk Factors.”
U.S. Legal and Regulatory Environment
General
Numerous
The complex environment created by the numerous federal,
state and
statelocal 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
operations.HR solutions to our clients. Many of these laws, such as ERISA, were enacted before the development of the co-employment relationship
that we use 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
our industry, the participants in which are referred to as professional employer
organizations. Otherorganizations 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
Patient Protection and 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
thosethese laws and regulations can be expected
to evolve over time.
While we
We believe that our operations are currently in compliance in all material respects with applicable federal and state statutes and
regulations, the topicsregulations. The sections discussed below summarize what we believe are the most important regulatory aspects of our
business.business:
In order for
clients and WSEs to receive the full benefit of our
benefitsemployee benefit plan offerings, it is important that we constitute the “employer” of the WSEs under the Internal Revenue Code of 1986, or the Code, and ERISA. The definitions of “employer” under both the Code and ERISA are not clear and are defined in part by complex multi-factor tests under common law. We believe that we qualify as an
8
“employer” “employer” of our WSEs in the United States under both the Code and ERISA, and we implement processes to protect and preserve this status.
With Congressional passage of the Small Business Efficiency Act in December 2014, the Code clarified the employer status of professional employer organizations, or PEOs, for federal tax purposes, for those PEOs who voluntarily become certified under 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 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. Generally, an entity is an “employer” of certain workers for federal employment tax purposes if an employment
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
requirementrequirements are not applicable to the operation of our cafeteria plans.
ERISA Regulations.Regulation. Employee pension and welfare benefit plans are also governed by ERISA. ERISA defines an “employer” as “any person acting directly as an employer, 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 an individual’s benefits status.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 of WSEs for ERISA purposes. If we were found not to be an employer for ERISA purposes, it could affect the manner in which we are able to provide employee benefits to our plans would not comply with ERISA, and fines and penalties could be imposed. In addition, our ERISA plans would not enjoy, with respect to WSEs, the full preemption of state laws provided by ERISA and could be subject to various state laws and regulation.WSEs.Patient Protection and
The
Patient Protection and Affordable Care Act, or the Act,
implementsimplemented sweeping health care reforms with staggered effective dates from 2010 through
2018,2020, and many provisions in the Act require the issuance of additional guidance from the U.S. Department of Labor, the IRS, the U.S. Department of Health and Human Services and the states. The Act
imposesimposed a number of new mandates on the coverage 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, the guidance issued to date by the IRS and the U.S. Department of Health and Human Services
havehas not addressed, or in some instances
areis unclear, as to
theirits application in the co-employer
context or whether such provisions should be applied at the client level.context. As a result, we are not yet able to predict all of the impacts to our business, and to our clients, resulting from the Act.
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 to the adverse U.S. economic conditions during recent years and the associated reductions in employment levels, the state unemployment
tax funds have experienced a significant increase in the number of unemployment claims. Accordingly, state unemployment tax rates increased substantially over the past few years. Employers in certain states are also experiencing higher federal unemployment tax rates as a result of certain states not repaying their unemployment loans from the federal government in a timely manner. We have taken steps to mitigate the risk of fluctuations in state and federal unemployment tax rates, including reporting and remitting unemployment insurance taxes or contributions at the
customerclient level and/or under the
customer’sclient’s own account number in approximately
3040 states, and we will continue to
seekevaluate 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, and others 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, 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
zoning and business regulations.
9
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 700 and 900 such entities currently operating in the United States. We are one of only four professional employer organizations or 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 professional employer organizations such as the TotalSource 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 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 competition in the form of companies serving their HR needs in traditional manners. These forms of competition include:
·
| HR and information systems departments and personnel of companies that perform their own administration of benefits, payroll and HR;
|
·
| providers of certain endpoint HR services, including payroll, 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; and
|
·
| benefits exchanges that provide benefits administration services over the Internet to companies that otherwise maintain their own benefit plans.
|
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 believe the principal competitive factors in our market include the following:
·
| level of customer satisfaction;
|
·
| ease of customer setup and on-boarding;
|
·
| breadth and depth of benefit plans and online functionality;
|
·
| vertical market expertise;
|
·
| brand awareness and reputation;
|
·
| ability to innovate and respond to customer needs rapidly; and
|
·
| subject matter expertise.
|
We believe that we compete favorably on the basis of each of these factors.
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. In addition, we experience higher levels of client attrition in connection with renewals of the health insurance we provide for our WSEs, in the event that such renewals result in increased premiums that we pass on 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 level of our insurance claims based on the unpredictable nature of large claims. These historical trends may change, and other seasonal trends and variability may develop that make it more difficult for us to manage our business.
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Intellectual Property
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, 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.
We refer to our employees, excluding employees that we co-employ on behalf of our clients, as our corporate employees. We had
2,057approximately 2,500 corporate employees as of December 31,
2014. We believe our relations with our corporate employees are good.2015. None of our corporate employees is covered by a collective bargaining agreement.
Directors and Executive Officers
Name
| | | Principal Occupation(s)
|
Executive Officers
| | | |
Burton M. Goldfield
| | | President, Chief Executive Officer and Director, TriNet
|
William Porter
| | | Vice President and Chief Financial Officer, TriNet
|
Gregory L. Hammond
| | | Executive Vice President and Chief Legal Officer, TriNet
|
John Turner
| | | Senior Vice President of Sales, TriNet
|
| | | |
Non-Employee Directors
| | | |
H. Raymond Bingham
| | | Advisory Director, General Atlantic LLC (a global growth equity investment firm)
|
Katherine August-deWilde
| | | President and Chief Operating Officer, First Republic Bank (commercial bank specializing in private banking, business banking and wealth management)
|
Martin Babinec
| | | Founder and Chairman, Upstate Venture Connect (a nonprofit corporation focused on the creation of new companies and jobs across Upstate New York); Founder and Chairman, StartFast Venture Accelerator (a mentorship-driven startup accelerator based in New York)
|
Kenneth Goldman
| | | Chief Financial Officer, Yahoo! Inc. (an Internet services company)
|
David C. Hodgson
| | | Managing Director, General Atlantic LLC (a global growth equity investment firm)
|
John Kispert
| | | President and Chief Executive Officer, Spansion, Inc. (a provider of flash memory-based embedded systems solutions until acquired by Cypress Semiconductor in March 2015)
|
Wayne B. Lowell
| | | Chairman and Chief Executive Officer, Senior Whole Health Holdings, Inc. (a health insurance company focused on providing health insurance coverage to senior citizens)
|
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 are located at 1100 San Leandro Blvd., Suite 400, San Leandro, CA 94577 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.
11
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 oncontained in or accessible through our website is not incorporated into this report and is not a part of this report.
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
our consolidated financial statements and related notes. If any of the following risks materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.Risks Related to Our Business and Industry
Our success depends on growth in market acceptance of the human resources outsourcing and related services we provide.
Our success depends on the willingness of SMBs to outsource their HR function to a third-party service provider. We estimate that fewer than 5% of U.S. employees of businesses with fewer than 500 employees are part of a co-employment arrangement, in which all or some portion of the employer’s HR function was outsourced to a single third-party provider such as TriNet. We believe that our growth opportunity is primarily a function of our ability to penetrate the SMB market. Many companies have invested substantial personnel, infrastructure and financial resources in their own internal HR organizations and therefore may be reluctant to switch to our solution. Companies may not engage us for other reasons, including a desire to maintain control over all aspects of their HR activities, a belief that they manage their HR activities more effectively using their internal administrative organizations, perceptions about the expenses associated with our services, perceptions about whether our services comply with laws and regulations applicable to them or their businesses, or other considerations that may not always be evident. Additional concerns or considerations may also emerge in the future. We must address our potential clients’ concerns and explain the benefits of our approach in order to convince them to change the way that they manage their HR activities, particularly in parts of the United States where our company and solution are less well-known. If we are not successful in addressing potential clients’ concerns and convincing companies that our solution can fulfill their HR needs, then the market for our solution may not develop as we anticipate and our business may not grow.
If we are unable to rapidly grow our sales force, we will not be able to grow our business at the rate that we anticipate, which could harm our business, results of operations and financial condition.
In order to raise awareness of the benefits of our services and identify and acquire new clients, we must rapidly grow our direct sales force, which consists of regional sales representatives who focus on serving clients in specific industry vertical markets. 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 rapidly grow and effectively train our sales force, our revenues likely will not increase at the rate that we anticipate, which could harm our business, results of operations and financial condition.
We are subject to client attrition.
We regularly experience significant client attrition due to a variety of factors, including increases in administrative fees and insurance costs, disruption caused by the transition of WSEs we have gained through acquisition to our technology platform, client business failure, competition and clients determining to bring 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, as we did in 2010 and 2011, it could harm our business, results of operations and financial condition.
Our acquisition strategy creates risks for our business.
We have completed numerous acquisitions of other businesses, and we expect that we will continue to grow through acquisitions of other businesses, assets 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.
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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. Acquisitions involve numerous other risks, including:
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| difficultiesintegratingtheoperations,technologies,servicesand personnelof theacquiredcompanies, includingthemigrationof WSEs froman acquiredcompany’stechnologyplatformto ours;
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| challengesmaintainingour internalstandards,controls,proceduresand policies;
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| diversionof management’sattentionfromotherbusinessconcerns;
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| over-valuationby us of acquiredcompanies;
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| litigationresultingfromactivitiesof theacquiredcompany,includingclaimsfromterminatedemployees, customers,formerstockholdersand otherthirdparties;
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| insufficientrevenuesto offsetincreasedexpensesassociatedwith theacquisitionsand unanticipated liabilitiesof theacquiredcompanies;
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| insufficientindemnificationor securityfromthesellingpartiesforlegalliabilitiesthatwe mayassumein connectionwith our acquisitions;
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| enteringmarketsin which we have no priorexperienceand maynot succeed;
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| risksassociatedwith foreignacquisitions,such as communicationand integrationproblemsresulting fromgeographicdispersionand languageand culturaldifferences,compliancewith foreignlaws and regulationsand generaleconomicor politicalconditionsin othercountriesor regions;
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| potentiallossof key employeesof theacquiredcompanies;and
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| impairmentof relationshipswith clientsand employeesof theacquiredcompaniesor our clientsand employeesas a resultof theintegrationof acquiredoperationsand new managementpersonnel.
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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.
Unexpected changes in workers compensation and health insurance claims by worksite employees could harm our business.
Our insurance costs are impacted significantly by our WSEs’ health and workers compensation insurance claims experience. We establish reserves to provide for the estimated costs of reimbursing our workers compensation and health insurance carriers for paying claims within the deductible layer in accordance with their insurance policies. Estimating these reserves involves our consideration of a number of factors and requires significant judgment. If there is an unexpected increase in the severity or frequency of claims, such as due to our WSEs generating additional claims activity, or if we subsequently receive updated information indicating insurance claims were higher than previously estimated and reported, our insurance costs could be higher in that period or subsequent periods as we adjust our reserves accordingly. We have also experienced variability in our insurance claims based on the unpredictable nature of large claims. In addition, we may be unable to increase our pricing to offset increases in insurance costs on a timely basis. A number of factors affect claim activity levels, such as changes in general economic conditions, proposed and enacted regulatory changes and disease outbreaks.
Our quarterly results of operations may fluctuate as a result of numerous factors, many of which are outside of our control.
Our quarterly results of operations are likely to fluctuate, and 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, rent expense and debt expense, may require significant lead time to 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 may cause our revenues, results of operations and cash flows to fluctuate from quarter to quarter include:
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| thenumberand severityof healthand workerscompensationinsuranceclaimsby WSEs and thetimingof claimsinformationprovidedby our insurancecarriers;
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| thenumberof our new clientsinitiatingserviceand thenumberof WSEs employedby eachnew client;
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| our lossof existingclients;
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| reductionin thenumberof WSEs atexistingclients;
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| thetimingof clientpaymentsand paymentdefaultsby clients;
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| theamountand timingof our operatingexpensesand capitalexpenditures;
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| costsassociatedwith our acquisitionsof companies,assetsand technologies;
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| payments or drawdowns on our credit facility, or any amendments to our obligations under our credit facility;
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| expenseswe incurforgeographicand serviceexpansion;
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| our regulatorycompliancecosts;
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| changesto our creditratingsby ratingagencies;
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| changesin our effectivetaxrate;
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| extraordinaryexpensessuch as litigationor otherdispute-relatedsettlementpayments;and
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| theimpactof new accountingpronouncements.
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Many of the above factors are discussed in more detail elsewhere in this “Risk Factors” section and in the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Many and our consolidated financial statements and related notes. Any of these factors are outsidethe following risks could materially and adversely affect our control,business, financial condition and results of operations and cause a decline in the variabilitytrading price of our common stock, and unpredictabilityyou may lose some or all of these factors could causeyour investment.
Risks Related to Our Business and Industry
Our co-employment relationship with our worksite employees exposes us to failbusiness risks.
Under our agreements with our clients, we are a co-employer of our WSEs and assume certain obligations, including the responsibility to meetpay salaries, wages and related payroll taxes of our expectationsWSEs, 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 revenuesfailure 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 operationsoperations.
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 given period. In addition,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
occurrenceclassification of
oneemployees as exempt or
more of these factors might causenon-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
vary widely,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
lead to negative impactshave a material adverse effect on our
margins, short-term liquidityfinancial condition or
ability to retain or attract key personnel, and could cause other unanticipated issues. Accordingly, we believe that quarter-to-quarter comparisons of our revenues, results of
operations and cash flows may not be meaningful and should not be relied upon as an indication of our future performance.operations.
Our business is subject to numerous state and federal laws, and uncertainty as to the application of these laws, or adverse applications of these laws, as well as changes in applicable laws, could adversely affect our business.
Our operations are governed by numerous federal, state and local laws relating to labor, tax,
employee benefits, insurance and employment matters.
We are a professional employer organization, and by entering into a co-employment relationship with WSEs, we assume certain obligations, responsibilities and potential legal risks of an employer under these laws. However, many of these laws (such as
the Employee Retirement Income Security Act, or ERISA and federal and state employment tax laws) do not specifically address the obligations and responsibilities of a
provider ofprofessional employer organization providing outsourced HR
services in a co-employment relationship, and the definition of employer under these laws is not uniform. In addition, many states have not addressed the co-employment relationship for purposes of compliance with applicable state laws governing the relationship between employers and employees and state insurance laws.
There is even greater uncertainty on the federal level, such as the application of immigration reform to a co-employment relationship, and tax credits for small businesses that utilize a co-employment relationship.We are not able to predict whether broader federal 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.us, our clients or our WSEs. Any adverse application or interpretation (in courts, agencies or otherwise) of new or existing federal or state laws to the co-employment relationship with our clients and WSEs could have a material adverse effect on our financial condition and clients could harm our business.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 some of our services, or could require that we make significant changes in our methods of doing business, which could increase our cost of doing business. Changes in regulations could also affect the extent and type of employee benefits employers can or must provide employees, the amount and type of taxes employers and employees are required to pay or the time within which employers must remit taxes to the applicable authority. These changes could substantially decrease our revenues and substantially increase our cost of doing business. If we fail to educatebusiness and assisthave a material adverse effect on our clients regarding new or revised legislation that impacts them, our reputation could be harmed.
financial condition and results of operations.
Although some states do not explicitly regulate professional employer organizations, 42 states have passed laws that have licensing, certification or registration requirements applicable to professional employer organizations or recognize the professional employer organization model, and other states may implement such requirements in the future. Laws regulating professional employer organizations vary from state to state, but generally provide for oversight 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, and we may not be able to satisfy these requirements or regulations in all states, which could prohibit us from doing business in such
states. In addition, we cannot assure you that we will be able to renewstates, which could have a material adverse effect on our
licenses in all states.14
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 for WSEs to receive the full benefit of our employee benefits plan offerings, it is important that we act and qualify as an employer of the WSEs for certain purposes under the Internal Revenue Code of 1986, or the Code and ERISA. In addition, our status as an employer is important for purposes of ERISAERISA’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 under common law.tests. We believe that we
qualify as an employer of our WSEs in the United States underfor the relevant purpose of both the Code and ERISA, and we implement processes to protect and preserve this status. With passage of the Small Business Efficiency Act in December 2014, the U.S. Congress clarified the employer status of professional employer organizations or PEOs for federal tax purposes under the Code for those PEOs who voluntarily become certified under this law. The IRS is expected to begin accepting applications for certification under the Code in July 2016 and we currently intend to apply for certification. However, the U.S. Department of Labor has issued guidance that certain entities in the HR outsourcing industry domay not qualify as common law employers of WSEs for ERISA purposes. If we were found not to be an employer under the Code or ERISA, it could affect the manner in which we are able to provide employee benefits to our WSEs and could have a material adverse effect on our financial condition and results of operations.
In addition, state regulatory authorities generally require licenses for companies that do business in their states 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. If regulatory authorities in any state determine that the nature of our business requires that we be licensed as an insurance agent or as a third-party administrator, we may
not receive the favorable tax treatment for any plans intendedneed to
qualify under Section 401 of the Code, including our 401(k) planshire additional personnel to manage regulatory compliance and
cafeteria plans,become obligated to pay annual regulatory fees, which could have a material adverse effect on our
business. If we were found not to be an employer for ERISA purposes, our plans would not comply with ERISA,financial condition and
fines and penalties could be imposed. In addition, if we were found not to be an employer for ERISA purposes, we and our plans would not enjoy the full preemptionresults of
state laws provided by ERISA and could be subject to varying state laws and regulations, including laws governing multiple employer welfare arrangements, or MEWAs, as well as to claims based upon state laws.operations.
We and our clients could be adversely impacted by health care reform.
The
Patient Protection and Affordable Care Act,
andor the
Heath Care and Education Reconciliation Act of 2010, which we refer to collectively as the Act, entailACA, proposes sweeping health care reforms with staggered effective dates
from 2010 through
2018,2020, and many provisions of the
ActACA require the issuance of additional guidance from the U.S. Departments of Labor and Health and Human Services, the
Internal Revenue Service, or IRS and
U.S.the states. A number of key provisions of the
ActACA have begun to take effect over the
last year,past several years, including the establishment of state and
federally runfederal insurance exchanges, insurance market reforms,
“pay“play or
play”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.
As a co-employer of our clients’ WSEs, we assume or share many of thecertain employer-related responsibilities and legal risks and assist our clients in complying with many employment-related governmental regulations. Generally, the ActACA 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. For example, the Act provides for a small business tax credit for eligible companies offering health care coverage to employees. We believe that these tax credits are available to our clients that meet the qualification requirements; however, the Act and subsequently issued IRS guidance do not expressly address the issue of whether small business clients of a professional employer organization may still qualify as small businesses eligible for such tax credits. As a result of this uncertainty, we are not yet able to determine the impacts to our business, and to our clients, resulting from the Act. In future periods, the changes 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.ACA. Furthermore, the uncertainty surrounding the terms and application of the ActACA may delay or inhibit the decisions of potential clients to outsource their HR needs. Any of these developments may have a material adverse effect on our financial condition and results of operations.
Our inability to offer competitive health and/or workers compensation insurance rates could harm our business.
If we are unable to offer competitive health and/or workers compensation insurance rates to our clients, it could affect our ability to attract and retain clients, which would have a material adverse effect on our business. For example, where we offer 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 set by our carriers on such policies may not be competitive. Further, for policies with respect to which we agree to pay additional amounts 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 make our rates competitive. In addition, broad adoption of our services in certain geographies or industries may make it more difficult for us to obtain competitive health and/or workers compensation insurance rates due to concentration of clients within a particular geography or industry. The inability to offer competitive insurance rates, for the above reasons or any other, could have a material adverse effect on our financial condition and results of operations.
Unexpected changes in workers 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 are impacted significantly by our WSEs’ health and workers compensation insurance claims experience. We establish reserves to provide for the estimated costs of reimbursing our workers compensation and health insurance carriers for paying claims within the deductible layer in accordance with their insurance policies. Estimating these reserves involves our consideration of a number
of factors and requires significant judgment. If there is an unexpected increase 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 ), or if we subsequently receive updated information indicating insurance claims were higher than previously estimated and reported, our insurance costs could be higher in that period or subsequent periods as we adjust our reserves accordingly. We have also experienced variability in the amount of our insurance 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, 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 condition and results of operations.
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 of our services. These service providers include insurance carriers to provide health and workers compensation insurance coverage 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 any of these vendors decide to terminate its relationship with 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 more 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, could have a material adverse effect on our financial condition and 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 operations may fluctuate as a result of numerous factors, many of which are outside of our control.
Our quarterly results of operations are likely to fluctuate, and 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:
the number and severity of health and workers compensation insurance claims by WSEs and the timing of claims information provided by our insurance carriers;
the amount and timing of our insurance costs, operating expenses and capital expenditures;
the number of our new clients initiating service and the number of WSEs employed by each new client;
the loss of existing clients;
reduction in the number of WSEs employed by existing clients;
the timing of client payments and payment defaults by clients;
costs associated with our acquisitions of companies, assets and technologies;
payments or drawdowns 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;
expenses we incur for geographic and service expansion;
our regulatory compliance costs;
changes in our effective tax rate; and
the impact of new accounting pronouncements.
Many of the above factors are discussed in more detail elsewhere in this “Risk Factors” section and in the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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 results of operations for a given period. 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 or ability to retain or attract key personnel, and could cause other unanticipated issues. Accordingly, we believe that quarter-to-quarter comparisons of our revenues, results of operations and cash flows may not be meaningful and should not be relied upon as an indication of our future performance.
Volatility in the financial and economic environment could harm our business.
Demand for our services is sensitive 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. 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, bonus 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 sufficient to offset the drop 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 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.
Most of our clients are concentrated in certain geographies 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 geographies and operate in a relatively small number of industries, including the technology, life sciences, not-for-profit, professional services, 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.
Our business and operations have experienced rapid growth in recent periods, and if we are unable to effectively manage this growth, our business 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 you that we will be able to do so 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, our costs and expenses may increase more than we expect them to, which in turn could harm our business, financial condition 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, 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 and 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.
Our acquisition strategy creates risks for 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, assets 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;
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;
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, which 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 States regularly examine our income and other tax returns. For example, in connection with an IRS examination of prior federal income tax returns filed by Gevity, a company we acquired in 2009, we received a technical advice memorandum from the IRS taking the position that
approximatelya total of $10.1 million
ofemployment tax credits taken by Gevity, and an additional approximately
$1.5$2.3 million taken by us after acquiring Gevity, should be reversed, which position we dispute. The ultimate outcome of these 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.
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Our business and operations have experienced rapid growth in recent periods, and if we are unable to effectively manage this growth, our business 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:
·
| effectivelyrecruit,integrate,trainand motivatea largenumberof new employees,includingour direct salesforce,whileretainingour existingemployees,maintainingthebeneficialaspectsof our corporate cultureand effectivelyexecutingour businessplan;
|
·
| satisfyour existingclientsand identifyand acquirenew clients;
|
·
| enhancethebreadthand qualityof our services;
|
·
| continueto improveour operational,financialand managementcontrols;and
|
·
| makesound businessdecisionsin lightof thescrutinyassociatedwith operatingas a publiccompany.
|
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 you that we will be able to do so 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, our costs and expenses may increase more than we expect them to, which in turn could harm our business, results of operations and financial condition.
We may not be able to sustain our revenue growth rate or profitability in the future.
While we have achieved profitability on an annual basis in each of the last four fiscal years, we expect our operating expenses to increase substantially in the near term, particularly as we make significant investments in our sales and marketing organization, expand our operations and 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 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, 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.
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 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 in growing our businesses, 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 do, 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.
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In addition to competition from other professional employer organizations, we also face competition in the form of companies and third parties serving HR needs in traditional manners. These forms of competition include:
·
| HRand informationsystemsdepartmentsand personnelof companiesthatperformtheirown administrationof benefits,payrolland otherHRfunctions;
|
·
| providersof certainendpointHRservices,includingpayroll,benefitsand businessprocessoutsourcers with high-volumetransactionand administrativecapabilities,such as AutomaticData Processing,Inc., Paychex, Inc.and otherthird-partyadministrators;and
|
·
| benefitsexchangesthatprovidebenefitsadministrationservicesovertheInternetto companiesthat otherwisemaintaintheirown benefitplans.
|
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, our market share, business, results of operations and financial condition may suffer.
Adverse changes in our relationships with key vendors could impair the quality of our solution.
Our success depends in part on our ability to establish and maintain arrangements and relationships with vendors that supply us with essential components of our services. These service providers include insurance carriers to provide health and workers compensation insurance coverage 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 employees. 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. Our agreements with many of these service providers typically have a term of one year. However, we engage some service providers, such as payroll couriers, on an as needed basis at published rates. In addition, many of our employee benefit plan agreements may be terminated by the insurance companies on 90 days’ notice. If any of these vendors decided to terminate its relationship with us, we may have difficulty obtaining replacement services at reasonable rates or on a timely basis, if at all. The loss of any one or more 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, could impair the quality of our solution and harm our business.
We depend on licenses to 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, including Oracle America, Inc. 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.
If we are deemed to be an insurance agent or third-party administrator, we may incur significant additional costs and expenses, which could harm our results of operations.
State regulatory authorities generally require licenses for companies that do business in their states 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. If regulatory authorities in any state determine that the nature of our business requires that we be licensed 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 adversely affect our results of operations.
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Most of our clients are concentrated in a relatively small number of industries, making us vulnerable to downturns in those industries.
Most of our clients operate in the technology, life sciences, property management, professional services, banking and financial services, retail, manufacturing and hospitality services industries. As a result, if any of those industries suffers a downturn, the portion of our business attributable to clients in that industry could be adversely affected. For example, in July 2013, we acquired Ambrose Employer Group, LLC, or Ambrose, a New York-based company that provides HR services primarily to WSEs in the financial services industry in the New York area. If the financial services industry were to suffer a downturn similar to the one that began in the fall of 2008, our Ambrose product line would likely suffer.
We have a substantial amount of indebtedness, which could adversely affect our financial condition and our operating flexibility.
As of December 31,
2014,2015, we had
$544.9 $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 us and certain of our subsidiaries. Our level of indebtedness and the limitations imposed on us by our credit facility could affect our business in various ways, including the following:
·
| we willhave to use a portionof our cashflowsfromoperatingactivitiesfordebtserviceratherthanfor otheroperationalactivities;
|
·
| wemaynotbeabletoborrowadditionalfundsorobtainadditionalfinancingforfutureworkingcapital, acquisitions,capitalexpendituresorothercorporatepurposes,ormayhavetopaymoreforsuchfinancing;
|
we will have to use a portion of our cash flows from operating activities for debt service rather than for other operational activities;·
| someor allof theindebtednessunderour currentor futurecreditfacilitiesbearsinterestatvariable interestrates,makingus morevulnerableto interestrateincreases;
|
we may not be able to borrow additional funds or obtain additional financing for future working capital, acquisitions, capital expenditures or other corporate purposes, or may have to pay more for such financing;·
| we couldbe lessableto takeadvantageof significantbusinessopportunities,such as acquisition opportunities,and to reactto changesin marketor industryconditions;and
|
some 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 maybe morevulnerableto generaladverseeconomicwe 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 industryconditionsas a resultof our inabilityto reduceour debtservicecostsin responseto reducedrevenues.
|
we may be more vulnerable to general adverse economic and industry conditions as a result of our inability to reduce our debt service costs in response to reduced revenues.
Because borrowings under our credit facility bear interest at 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 depends on our future business performance, which will be affected by various factors, including the risks described in this “Risk Factors” section. We are not able to control many of these factors, such as economic conditions 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 part 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. In addition, the terms of our existing or future debt agreements may restrict our ability to take some or all of these responsive actions. If we were unable to pay the principal and interest 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 us 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.
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, including restricting our ability to:
·
| incur,assumeor guaranteeadditionaldebt;
|
·
| pay dividendsor distributionsor redeemor repurchasecapitalstock;
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incur, assume or guarantee additional debt;pay dividends or distributions or redeem or repurchase capital stock; ·
| makeloans,investmentsand acquisitions;
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incur or assume liens;·
| engagein salesof assetsand subsidiarystock;
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make loans, investments and acquisitions;·
| enterintosale-leasebacktransactions;
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engage in sales of assets and subsidiary stock;·
| enterintocertaintransactionswith affiliates;
|
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·
| completedividends,loansor assettransfersfromour subsidiaries;
|
enter into sale-leaseback transactions;·
| enterintonew linesof business;
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enter into certain transactions with affiliates;·
| prepayotherindebtedness;
|
complete dividends, loans or asset transfers from our subsidiaries;·
| transferallor substantiallyallof our assetsor enterintomergeror consolidationtransactionswith another person;and
|
enter into new lines of business;·
| makecapitalexpenditures.
|
prepay other indebtedness;transfer all or substantially all of our assets or enter into merger or consolidation transactions with another person; and
make capital expenditures.
Under the
revolving credit facility, we are required to comply with a financial covenant that requires us and 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 issued 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. Our failure to comply with this financial covenant or other restrictive covenants 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
revolving 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 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.
Volatility in the financial and economic environment could harm our business.
Demand for our services is sensitive 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. 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, bonus or benefits levels, any of which would affect our revenues, and may affect our margins, because we may be unable to reduce our selling, administrative or other expenses sufficient to offset the drop in revenues. It is difficult for us to forecast future demand for our services due to the inherent difficulty in forecasting the direction and strength 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 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 harm our business.
If we fail to retain 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.
Qualified personnel are in great demand throughout the HR industry. 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.Improper disclosureclients, or otherwise have a material adverse effect on our financial condition or results of sensitiveoperations.
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 confidentiala 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 purported stockholder of our company
employeein 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
client data, including personal data,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
harmadversely affect our
reputation.Our business, involves the use, storageoperating results, and transmission offinancial 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 corporate employees, WSEs and clients. This information includes sensitive or confidential data, suchAnnual 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 employees’ Social Security numbers, bank account numbers, retirement account information and medical information. We and our third-party service providers have established policies and procedures to help protect the security and privacy of this information, but it is possible that our security controls over sensitive or confidential data may not prevent the improper access to or disclosure of this information. Third parties, including vendors that provide servicesa condition for our operations,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 also behave a sourcesignificant negative effect on the value and liquidity of security riskour 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 inor 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
event ofSEC for a
failure of their own security systems and infrastructure. Any such disclosure could harmfull year. Our inability to use Form S-3 during this time period may have a negative impact on our
reputation and expose usability to
liability under our contracts and underaccess the
many and sometimes contradictory laws and regulations regarding data privacy in the variouspublic capital markets in
whicha timely fashion because we
operate. Any failurewould be required to
adherefile 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
19
applicable laws and regulations 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 contractual commitments with respect to the preservation and use of confidential information could result in legal liability and could damage our reputation.
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
theclient transactions
involved in managing the client relationship throughincluding 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
aremay 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.
Security breaches could compromise our data and the data of our clients and WSEs, 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 client and WSE information is critical to our operations.
We relydepend on standard internet and other security systemslicenses with third-party software in order to provide our services.
We license a substantial portion of the
security and authentication necessarysoftware on which we depend to
effect secure transmission of data. Despite our security measures, our information technology and infrastructure may be vulnerable to cybersecurity threats, including attacks by hackers and other malfeasance. 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, 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 from third-party vendors. If we also rely on certain third-party service providersare unable to maintain these licenses, or if we are required to make significant changes in the terms and products, such as insurance carriers,conditions of these licenses, we may need to process information relatedseek replacement vendors or change our software architecture to address licensing revisions with our clientscurrent vendors, either of which could increase our expenses and WSEs. Through contractual provisions,impair the quality of our services. In addition, we take steps to requirecannot assure you that our service providers protect sensitive information. However, we cannot provide assurances askey vendors will continue to the security steps taken by such providers. Any security breachsupport their technology. Financial or other disruption of our third-party service providers that results in an inadvertent disclosure or loss of confidential information coulddifficulties experienced by these vendors may adversely affect the technologies we incorporate into our reputationproducts and our business.
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, thatwhich 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
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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.
Our co-employment relationship with our worksite employees exposes us to business risks.
We are a co-employer of our WSEs, and there is a possibility that we may be subject to liability for violations of employment laws by our clients and acts or omissions of our 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 these contractual obligations with our clients, which could harm our business. We maintain employment practices liability insurance coverage (including coverage for our clients) to manage our and our clients’ exposure for various employee-related claims, and as a result, our incurred costs with respect to this exposure have historically been insignificant to our operating results. 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 related to WSEs that we and our clients employ 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 harm our business.
Our failure to maintain or enhance our reputation or brand recognition 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:
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| theeffectivenessof our marketingefforts;
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| our abilityto attractand retainnew salespersonnelto expand our directsalesforce;
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·
| our abilityto retainour existingclientsand attractnew clients;
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·
| thequalityand perceivedvalueof our services;
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·
| our abilityto successfullydifferentiateour servicesfromthoseof our competitors;
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·
| actionsof our competitorsand otherthirdparties;
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·
| positiveor negativepublicityaboutus or our industryin general;
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·
| interruptions,delaysor attackson our website;and
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·
| litigationor regulatorydevelopments.
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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 equity may reduce demand for our services and 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.
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, 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.21
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.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting and, beginning with our annual report for the year ending December 31, 2015, provide a management report on our internal control over financial reporting. This report must be attested to by our independent registered public accounting firm. If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated.
We are in the process of designing and implementing our internal control over financial reporting, which process will be time consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting in the future, we are unable to comply with the requirements of Section 404 in a timely manner, we are unable to assert that our internal control over financial reporting is effective or our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required to do so, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission, or SEC, or other regulatory authorities, which could require additional financial and management resources.
If we are unable to successfully remediate the existing material weakness in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected.
In preparing and reviewing our consolidated financial statements as of and for the nine months ended September 30, 2013 and in connection with our restatement of previously issued consolidated financial statements for the years ended December 31, 2010 and 2011, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting related to accounting for income taxes. 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 financial statements will not be prevented or detected on a timely basis. The material weakness identified related to our incorrectly recording a deferred tax asset in connection with our accounting for our acquisition of Ambrose that should have been recorded as goodwill as of September 30, 2013, and to incorrectly recording a true-up to the income tax provision in 2011 related to the allocation of stock compensation between qualified and nonqualified stock options that should have been identified and recorded in 2010. As such, our controls over financial reporting were not designed or operating effectively, and as a result there were adjustments required in connection with closing our books and records and preparing our consolidated financial statements for the nine months ended September 30, 2013 and a restatement was required for our consolidated financial statements for 2010 and 2011.
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In response to this material weakness, we hired a Director of Income Tax Accounting, who reports directly to our Chief Accounting Officer, we engaged external technical advisers with expertise in accounting for income taxes to assist us with the evaluation of complex tax issues, and we improved our process, procedures and documentation standards relating to the preparation of income tax provision calculations. We continue to assess and develop our tax professionals to provide appropriate technical and accounting expertise commensurate with our needs to properly consider and apply GAAP for income taxes.
We believe our remediation efforts resulted in the elimination of the previously identified material weakness. While this material weakness has been remediated, we cannot assure you that we have identified all of our existing material weaknesses, or that we will not in the future have additional material weaknesses. We have dedicated resources to the design, implementation, documentation and testing of our internal controls. We will continue to evaluate the effectiveness of our internal controls, including our internal control over accounting for income taxes and will continue to make changes that we believe will strengthen our internal controls to ensure that our financial statements continue to be fairly stated in all material respects.
Neither we nor our independent registered public accounting firm has performed an evaluation of our internal control over financial reporting during any period in accordance with the provisions of the Sarbanes-Oxley Act. In light of the material weakness that was identified in 2013 as a result of the limited procedures performed, we believe that it is possible that, had we and our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses or significant control deficiencies may have been identified.
If we fail to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to accurately report our financial results, or report them within the timeframes required by law or stock exchange regulations. Failure to comply with Section 404 of the Sarbanes-Oxley Act could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. We cannot assure you that additional material weaknesses will not exist or otherwise be discovered. If other material weaknesses or other significant control deficiencies occur, our ability to accurately and timely report our financial results could be impaired, which could result in late filings of our annual and quarterly reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, restatements of our consolidated financial statements, a decline in our stock price, suspension or delisting of our common stock from the New York Stock Exchange, or NYSE, and could adversely affect our reputation, results of operations and financial condition.
We incur substantial increased costs as a result of being a public company.
As a public company, we incur significant levels of legal, accounting and other expenses that we did not incur as a private company. We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the NYSE and other applicable securities rules and regulations. Compliance with these rules and regulations has increased our legal and financial compliance costs, made some activities more difficult, time-consuming or costly and increased demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and results of operations. Although we have already hired additional corporate employees to comply with these requirements, we may need to hire more corporate employees in the future or engage outside consultants, which would increase our costs and expenses.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.
As a result of disclosure of information in this report and the other filings that we are required to make as a public company, our business, results of operations and financial condition are more visible, which may result in threatened or actual litigation, including by competitors and other third parties. If any such claims are successful, our business, results of operations and financial condition could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time
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and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, results of operations and financial condition.
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.
For example, since Since shares of our common stock were sold in our initial public offering or IPO, in March 2014 at a price of $16.00 per share, the daily closing price of our common stock has ranged from $19.10$16.33 to $32.59$37.88 per share through December 31, 2014. 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:
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| actualor anticipatedfluctuationsin our resultsof operations;
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| any financialprojectionswe provideto thepublic,any changesin theseprojectionsor our failureto meet theseactual 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;
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| failureof securitiesanalyststo initiateor maintaincoverageof our company,changesin financial estimatesby any securitiesanalystswho followour company,or our failureto meettheseestimatesor the expectationsfailure 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;
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| ratingschangesby any securitiesanalystswho followratings changes by any securities analysts who follow our company;
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| announcementsby us or our competitorsof significantinnovations,acquisitions,strategicpartnerships, jointventuresor capitalannouncements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
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| changesin operatingperformanceand stockmarketvaluationsof otherbusinessservicescompanies generally,or thosein our industrychanges in operating performance and stock market valuations of other business services companies generally, or those in our industry in particular;
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| priceand volumefluctuationsin theoverallstockmarket,includingas a resultof trendsin theprice and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
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| changesin our boardof directorschanges in our board of directors or management;
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| salesof largeblocksof our commonstock,includingsalesby our executiveofficers,directorsand significantsales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
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| lawsuitsthreatenedor filedagainstlawsuits threatened or filed against us;
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| shortsales,hedgingand otherderivativetransactionsinvolvingour capitalshort sales, hedging and other derivative transactions involving our capital stock;
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| generaleconomicconditionsin theUnitedStatesgeneral economic conditions in the United States and abroad; and abroad;and
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| othereventsorfactors,includingthoseresultingfromwar,incidentsofterrorismorresponsestotheseother events or factors, including those resulting from war, incidents of terrorism or responses to these events.
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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.
If we were to become involved in securitiesSecurities litigation
it 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,
2014,2015, there were
6,892,8104,446,149 shares of common stock subject to outstanding options,
and 7,750956,687 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.
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As of December 31,
2014,2015, 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 by 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, 2014,2015, funds affiliated with General Atlantic, our largest stockholder, beneficially own approximately 26.2%28.6% of our outstanding common stock, and all of our directors, officers and their affiliates, including the funds affiliated with General Atlantic, beneficially own, in the aggregate, approximately 42.1%40.8% of our outstanding common stock. As
a result, these stockholders will be able to determine substantially 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 securities 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, our market and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more 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:
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| establisha classifiedboardof directorsso thatnot allmembersof our boardof directorsareelectedatone time;
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| permitour boardof directorsto establishthenumberof directors;
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establish a classified board of directors so that not all members of our board of directors are elected at one time;·
| providethatdirectorsmayonly be removed“forcause”;
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permit our board of directors to establish the number of directors;·
| requiresuper-majorityvotingto amendsomeprovisionsin our certificateof incorporationand bylaws;
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provide that directors may only be removed “for cause”;·
| authorizetheissuanceof “blankcheck”preferredstockthatour boardof directorscoulduse to implement a stockholderrightsplan;
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require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;·
| eliminatetheabilityof our stockholdersto callspecialmeetingsof stockholders;
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authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;·
| prohibitstockholderactionby writtenconsent,which requiresallstockholderactionsto be takenata meetingeliminate the ability of our stockholders to call special meetings of stockholders;
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| providethatour boardof directorsisexpresslyauthorizedto make,alteror repealour bylaws;and
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prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;·
| establishadvancenoticerequirementsfornominationsforelectionto our boardof directorsor for proposingmattersthatcan be actedupon by stockholdersatannualstockholdermeetings.
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provide that our board of directors is expressly authorized to make, alter or repeal our bylaws; andestablish 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.
Item 1B. Unresolved Staff Comments
We lease space for our
client service centerscorporate headquarters in
Bradenton, Florida, Reno, Nevada, Fort Mill, South Carolina, Oklahoma City, Oklahoma and New York, New York,San Leandro, California, approximately
6050 regional sales offices in various states in the United States and our
corporate headquartersclient service centers in
San Leandro, California.Bradenton, Florida; Reno, Nevada; Fort Mill, South Carolina; Oklahoma City, Oklahoma and New York, New York. All of these leases expire at various times
up through 2023.
We believe 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
As
Securities Class Action. On or about August 7, 2015, Howard Welgus, a co-employer, wepurported stockholder 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 regularlythe 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.
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 are subject to WSE claims arising in the ordinary course of our business. Someits business, including disputes with its clients or various class action, collective action, representative action and other proceedings arising from the nature of theseits 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
and legalor proceedings
arise outor the above mentioned securities class action will have a materially adverse effect on the Company’s consolidated financial position, results of
our clients’ conduct by virtueoperations or cash flows. However, the unfavorable resolution of
our co-employer relationship, over which we have no control.We are not presently a party to any legal proceedings thatparticular matter or the Company’s reassessment of its exposure for any of the above matters based on additional information obtained in the opinion of our management, if determined adversely to us, wouldfuture could have a material adverse effectimpact on our business,the Company’s consolidated financial condition, operatingposition, results of operations or cash flows. RegardlessIn addition, regardless of the outcome, litigation canthe above matters, individually and in the aggregate, could have an adverse impact on usthe Company because of defense and settlement costs, diversion of management resources and other factors.
Item 4. Mine Safety Disclosures
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, 2014: | | High | | | Low | |
First Quarter (from March 27, 2014) | | $ | 23.44 | | | $ | 17.28 | |
Second Quarter | | $ | 27.78 | | | $ | 18.81 | |
Third Quarter | | $ | 29.96 | | | $ | 21.79 | |
Fourth Quarter | | $ | 32.79 | | | $ | 24.38 | |
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| | | | | | | | |
| Year Ended December 31, 2015: | | High | | Low |
| First Quarter | | $ | 37.88 |
| | $ | 30.04 |
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| 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 18, 2015,29, 2016, the last reported sale price of our common stock on the New York Stock Exchange was $35.76$13.97 per share. As of March 18, 2015,29, 2016, we had 5548 holders of record of our common stock.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. Our board 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, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, 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.
The following graph compares the cumulative return on the
Company'sCompany’s common stock since the initial public offering on March 27, 2014 with the cumulative return on the S&P 500 Index and a Peer Group Index.
COMPARISON OF
921 MONTH CUMULATIVE TOTAL RETURN
Among TriNet Group, Inc., the S&P 500 Index, and a Peer Group*
* The Peer Group Index
is comprisedconsists of the following companies:
Automatic Data Processing, Inc.
Barrett Business Services, Inc.
Heartland Payment Systems, 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.
Use of Proceeds
On March 31, 2014, we closed our IPO, pursuant to which we sold 15,000,000 shares of our common stock at a public offering price of $16.00 per share, for an aggregate offering price of $240 million, resulting in net proceeds to us of $217.8 million, after deducting underwriting discounts and commissions of approximately $16.8 million and offering expenses payable by us of approximately $5.6 million. An additional 2,250,000 shares were sold by certain selling stockholders pursuant to the underwriters’ option to purchase additional shares. We did not receive any proceeds from the sale by the selling stockholders. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-192465), which was declared effective by the SEC on March 26, 2014. The offering commenced on March 26, 2014, closed on March 31, 2014, and did not terminate before all of the shares that were registered in the registration statement were sold. J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, Deutsche Bank Securities Inc., Jefferies LLC, Stifel, Nicolaus & Company, Incorporated and William Blair & Company, L.L.C acted as underwriters. No payments were made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates in connection with the issuance and distribution of the securities registered. On March 31, 2014, we used $216.6 million of the proceeds of our IPO to repay the indebtedness outstanding under our credit facilities, as described in our final prospectus filed pursuant to Rule 424(b) with the SEC on March 27, 2014. The remaining proceeds have been used for working capital purposes.
Issuer Purchases of Equity Securities
The following table provides information about our purchases of TriNet common stock during the quarter ended
December 31, 2014:2015:Period | | Total Number of Shares Purchased | | | Average Price Paid Per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans (1) | | | Maximum Number of Shares that May Yet be Purchased Under the Plans (1) | |
October 1 - October 31, 2014 | | | - | | | | - | | | | - | | | | - | |
November 1 - November 30, 2014 | | | 490,419 | | | $ | 30.58 | | | | 490,419 | | | | 980,198 | |
December 1 - December 31, 2014 | | | - | | | | - | | | | - | | | | - | |
Total | | | 490,419 | | | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| 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)
| During the fourth quarter of
|
| (1) | In May 2014, our board of directors approvedauthorized a $30 million increase to our ongoing stock repurchase program authorizing us to repurchase in the aggregate up to $45 million of our outstanding common stock. The program was initially approved by our board of directors in May 2014 to authorize us to repurchase in the aggregate up to $15 million of our outstanding common stock. WeOur 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 year-to-date in 2014.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.
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” as well as our audited consolidated financial statements and related notes included in Item 8 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
2013 and
20122013 and the consolidated balance sheet data as of December 31,
20142015 and
20132014 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,
2011and 20102012 and 2011 and consolidated balance sheet data as of December 31,
2013, 2012
2011 and
20102011 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, | |
| | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
| | (in thousands, except share and per share data) | |
Consolidated Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
Professional service revenues | | $ | 342,074 | | | $ | 272,372 | | | $ | 148,233 | | | $ | 113,279 | | | $ | 139,495 | |
Insurance service revenues | | | 1,851,457 | | | | 1,371,903 | | | | 870,828 | | | | 727,111 | | | | 766,695 | |
Total revenues | | | 2,193,531 | | | | 1,644,275 | | | | 1,019,061 | | | | 840,390 | | | | 906,190 | |
Costs and operating expenses: | | | | | | | | | | | | | | | | | | | | |
Insurance costs | | | 1,686,315 | | | | 1,226,585 | | | | 750,025 | | | | 651,094 | | | | 713,653 | |
Cost of providing services (exclusive of depreciation and amortization of intangible assets) (1) | | | 134,256 | | | | 106,661 | | | | 63,563 | | | | 59,388 | | | | 72,073 | |
Sales and marketing (1) | | | 139,997 | | | | 109,183 | | | | 59,931 | | | | 38,087 | | | | 46,454 | |
General and administrative (1) | | | 53,926 | | | | 52,455 | | | | 37,879 | | | | 31,421 | | | | 28,366 | |
Systems development and programming costs (1) | | | 26,101 | | | | 19,948 | | | | 16,718 | | | | 15,646 | | | | 15,045 | |
Amortization of intangible assets | | | 52,302 | | | | 51,369 | | | | 17,441 | | | | 12,388 | | | | 17,960 | |
Depreciation | | | 13,843 | | | | 11,737 | | | | 11,676 | | | | 9,201 | | | | 12,042 | |
Restructuring | | | — | | | | — | | | | — | | | | 2,358 | | | | 5,922 | |
Total costs and operating expenses | | | 2,106,740 | | | | 1,577,938 | | | | 957,233 | | | | 819,583 | | | | 911,515 | |
Operating income (loss) | | | 86,791 | | | | 66,337 | | | | 61,828 | | | | 20,807 | | | | (5,325 | ) |
Other income (expense): | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | (54,193 | ) | | | (45,724 | ) | | | (9,709 | ) | | | (751 | ) | | | (4,444 | ) |
Other, net | | | 478 | | | | 471 | | | | 57 | | | | 127 | | | | 67 | |
Income (loss) before provision for (benefit from) income taxes | | | 33,076 | | | | 21,084 | | | | 52,176 | | | | 20,183 | | | | (9,702 | ) |
Provision for (benefit from) income taxes | | | 17,579 | | | | 7,937 | | | | 20,344 | | | | 5,421 | | | | (875 | ) |
Net income (loss) | | $ | 15,497 | | | $ | 13,147 | | | $ | 31,832 | | | $ | 14,762 | | | $ | (8,827 | ) |
Net income (loss) per share attributable to common stock: | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.24 | | | $ | 0.26 | | | $ | 0.66 | | | $ | 0.32 | | | $ | (1.18 | ) |
Diluted | | $ | 0.22 | | | $ | 0.24 | | | $ | 0.63 | | | $ | 0.31 | | | $ | (1.18 | ) |
Weighted average common stock outstanding: | | | | | | | | | | | | | | | | | | | | |
Basic | | | 56,160,539 | | | | 12,353,047 | | | | 9,805,384 | | | | 7,842,682 | | | | 7,454,390 | |
Diluted | | | 59,566,773 | | | | 15,731,807 | | | | 12,476,091 | | | | 10,103,979 | | | | 7,454,390 | |
|
| | | | | | | | | | | | | | | | | | | |
| | 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 |
|
(1)
| |
| (1) | Includes stock-based compensation expense as follows: |
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| | (in thousands) | | (in thousands) |
Cost of providing services | | $ | 2,658 | | | $ | 1,193 | | | $ | 516 | | | $ | 438 | | | $ | 467 | | $ | 4,244 |
| | $ | 2,658 |
| | $ | 1,193 |
| | $ | 516 |
| | $ | 438 |
|
Sales and marketing | | | 2,755 | | | | 1,284 | | | 500 | | | 637 | | | 670 | | 4,490 |
| | 2,755 |
| | 1,284 |
| | 500 |
| | 637 |
|
General and administrative | | | 4,517 | | | | 3,220 | | | | 3,144 | | | | 3,590 | | | | 3,385 | | 7,501 |
| | 4,517 |
| | 3,220 |
| | 3,144 |
| | 3,590 |
|
Systems development and programming costs | | | 1,030 | | | | 416 | | | 200 | | | 160 | | | 531 | | 1,688 |
| | 1,030 |
| | 416 |
| | 200 |
| | 160 |
|
Total stock-based compensation expense | | $ | 10,960 | | | $ | 6,113 | | | $ | 4,360 | | | $ | 4,825 | | | $ | 5,053 | | $ | 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 |
|
| | Year Ended December 31, | |
| | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
| | (in thousands) | |
Other Financial Data: | | | | | | | | | | | | | | | | | | | | |
Net Insurance Service Revenues (1) | | $ | 165,142 | | | $ | 145,318 | | | $ | 120,803 | | | $ | 76,017 | | | $ | 53,042 | |
Net Service Revenues (2) | | $ | 507,216 | | | $ | 417,690 | | | $ | 269,036 | | | $ | 189,296 | | | $ | 192,537 | |
Adjusted EBITDA (3) | | $ | 165,319 | | | $ | 136,027 | | | $ | 95,362 | | | $ | 47,348 | | | $ | 29,797 | |
Adjusted Net Income (4) | | $ | 74,392 | | | $ | 57,456 | | | $ | 47,431 | | | $ | 27,626 | | | $ | 13,798 | |
(1)
| |
| (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 Revenues and a reconciliation of Net Insurance Service Revenues to insurance service revenues, the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Non-GAAP Financial Measures.” |
(2)
| |
| (2) | Net Service Revenues is a non-GAAP financial measure that we calculate as the sum of professional service revenues and Net Insurance Service Revenues. For more information about Net Service Revenues and a reconciliation of Net Service Revenues to total revenues, the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Non-GAAP Financial Measures.” |
(3)
| |
| (3) | Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income, (loss), excluding the effects of our income tax provision, (benefit), interest expense, depreciation, amortization of intangible assets, and stock-based compensation expense.expense and, in 2014, certain costs related to a public offering of shares of our common stock. For more information about Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Non-GAAP Financial Measures.” |
(4)
| |
| (4) | Adjusted Net Income is a non-GAAP financial measure that we calculate as net income, (loss), excluding the effects of our effective income tax rate, stock-based compensation, amortization of intangible assets, non-cash interest expense, debt prepayment premium and the income tax effect (at our effective tax rate) of these pre-tax adjustments atand, in 2014, certain costs related to a public offering of our effectiveshares of common stock. For purposes of our non-GAAP financial presentation, as a result of a 2015 increase in New York City tax rate. In 2014, Adjusted Net Income also includesrates and an adjustment to exclude income tax on non-deductible stock-based compensation and other discrete items, includingincrease in blended state rates, we have adjusted the effect of state law changes, to reach an effective tax rate ofto 41.5% for the year ended December 31, 2015, from 39.5%. for year ended December 31, 2014. For more information about Adjusted Net Income and a reconciliation of Adjusted Net Income to net income, (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Non-GAAP Financial Measures.” |
| | As of December 31, | |
| | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
| | (in thousands) | |
Consolidated Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 134,341 | | | $ | 94,356 | | | $ | 63,749 | | | $ | 31,620 | | | $ | 45,535 | |
Working capital | | $ | 55,577 | | | $ | 65,061 | | | $ | 27,380 | | | $ | 26,424 | | | $ | 44,280 | |
Total assets | | $ | 2,347,764 | | | $ | 1,434,738 | | | $ | 887,727 | | | $ | 335,369 | | | $ | 340,739 | |
Notes payable and borrowings under capital leases | | $ | 545,150 | | | $ | 818,877 | | | $ | 301,334 | | | $ | 1,683 | | | $ | 1,798 | |
Total liabilities | | $ | 2,373,523 | | | $ | 1,705,100 | | | $ | 830,407 | | | $ | 241,771 | | | $ | 214,190 | |
Convertible preferred stock | | $ | — | | | $ | 122,878 | | | $ | 122,878 | | | $ | 122,878 | | | $ | 122,878 | |
Total stockholders’ equity (deficit) | | $ | (25,759 | ) | | $ | (393,240 | ) | | $ | (65,558 | ) | | $ | (29,280 | ) | | $ | 3,671 | |
|
| | | | | | | | | | | | | | | | | | | |
| | 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.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, (loss), excluding the effects of our income tax provision, (benefit), interest expense, depreciation, amortization of intangible assets, and stock-based compensation expense.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, (loss), excluding the effects of our effective income tax rate, stock-based compensation, amortization of intangible assets, non-cash interest expense, debt prepayment premium, and the income tax effect (at our effective tax rate) of these pre-tax adjustments atand, 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. In 2014, Adjusted Net Income also includes an adjustmentrate 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
other discrete items including the
cumulative effect of state
law changes, to reach an effective tax rate of 39.5%.legislative changes. Non-cash interest expense represents amortization and write-off of
theour debt issuance
cost.costs.
We believe that the use of Net Insurance Service Revenues provides useful information as it presents a measure of revenues from our provision of insurance services to our clients
that eliminatesless the
cost to us of thatcosts associated with such insurance. We believe that Net Service Revenues provides a useful measure 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, 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
31
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.
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 insurance costs that we pay to the insurance carriers;
|
·
| Adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our debt;
|
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 the amounts we paid in taxes or other components of our tax provision;
|
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 our cash expenditures or future requirements for capital expenditures or contractual commitments;
|
Adjusted EBITDA does not reflect the amounts we paid in taxes or other components of our tax provision;·
| Adjusted EBITDA and Adjusted Net Income do not reflect changes in, or cash requirements for, our working capital needs;
|
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;·
| AdjustedEBITDAand AdjustedNet Income do not reflect the expenses we incurred in connection with the registered offering of our common stock;
|
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 Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income differently than we do, limiting theOther companies in our industry may calculate these measures or similar measures differently than we do, limiting their usefulness of these items 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
(loss) and our financial results presented in accordance with GAAP.
The table below sets forth a reconciliation of GAAP insurance service revenues to Net Insurance Service Revenues:
| | Year Ended December 31, | |
| | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
| | (in thousands) | |
Insurance service revenues | | $ | 1,851,457 | | | $ | 1,371,903 | | | $ | 870,828 | | | $ | 727,111 | | | $ | 766,695 | |
Less: insurance costs | | | 1,686,315 | | | | 1,226,585 | | | | 750,025 | | | | 651,094 | | | | 713,653 | |
Net Insurance Service Revenues | | $ | 165,142 | | | $ | 145,318 | | | $ | 120,803 | | | $ | 76,017 | | | $ | 53,042 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| | (in thousands) |
| Insurance service revenues | $ | 2,258,001 |
| | $ | 1,851,457 |
| | $ | 1,371,903 |
| | $ | 870,828 |
| | $ | 727,111 |
|
| Less: Insurance costs | 2,112,376 |
| | 1,686,315 |
| | 1,226,585 |
| | 750,025 |
| | 651,094 |
|
| Net Insurance Service Revenues | $ | 145,625 |
| | $ | 165,142 |
| | $ | 145,318 |
| | $ | 120,803 |
| | $ | 76,017 |
|
The table below sets forth a reconciliation of GAAP total revenues to Net Service Revenues:
| | Year Ended December 31, | |
| | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
| | (in thousands) | |
Total revenues | | $ | 2,193,531 | | | $ | 1,644,275 | | | $ | 1,019,061 | | | $ | 840,390 | | | $ | 906,190 | |
Less: insurance costs | | | 1,686,315 | | | | 1,226,585 | | | | 750,025 | | | | 651,094 | | | | 713,653 | |
Net Service Revenues | | $ | 507,216 | | | $ | 417,690 | | | $ | 269,036 | | | $ | 189,296 | | | $ | 192,537 | |
32
|
| | | | | | | | | | | | | | | | | | | |
| | 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 |
|
The table below sets forth a reconciliation of GAAP net income
(loss) to Adjusted EBITDA:
| | Year Ended December 31, | |
| | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
| | (in thousands) | |
Net income (loss) | | $ | 15,497 | | | $ | 13,147 | | | $ | 31,832 | | | $ | 14,762 | | | $ | (8,827 | ) |
Provision for (benefit from) income taxes | | | 17,579 | | | | 7,937 | | | | 20,344 | | | | 5,421 | | | | (875 | ) |
Stock-based compensation | | | 10,960 | | | | 6,113 | | | | 4,360 | | | | 4,825 | | | | 5,053 | |
Interest expense and bank fees | | | 54,193 | | | | 45,724 | | | | 9,709 | | | 751 | | | | 4,444 | |
Depreciation | | | 13,843 | | | | 11,737 | | | | 11,676 | | | | 9,201 | | | | 12,042 | |
Amortization of intangible assets | | | 52,302 | | | | 51,369 | | | | 17,441 | | | | 12,388 | | | | 17,960 | |
Secondary offering costs | | | 945 | | | | — | | | | — | | | | — | | | | — | |
Adjusted EBITDA | | $ | 165,319 | | | $ | 136,027 | | | $ | 95,362 | | | $ | 47,348 | | | $ | 29,797 | |
|
| | | | | | | | | | | | | | | | | | | |
| | 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
(loss) to Adjusted Net Income:
| | Year Ended December 31, | |
| | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
| | (in thousands) | |
Net income (loss) | | $ | 15,497 | | | $ | 13,147 | | | $ | 31,832 | | | $ | 14,762 | | | $ | (8,827 | ) |
Effective income tax rate adjustment | | | 4,514 | | | — | | | — | | | — | | | — | |
Stock-based compensation | | | 10,960 | | | | 6,113 | | | | 4,360 | | | | 4,825 | | | | 5,053 | |
Amortization of intangible assets | | | 52,302 | | | | 51,369 | | | | 17,441 | | | | 12,388 | | | | 17,960 | |
Non-cash interest expense | | | 21,880 | | | | 13,577 | | | | 3,768 | | | 375 | | | | 1,855 | |
Debt prepayment premium | | | 3,800 | | | — | | | — | | | — | | | — | |
Secondary offering costs | | 945 | | | | | | | | | | | | | | | | | |
Income tax impact of pre-tax adjustments at effective tax rate | | | (35,506 | ) | | | (26,750 | ) | | | (9,970 | ) | | | (4,724 | ) | | | (2,243 | ) |
Adjusted Net Income | | $ | 74,392 | | | $ | 57,456 | | | $ | 47,431 | | | $ | 27,626 | | | $ | 13,798 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| | (in thousands) |
| Net income | $ | 31,695 |
| | $ | 15,497 |
| | $ | 13,147 |
| | $ | 31,832 |
| | $ | 14,762 |
|
| Effective income tax rate adjustment | 3,411 |
| | 4,514 |
| | — |
| | — |
| | — |
|
| Stock-based compensation | 17,923 |
| | 10,960 |
| | 6,113 |
| | 4,360 |
| | 4,825 |
|
| Amortization of intangible assets | 39,346 |
| | 52,302 |
| | 51,369 |
| | 17,441 |
| | 12,388 |
|
| Non-cash interest expense | 3,610 |
| | 21,880 |
| | 13,577 |
| | 3,768 |
| | 375 |
|
| 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 | ) |
| Adjusted Net Income | $ | 70,720 |
| | $ | 74,392 |
| | $ | 57,456 |
| | $ | 47,431 |
| | $ | 27,626 |
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with 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 characterize our business. In particular, we encourage you 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 materially from those projected in forward-looking statements contained in this report or implied by past results
andor trends.
TriNet is a leading provider of
a comprehensive
human resources solutionHR solutions for small to
medium-sizedmidsize businesses
or SMBs. We enhance business productivity by enablingunder 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,
to outsource their HR function to one strategic partner and allowing them to focus on operating and growing their core businesses. Our
bundled HR
solution includes services such assolutions include 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, expense and time management, and other human capital consulting
employment law compliance and employee benefits, including health insurance, retirement plans and workers compensation insurance.services. Our
services are delivered by our expert team of HR professionals and enabled by our proprietary, cloud-based
technology platform, which allowsHR software systems are used by our clients and their
employeesWSEs to efficiently
store and manage their core HR-related information and conduct
their HRa variety of HR-related transactions anytime and anywhere.
We believe we are a leader in the industry dueIn addition, our expert teams of in-house HR professionals also provide additional services upon request to
our size, our presence in the United States and Canada and the number of clients and employees that we serve.We utilize a co-employment model pursuant to which both we and our clients become employerssupport various stages of our clients’ employees, which we refer to as worksite employees,growth, including talent management, recruiting and training, performance management consulting or WSEs. This model affords us a close and embedded relationship with our clients and their employees. Under the co-employment model, employment-related liabilities are contractually allocated between us and our clients. We assume responsibilityother consulting services (with an incremental charge for and manage the risks associated with, each clients’ employee payroll obligations, including the liability for payment of salaries and wages to each client employee, the payment of payroll taxes and, at the client’s option, responsibility for providing group health, welfare, workers compensation and retirement benefits to such individuals. Unlike a payroll service provider, we issue each WSE a payroll check drawn on our bank accounts and contract with insurance carriers to provide health and workers compensation insurance to WSEs under TriNet’s name.
We serve thousands of clients in specific industry vertical markets, including technology, life sciences, property management, professional services, banking and financial services, retail, manufacturing and hospitality services, as well as non-profit entities. services).
As of December 31,
2014,2015, we served over
10,00012,700 clients in all 50 states, the District of Columbia and Canada,
co-employed more than 324,000 WSEs, and
co-employed approximately 288,000 WSEs. In 2014, wehad processed over
$25$31 billion in payroll and payroll tax payments for our
clients.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, 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, 2014 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
2013, 16%
and 17% of our total revenues, respectively, consisted of professional service revenues, and
84%85% and
83%84% of our total revenues, respectively, consisted of insurance service revenues. We
earnrecognize as professional service
revenues by processing HR transactions, such as payroll and employment tax withholding, and providing labor and benefit law compliance services, on behalf of our clients. We earn insurance service revenues by providing risk-based, third-party plans to our clients, primarily employee health benefit plans and workers compensation insurance.For professional service revenues, we recognize as revenues the fees we earn for processingproviding our clients with a comprehensive suite of HR transactions, which feesprofessional services, but do not include the payroll that isamounts paid to us by the client andclients 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 for risk-based insurance plans provided through third-party insurance carriers, primarily employee health insurance and workers compensation insurance.WSEs. We in turn pay premiums to third-party insurance carriers for theseclient and WSE insurance benefits as well asand reimburse themthe insurance carriers and third-party administrators for claimclaims payments made on our behalf within our insurance deductible layer.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 2014 and 2013, 67% and 65% of our Net Service Revenues, respectively, consisted of professional service revenues and 33% and 35% of our Net Service Revenues, respectively, consisted of Net Insurance Service Revenues.
34
We sell our services primarily through our direct sales
force,organization, which consists of sales representatives who focus on serving clients in specific industry vertical markets. For
2015, 2014
2013 and
2012,2013, our sales and marketing expenses were
$166.8 million, $140.0 million
$109.2 million and
$59.9$109.2 million, respectively, or 6%,
7%6% and
6%7% of our total revenues and
28%30%,
26%28% and
22%26% of our Net Service Revenues, respectively.
We have made significant investments in our proprietary, cloud-based
technology platform,HR systems, including implementing client information and management software to provide our clients with enhanced features and
functionality with which to conduct their HR transactions, manage their employeesfunctionality. For 2015, 2014 and
analyze employee benefits data. For 2014, 2013,
and 2012, our systems development and programming costs were
$27.6 million, $26.1 million
$19.9 million and
$16.7$19.9 million, or 1%, 1% and
2%1% of our total revenues and 5%, 5% and
6%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
We operate in a highly fragmented industry and
Historically, we have
completed numerouspursued strategic acquisitions
over the course of the past decade.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
employees toWSEs, expand our
existing businesspresence in certain geographies or industry verticals and offer our clients and
their employeesWSEs more comprehensive and attractive
products and services.
Our recent acquisitions are listed below:·
| In July 2013, we acquired Ambrose Employer Group, LLC, which we refer to as Ambrose, a New York-based company that provides premium HR services primarily to WSEs in the financial services industry in the New York area. Through our acquisition of Ambrose, we acquired approximately 13,000 WSEs, approximately 1,000 clients and 12 sales representatives.
|
·
| In October 2012, we acquired South Carolina-based SOI Holdings, Inc., which we refer to as SOI, which expanded our presence in the property managementKey Financial and food services industry vertical markets. Through our acquisition of SOI, we acquired approximately 66,000 WSEs, approximately 1,500 clients and 92 sales representatives.
|
·
| In May 2012, we acquired Los Angeles-based technology company App7, Inc., which does business under the name of, and which we refer to as, ExpenseCloud, which enabled us to enhance our technology platform with additional expense management capabilities.
|
·
| In April 2012, we acquired Oklahoma-based 210 Park Avenue Holding, Inc., which does business under the name of, and which we refer to as, Accord, through which we expanded our presence in the hospitality and manufacturing industry vertical markets. Through our acquisition of Accord, we acquired approximately 14,000 WSEs, approximately 500 clients and 8 sales representatives.
|
·
| In June 2009, we acquired Florida-based Gevity HR Inc., which we refer to as Gevity, which has provided us with insurance and risk-management expertise and a national presence through its East Coast processing facility. Through our acquisition of Gevity, we acquired approximately 92,000 WSEs and approximately 6,000 clients. Following our acquisition of Gevity, we elected to change the pricing terms with certain of Gevity’s clients, terminate Gevity’s relationships with certain of its clients, significantly restructure Gevity’s and our combined sales forces and migrate all of Gevity’s WSEs to our technology platform. As a result of these actions, our revenues fell short of our expectations in 2010 and declined in 2011, and we incurred restructuring charges of $2.4 million, $5.9 million and $6.2 million in the years ended December 31, 2011, 2010 and 2009, respectively.
|
Our operations could be adversely impacted if our strategic acquisitions are not integrated effectively. Because many of the companies we have acquired were focused on specific industries, our acquisitions have allowed us to expand our vertical service offerings into areas such as financial services, property management and food services, hospitality and manufacturing in which we did not previously have a significant presence. In addition, we have acquired sales representatives with experience in these vertical markets. Our acquisitions have provided us with additional clients and WSEs to allow us to continue to leverage our operations over a larger client base. These acquisitions have resulted in increased revenues and costs, as described below in our results of operations. We expect to continue to pursue strategic acquisitions.
35
Key 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
2013 and
2012,2013, were as follows:
| | Year Ended | |
| | December 31, | |
| | 2014 | | | 2013 | | | 2012 | |
Key Operating Metrics: | | | | | | | | | | | | |
Net Insurance Service Revenues (in thousands) | | $ | 165,142 | | | $ | 145,318 | | | $ | 120,803 | |
Net Service Revenues (in thousands) | | $ | 507,216 | | | $ | 417,690 | | | $ | 269,036 | |
Total WSEs | | | 288,312 | | | | 231,203 | | | | 174,311 | |
Total Sales Representatives | | | 385 | | | | 300 | | | | 224 | |
Total WSEs
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. We believe that comparing our Total WSEs at the end of a fiscal period to that of prior periods is an indicator of our success in growing our business, both organically and through the integration of acquired businesses, and retaining clients, and that our Total WSEs paid in the last calendar month of the fiscal period is a leading indicator of our anticipated revenues for future fiscal periods.
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. We believe that 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 is an indicator of our success in growing our business, and that our Total Sales Representatives at the end of recent fiscal periods is a key indicator of our ability to increase our revenues in the following fiscal periods.
|
| | | | | | | | | | | |
| | 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 revenues 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. Our insurance costs include the premiums we pay to
third-party 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
claimclaims payments
made on our behalf within our insurance deductible
layer.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
ishas served as the primary indicator of our ability to source, add value and offer benefit services to
our clients and WSEs through third-party insurance carriers, and
ishas been considered by management to be a key performance measure.
We believe thatHistorically, Net Service Revenues
ishas also
served as a key performance measure as it provides a useful measure of total revenues for the two main components of our revenues calculated on a consistent basis. In addition, management believes measuring operating costs as a function of Net Service Revenues
provideshas historically provided a useful metric, as we believe it
enables betterhas enabled evaluation of the performance of our business.
Total WSEs
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.
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.
Impact of Health Care Reform
The
Patient Protection and Affordable Care Act,
and the Heath Care and Education Reconciliation Act of 2010, which we refer to collectively asor the Act,
entailentails sweeping health care reforms with staggered effective dates from 2010 through
2018,2020, 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
U.S.the states. A number of key provisions of the Act have begun to take effect over the
last year,past three years, including the establishment of state and
federallyfederal insurance exchanges, insurance market reforms,
“pay“play or
play”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 impactsfull 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.
36
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.
In addition, weWe also experience higher levels of client attrition in connection with renewals of the health insurance we
providesponsor for our WSEs, in the event that such renewals result in
increased premiums that we pass onhigher 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
levelamount of our
health and workers compensation insurance costs due to the number and severity of insurance claims
based on the unpredictable nature of large claims.being unpredictable. These historical trends may change, and other seasonal trends and variability may develop,
thatwhich would make it more difficult for us to manage our business.
Basis of Presentation and Key Components of Our Results of Operations
Our total revenues consist of professional service revenues and insurance service revenues.
We earn 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
processing HR transactions, suchclients as payroll
and employment tax withholding, paymentthat are paid out to WSEs
or amounts withheld and
labor and benefit law compliance, on behalf of our clients.remitted to authorities as taxes. Our clients
generally pay us these fees based on either a fixed fee per WSE per month or per transaction, or a percentage of the WSE’s payroll cost, pursuant to written
professional services agreements that are generally cancelable by us or our clients upon 30 days’ prior written notice.
We also earn professional service revenues by providing strategic HR services to our clients, such as talent acquisition, performance management and time and expense reporting services. Our clients pay us professional service fees for these services based on separate written agreements.We earn insurance service revenues by providing risk-based, third-party plans to our clients, primarily employee health benefit plans and workers compensation insurance. Insurance service revenues consist of insurance-related billings and administrative fees.
We recognize as insurance service revenues
all insurance-related billings and administrative fees collected from clients and withheld from
WSEs for risk-based insurance plans provided through third-party insurance carriers, primarily employee health insurance and workers compensation insurance.WSEs. We
in turn pay premiums to third-party insurance carriers for
theseclient and WSE insurance benefits
as well asand reimburse
themthe insurance carriers and third-party administrators for
claimclaims payments
made on our behalf within our insurance deductible
layer.layer, where applicable, as further described below in “Insurance Costs”. These premiums and reimbursements are classified as insurance costs on our statements of operations.
Our clients pay us administrative fees, typically based on a percentage of insurance-related amounts, collected from clients and withheld from WSEs, primarily in exchange for our administration of employee health benefit plans.
Insurance costs include the premiums we pay to
thethird-party insurance carriers for
the health and workers compensation insurance coverage provided to
the clients and WSEs and the reimbursements we pay to the insurance carriers
and third-party administrators for
claimclaims payments made
foron our
WSEsbehalf within the insurance deductible
layer.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-party insurance carriers that provide fully-insured coverageTriNet-sponsored insurance plans for our clients and WSEs. Approximately 41%38% of our 2014 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.deductible, which are referred to as ‘guaranteed cost’ policies. Our future premiums under these
or ensuing,guaranteed cost policies will be influenced by the WSE claims activity in prior
periods.periods and rate increases by our insurance carriers. The
remainderremaining 62% of
theour 2015 group health insurance
policiespremiums, and all of
theour workers compensation insurance
policies that we provide to our clients arepremiums, were for fully-insured policies with respect to which we agree to reimburse our carriers for any claims
that they paypaid 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
and third-party administrators then seek reimbursement from us
for payments of claims made on 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
cap for health insurance claimsgiven policy year in accordance with the terms of the underlying health insurance policies. In no event are we liable to pay
the claims directly to WSEs. As we evaluate the claims experience for each fiscal period, we adjust, as we deem necessary, our workers compensation and health benefits reserves, and this in turn has a corresponding impact on our insurance costs. As a result, our insurance costs fluctuate
significantly at times, from period to period depending on the number and severity of the claims incurred by our
WSEs. WSEs in that period and prior periods. We expectour insurance coststo continueto increase in absolutedollars on an annual basis fortheforeseeablefuturedue to expected growth in WSEs.37
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
customerclient support, such as payroll and benefits processing, professional HR consultants, employee liability insurance and costs associated with
defendingassisting 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,
partially offset by improvedalthough as we improve our systems and processes, we expect to gain efficiencies
although these expensesand 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
thesethose 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
continue to increase
both in absolute dollars
and asat a
percentage of our total revenues on an annual basis, forslower rate than in the
foreseeable futurepast three years as we
expandreduce our rate of growth in our direct sales force offset by increased investments to improve our sales
force andproductivity. In addition, our
other sales and marketing
efforts to build our brand, although these expenses may fluctuate as a percentage of our total revenues from period to period depending on the timing of those expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of compensation-related expenses, legal,
accounting and other professional services fees and other general corporate expenses. We expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future due to increases in our legal and financial compliance costs in connection with being a newly public
company, althoughcompany. As we improve our systems, processes and internal controls we expect to gain efficiencies and expect our general and administrative costs as a percentage of total revenues to decline. In addition, these expenses may fluctuate as a percentage of our total revenues from period to period depending on the timing 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
modestly in absolute dollars for the foreseeable future as we continue to invest in and improve our technology platform.
However, overOver time, we expect our systems development and programming costs to remain relatively consistent as a percentage of our total revenues on an annual
basis, although thesebasis. 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 Assets
Amortization of intangible assets represents costs associated with an acquired company’s developed technologies, client lists, trade names and contractual agreements. We amortize these intangibles over their respective estimated useful lives using either the straight-line method or the accelerated method.
Depreciation consists primarily of amortization of the cost of software and furniture, fixtures and equipment.
Other income (expense) consists primarily of interest expense under our credit facility and capital leases, debt issuance cost amortization, and a prepayment premium.
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.
However, weWe 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
20142015 and
2013.2014. Our effective tax rate differs from the statutory rate primarily due to state taxes, tax credits, non-deductible charges,
and changes in uncertain tax
positions.positions, 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.
38
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.
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, | |
| | 2014 | | | 2013 | | | 2012 | |
| (in thousands) | |
Consolidated Statement of Operations: | | | | | | | | | | | | |
Professional service revenues | | $ | 342,074 | | | $ | 272,372 | | | $ | 148,233 | |
Insurance service revenues | | | 1,851,457 | | | | 1,371,903 | | | | 870,828 | |
Total revenues | | | 2,193,531 | | | | 1,644,275 | | | | 1,019,061 | |
Costs and operating expenses: | | | | | | | | | | | | |
Insurance costs | | | 1,686,315 | | | | 1,226,585 | | | | 750,025 | |
Cost of providing services (exclusive of depreciation and amortization of intangible assets) (1) | | | 134,256 | | | | 106,661 | | | | 63,563 | |
Sales and marketing (1) | | | 139,997 | | | | 109,183 | | | | 59,931 | |
General and administrative (1) | | | 53,926 | | | | 52,455 | | | | 37,879 | |
Systems development and programming costs (1) | | | 26,101 | | | | 19,948 | | | | 16,718 | |
Amortization of intangible assets | | | 52,302 | | | | 51,369 | | | | 17,441 | |
Depreciation | | | 13,843 | | | | 11,737 | | | | 11,676 | |
Total costs and operating expenses | | | 2,106,740 | | | | 1,577,938 | | | | 957,233 | |
Operating income | | | 86,791 | | | | 66,337 | | | | 61,828 | |
Other income (expense): | | | | | | | | | | | | |
Interest expense and bank fees | | | (54,193 | ) | | | (45,724 | ) | | | (9,709 | ) |
Other, net | | | 478 | | | | 471 | | | | 57 | |
Income before provision for income taxes | | | 33,076 | | | | 21,084 | | | | 52,176 | |
Provision for income taxes | | | 17,579 | | | | 7,937 | | | | 20,344 | |
Net income | | $ | 15,497 | | | $ | 13,147 | | | $ | 31,832 | |
|
| | | | | | | | | | | |
| | 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)
| |
| (1) | Includes stock-based compensation expense as follows: |
| | Year Ended December 31, | |
| | 2014 | | | 2013 | | | 2012 | |
| (in thousands) | |
Cost of providing services | | $ | 2,658 | | | $ | 1,193 | | | $ | 516 | |
Sales and marketing | | | 2,755 | | | | 1,284 | | | | 500 | |
General and administrative | | | 4,517 | | | | 3,220 | | | | 3,144 | |
Systems development and programming costs | | | 1,030 | | | | 416 | | | | 200 | |
Total stock-based compensation expense | | $ | 10,960 | | | $ | 6,113 | | | $ | 4,360 | |
|
| | | | | | | | | | | |
| | 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, | |
| | 2014 | | | 2013 | | | 2012 | |
Percentage of total revenues: | | | | | | | |
Professional service revenues | | | 16 | % | | | 17 | % | | | 15 | % |
Insurance service revenues | | | 84 | % | | | 83 | % | | | 85 | % |
Total revenues | | | 100 | % | | | 100 | % | | | 100 | % |
Costs and operating expenses: | | | | | | | | | | | | |
Insurance costs | | | 77 | % | | | 75 | % | | | 74 | % |
Cost of providing services (exclusive of depreciation and amortization of intangible assets) | | | 6 | % | | | 6 | % | | | 6 | % |
Sales and marketing | | | 6 | % | | | 7 | % | | | 6 | % |
General and administrative | | | 2 | % | | | 3 | % | | | 4 | % |
Systems development and programming costs | | | 1 | % | | | 1 | % | | | 2 | % |
Amortization of intangible assets | | | 2 | % | | | 3 | % | | | 2 | % |
Depreciation | | | 1 | % | | | 1 | % | | | 1 | % |
Total costs and operating expenses | | | 96 | % | | | 96 | % | | | 94 | % |
Operating income | | | 4 | % | | | 4 | % | | | 6 | % |
Other income (expense): | | | | | | | | | | | | |
Interest expense and bank fees | | | (2 | %) | | | (3 | %) | | | (1 | %) |
Other, net | | | 0 | % | | | 0 | % | | | 0 | % |
Income before provision for income taxes | | | 2 | % | | | 1 | % | | | 5 | % |
Provision for income taxes | | | 1 | % | | | 0 | % | | | 2 | % |
Net income | | | 1 | % | | | 1 | % | | | 3 | % |
| | Year Ended December 31, | |
| | 2014 | | | 2013 | | | 2012 | |
Percentage of Net Service Revenues: | | | | | | | | | | | | |
Professional service revenues | | | 67 | % | | | 65 | % | | | 55 | % |
Net Insurance Service Revenues | | | 33 | % | | | 35 | % | | | 45 | % |
Net Service Revenues | | | 100 | % | | | 100 | % | | | 100 | % |
Other operating expenses: | | | | | | | | | | | | |
Cost of providing services (exclusive of depreciation and amortization of intangible assets) | | | 26 | % | | | 26 | % | | | 24 | % |
Sales and marketing | | | 28 | % | | | 26 | % | | | 22 | % |
General and administrative | | | 11 | % | | | 13 | % | | | 14 | % |
Systems development and programming costs | | | 5 | % | | | 5 | % | | | 6 | % |
Amortization of intangible assets | | | 10 | % | | | 12 | % | | | 6 | % |
Depreciation | | | 3 | % | | | 3 | % | | | 4 | % |
Total other operating expenses | | | 83 | % | | | 84 | % | | | 77 | % |
Operating income | | | 17 | % | | | 16 | % | | | 23 | % |
Other income (expense): | | | | | | | | | | | | |
Interest expense and bank fees | | | (11 | %) | | | (11 | %) | | | (4 | %) |
Other, net | | | 0 | % | | | 0 | % | | | 0 | % |
Income before provision for income taxes | | | 7 | % | | | 5 | % | | | 19 | % |
Provision for income taxes | | | 3 | % | | | 2 | % | | | 8 | % |
Net income | | | 3 | % | | | 3 | % | | | 12 | % |
|
| | | | | | | | |
| | 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 2013 and 20122013
Total Revenues and Key Operating Metrics
| | Year Ended | | | Change | | | Change | |
| | December 31, | | | 2014 vs. 2013 | | | 2013 vs. 2012 | |
| | 2014 | | | 2013 | | | 2012 | | | $ | | | % | | | $ | | | % | |
| | (in thousands, except percentages) | |
Professional service revenues | | $ | 342,074 | | | $ | 272,372 | | | $ | 148,233 | | | $ | 69,702 | | | | 26% | | | $ | 124,139 | | | | 84% | |
Insurance service revenues | | | 1,851,457 | | | | 1,371,903 | | | | 870,828 | | | | 479,554 | | | | 35% | | | | 501,075 | | | | 58% | |
Total revenues | | $ | 2,193,531 | | | $ | 1,644,275 | | | $ | 1,019,061 | | | $ | 549,256 | | | | 33% | | | $ | 625,214 | | | | 61% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | | Change | | | Change | |
| | December 31, | | | 2014 vs. 2013 | | | 2013 vs. 2012 | |
| | 2014 | | | 2013 | | | 2012 | | | $ | | | % | | | $ | | | % | |
| | (in thousands, except percentages) | |
Key operating metrics: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total WSEs | | | 288,312 | | | | 231,203 | | | | 174,311 | | | | 57,109 | | | | 25% | | | | 56,892 | | | | 33% | |
Total Sales Representatives | | | 385 | | | | 300 | | | | 224 | | | | 85 | | | | 28% | | | | 76 | | | | 34% | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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.
Our insurance
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.
Total revenues
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
20132015 increased
by $625.2$426.1 million, or
61%25%, compared to
2012. Professional service revenues for 2013 increased by $124.1 million, or 84%, compared to 2012. Of this amount, $88.1 million was attributable to our acquisitions of SOI, Ambrose and Accord.2014. The
remaining growth was primarily due to a 22% increase
in Total WSEs (excluding WSEs added as a result of our acquisitions of Accord, SOI and Ambrose) and a 7% increase in average professional service revenues per WSE other than those acquiredresulted from
Accord, SOI and Ambrose.Insurance service revenues for 2013 increased by $501.1 million, or 58%, compared to 2012 primarily due to $316.5 million from our acquisitions of SOI, Ambrose and Accord, an increase in Total WSEs, otherthe volume and severity of medical claims being unexpectedly higher than those acquired from Accord, SOIour WSE growth, experience and Ambrose,available information would have suggested and, to a 2% increase in average insurance service revenueslesser extent, increased workers compensation costs per WSE other than those acquired from Accord, SOI and Ambrose.
Total WSEs at December, 2013 increased by approximately 57,000, or 33%, compared to Total WSEs at December 31, 2012, with approximately 13,000 of such increase due to the Ambrose acquisition. The remaining growth in Total WSEs was primarily driven by a net increase in total clients other than those acquired from Ambrose. Our Total Sales Representatives increased from 224 at December 31, 2012 to 300 at December, 2013, 12 of which we acquired from Ambrose.
Insurance Costs
WSE. | | Year Ended | | | Change | | | Change | |
| | December 31, | | | 2014 vs. 2013 | | | 2013 vs. 2012 | |
| | 2014 | | | 2013 | | | 2012 | | | $ | | | % | | | $ | | | % | |
| | (in thousands, except percentages) | |
Insurance costs | | $ | 1,686,315 | | | $ | 1,226,585 | | | $ | 750,025 | | | $ | 459,730 | | | | 37% | | | $ | 476,560 | | | | 64% | |
41
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.
Insurance costs for 2013 increased $476.6 million, or 64%, compared to 2012, primarily due to $311.0 million from our acquisitions of Accord, SOI and Ambrose. The remaining increase resulted from an increase in Total WSEs other than those acquired from Ambrose and a 2% increase in average insurance costs per WSE other than those acquired from Ambrose.
Net Insurance Service Revenues and Net Service Revenues
| | Year Ended | | | Change | | | Change | |
| | December 31, | | | 2014 vs. 2013 | | | 2013 vs. 2012 | |
| | 2014 | | | 2013 | | | 2012 | | | $ | | | % | | | $ | | | % | |
| | (in thousands, except percentages) | |
Insurance service revenues | | $ | 1,851,457 | | | $ | 1,371,903 | | | $ | 870,828 | | | $ | 479,554 | | | | 35% | | | $ | 501,075 | | | | 58% | |
Less: Insurance costs | | | 1,686,315 | | | | 1,226,585 | | | | 750,025 | | | | 459,730 | | | | 37% | | | | 476,560 | | | | 64% | |
Net Insurance Service Revenues | | $ | 165,142 | | | $ | 145,318 | | | $ | 120,803 | | | $ | 19,824 | | | | 14% | | | $ | 24,515 | | | | 20% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | | Change | | | Change | |
| | December 31, | | | 2014 vs. 2013 | | | 2013 vs. 2012 | |
| | 2014 | | | 2013 | | | 2012 | | | $ | | | % | | | $ | | | % | |
| | (in thousands, except percentages) | |
Total revenues | | $ | 2,193,531 | | | $ | 1,644,275 | | | $ | 1,019,061 | | | $ | 549,256 | | | | 33% | | | $ | 625,214 | | | | 61% | |
Less: insurance costs | | | 1,686,315 | | | | 1,226,585 | | | | 750,025 | | | | 459,730 | | | | 37% | | | | 476,560 | | | | 64% | |
Net Service Revenues | | $ | 507,216 | | | $ | 417,690 | | | $ | 269,036 | | | $ | 89,526 | | | | 21% | | | $ | 148,654 | | | | 55% | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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.
Also
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
the reasons set forth above with respect2015 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
our Net Insurance Service Revenues for 2013in each of the years ended December 31, 2015 and 2014. Cost of providing services increased
by $24.5 million, or 20%, as compared to
2012, and our28% of Net Service Revenues
for 2013 increased by $148.7 million, or 55%, as compared to 2012.Other Operating Expenses
in 2015 from 26% in 2014. | | Year Ended | | | Change | | | Change | |
| | December 31, | | | 2014 vs. 2013 | | | 2013 vs. 2012 | |
| | 2014 | | | 2013 | | | 2012 | | | $ | | | % | | | $ | | | % | |
| | (in thousands, except percentages) | |
Cost of providing services | | $ | 134,256 | | | $ | 106,661 | | | $ | 63,563 | | | $ | 27,595 | | | | 26% | | | $ | 43,098 | | | | 68% | |
Sales and marketing | | | 139,997 | | | | 109,183 | | | | 59,931 | | | | 30,814 | | | | 28% | | | | 49,252 | | | | 82% | |
General and administrative | | | 53,926 | | | | 52,455 | | | | 37,879 | | | | 1,471 | | | | 3% | | | | 14,576 | | | | 38% | |
System development and programming costs | | | 26,101 | | | | 19,948 | | | | 16,718 | | | | 6,153 | | | | 31% | | | | 3,230 | | | | 19% | |
Amortization of intangible assets | | | 52,302 | | | | 51,369 | | | | 17,441 | | | | 933 | | | | 2% | | | | 33,928 | | | | 195% | |
Depreciation | | | 13,843 | | | | 11,737 | | | | 11,676 | | | | 2,106 | | | | 18% | | | | 61 | | | | 1% | |
Total other operating expenses | | $ | 420,425 | | | $ | 351,353 | | | $ | 207,208 | | | $ | 69,072 | | | | 20% | | | $ | 144,145 | | | | 70% | |
42
Cost of Providing Services
| | Year Ended | | | Change | | | Change | |
| | December 31, | | | 2014 vs. 2013 | | | 2013 vs. 2012 | |
| | 2014 | | | 2013 | | | 2012 | | | $ | | | % | | | $ | | | % | |
| | (in thousands, except percentages) | |
Compensation-related costs | | $ | 97,423 | | | $ | 75,941 | | | $ | 44,629 | | | $ | 21,482 | | | | 28% | | | $ | 31,312 | | | | 70% | |
Facilities | | | 7,149 | | | | 5,615 | | | | 3,941 | | | | 1,534 | | | | 27% | | | | 1,674 | | | | 42% | |
Information technology and communication | | | 8,948 | | | | 8,482 | | | | 4,720 | | | | 466 | | | | 5% | | | | 3,762 | | | | 80% | |
Other expenses | | | 20,736 | | | | 16,623 | | | | 10,273 | | | | 4,113 | | | | 25% | | | | 6,350 | | | | 62% | |
Total cost of providing services | | $ | 134,256 | | | $ | 106,661 | | | $ | 63,563 | | | $ | 27,595 | | | | 26% | | | $ | 43,098 | | | | 68% | |
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 Revenues for the years ended December 31, 2014 and 2013.
Cost of providing services
Sales and Marketing
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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
20132015 increased by
$43.1$26.8 million, or
68%19%, compared to
2012, primarily due to our acquisitions of SOI and Ambrose. Compensation-related costs increased by $31.32014. Of this increase, $16.8 million
due to increased headcount, including $21.1 million from our acquisitions of SOI and Ambrose. Facilities-related costs increased by $1.7 million due to our acquisitions of SOI and Ambrose, partly offset by a reduction in expense associated with a renegotiation of certain lease terms. The remainder of the increase was due to
ancompensation-related costs from our growth in direct sales channels, primarily the addition of new sales representatives, which includes a $1.7 million increase in
WSEsstock-based compensation expense. Marketing and advertising expenses increased $2.4 million, or 12%, primarily as a result of our effort to focus on market verticals and penetration. In order to support the growth in sales force, other
than those that we acquired from SOIexpenses including travel expenses, meetings, recruiting, training and
Ambrose.consulting increased $6.8 million for 2015, or 35% compared to 2014. Sales and Marketing
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 to 30% in 2015 from 28% in 2014 as a result of lower Net Service Revenues. | | Year Ended | | | Change | | | Change | |
| | December 31, | | | 2014 vs. 2013 | | | 2013 vs. 2012 | |
| | 2014 | | | 2013 | | | 2012 | | | $ | | | % | | | $ | | | % | |
| | (in thousands, except percentages) | |
Compensation-related costs | | $ | 96,903 | | | $ | 73,901 | | | $ | 39,740 | | | $ | 23,002 | | | | 31% | | | $ | 34,161 | | | | 86% | |
Marketing and advertising | | | 19,667 | | | | 15,863 | | | | 8,894 | | | | 3,804 | | | | 24% | | | | 6,969 | | | | 78% | |
Facilities | | | 3,832 | | | | 3,155 | | | | 2,066 | | | | 677 | | | | 21% | | | | 1,089 | | | | 53% | |
Other expenses | | | 19,595 | | | | 16,264 | | | | 9,231 | | | | 3,331 | | | | 20% | | | | 7,033 | | | | 76% | |
Total sales and marketing | | $ | 139,997 | | | $ | 109,183 | | | $ | 59,931 | | | $ | 30,814 | | | | 28% | | | $ | 49,252 | | | | 82% | |
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.
Sales
General and marketingAdministrative
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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
20132015 increased by
$49.3$15.7 million, or
82%29%, compared to
2012. Of this increase, $34.22014. Compensation-related costs increased $4.0 million
was attributablecompared to
compensation-related costs, $19.1 million of which was attributable to increased headcount mainly from our acquisitions of SOI and Ambrose, and $15.0 million of which was attributable to growth in our direct sales channel, primarily the addition of new sales representatives. The remaining increase in sales and marketing expenses was partially attributable to marketing and advertising expenses, which increased by $7.0 million, or 78%, largely due to our acquisitions of SOI and Ambrose. In addition, facilities-related expenses increased by $1.1 million, or 53%,2014 primarily due to
our acquisitions of SOIa $3.0 million increase in stock-based compensation expenses. Legal, accounting and
Ambrose, and partly offset by reduction in expense associated with a renegotiation of certain lease terms. Other expensesother professional fees increased
by $7.0$9.8 million
or 76%, primarily due to
increased sales travel, meeting and conference activities, as well as increased expensescosts associated with
recruiting efforts and information technology spendingthe implementation of Section 404 of the Sarbanes-Oxley Act, which amounted to
support the growth of our sales organization.43
$5.7 million for 2015. General and Administrative
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. | | Year Ended | | | Change | | | Change | |
| | December 31, | | | 2014 vs. 2013 | | | 2013 vs. 2012 | |
| | 2014 | | | 2013 | | | 2012 | | | $ | | | % | | | $ | | | % | |
| | (in thousands, except percentages) | |
Compensation-related costs | | $ | 32,697 | | | $ | 31,934 | | | $ | 23,384 | | | $ | 763 | | | | 2% | | | $ | 8,550 | | | | 37% | |
Legal and professional fees | | | 6,969 | | | | 6,910 | | | | 4,904 | | | | 59 | | | | 1% | | | | 2,006 | | | | 41% | |
Other expenses | | | 14,260 | | | | 13,611 | | | | 9,591 | | | | 649 | | | | 5% | | | | 4,020 | | | | 42% | |
Total general and administrative | | $ | 53,926 | | | $ | 52,455 | | | $ | 37,879 | | | $ | 1,471 | | | | 3% | | | $ | 14,576 | | | | 38% | |
44
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.
General and administrative expenses for 2013 increased by $14.6 million, or 38%, compared to 2012, primarily due to increased headcount resulting from our acquisitions of SOI and Ambrose and increased legal, professional services and other corporate expenses resulting from these acquisitions and related integration efforts.
Systems Development and Programming
| | Year Ended | | | Change | | | Change | |
| | December 31, | | | 2014 vs. 2013 | | | 2013 vs. 2012 | |
| | 2014 | | | 2013 | | | 2012 | | | $ | | | % | | | $ | | | % | |
| | (in thousands, except percentages) | |
Compensation-related costs | | $ | 20,766 | | | $ | 15,493 | | | $ | 12,427 | | | $ | 5,273 | | | | 34% | | | $ | 3,066 | | | | 25% | |
Other expenses | | | 5,335 | | | | 4,455 | | | | 4,291 | | | | 880 | | | | 20% | | | | 164 | | | | 4% | |
Total systems development and programming costs | | $ | 26,101 | | | $ | 19,948 | | | $ | 16,718 | | | $ | 6,153 | | | | 31% | | | $ | 3,230 | | | | 19% | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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.
Systems development and programming costs for 2013 increased by $3.2 million, or 19%, compared to 2012. Of this increase, $1.5 million was attributable to increased headcount from our acquisitions of SOI and Ambrose. The remaining increase was due to a $1.6 million increase in compensation-related costs resulting from the increase in headcount other than those we acquired from SOI and Ambrose to support and enhance our technology product delivery.
Amortization of Intangible Assets and Depreciation
| | Year Ended | | | Change | | | Change | |
| | December 31, | | | 2014 vs. 2013 | | | 2013 vs. 2012 | |
| | 2014 | | | 2013 | | | 2012 | | | $ | | | % | | | $ | | | % | |
| | (in thousands, except percentages) | |
Amortization of intangible assets | | $ | 52,302 | | | $ | 51,369 | | | $ | 17,441 | | | $ | 933 | | | | 2% | | | $ | 33,928 | | | | 195% | |
Depreciation | | $ | 13,843 | | | $ | 11,737 | | | $ | 11,676 | | | $ | 2,106 | | | | 18% | | | $ | 61 | | | | 1% | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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
customerclient 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.
Amortization of intangible assets for 2013 increased by $33.9 million, or 195%, compared to 2012. Such increase was primarily attributable to our acquisitions of SOI and Ambrose. Depreciation expense for 2013 increased by $0.1 million, or 1%, compared to 2012, primarily attributable to depreciation from our acquisitions of SOI and Ambrose, partially offset by accelerated depreciation recorded in 2012.
44
We accelerated depreciation expenses of
$0.4 million, $0.9 million,
$0.8 million and
$2.8$0.8 million in the years ended December 31,
2015, 2014,
2013, and
2012,2013, respectively, due to significant changes in the extent and manner in which certain assets were expected to be used.
| | Year Ended | | | Change | | | Change | |
| | December 31, | | | 2014 vs. 2013 | | | 2013 vs. 2012 | |
| | 2014 | | | 2013 | | | 2012 | | | $ | | | % | | | $ | | | % | |
| | (in thousands, except percentages) | |
Interest expense and bank fees | | $ | (54,193 | ) | | $ | (45,724 | ) | | $ | (9,709 | ) | | $ | (8,469 | ) | | | 19% | | | $ | (36,015 | ) | | | 371% | |
Other, net | | $ | 478 | | | $ | 471 | | | $ | 57 | | | $ | 7 | | | | 1% | | | $ | 414 | | | | 726% | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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
October 2012 we amended and restated our secured credit facility to provide for total borrowings of $350.0 million, and in April 2013 we amended our credit facility to provide for total borrowings of $500.0 million. In August 2013, we entered into two new senior secured credit facilities for total borrowings of $820.0 million to pay off our previous credit facility and pay a special dividend. At that time we recorded a charge of $11.4 million with respect to unamortized loan fees from the previous credit facility. Interest expense increased correspondingly with the increased indebtedness. In March 2014, we repaid $216.6 million of these facilities from the proceeds of our initial public offering, or IPO, proceeds. Interestwhich led to lower interest expense
increased forin 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
due to a $5.0included $12.1 million
charge related to the acceleration of loan fee amortization due to our refinancing activities,in deferred issuance cost write-offs and a $3.8 million
debt prepayment
premium related to our partial repayment of the credit facilities during the year.premium.
Provision for Income Taxes
| | Year Ended | | | Change | | | Change | |
| | December 31, | | | 2014 vs. 2013 | | | 2013 vs. 2012 | |
| | 2014 | | | 2013 | | | 2012 | | | $ | | | % | | | $ | | | % | |
| | (in thousands, except percentages) | |
Provision for income taxes | | $ | 17,579 | | | $ | 7,937 | | | $ | 20,344 | | | $ | 9,642 | | | | 121% | | | $ | (12,407 | ) | | | (61% | ) |
Effective tax rates | | | 53.2 | % | | | 37.6 | % | | | 39.0 | % | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 2014 primarily due to the increase in our pre-tax income. Our effective tax rate decreased from 53.2% for 2014 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 due to a state legislative change enacted in the second quarter ended June 30, 2015.
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
tax lawlegislative 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
lawlegislative 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.
Our provision for income taxes for 2013 decreased by $12.4 million compared to 2012 primarily due to the decrease in our pre-tax income. Our effective tax rate decreased from 39.0% for 2012 to 37.6% for 2013, primarily due to a release of uncertain tax positions as a result of statute expirations and a retroactive law change in 2013, allowing for recognition of certain tax credits.
Liquidity and Capital Resources
Our principal source of liquidity for operations is derived from cash provided by operating activities. We rely on cash provided by operating activities to meet our short-term liquidity requirements, which primarily relate to the payment of corporate payroll and other operating costs, and capital expenditures. Our credit facilities have been used to fund acquisitions and
special dividends, and we have not relied on these facilities to provide liquidity for our operations. Our cash flow related to WSE payroll and benefits is generally matched by advance collection from our clients. To minimize the credit risk associated with remitting the payroll and associated taxes and benefits costs, we
predominately require clients to prefund the payroll and related payroll taxes and benefits costs. To the extent this does not occur, our results of operations and cash flow may be negatively impacted.
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. We report the advance collection from our clients as payroll funds collected within WSE-related assets on our balance sheet. Our cash and cash equivalents reported on our balance sheet represent our corporate cash available
to meet corporate liquidity requirements, capital spending and expansion plans, potential acquisitions, debt service requirements and other corporate operating cash needs.
45
The following table shows our capital resources for the stated periods:
| | As of December 31, | |
| | 2014 | | | 2013 | |
| | (in thousands) | |
Cash and cash equivalents | | $ | 134,341 | | | $ | 94,356 | |
Working capital: | | | | | | | | |
Corporate working capital | | | 50,996 | | | | 60,248 | |
WSE-related assets, net of WSE-related liabilities | | $ | 4,581 | | | $ | 4,813 | |
|
| | | | | | | |
| | 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
$134.3$166.2 million and
$94.4$134.3 million as of December 31,
20142015 and
2013,2014, respectively. The increase was primarily due to the cash generated from operations during the year ended December 31,
2014.2015. We believe that our existing cash and cash equivalents, 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-related 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
customerclient 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,
2014,2015, we had
$51.0$108.5 million in corporate working capital and
$4.6$3.9 million in WSE-related assets net of WSE-related liabilities. Corporate working capital decreased by
$9.3$8.2 million as compared to December 31,
20132014 primarily due to
an increaserecording a $12.7 million anticipated debt prepayment as a result of excess cash flows requirements in
deferred tax liabilities.Includedaccordance with our credit facility. Included in WSE-related assets as of December 31,
20142015 is
$1.3$0.9 billion of payroll funds collected from
customers,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,
2014,2015, we had
$64.9$92.9 million of restricted cash included in WSE-related assets and
$69.4$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
we do not anticipate
any material additionalfunding further collateral
obligations to be required in 2014 for our workers compensation arrangements.as needed based on program development.
At December 31,
2014,2015, we had approximately
$544.9$499.6 million of outstanding debt 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 of $75 million. 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 for working capital and other general corporate purposes. The repayment of obligations under the Amended and Restated 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.
46
We generated positive cash flows from operating activities during
2015, 2014
2013 and
2012.2013. 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, | |
| | 2014 | | | 2013 | | | 2012 | |
| | (in thousands) | |
Net cash provided by (used in): | | | | | | | | | | | | |
Operating activities | | $ | 153,838 | | | $ | 100,721 | | | $ | 80,542 | |
Investing activities | | | (45,427 | ) | | | (212,438 | ) | | | (262,608 | ) |
Financing activities | | | (68,311 | ) | | | 142,377 | | | | 214,190 | |
Effect of exchange rates on cash and cash equivalents | | | (115 | ) | | | (53 | ) | | | 5 | |
Net increase in cash and cash equivalents | | $ | 39,985 | | | $ | 30,607 | | | $ | 32,129 | |
|
| | | | | | | | | | | |
| | 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
$153.8$130.6 million,
$100.7$151.9 million and
$80.5$100.7 million for the years ended December 31,
2015, 2014
2013 and
2012,2013, 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
as compared toand $212.4 million in
2013 and $262.62013. In 2015, we invested $41.9 million in
2012. In 2014, we investeddebt securities and collected $27.6 million on maturing of debt securities, compared to investing $24.9 million in debt securities
compared to $7.8 million in
2013.2014. Investments to purchase property and equipment were
$20.6$18.6 million for
20142015 compared to
$10.7$20.6 million for the same period of
2013 reflecting2014. In 2015, we used $4.8 million for an
increased investmentacquisition of a business, while there were no such acquisitions in
technology to enhance our product offerings.2014. In 2013, we used $195.0 million (net of cash acquired) for the acquisition of Ambrose.
In 2012 we used $225.8 million (net of cash acquired) for the acquisitions of SOI, Accord and ExpenseCloud and $28.5 million for investments in debt securities.Cash Flows from Financing Activities
Net cash used in financing activities was
$68.3$60.8 million in 2015, compared to $66.4 million in 2014
compared toand $142.4 million provided by financing activities in
2013 and $214.2 million provided by2013. Net cash used in financing activities
during 2015 consisted of $45.3 million in
2012.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
consisted ofwas largely attributable to $273.6 million in loan repayments,
$16.4$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
theour borrowing of $970.0
million from our credit facilities, offset by $25.7 million in payments for debt issuance costs, $451.7 million in loan repayments, $14.6 million in common stock repurchases and $357.6 million of special dividends. Net cash provided by financing activities during 2012 was largely attributable to our borrowing of $405.0 million under our credit facility and receipt of
$5.4$7.1 million in proceeds from stock option exercises, offset by
$105.7$451.7 million in repayments of notes payable, the payment of a
$75.4$357.6 million special dividend,
$6.0 million in common stock repurchases and the payment of
$14.0$25.7 million in debt issuance costs.
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. In March 2014, proceedsProceeds 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.
OnIn 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.
47
The Amended and Restated Credit Agreement provides for: (i) $375 million principal amount of
tranche“tranche A term loans,
” (ii) $200 million principal amount of
tranche“tranche B term loans,
” and (iii) a revolving credit facility of $75
million.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 Restated Credit Agreement, all of 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 to 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 for working capital and other general corporate purposes.
The tranche A term loans and loans under the revolving credit facility bear interest, at our 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 applicable margins for the tranche A term loans and loans under the revolving credit facility are subject to
reduction byspecified rate adjustments of 0.25%
or 0.50%, or increase by 0.25%, based upon our total leverage ratio. The tranche B term loans bear interest, at our 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. We are required to pay a commitment fee of 0.50%, subject to decrease to 0.375% 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% if our total leverage ratio 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
paidrepaid 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% 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
paidrepaid in equal quarterly installments in an aggregate annual amount equal to 1% of the
original principal amount thereof, with any remaining balance payable on the final maturity date of the tranche B term loans.
Our credit facility 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, and dividends and other distributions. Our credit facility also contains financial covenants that require us to maintain a minimum consolidated interest coverage ratio and a maximum total leverage ratio.
48
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and commercial commitments as of December 31,
2014,2015, and the effect they are expected to have on our liquidity and capital resources (in thousands):
| | Payments Due by Period | |
| | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | |
Long-term debt obligations | | $ | 544,875 | | | | 20,500 | | | | 222,031 | | | | 302,344 | | | | - | |
Interest on debt obligations | | | 76,295 | | | | 16,220 | | | | 38,785 | | | | 21,290 | | | | - | |
Workers compensation liabilities | | | 112,954 | | | | 26,784 | | | | 31,267 | | | | 15,994 | | | | 38,909 | |
Capital lease obligations | | | 291 | | | | 247 | | | | 40 | | | | 4 | | | | - | |
Operating lease obligations | | | 35,165 | | | | 10,877 | | | | 12,956 | | | | 6,817 | | | | 4,515 | |
Purchase obligations | | | 14,847 | | | | 5,751 | | | | 9,096 | | | | - | | | | - | |
Uncertain tax positions | | | 2,641 | | | | 2,584 | | | | 57 | | | | - | | | | - | |
Total | | $ | 787,068 | | | $ | 82,963 | | | $ | 314,232 | | | $ | 346,449 | | | $ | 43,424 | |
|
| | | | | | | | | | | | | | | | | | | |
| | 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 |
|
Long-term debt obligations 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,
2014.2015.
Workers compensation liabilities represented in the table above are considered contractual obligations because they represent the estimated
payments that will be made to carriers for the various workers compensation programs. These obligations include the costs of reimbursing the carriers for paying claims within the deductible layer in accordance with workers compensation insurance
policies.policies as well as premiums 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.
Our purchase obligations
represented in the table above primarily consist of
obligations for renewal premiums on workers compensation policies, software licenses and maintenance, sales and marketing events and professional 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.
Obligations under contracts that we can cancel without a significant penalty are not included in the table above. The table includes purchase obligations individually greater than $100,000 and with a remaining term in excess of one year.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.
In the normal course of business, we make representations and warranties that guarantee the performance of services under service arrangements with clients. Historically, there has been no material losses related to such guarantees. In addition, in connection with our
IPO,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 in the
table above
table excludesexclude certain tax credit related reserves that
are nettedwe 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.
Critical Accounting Policies, Estimates and Judgments
Our consolidated financial statements
have beenare prepared in accordance with
U.S. generally accepted accounting principles.GAAP. The preparation of
these consolidated financial statements
in conformity with GAAP requires
usmanagement to make
significant estimates
assumptions and
judgmentsassumptions that affect
thecertain reported amounts
of assets, liabilities, service revenues and
expenses and related disclosures.
We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. SignificantThese estimates include,
but are not limited to, allowances for accounts receivable, workers compensation related assets and liabilities, health plan assets and liabilities, recoverability of goodwill and other intangible assets, income taxes, stock-based compensation and other contingent liabilities.
Such estimates are based on historical experience and on various other assumptions that Company management believes to be reasonable under the circumstances. Actual results could differ
significantly from
thoseour estimates.
49
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 in the preparation of our consolidated financial statements.
Professional service revenues represent
service fees charged to clients for co-employment services including processing HR transactions such as payroll
payments and
remitting employment tax withholding
amounts, providing access 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.
Professional service revenues also include fees billed for other HR-related services such as talent acquisitions, performance management and time and expense reporting services in accordance with separate written service agreements. 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.
Insurance service revenues consist of insurance-related
amountsbillings and administrative fees collected from clients and withheld from WSEs for
TriNet-sponsored, risk-based,
fully-insured insurance plans provided through third-party insurance carriers, primarily employee health benefit
insuranceplans and workers compensation insurance. We recognize insurance service revenues in 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 of 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 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 behalf of our clients, combined, were
$30.6 billion, $25.6 billion
$17.6 billion and
$10.0$17.6 billion for the years ended December 31,
2015, 2014,
and 2013,
and 2012, 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
includesinclude insurance premiums paid to the
third-party insurance carriers for
the healthinsurance coverage for our clients and
workers compensation insurance coverageWSEs and the reimbursements paid to the insurance carriers
and/or third-party administrators for
claimclaims payments made by them
on our behalf within
theour insurance deductible
layer.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 behalf within the deductible layer in accordance with workers compensation insurance policies. These reserves include estimates for reported losses, plus amounts for those claims not yet reported, and estimates of certain expenses incurred 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 made to settle the claims.
In estimating these reserves, we utilize our historical loss experience, exposure data and actuarial judgment, together with a range of inputs that are primarily based upon the WSEs’ job responsibilities, their location, the historical frequency and severity of workers compensation claims, and an estimate of future cost trends. All of these components can materially impact the reserves as reported in our consolidated financial statements. For each reporting period, we incorporate changes in the actuarial assumptions resulting from changes in our actual claims experience and other trends into our workers compensation claims cost estimates. Accordingly, final claim settlements may vary from the present estimates, particularly when those payments may not occur until well into the future.
We review the adequacy of our workers compensation insurance reserves on a quarterly basis. We reflect adjustments to previously established reserves in our results of operations for the period in which the adjustments are identified. These adjustments 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.
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
as short-term 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.
50
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
premiumsworkers 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
theour deductible layer in accordance with health insurance policies. These reserves include estimates for reported losses, plus amounts for those claims
incurred but not yet
reported.paid. We determine our health benefits insurance reserves based upon a number of factors, including actuarial calculations, our current and historical claims payment patterns, plan enrollment and medical trend rates. We record these reserves within health benefits payable and include them in WSE-related liabilities on our consolidated balance sheets.
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 premium and claims data and record 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 our results of operations for the period in which the adjustments are identified. These adjustments 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, 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
51
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.
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.
|
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 differ from our initial estimates. Quarterly changes 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 to these assumptions for the periods presented:
| | Year Ended December 31, | |
| | 2014 | | | 2013 | | | 2012 | |
Expected volatility | | | 58 | % | | | 48 | % | | | 46 | % |
Expected term (in years) | | | 6.05 | | | | 6.04 | | | | 6.04 | |
Risk-free interest rate | | | 1.80 | % | | | 1.26 | % | | | 1.01 | % |
Expected dividend yield | | | 0 | % | | | 0 | % | | | 0 | % |
Weighted-average grant-date fair value of stock options | | $ | 7.18 | | | $ | 4.11 | | | $ | 1.51 | |
52
|
| | | | | | | | | | | |
| | 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.
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,
20142015 and
2013,2014, we had recognized tax liabilities of approximately
$3.2$3.3 million and
$2.9$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,
2014.2015.
We believe that our accruals for tax liabilities 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 result 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 expense in the period in which such determination is made.
There are outstandingWe paid Notices of Proposed
Assessment disallowingAssessments outstanding as of December 31, 2014 related to the disallowance of employment tax credits totaling $10.5 million in connection with the IRS examination of Gevity HR, Inc. and
Subsidiaries,its subsidiaries, which was acquired by TriNet
onin June
1, 2009.
While Appeals has denied the credits, and theThe Company plans to exhaust all administrative efforts to resolve this
issue,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.
Recent Accounting Pronouncements
In January 2015,February 2016, the Financial Accounting Standards Board, or (FASB), issued Accounting Standards Update (ASU) 2015-01— 2016-02—Income Statement-ExtraordinaryLeases. The amendment requires that lease arrangements longer than 12 months result in an entity recognizing an asset and Unusual Itemsliability. 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 currently in the process of evaluating the impact of the adoption of this standard on our consolidated financial statements.
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). ASU 2015-01 became effective on January 9, 2015. The amendment eliminates from GAAPrequires 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 conceptFASB issued ASU 2015-05—Intangibles—Goodwill and Other—Internal-Use Software, as part of extraordinary items.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. A reporting entity may apply the amendments prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption.permitted. We adoptedexpect to adopt this guidance in 2014. The adoption did2016. We do not expect this guidance to have ana material effect on our consolidated financial statements. In NovemberApril 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 2014-17— 2014-15—Business CombinationsPresentation of Financial Statements — Going Concern (Subtopic 205-40), which providesaddresses management’s responsibility to evaluate whether there is substantial doubt about an acquired entity with an optionentity’s ability to apply pushdown accountingcontinue as a going concern and to its financial statements upon occurrence of an event in which an acquirer obtains control ofprovide related footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the acquired entity. ASU 2014-17 became effective on November 28, 2014. An acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. However, ifdate that the financial statements are issued. The standard will be effective for the first interim period in whichwithin 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 most recent change-in-control event occurred already have been issued or made available to be issued, the applicationadoption of this guidance would bewill have a change in accounting principle. We adopted this guidance in 2014. The adoption did not have anmaterial effect on our consolidated financial statements.53
In June 2014, the FASB issued ASU 2014-12—Compensation-StockCompensation - 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.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.presented. We do not expect this guidance to have a material effect on our consolidated financial statements. We planexpect 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. ASU 2014-09 isIn July 2015, the FASB deferred the effective fordate to annual reporting periods, and interim periods within those years, beginning after December 15, 2016.2017. Early adoption at the original effective date of December 15, 2016 is not permitted. The guidanceamendments may be applied retrospectively or as a cumulative-effect adjustment as of the date of adoption. We expect to adopt this guidance in 2017. We have not yet selected a method of adoption and we are currently evaluating the effect that the guidanceamendments will have on our consolidated financial statements.In July 2013, the FASB issued ASU 2013-11— Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which requires that an unrecognized tax benefit, or portion of an unrecognized tax benefit, be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If an applicable deferred tax asset is not available or a company does not expect to use the applicable deferred tax asset, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined with an unrelated deferred tax asset. ASU 2013-11 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date, however retrospective application is permitted. We adopted this guidance in 2014. The adoption did not have a material effect on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities as
follows:follows.
We had cash and cash equivalents, restricted cash, restricted investments, payroll funds collected, and interest bearing
receivablereceivables in connection with workers compensation premiums totaling
$1.8$1.3 billion at December 31,
2014.2015. Included in this amount
was $52.4were $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 value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded 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 to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of
expectationexpectations due to changes in interest rates or we may suffer losses in principal 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 prior to maturity or declines in fair value are determined to be other-than-temporary. Our fixed-income portfolio is subject to interest rate risk.
We also had total outstanding indebtedness of
$544.9$499.6 million as of December 31,
2014,2015, of which
$20.5$35.3 million is due within 12 months. Amounts outstanding under our credit facility carry variable interest rates of LIBOR + 2.75% over the term of the
facility.facility, subject to specified rate adjustments under certain circumstances. As a result of our credit facility, we are exposed to changes in interest rates. With an increase in interest rates in effect at December 31,
20142015 of 100 basis points, our interest expense for
20152016 through
20192020 would be
$95.5$66.5 million. On the other hand, with a decrease in interest rates in effect at December 31,
20142015 of 100 basis points, our interest expense for
20152016 through
20192020 would be
$57.1$39.7 million.
54
Item 8. Financial Statements and Supplementary Data.
Consolidated Financial Statements of TriNet Group, Inc. and Subsidiaries 55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and
stockholdersStockholders of
TriNet Group, Inc.
and Subsidiaries
We have audited the accompanying consolidated balance sheets of TriNet Group, Inc. and Subsidiaries as of December 31,
20142015 and
2013,2014, and the related consolidated statements of operations, comprehensive income, stockholders’
deficitequity (deficit) and cash flows for each of the three years in the period ended December 31,
2014.2015. Our audits also included the financial statement schedule listed at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits 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 the financial statements are free of material misstatement.
We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements,statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
andas well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TriNet Group, Inc. and Subsidiaries at December 31,
20142015 and
2013,2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31,
2014,2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), 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) and our report dated March 31, 2016 expressed an adverse opinion thereon.
San Francisco, California
TriNet Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| | December 31, | | | December 31, | |
| | 2014 | | | 2013 | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 134,341 | | | $ | 94,356 | |
Restricted cash | | | 14,543 | | | | 15,267 | |
Prepaid income taxes | | | 26,711 | | | | 3,331 | |
Deferred income taxes | | | — | | | | 68 | |
Prepaid expenses | | | 9,336 | | | | 7,849 | |
Deferred loan costs and other current assets | | | 4,271 | | | | 5,238 | |
Worksite employee related assets | | | 1,635,136 | | | | 772,437 | |
Total current assets | | | 1,824,338 | | | | 898,546 | |
Workers compensation receivable | | | 31,905 | | | | 25,381 | |
Restricted cash and investments | | | 69,447 | | | | 36,968 | |
Property and equipment, net | | | 32,298 | | | | 25,690 | |
Goodwill | | | 288,857 | | | | 288,857 | |
Other intangible assets, net | | | 81,718 | | | | 134,020 | |
Deferred income taxes | | | 7,184 | | | | 1,000 | |
Deferred loan costs and other assets | | | 12,017 | | | | 24,276 | |
Total assets | | $ | 2,347,764 | | | $ | 1,434,738 | |
Liabilities and stockholders’ deficit | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 12,273 | | | $ | 7,315 | |
Accrued corporate wages | | | 29,179 | | | | 26,264 | |
Deferred income taxes | | | 65,713 | | | | 16,535 | |
Current portion of notes payable and borrowings under capital leases | | | 20,738 | | | | 6,669 | |
Other current liabilities | | | 10,303 | | | | 9,078 | |
Worksite employee related liabilities | | | 1,630,555 | | | | 767,624 | |
Total current liabilities | | | 1,768,761 | | | | 833,485 | |
Notes payable and borrowings under capital leases, less current portion | | | 524,412 | | | | 812,208 | |
Workers compensation liabilities | | | 75,448 | | | | 45,309 | |
Deferred income taxes | | | — | | | | 8,888 | |
Other liabilities | | | 4,902 | | | | 5,210 | |
Total liabilities | | | 2,373,523 | | | | 1,705,100 | |
Commitments and contingencies (Note 13) | | | | | | | | |
Series G convertible preferred stock, $.0001 per share stated value (aggregate liquidation preference of $59,306); no shares authorized, issued and outstanding at December 31, 2014; 5,391,441 shares authorized, issued and outstanding at December 31, 2013 | | | — | | | | 59,059 | |
Series H convertible preferred stock, $.0001 per share stated value (aggregate liquidation preference of $60,000); no shares authorized, issued and outstanding at December 31, 2014; 4,124,986 shares authorized, issued and outstanding at December 31, 2013 | | | — | | | | 63,819 | |
Stockholders’ deficit: | | | | | | | | |
Preferred stock, $.000025 per share stated value; 20,000,000 shares authorized; no shares issued and outstanding at December 31, 2014 and 2013 | | | — | | | | — | |
Common stock, $.000025 per share stated value; 750,000,000 shares authorized at December 31, 2014; 69,811,326 and 15,259,540 shares issued and outstanding at December 31, 2014 and 2013 | | | 442,682 | | | | 74,160 | |
Accumulated deficit | | | (468,127 | ) | | | (467,209 | ) |
Accumulated other comprehensive loss | | | (314 | ) | | | (191 | ) |
Total stockholders’ deficit | | | (25,759 | ) | | | (393,240 | ) |
Total liabilities and stockholders’ deficit | | $ | 2,347,764 | | | $ | 1,434,738 | |
|
| | | | | | | |
| | 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 |
|
See accompanying notes.
57
TriNet Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
| | Year Ended December 31, | |
| | | 2014 | | | | 2013 | | | | 2012 | |
Professional service revenues | | $ | 342,074 | | | $ | 272,372 | | | $ | 148,233 | |
Insurance service revenues | | | 1,851,457 | | | | 1,371,903 | | | | 870,828 | |
Total revenues | | | 2,193,531 | | | | 1,644,275 | | | | 1,019,061 | |
Costs and operating expenses: | | | | | | | | | | | | |
Insurance costs | | | 1,686,315 | | | | 1,226,585 | | | | 750,025 | |
Cost of providing services (exclusive of depreciation and amortization of intangible assets) | | | 134,256 | | | | 106,661 | | | | 63,563 | |
Sales and marketing | | | 139,997 | | | | 109,183 | | | | 59,931 | |
General and administrative | | | 53,926 | | | | 52,455 | | | | 37,879 | |
Systems development and programming costs | | | 26,101 | | | | 19,948 | | | | 16,718 | |
Amortization of intangible assets | | | 52,302 | | | | 51,369 | | | | 17,441 | |
Depreciation | | | 13,843 | | | | 11,737 | | | | 11,676 | |
Total costs and operating expenses | | | 2,106,740 | | | | 1,577,938 | | | | 957,233 | |
Operating income | | | 86,791 | | | | 66,337 | | | | 61,828 | |
Other income (expense): | | | | | | | | | | | | |
Interest expense and bank fees | | | (54,193 | ) | | | (45,724 | ) | | | (9,709 | ) |
Other, net | | | 478 | | | | 471 | | | | 57 | |
Income before provision for income taxes | | | 33,076 | | | | 21,084 | | | | 52,176 | |
Provision for income taxes | | | 17,579 | | | | 7,937 | | | | 20,344 | |
Net income | | $ | 15,497 | | | $ | 13,147 | | | $ | 31,832 | |
Net income per share: | | | | | | | | | | | | |
Basic | | $ | 0.24 | | | $ | 0.26 | | | $ | 0.66 | |
Diluted | | $ | 0.22 | | | $ | 0.24 | | | $ | 0.63 | |
Weighted average shares: | | | | | | | | | | | | |
Basic | | | 56,160,539 | | | | 12,353,047 | | | | 9,805,384 | |
Diluted | | | 59,566,773 | | | | 15,731,807 | | | | 12,476,091 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| 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) | 150,694 |
| | 134,256 |
| | 106,661 |
|
| Sales and marketing | 166,759 |
| | 139,997 |
| | 109,183 |
|
| General and administrative | 69,626 |
| | 53,926 |
| | 52,455 |
|
| 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 |
|
| 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 |
|
| Net income per share: | | | | | |
| Basic | $ | 0.45 |
| | $ | 0.24 |
| | $ | 0.26 |
|
| Diluted | $ | 0.44 |
| | $ | 0.22 |
| | $ | 0.24 |
|
| Weighted average shares: | | | | | |
| Basic | 70,228,159 |
| | 56,160,539 |
| | 12,353,047 |
|
| Diluted | 72,618,069 |
| | 59,566,773 |
| | 15,731,807 |
|
See accompanying notes.
58
TriNet Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | Year Ended December 31, | |
| | | 2014 | | | | 2013 | | | | 2012 | |
Net income | | $ | 15,497 | | | $ | 13,147 | | | $ | 31,832 | |
Other comprehensive income (loss), net of tax | | | | | | | | | | | | |
Unrealized gains (losses) on investments | | | (8 | ) | | | (9 | ) | | | 36 | |
Unrealized gains (losses) on interest rate cap | | | – | | | | 66 | | | | (66 | ) |
Foreign currency translation adjustments | | | (115 | ) | | | (53 | ) | | | 5 | |
Total other comprehensive income (loss), net of tax | | | (123 | ) | | | 4 | | | | (25 | ) |
Comprehensive income | | $ | 15,374 | | | $ | 13,151 | | | $ | 31,807 | |
|
| | | | | | | | | | | |
| | 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.
59
TriNet Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
DEFICITEQUITY (DEFICIT)
(In thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | |
| Preferred Stock– | | | Preferred Stock– | | | | | | | | | | | | | | | Other | | | Total | |
| Series G | | | Series H | | | Common Stock | | | Accumulated | | | Comprehensive | | | Stockholders’ | |
| Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Deficit | | | Loss | | | Deficit | |
Balance at December 31, 2011 | | 5,391,441 | | | $ | 59,059 | | | | 4,124,986 | | | $ | 63,819 | | | | 8,398,712 | | | $ | 35,440 | | | $ | (64,550 | ) | | $ | (170 | ) | | $ | (29,280 | ) |
Net income | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 31,832 | | | | — | | | | 31,832 | |
Other comprehensive loss | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (25 | ) | | | (25 | ) |
Issuance of common stock from vested restricted stock units | | — | | | | — | | | | — | | | | — | | | | 75,992 | | | | — | | | | — | | | | — | | | | — | |
Issuance of common stock from exercise of stock options | | — | | | | — | | | | — | | | | — | | | | 2,858,784 | | | | 5,391 | | | | — | | | | — | | | | 5,391 | |
Repurchase of common stock | | — | | | | — | | | | — | | | | — | | | | (624,264 | ) | | | — | | | | (2,683 | ) | | | — | | | | (2,683 | ) |
Stock-based compensation expense | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,360 | | | | — | | | | — | | | | 4,360 | |
Excess tax benefit from equity incentive plan activity | | — | | | | — | | | | — | | | | — | | | | — | | | | 297 | | | | — | | | | — | | | | 297 | |
Special dividend | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (75,450 | ) | | | — | | | | (75,450 | ) |
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 | ) |
Net income | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 13,147 | | | | — | | | | 13,147 | |
Other comprehensive income | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4 | | | | 4 | |
Issuance of common stock from vested restricted stock units | | — | | | | — | | | | — | | | | — | | | | 36,512 | | | | — | | | | — | | | | — | | | | — | |
Issuance of common stock from exercise of stock options | | — | | | | — | | | | — | | | | — | | | | 5,730,544 | | | | 7,109 | | | | — | | | | — | | | | 7,109 | |
Repurchase of common stock | | — | | | | — | | | | — | | | | — | | | | (1,216,740 | ) | | | — | | | | (11,985 | ) | | | — | | | | (11,985 | ) |
Stock-based compensation expense | | — | | | | — | | | | — | | | | — | | | | — | | | | 5,953 | | | | — | | | | — | | | | 5,953 | |
Excess tax benefit from equity incentive plan activity | | — | | | | — | | | | — | | | | — | | | | — | | | | 15,610 | | | | — | | | | — | | | | 15,610 | |
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 | ) |
Net income | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 15,497 | | | | — | | | | 15,497 | |
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 | |
Repurchase of common stock | | — | | | | — | | | | — | | | | — | | | | (571,018 | ) | | | — | | | | (16,440 | ) | | | — | | | | (16,440 | ) |
Stock-based compensation expense | | — | | | | — | | | | — | | | | — | | | | — | | | | 10,660 | | | | — | | | | — | | | | 10,660 | |
Excess tax benefit from equity incentive plan activity | | — | | | | — | | | | — | | | | — | | | | — | | | | 9,663 | | | | — | | | | — | | | | 9,663 | |
Excess tax benefit from initial public offering | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,939 | | | | — | | | | — | | | | 1,939 | |
Special dividend forfeited | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 25 | | | | — | | | | 25 | |
Balance at December 31, 2014 | | — | | | $ | — | | | | — | | | $ | — | | | | 69,811,326 | | | $ | 442,682 | | | $ | (468,127 | ) | | $ | (314 | ) | | $ | (25,759 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Accumulated | | |
| | 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 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 13,147 |
| | — |
| | 13,147 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | 4 |
|
| Issuance of common stock from vested restricted stock units | — |
| | — |
| | — |
| | — |
| | 36,512 |
| | — |
| | — |
| | — |
| | — |
|
| Issuance of common stock from exercise of stock options | — |
| | — |
| | — |
| | — |
| | 5,730,544 |
| | 7,109 |
| | — |
| | — |
| | 7,109 |
|
| Stock-based compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | 5,953 |
| | — |
| | — |
| | 5,953 |
|
| Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | (407,728 | ) | | — |
| | (3,342 | ) | | — |
| | (3,342 | ) |
| Awards effectively repurchased for required employee withholding taxes | — |
| — |
| — |
| | — |
| | — |
| | (809,012 | ) | | — |
| | (8,643 | ) | | — |
| | (8,643 | ) |
| Excess tax benefit from equity incentive plan activity | — |
| | — |
| | — |
| | — |
| | — |
| | 15,610 |
| | — |
| | — |
| | 15,610 |
|
| 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 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 15,497 |
| | — |
| | 15,497 |
|
| 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 |
| | — |
| | — |
| | — |
| | — |
|
| Issuance of common stock for employee stock purchase plan | — |
| | — |
| | — |
| | — |
| | 272,836 |
| | 5,315 |
| | — |
| | — |
| | 5,315 |
|
| Issuance of common stock from exercise of stock options | — |
| | — |
| | — |
| | — |
| | 2,112,131 |
| | 7,166 |
| | — |
| | — |
| | 7,166 |
|
| Stock-based compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | 17,742 |
| | — |
| | — |
| | 17,742 |
|
| Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | (1,895,625 | ) | | — |
| | (48,364 | ) | | — |
| | (48,364 | ) |
| Awards effectively repurchased for required employee withholding taxes | — |
| | — |
| | — |
| | — |
| | (35,379 | ) | | — |
| | (799 | ) | | — |
| | (799 | ) |
| 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 |
|
See accompanying notes.
60
TriNet Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | Year Ended December 31, | |
| | | 2014 | | | | 2013 | | | | 2012 | |
Operating activities | | | |
Net income | | $ | 15,497 | | | $ | 13,147 | | | $ | 31,832 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 84,403 | | | | 73,838 | | | | 31,196 | |
Deferred income taxes | | | 43,842 | | | | (6,680 | ) | | | 7,658 | |
Stock-based compensation | | | 10,660 | | | | 6,113 | | | | 4,360 | |
Excess tax benefit from equity incentive plan activity | | | (9,663 | ) | | | (15,610 | ) | | | (297 | ) |
Accretion of workers compensation and leases fair value adjustment | | | (1,090 | ) | | | (1,427 | ) | | | (1,371 | ) |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Restricted cash | | | (6,880 | ) | | | (6,118 | ) | | | 6,738 | |
Prepaid expenses and other current assets | | | (7,389 | ) | | | (7,723 | ) | | | (1,026 | ) |
Workers compensation receivables | | | (5,413 | ) | | | 9,876 | | | | 3,776 | |
Other assets | | | 8,004 | | | | 4,052 | | | | 753 | |
Accounts payable | | | 5,212 | | | | 976 | | | | (150 | ) |
Income tax payable/receivable | | | (21,448 | ) | | | 6,394 | | | | (6,273 | ) |
Other current liabilities | | | 7,749 | | | | 13,186 | | | | 1,789 | |
Other liabilities | | | 30,122 | | | | 4,149 | | | | 1,564 | |
Worksite employee related assets | | | (862,699 | ) | | | (304,265 | ) | | | (75,598 | ) |
Worksite employee related liabilities | | | 862,931 | | | | 310,813 | | | | 75,591 | |
Net cash provided by operating activities | | | 153,838 | | | | 100,721 | | | | 80,542 | |
Investing activities | | | | | | | | | | | | |
Acquisition of businesses | | | – | | | | (194,998 | ) | | | (225,817 | ) |
Purchase of debt securities | | | (24,875 | ) | | | (7,750 | ) | | | (28,497 | ) |
Purchase of property and equipment | | | (20,552 | ) | | | (10,690 | ) | | | (9,658 | ) |
Proceeds from sale and maturity of debt securities | | | – | | | | 1,000 | | | | 1,364 | |
Net cash used in investing activities | | | (45,427 | ) | | | (212,438 | ) | | | (262,608 | ) |
Financing activities | | | | | | | | | | | | |
Proceeds from issuance of common stock, net of issuance costs | | | 217,796 | | | | – | | | | – | |
Proceeds from issuance of common stock on exercised options | | | 2,193 | | | | 7,109 | | | | 5,391 | |
Proceeds from issuance of common stock for employee stock purchase plan | | | 3,393 | | | | – | | | | – | |
Excess tax benefit from equity incentive plan activity | | | 9,663 | | | | 15,610 | | | | 297 | |
Borrowings under notes payable | | | – | | | | 970,000 | | | | 405,000 | |
Repayment of notes payable | | | (273,550 | ) | | | (451,679 | ) | | | (105,681 | ) |
Payment of debt issuance costs | | | (11,060 | ) | | | (25,697 | ) | | | (14,001 | ) |
Payments of special dividend | | | – | | | | (357,582 | ) | | | (75,353 | ) |
Repayments under capital leases | | | (306 | ) | | | (778 | ) | | | (825 | ) |
Repurchase of common stock | | | (16,440 | ) | | | (14,606 | ) | | | (638 | ) |
Net cash provided by (used in) financing activities | | | (68,311 | ) | | | 142,377 | | | | 214,190 | |
Effect of exchange rate changes on cash and cash equivalents | | | (115 | ) | | | (53 | ) | | | 5 | |
Net increase in cash and cash equivalents | | | 39,985 | | | | 30,607 | | | | 32,129 | |
Cash and cash equivalents at beginning of period | | | 94,356 | | | | 63,749 | | | | 31,620 | |
Cash and cash equivalents at end of period | | $ | 134,341 | | | $ | 94,356 | | | $ | 63,749 | |
| | | | | | | | | | | | |
Supplemental disclosures of cash flow information | | | | | | | | | | | | |
Cash paid for interest | | $ | 32,051 | | | $ | 30,534 | | | $ | 5,355 | |
Cash paid for income taxes, net of refunds | | $ | (3,809 | ) | | $ | 8,070 | | | $ | 19,595 | |
Supplemental schedule of noncash investing and financing activities | | | | | | | | | | | | |
Payable for purchase of property and equipment | | $ | 1,290 | | | $ | 1,302 | | | $ | 218 | |
|
| | | | | | | | | | | |
| | 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 |
| | $ | — |
| | $ | — |
|
TriNet Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
TriNet Group, Inc. (the Company or TriNet), a Delaware corporation incorporated in January 2000, provides
a comprehensive human resources,
solutionor HR, solutions for small to
medium-sized businesses.midsize businesses, or SMBs, across a number of industries under a co-employment model. The Company’s
solution includesHR 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, workers compensation insurance and claims management, federal, state and local labor, employment and benefit law compliance, risk mitigation, expense and time management, human capital consulting
employment law compliance and
employee benefits, including health insurance, retirement plans and workers compensation insurance.other services.
The Company provides its services through co-employment relationships with its
customers,clients, under which the Company and its
customersclients each take responsibility for certain portions of the employer-employee relationship for worksite employees
or WSEs.(WSEs). The Company is the employer of record for most administrative and regulatory purposes, including the following: (i) compensation through wages and salaries; (ii) employer payroll-related taxes payment; (iii) employee payroll-related taxes withholding and payment; (iv) employee benefit programs including health and life insurance, and others; and (v) workers compensation coverage.
The client is responsible for responsibilities not assumed by the Company, including the day-to-day job responsibilities of the WSEs.
The Company operates in one reportable segment in accordance with Accounting Standard Codification (ASC)
Topic 280 – Segment
Reporting.Reporting, issued by the Financial Accounting Standards Board (FASB). All of the Company’s service revenues are generated from external
customers.clients. Less than 1% of
revenues arerevenue 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.
The accompanying consolidated financial statements and footnotes thereto of the Company and its wholly owned subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). All intercompany accounts and transactions have been eliminated in consolidation.
Certain prior period 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 presentation.
The accompanying consolidated balance sheets present the current assets and current liabilities directly related to the processing of human resources transactions as WSE-related assets and WSE-related liabilities, respectively. WSE-related assets
compriseconsist 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
comprise customerconsist 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 amounts due to providers for enrolled employees, and workers compensation and health reserves that are expected to be disbursed within the next 12 months.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. These estimates include, but are not limited to, allowances for accounts receivable, workers
compensation relatedcompensation-related assets and liabilities, health plan assets and liabilities, recoverability of goodwill and other intangible assets, income taxes, stock-based compensation and other contingent liabilities. Such estimates are based on historical experience and on various other assumptions that Company management believes to be reasonable under the circumstances. Actual results could differ from those estimates.
Professional service revenues represent service fees charged to clients for co-employment services, including processing HR transactions on behalf of the Company’s clients, such as payroll payments and remitting employment tax withholding; paymentwithholding amounts, providing access to WSEs;the Company’s HR expertise, including HR templates, best practices, and interactions with our HR professionals, providing labor, employment and benefit law compliance based on either a fixed fee per WSE per monthservices to assist clients in avoiding or per transaction,reducing liability and exposure and providing additional services, including recruiting or a percentageother services, to support various stages of WSEs’ payroll. Professional service revenues also include fees billed for other human resource-related services, such as talent acquisitions, performance management, and time and expense reporting services in accordance with separate written service agreements.clients’ growth. Professional service revenues are recognized 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.
Insurance service revenues consist of insurance-related amountsbillings 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 collectibilitycollectability 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 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 behalf of the clients, combined, were
$30.6 billion, $25.6 billion
$17.6 billion and
$10.0$17.6 billion for the years ended December 31,
2015, 2014,
and 2013,
and 2012, respectively.
The Company records a liability relating to work performed by WSEs but unpaid at the end of each period in the period in which the WSEs perform work, along with the related receivable for the same period. The Company generally charges an upfront non-refundable set-up fee for which the performance of onboarding 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 premiums paid to the insurance carriers for the
healthinsurance coverage for clients and
workers compensation insurance coverageWSEs and the reimbursements paid to the insurance carriers
or third-party administrators for
claimclaims payments made
toon the
WSEsCompany’s behalf within
theits insurance deductible layer,
where applicable, are included in cost and operating expenses as insurance costs.
Workers Compensation Insurance Reserves
Workers compensation insurance reserves are established to provide for the estimated
ultimate costs of paying claims within the deductible layer in accordance with workers compensation insurance policies. These reserves include estimates for reported losses, plus amounts for those claims incurred but not
reported,paid, and estimates of certain expenses associated with processing and settling the claims. In establishing the workers compensation insurance reserves, the Company uses an independent actuarial 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.
In estimating these reserves, the Company utilizes historical loss experience, exposure data, and actuarial judgment, together with a range of inputs which are primarily based upon the WSE job responsibilities, their location, the historical frequency and severity of workers compensation claims, and an estimate of future cost trends. All of these components could materially impact the reserves as reported in the consolidated financial statements. For each reporting period, changes in the actuarial assumptions resulting from changes in actual claims experience and other trends are incorporated into the 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. Adjustments to previously established reserves are reflected in the results of operations for the period in which the adjustment is identified. Such adjustments could
possibly be significant, reflecting any variety of new and adverse or favorable trends. Any unexpected increases in the severity or frequency of claims could result in material adverse effects to the operating results.
The Company does not discount loss reserves accrued under these programs. Claim costs expected to be paid within one year are recorded as accrued workers 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, while costs expected to be paid beyond one year are included in long-term liabilities
or long term workers compensation receivables if funds 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 the plan year to which they relate are settled.
At policy inception, annual premiums are estimated 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 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.
Health benefits insurance reserves are established to provide for the estimated costs of reimbursing the carriers for paying claims within the deductible layer in accordance with health insurance policies. These reserves include estimates for reported losses, plus estimates for claims incurred but not reported. Reserves are determined regularly by the Company based upon a number of factors,
including but not limited to actuarial calculations, current and historical claims payment patterns, plan enrollment and medical trend rates. Ultimate health insurance reserves may vary in subsequent years from the amounts estimated. As of December 31, 20142015 and 2013,2014, liability reserves of $82.1$113.2 million and $46.6$82.1 million, respectively, were recorded within health benefits payable and are included in WSE-related liabilities in the accompanying consolidated balance sheets.
Under certain contracts, based on plan performance, the Company may be entitled to receive refunds of premiums. We estimate these refunds based on premium and claims data and record these
aswithin prepaid health plan expenses
withinand are included in WSE-related assets on the consolidated balance sheet. As of December 31,
20142015 and
2013,2014, the Company had
$4.9$6.8 million and
$7.6$4.9 million, respectively, as prepaid health plan expenses included within WSE-related assets.
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.
The Company classifies its investments as available-for-sale and are carried at fair value. Unrealized gains and losses are reported as a component of accumulated other comprehensive income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts from the date of purchase to maturity or sale. Such amortization is included in interest income as an addition to or deduction from the coupon interest earned on the investments. The Company uses the specific identification method of determining 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 other income in the accompanying consolidated statement of operations.
The Company assesses whether an other-than-temporary impairment loss has occurred due to declines in fair value or other market conditions. With respect to debt securities, this assessment takes into account our current intent to sell, or not sell, the security, and whether it is more likely than not that we will not be required to sell the security before recovery of its amortized cost.
The Company’s accounts receivable, which represent outstanding gross billings to
customers,clients, are reported net of an allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on historical experience, the age of the accounts receivable balances, credit quality of
customers,clients, current economic conditions and other factors that may affect
customers’clients’ ability to pay, and charges off amounts when they are deemed uncollectible.
The Company records property and equipment at historical cost and computes 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 expenses the cost of maintenance and repairs as incurred and capitalizes betterments.
The Company capitalizes internal and external costs incurred to develop internal-use computer software during the application development stage. Application development stage costs include license fees 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 expenses 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, 2014
2013 and
2012,2013, internally developed software costs capitalized were
$11.2 million, $6.3 million
and $3.3 million
and $4.3 million respectively.
Goodwill and Other Intangible Assets
The Company’s 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. 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, all goodwill is associated with the Company’s one reportable segment.
Intangible assets with finite useful lives include purchased customerclient lists, trade names, developed technologies, and contractual agreements. Intangible assets are amortized over their respective estimated useful lives ranging from two to six 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’s reviews, no impairment loss was recognized in the results of operations for the years ended December 31, 2015, 2014 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
2013 and
2012.2013.
Impairment of Long-Lived Assets
The Company evaluates its 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.
The Company expenses the costs of producing advertisements at the time production occurs, and expenses 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 million, $7.3 million,
$7.5 million and
$6.4$7.5 million for the years ended December 31,
2015, 2014
and 2013,
and 2012, respectively.
The Company has issued three types of stock-based awards to employees: restricted stock units, stock options and employee stock purchase plan. Compensation expense associated with restricted stock units 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 valuation 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 is recognized in equity to the extent that an incremental tax benefit is realized.
The Company recognizes deferred tax assets and liabilities for estimated future tax effects based on differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes under current tax laws. Deferred tax expense results from the change in the net liability for deferred income taxes between periods.
The Company maintains 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 conclude that tax positions are more likely than not to be sustained, assuming those positions will be examined by taxing authorities with full knowledge of all relevant information. The benefit recognized in the consolidated financial statements is 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. 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 change in the assessment of the more likely than not standard could materially impact the Company’s results of operations or financial position. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense.
Concentrations of Credit Risk
Financial instruments that subject the Company to concentrations of credit risk include cash and cash equivalents, investments, restricted cash and restricted investments (including payroll funds collected), 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) principally in domestic financial institutions and performs periodic evaluations of the relative credit standing of these institutions. The Company’s 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,
customersclients agree to maintain sufficient funds or other satisfactory credit at all times to cover the cost of its 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 Company generally requires payment from its
customersclients on or before the applicable payroll date.
For certain
customers,clients, the Company requires 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, one
customerclient accounted for 12% of accounts receivable.
As of December 31, 2013, one customer accounted for 15% of accounts receivable and one customer accounted for 13% of accounts receivable. No
customerclient accounted for more than 10% of
servicetotal revenues in the years ended December 31,
2015, 2014
2013 or 2012.and 2013. Bad debt expense, net of recoveries was
$2.0 million, $1.4 million
$0.6 million and
$0.4$0.6 million for the years ended December 31,
2015, 2014
and 2013,
and 2012, respectively.
Recent Accounting Pronouncements
In January 2015,February 2016, the Financial Accounting Standards Board, or (FASB), issued Accounting Standards Update (ASU) 2015-01— 2016-02—Income Statement-ExtraordinaryLeases. The amendment requires that lease arrangements longer than 12 months result in an entity recognizing an asset and Unusual 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.Items,
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. 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 standardstandards (the Simplification Initiative). ASU 2015-01 became effective on January 9, 2015. The amendment eliminates from GAAPrequires 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 conceptFASB issued ASU 2015-05—Intangibles—Goodwill and Other—Internal-Use Software, as part of extraordinary items.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. A reporting entity may applyEarly 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 amendments prospectively or retrospectivelyFASB issued ASU 2015-03—Interest—Imputation of Interest, as part of its Simplification Initiative. The amendment requires that debt issuance costs related to all prior periodsa recognized debt liability be presented in the financial statements.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 providedfor financial statements that the guidance is applied from the beginning of the fiscal year of adoption.have not been previously issued. The Company adoptedexpects to adopt this guidance in 2014.2016. The adoption didCompany does not expect this guidance to have ana material effect on theits consolidated financial statements. In NovemberAugust 2014, the FASB issued ASU 2014-17— 2014-15—Business CombinationsPresentation 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 an acquired entity with an option to apply pushdown accounting in its financial statements upon occurrence of an event in which an acquirer obtains control ofrelated footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the acquired entity. ASU 2014-17 became effective on November 28, 2014. An acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. However, ifdate that the financial statements are issued. The standard will be effective for the first interim period in whichwithin 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 most recent change-in-control event occurred already have been issued or made available to be issued, the applicationadoption of this guidance would bewill have a change in accounting principle. The Company adopted this guidance in 2014. The adoption did not have anmaterial effect on theits consolidated financial statements. In June 2014, the FASB issued ASU 2014-12—Compensation-Stock 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.presented. The Company does not expect this guidance to have a material effect on its consolidated financial statements. The Company plansexpects 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. ASU 2014-09 isIn July 2015, the FASB deferred the effective fordate to annual reporting periods, and interim periods within those years, beginning after December 15, 2016.2017. Early adoption at the original effective date of December 15, 2016 is not permitted. The guidanceamendments may be applied retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company expects to adopt this guidance in 2017. The Company has not yet selected a method of adoption and is currently evaluating the effect that the guidanceamendments will have on the consolidated financial statements.In July 2013, the FASB issued ASU 2013-11— Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which requires that an unrecognized tax benefit, or portion of an unrecognized tax benefit, be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If an applicable deferred tax asset is not available or a company does not expect to use the applicable deferred tax asset, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined with an unrelated deferred tax asset. ASU 2013-11 is effective for annual reporting periods, and interim periods within
those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date, however retrospective application is permitted. The Company adopted this guidance in 2014. The adoption did not have a material effect on the consolidated financial statements.
NOTE 2. WORKSITE EMPLOYEE-RELATED ASSETS AND LIABILITIES
The following schedule presents the components of the Company’s WSE-related assets and WSE-related liabilities (in thousands):
| | December 31, | | | December 31, | |
| | 2014 | | | 2013 | |
Worksite employee-related assets: | | | | | | | | |
Restricted cash | | $ | 64,890 | | | $ | 19,154 | |
Restricted investment | | | 4,555 | | | | 2,317 | |
Payroll funds collected | | | 1,336,994 | | | | 490,058 | |
Unbilled revenue, net of advance collection of $113,190 and $54,159 at December 31, 2014 and 2013, respectively | | | 203,599 | | | | 200,641 | |
Accounts receivable, net of allowance for doubtful accounts of $388 and $865 at December 31, 2014 and 2013, respectively | | | 5,193 | | | | 10,450 | |
Prepaid health plan expenses | | | 4,932 | | | | 7,584 | |
Refundable health plan premiums | | | – | | | | 17,601 | |
Refundable workers compensation premiums | | | 7,975 | | | | 20,834 | |
Prepaid workers compensation expenses | | | 1,256 | | | | 1,414 | |
Other payroll assets | | | 5,742 | | | | 2,384 | |
Total worksite employee-related assets | | $ | 1,635,136 | | | $ | 772,437 | |
| | | | | | | | |
Worksite employee-related liabilities: | | | | | | | | |
Unbilled wages accrual | | $ | 292,906 | | | $ | 243,640 | |
Payroll taxes payable | | | 1,119,427 | | | | 358,285 | |
Health benefits payable | | | 104,220 | | | | 67,132 | |
Customer prepayments | | | 53,770 | | | | 51,902 | |
Workers compensation payable | | | 36,778 | | | | 23,453 | |
Other payroll deductions | | | 23,454 | | | | 23,212 | |
Total worksite employee-related liabilities | | $ | 1,630,555 | | | $ | 767,624 | |
|
| | | | | | | |
| | 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.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 liabilitythe balance sheet for unpaid claims and claims adjustment expenses within workers compensation assets and liabilities (in thousands):
| | Year Ended December 31, | |
| | 2014 | | | 2013 | |
| | | | | | | | |
Liability for unpaid claims and claims adjustment at beginning of period | | $ | 58,610 | | | $ | 53,900 | |
Plans acquired through business combinations | | | – | | | | 481 | |
Incurred related to: | | | | | | | | |
Current year | | | 61,669 | | | | 26,401 | |
Prior years | | | (4,725 | ) | | | (3,319 | ) |
Total incurred | | | 56,944 | | | | 23,082 | |
Paid related to: | | | | | | | | |
Current year | | | (13,525 | ) | | | (8,055 | ) |
Prior years | | | (9,623 | ) | | | (10,798 | ) |
Total paid | | | (23,148 | ) | | | (18,853 | ) |
Liability for unpaid claims and claims adjustment at end of period | | | 92,406 | | | | 58,610 | |
Other premiums and collateral liabilities | | | 19,820 | | | | 10,152 | |
Total workers compensation liabilities at end of period | | $ | 112,226 | | | $ | 68,762 | |
Current portion included in worksite employee-related liability | | | 36,778 | | | | 23,453 | |
Long term portion | | $ | 75,448 | | | $ | 45,309 | |
70
|
| | | | | | | |
| | 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.
Under the terms of itscertain agreements with its workers compensation insurance carriers, the Company collects and holds premiums in restricted accounts pending claims payments by the claims administrator. As of December 31, 20142015 and 2013,December 31, 2014, such restricted amounts of $36.5$49.8 million and $21.5$36.5 million, respectively, are presented as restricted cash and restricted investmentinvestments within WSE-related assets in the accompanying consolidated balance sheets. In addition, at December 31, 2015 and December 31, 2014, and 2013, $69.4$101.8 million and $37.0$69.4 million, respectively, are presented as restricted long-term restricted cash and investments. Assets held by third parties to cover claim liabilities represents prefunded claim obligations paid to carriers in excess of estimated total claim liabilities, which will be applied to incurred claims. The funds remain restricted until the plan year to which they relate are settled.
The reclassification from workers compensation receivable to workers compensation liability resulted from the return of collateral to the Company following a negotiated amendment of the underlying contract with a carrier.
NOTE 4. BUSINESS
COMBINATIONCOMBINATIONS
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 year ended December 31, 2015, 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.
Ambrose Employer Group, LLC (Ambrose)
On July 1, In 2013, (the acquisition date), the Company acquired 100% of the outstanding equity of Ambrose Employer Group, LLC (Ambrose).
The estimated acquisition date fair value of the consideration transferred totaled for $195.0 million, which consisted of the following (in thousands):
Cash paid to equity holders | | $ | 201,271 | |
Cash and cash equivalents acquired | | | (6,273 | ) |
Total | | $ | 194,998 | |
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):
Restricted cash | | $ | 442 | |
WSE-related assets | | | 57,366 | |
Prepaid expenses and other current assets | | | 893 | |
Goodwill | | | 98,918 | |
Identifiable intangible assets | | | 94,380 | |
Property and equipment | | | 1,358 | |
Other noncurrent assets | | | 878 | |
WSE-related liabilities | | | (53,115 | ) |
Accounts payable and accrued liabilities | | | (5,646 | ) |
Deferred rent | | | (126 | ) |
Other long term liabilities | | | (350 | ) |
Consideration transferred | | $ | 194,998 | |
The goodwill of $98.9 million is primarily attributable to the synergies and economies of scale expected from the acquisition of Ambrose. Because the Company acquired a 100% interest in Ambrose, a limited liability company, the Company received a stepped-up tax basis in the fair market value of the assets. Therefore, the goodwill is deductible for income tax purposes. The estimated fair value of the acquired identifiable other intangible assets of $94.4 million consisted of customer contracts, trademarks and non-compete agreements valued at $90.4 million, $2.6 million and $1.4 million, respectively.
The Company recognized $0.4 million of acquisition-related costs for the Ambrose acquisition within general and administrative expenses in the accompanying consolidated statements of operations.
million. Ambrose contributed revenues of $134.5 million and net income of $1.6 million to the Company from July 1, 2013 to December 31, 2013.
SOI Holdings, Inc. (SOI)
On October 24, 2012 (the acquisition date), the Company acquired 100% of the outstanding equity of SOI Holdings, Inc. (SOI), the parent company of Strategic Outsourcing, Inc.
The estimated acquisition date fair value of the consideration transferred totaled $195.8 million, which consisted of the following (in thousands):
Cash paid to equity holders | | $ | 198,171 | |
Receivable from equity holders | | | (1,893 | ) |
Cash and cash equivalents acquired | | | (504 | ) |
Total | | $ | 195,774 | |
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):
Restricted cash | | $ | 700 | |
WSE-related assets | | | 122,135 | |
Prepaid expenses and other current assets | | | 600 | |
Goodwill | | | 164,616 | |
Identifiable intangible assets | | | 81,500 | |
Property and equipment | | | 8,941 | |
Other noncurrent assets | | | 464 | |
WSE-related liabilities | | | (115,902 | ) |
Accrued corporate wages | | | (2,611 | ) |
Deferred income taxes | | | (17,386 | ) |
Current portion of notes payable and borrowings under capital leases | | | (579 | ) |
Other current liabilities | | | (3,841 | ) |
Other noncurrent liabilities | | | (42,863 | ) |
Consideration transferred | | $ | 195,774 | |
The goodwill of $164.6 million is primarily attributable to the synergies and economies of scale expected from the acquisition of SOI. None of the goodwill recognized is expected to be deductible for income tax purposes. The estimated fair value of the acquired identifiable other intangible assets of $81.5 million consisted of customer contracts and trademarks valued at $68.0 million and $13.5 million, respectively. The Company recorded $31.3 million in deferred tax liabilities associated with the identifiable intangible assets, $0.1 million of which is included in current deferred income taxes, while $31.2 million is included in other noncurrent liabilities above. Additionally, $17.3 million of current deferred tax liabilities and $9.4 million of noncurrent deferred tax liabilities were acquired in the transaction, for a total of $58.0 million in total deferred tax liabilities. During the year ended December 31, 2013, an adjustment to goodwill of $5.1 million was recorded, reducing the SOI goodwill balance to $159.5 million as a result of finalizing provisional income tax amounts.
The Company recognized $0.6 million of acquisition-related costs for the SOI acquisition within general and administrative expenses in the accompanying consolidated statements of operations.
SOI contributed revenues of $17.2 million and a net loss of $1.4 million to the Company from October 24, 2012 to December 31, 2012.
210 Park Avenue Holding, Inc. (Accord)
On April 26, 2012, the Company acquired 100% of the stock of 210 Park Avenue Holding, Inc. (Accord), an Oklahoma-based professional employer organization, for total consideration of $25.5 million, net of cash and cash equivalents acquired of $2.1 million. The acquisition of Accord resulted in approximately $16.3 million of goodwill, which is not deductible for tax purposes. Identifiable intangible assets acquired, which totaled approximately $13.8 million, consist of customer list, trademarks and non-compete agreements.
App7, Inc. (ExpenseCloud)
On May 3, 2012, the Company acquired 100% of the stock of App7, Inc. (ExpenseCloud), an expense management solution company, for total consideration of $2.7 million, net of cash acquired. The acquisition of ExpenseCloud resulted in approximately $1.8 million of goodwill, which is not deductible for tax purposes. Identifiable intangible assets acquired, which totaled approximately $1.2 million, consist of developed technology and non-compete agreements.
The 2013 and 2012 acquisitions reflect the Company’s continued business strategy to diversify and expand its customer base as well as to expand its human resources services and solutions available to the Company’s current and target clients. Operating results of Ambrose, SOI, Accord and ExpenseCloud have been combined with TriNet’s operating results from the respective dates of acquisition.
Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined results of TriNet, SOI and Ambrose for the years ended December 31, 2013 and 2012 as if the SOI and Ambrose acquisition had occurred as of the beginning of 2012, by applying certain adjustments, principally adding acquisition financing costs and the amortization of acquired intangible assets and removing acquisition-related transaction expenses and SOI historical debt costs (in thousands):
| | | Year Ended December 31, | |
| | | 2013 | | | | 2012 | |
Total revenues | | $ | 1,749,115 | | | $ | 1,424,876 | |
Net income | | | 7,978 | | | | 16,374 | |
This pro forma information is based on estimates and assumptions, which Company management believes are reasonable, and is not necessarily indicative of the results of operations in future periods or the results that actually would have been realized had TriNet, Ambrose and SOI been a combined company during the specified periods.
NOTE 5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consist of the following (in thousands):
| | December 31, | | | December 31, | |
| | 2014 | | | 2013 | |
| | | | | | | | |
Software | | $ | 53,349 | | | $ | 43,513 | |
Office equipment, including data processing equipment | | | 18,550 | | | | 14,667 | |
Leasehold improvements | | | 7,092 | | | | 6,836 | |
Furniture, fixtures, and equipment | | | 6,450 | | | | 3,998 | |
Projects in progress | | | 6,786 | | | | 5,106 | |
| | | 92,227 | | | | 74,120 | |
Accumulated depreciation | | | (59,929 | ) | | | (48,430 | ) |
Property and equipment, net | | $ | 32,298 | | | $ | 25,690 | |
|
| | | | | | | |
| | December 31,
2015 | | December 31,
2014 |
| Software | $ | 64,727 |
| | $ | 53,349 |
|
| Office equipment, including data processing equipment | 20,044 |
| | 18,550 |
|
| Leasehold improvements | 9,874 |
| | 7,092 |
|
| Furniture, fixtures, and equipment | 7,911 |
| | 6,450 |
|
| Projects in progress | 7,407 |
| | 6,786 |
|
| | 109,963 |
| | 92,227 |
|
| Accumulated depreciation | (72,119 | ) | | (59,929 | ) |
| Property and equipment, net | $ | 37,844 |
| | $ | 32,298 |
|
Software and furniture, fixtures, and equipment include amounts for assets under capital leases of
$0.2 million and $1.4 million at December 31,
2015 and December 31, 2014,
and 2013.respectively. Accumulated depreciation of these assets was
$0.9 millionde minimis and
$0.5$0.9 million at December 31,
20142015 and
2013,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 Company recognized depreciation expense for capitalized internally developed software of $5.4 million, $5.2 million, $4.5 million and $2.4$4.5 million for the years ended December 31, 2015, 2014 2013 and 2012,2013, respectively. Accumulated depreciation for these assets was $29.4$34.5 million and $25.3$29.4 million at December 31, 20142015 and 2013,2014, 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
$0.8 million and
$2.8$0.8 million for the years ended December 31,
2015, 2014
2013 and
2012,2013, respectively, and included these charges in depreciation expense in the accompanying consolidated statements of operations.
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
The following schedule summarizes goodwill and other intangible assets (in thousands):
| | December 31, 2014 | |
| | Weighted Average Amortization Period | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | |
Goodwill | | | - | | | $ | 288,857 | | | $ | - | | | $ | 288,857 | |
Amortizable intangibles: | | | | | | | | | | | | | | | | |
Customer contracts | | 3-5 years | | | | 209,850 | | | | (134,454 | ) | | | 75,396 | |
Trademark | | 3 years | | | | 16,900 | | | | (11,761 | ) | | | 5,139 | |
Developed technology | | 5 years | | | | 1,000 | | | | (533 | ) | | | 467 | |
Noncompete agreements | | 2-3 years | | | | 1,940 | | | | (1,224 | ) | | | 716 | |
| | 4 years | | | | 229,690 | | | | (147,972 | ) | | | 81,718 | |
Total | | | | | | $ | 518,547 | | | $ | (147,972 | ) | | $ | 370,575 | |
| | | | December 31, 2013 | | December 31, 2015 |
| | Weighted Average Amortization Period | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | Weighted Average Amortization Period | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Goodwill | | | - | | | $ | 288,857 | | | $ | - | | | $ | 288,857 | |
| | $ | 289,207 |
| | $ | — |
| | $ | 289,207 |
|
Amortizable intangibles: | | | | | | | | | | | | | | | | | | | | | | |
Customer contracts | | 3-5 years | | | | 209,850 | | | | (88,579 | ) | | | 121,271 | | 5 years | | 209,850 |
| | (167,968 | ) | | 41,882 |
|
Trademark | | 3 years | | | | 16,900 | | | | (6,128 | ) | | | 10,772 | | 3 years | | 16,900 |
| | (16,467 | ) | | 433 |
|
Developed technology | | 5 years | | | | 1,000 | | | | (333 | ) | | | 667 | | 5 years | | 5,400 |
| | (1,173 | ) | | 4,227 |
|
Noncompete agreements | | 2-3 years | | | | 1,940 | | | | (630 | ) | | | 1,310 | | 3 years | | 1,940 |
| | (1,710 | ) | | 230 |
|
| | 4 years | | | | 229,690 | | | | (95,670 | ) | | | 134,020 | | 5 years | | 234,090 |
| | (187,318 | ) | | 46,772 |
|
Total | | | | | | $ | 518,547 | | | $ | (95,670 | ) | | $ | 422,877 | | | $ | 523,297 |
| | $ | (187,318 | ) | | $ | 335,979 |
|
|
| | | | | | | | | | | | | |
| | December 31, 2014 |
| | Weighted Average Amortization Period | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Goodwill | — | | $ | 288,857 |
| | $ | — |
| | $ | 288,857 |
|
| Amortizable intangibles: | | | | | | | |
| Customer contracts | 5 years | | 209,850 |
| | (134,454 | ) | | 75,396 |
|
| Trademark | 3 years | | 16,900 |
| | (11,761 | ) | | 5,139 |
|
| Developed technology | 5 years | | 1,000 |
| | (533 | ) | | 467 |
|
| Noncompete agreements | 3 years | | 1,940 |
| | (1,224 | ) | | 716 |
|
| | 5 years | | 229,690 |
| | (147,972 | ) | | 81,718 |
|
| Total | | | $ | 518,547 |
| | $ | (147,972 | ) | | $ | 370,575 |
|
Amortization expense related to amortizable intangibles in future periods as of December 31,
20142015 is expected to be as follows (in thousands):
Year ending December 31: | | | | |
2015 | | $ | 38,905 | |
2016 | | | 18,376 | |
2017 | | | 16,617 | |
2018 | | | 7,820 | |
2019 and thereafter | | | - | |
Total | | $ | 81,718 | |
|
| | | |
| Year ending December 31: | |
| 2016 | $ | 19,255 |
|
| 2017 | 17,497 |
|
| 2018 | 8,700 |
|
| 2019 | 880 |
|
| 2020 and thereafter | 440 |
|
| Total | $ | 46,772 |
|
NOTE 7. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS
The Company’s noncurrent restricted cash and investments include
$48.4$63.1 million of available-for-sale marketable securities and
$21.0$38.7 million of cash collateral at December 31,
2014.2015. The Company’s restricted investments within WSE-related assets include
$2.2 million of available-for-sale marketable securities and $2.3 million of certificates of deposit
and $1.5 million of available-for-sale marketable securities as of December 31,
2014.2015. The available-for-sale marketable securities
as of December 31, 2015 and December 31, 2014 consist of the following (in thousands):
| | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | |
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 | |
| | | | | | | | | | | | | | | | |
December 31, 2013: | | | | | | | | | | | | | | | | |
U.S. treasuries | | $ | 35,900 | | | $ | 38 | | | $ | (20 | ) | | $ | 35,918 | |
Mutual funds | | | 500 | | | | 8 | | | – | | | | 508 | |
Total investments | | $ | 36,400 | | | $ | 46 | | | $ | (20 | ) | | $ | 36,426 | |
|
| | | | | | | | | | | | | | | |
| | 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 |
|
There were no realized gains or losses for the year ended December 31,
20142015 and
2013.2014. As of December 31,
20142015 and
2013,December 31, 2014, the contractual maturities of the U.S. treasuries were
twoone to
threefour years.
As of December 31,
2014 and 2013,2015, certain of the Company’s U.S. treasuries were in an unrealized loss
position, all for a period of less than 12 months. These unrealizedposition. Unrealized losses are principally due to changes in interest
rates and credit spreads.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, and industry analysts’ reports. The fair value of these securities in an unrealized loss position represented
59%81% and
24%, respectively,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
loss was $0.02losses were $0.1 million
and de minimis as of
each December 31,
20142015 and
2013.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.
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
valuationvalue 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 theLevel I—observable inputs such as 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
|
Level II—inputs other than the quoted prices in active markets that are observable either directly or indirectlyLevel 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, 2014 | | | | | | | | | | | | | | | | |
Certificate 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 | | | $ | – | |
December 31, 2013: | | | | | | | | | | | | | | | | |
Certificates of deposit | | $ | 2,858 | | | $ | 2,858 | | | $ | – | | | $ | – | |
U.S. treasuries | | | 35,918 | | | | 35,918 | | | – | | | – | |
Mutual funds | | 508 | | | 508 | | | – | | | – | |
Interest rate cap | | 47 | | | – | | | 47 | | | – | |
Total | | $ | 39,331 | | | $ | 39,284 | | | $ | 47 | | | $ | – | |
|
| | | | | | | | | | | | | | | |
| | 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
forduring the years
ended December 31,
20142015 or
2013.December 31, 2014.
As of December 31,
2015 and December 31, 2014,
and 2013, certificatecertificates of deposit consisted of certificates of deposit held by domestic financial institutions,
of which
$2.3 million are presented as restricted investments within WSE-related
assets. As of December 31, 2013, $0.5 million are presented as noncurrent restricted investmentsassets in the accompanying consolidated balance sheets.
The
bookcarrying 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,
areother 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, 20142015 and 2013,December 31, 2014, the carrying value of ourthe Company’s notes payable of $544.9$499.6 million and $818.4$544.9 million, respectively, approximated fair value. The estimateestimated fair values of ourthe Company’s notes payable are considered a levelLevel 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):
| | December 31, | | | December 31, | |
| | 2014 | | | 2013 | |
Notes payable under credit facility | | $ | 544,875 | | | $ | 818,425 | |
Capital leases | | | 275 | | | | 452 | |
Less current portion | | | (20,738 | ) | | | (6,669 | ) |
| | $ | 524,412 | | | $ | 812,208 | |
In August 2013, the Company, as guarantor, its subsidiary TriNet HR Corporation, as borrower, and certain of its other subsidiaries as subsidiary guarantors entered into two senior secured credit facilities:
·
| a $705.0 million first lien credit facility with JPMorgan Chase Bank, N.A., as administrative agent which provided a $75.0 million revolving credit facility, a $175.0 million tranche B-1 term loan and a $455.0 million tranche B-2 term loan; and
|
·
| a $190.0 million second lien credit facility with Wilmington Trust, National Association, as administrative agent.
|
|
| | | | | | | |
| | 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 March 2014, the proceeds from the
IPOCompany’s initial public offering (IPO) were used to fully repay
theits existing $190.0 million second lien credit facility, which resulted in a prepayment premium of $3.8 million, and to repay $25.0 million of
theits existing first lien 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 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
werewas fully amortized in May 2014 for a charge of $0.5 million.
On
In July 9, 2014, the Company amended and restated its first lien credit facility pursuant to an amended and restated first lien credit agreement (“the(the Amended and Restated Credit Agreement”)Agreement). The Amended and Restated Credit Agreement provides
for: (i)
$375.0$375 million principal amount of
“tranchetranche A term loans,
” (ii)
$200.0$200 million principal amount of
“tranchetranche B term loans,
” and (iii) a revolving credit facility of
$75.0$75 million. 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 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 for working capital and other general corporate purposes.
The tranche A term loans and loans under the revolving credit facility 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 applicable margins for the tranche A term loans and loans under the revolving credit facility are subject to
reduction by 0.25% or 0.50%, or increase byspecified 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 commitment fee of 0.50%, subject to decrease to 0.375% based on
ourits 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.
The Company is 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.premium. The Company is 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
ourits excess cash flow (subject to decrease to (x) 25% if
ourits 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 loans will be
paidrepaid 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% 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
paidrepaid in equal quarterly installments in an aggregate annual amount equal to 1% of the
original 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
$30.0$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,
2014.2015. 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
recognized asrecorded 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
recognized asrecorded 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 August 2014,March 2015, the Company repaid $25.0 million of the first lien tranche B-1B term loan. As a result, a portion of the loan fees associated with the first lien credit facility was fully amortized in August 2014March 2015 for a charge of $0.6$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, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, and dividends and other distributions. The Amended and Restated Credit Agreement also contains financial covenants that require the Company to maintain a minimum consolidated interest coverage ratio of at least 3.50 to 1.00 beginning with the fiscal quarter ending December 31, 2014, and a maximum total leverage ratio currentlyof 4.25 to 1.00 at 5.00 to 1.00.December 31, 2015. The Company was in compliance with the restrictive covenants under the credit facilities at
December 31,
2014.2015. 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.
NOTE 9. 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.
NOTE
10:9: 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.
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$240.0 million, resulting in net proceeds to us of
$217.8$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$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. NonemployeeNon-employee directors are eligible to receive nonstatutory stock options automatically at designated intervals over their period of continuous service on the Board. In February 2014, the Board approved an amendment to theThe 2009 Plan, authorizing an additional 3,000,000 shares available for grant. Theas amended, 2009 Plan also 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.The2019. 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 issued to recipients other than nonemployee directors generally vest over four years with a one year cliff and monthly thereafter, and have a maximum contractual term of 10 years. Options issued to members of the Board of Directors are issued with varying vesting schedules. 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 also has granted restricted stock units (RSUs) to members of the Board of Directors, certain executives and certain executives.employees. These restricted stock unitsRSUs represent rights to receive shares of the Company’s common stock on satisfaction of applicable vesting conditions. The fair value of restricted stock unitsRSUs is equal to the fair value of the Company’s common stock on the date of grant. The restricted stock unitsRSUs 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 endgrant 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 first year and then pro rata monthly thereafterperformance awards is cumulative annual growth rate in the Company’s net service revenues. These values are being recognized over the remaining vesting term of three or two years, as applicable. 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 Planincentive plan activity under the 2000 Plan and the 2009 Plan is summarized as follows:
|
| | |
Equity Incentive Plan activityActivity | | Shares Available for Grant | |
Balance at December 31, 2013
| | | 2,004,464
| |
Authorized
| | | 3,000,000
| |
Granted
| | | (2,773,500
| )
|
Forfeited
| | | 470,980
| |
Expired
| | | 6,580
| |
Balance at December 31, 2014 | 2,708,524 |
|
| Authorized | 2,708,524
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 |
|
The following table summarizes stock option activity under the Company’s equity-based plans for the year ended December 31,
2014:2015:Stock Options activity | | Number of Shares | | | Weighted Average Exercise Price | | | Weighted- Average Remaining Contractual Term (Years) | | | Aggregate Intrinsic Value (in thousands) | |
Balance at December 31, 2013 | | | 6,281,148 | | | $ | 1.74 | | | 8.55 | | | $ | 53,373 | |
Granted | | | 2,748,500 | | | | 13.02 | | | | | | | | | �� |
Exercised | | | (1,712,278 | ) | | | 1.28 | | | | | | | | | |
Forfeited | | | (417,980 | ) | | | 5.33 | | | | | | | | | |
Expired | | | (6,580 | ) | | | 0.50 | | | | | | | | | |
Balance at December 31, 2014 | | | 6,892,810 | | | $ | 6.13 | | | | 8.22 | | | $ | 173,338 | |
| | | | | | | | | | | | | | | | |
Exercisable at December 31, 2014 | | | 1,735,148 | | | $ | 1.20 | | | | 7.09 | | | $ | 52,195 | |
| | | | | | | | | | | | | | | | |
Vested and expected to vest at December 31, 2014 | | | 6,600,369 | | | $ | 6.01 | | | | 8.19 | | | $ | 166,806 | |
|
| | | | | | | | | | | | |
| 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 |
|
The weighted-average
grant-dategrant date fair value of stock options granted in the years ended December 31,
2015, 2014
and 2013
was $12.73, $7.18 and
2012 was $7.18, $4.11
and $1.51 per share, respectively. The total fair value of options vested for the years ended December 31,
2015, 2014
and 2013
and 2012 was
$12.2 million, $7.5 million
and $4.0 million,
and $3.6 million, respectively.
The total intrinsic value of options exercised for the years ended December 31,
2015, 2014
and 2013
and 2012 was
$53.3 million, $35.1 million
$52.6 million and
$6.1$52.6 million, respectively. Cash received from options exercised during the years ended December 31,
2015, 2014
and 2013
and 2012 was
$7.3 million, $2.2 million
$7.1 million, and
$5.4$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, 2014,2015, unrecognized compensation expense, net of forfeitures, associated with nonvested options outstanding was $22.5$13.9 million and is expected to be recognized over a weighted-average period of 2.792.19 years.
The following table summarizes restricted stock unitRSU activity under the Company’s equity-based plans for the year ended December 31, 2014:
2015:Restricted Stock Unit activity | | Number of Units | | | Weighted-Average Grant Date Fair Value | |
Nonvested at December 31, 2013 | | | 40,000 | | | $ | 13.21 | |
Granted | | | 25,000 | | | | 28.59 | |
Vested | | | (4,250 | ) | | | 13.21 | |
Forfeited | | | (53,000 | ) | | | 20.46 | |
Nonvested at December 31, 2014 | | | 7,750 | | | $ | 13.21 | |
|
| | | | | | |
| 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
restricted stock unitsRSUs granted in the year ended December 31,
20142015 was
$0.7$31.2 million. The total grant date fair value of
restricted stock unitsRSUs vested in
the years ended December 31,
2015, 2014
and 2013
and 2012 was
$0.1$3.5 million, $0.1 million
$0.3and $0.1 million, respectively. As of December 31,
2014 ,2015, unrecognized compensation expense, net of forfeitures, associated with the nonvested
restricted stock unitsRSUs outstanding was
$0.1$23.3 million, and is expected to be recognized over a weighted-average period of
2.503.05 years.
During the years
2015, 2014
2013 and
2012,2013, the Company withheld
35,379, 80,599
809,012 and
15,724809,012 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 expense of
$17.9 million, $11.0 million
$6.1 million and
$4.4$6.1 million was recognized for the years ended December 31,
2015, 2014
and 2013,
and 2012, respectively.
An incomeIncome tax benefit of
$5.7 million, $2.0 million
$4.4 million, and
$1.7$4.4 million was recognized relating to stock-based compensation expense for
the years ended December 31, 2015, 2014
2013, and
2012,2013, respectively. The actual tax benefit realized from stock options exercised was
$19.6 million, $13.5 million
and $19.9 million
for 2015, 2014 and
$2.4 million for 2014, 2013,
and 2012, respectively.
The fair value of stock-based awards is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| | Year Ended December 31, | |
Stock Option: | | 2014 | | | 2013 | | | 2012 | |
Expected term (in years) | | | 6.05 | | | 6.04 | | | 6.04 | |
Expected volatility | | | 58 | % | | | 48 | % | | | 46 | % |
Risk-free interest rate | | | 1.80 | % | | | 1.26 | % | | | 1.01 | % |
Expected dividend yield | | | 0 | % | | | 0 | % | | | 0 | % |
| | Year Ended December 31, | |
ESPP: | | 2014 | | | 2013 | | 2012 | |
| | Stock Option Assumptions | | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
Expected term (in years) | | | 0.50 | | | n/a | | n/a | 6.08 |
| | 6.05 |
| | 6.04 |
|
Expected volatility | | 33-58% | | | n/a | | n/a | 39 | % | | 58 | % | | 48 | % |
Risk-free interest rate | | 0.06-0.07% | | | n/a | | n/a | 1.73 | % | | 1.80 | % | | 1.26 | % |
Expected dividend yield | | | 0 | % | | n/a | | n/a | 0 | % | | 0 | % | | 0 | % |
Diluted EPS is calculated using the more dilutive 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.
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 price 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.
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.options. During 2014, the Company repurchased 490,419 shares of outstanding common stock for $15 million. As
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 $1.9$0.6 million and $2.0$1.9 million as of December 31, 20142015 and 2013,2014, respectively, related to 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 $8.6$0.1 million and $58.6$60.8 million, respectively, as of December 31, 2014, respectively. 2015. The federal net operating loss carryforward will begin expiring in 20302031 and the state net operating loss carryforward will begin expiring in 2015.The2016. The Internal Revenue Code of 1986, as amended, imposes substantial restrictions on the utilization of net operating losses in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be limited as prescribed under Internal Revenue Code Section 382 (“IRC Section 382”). Events which may cause limitations in the amount of the net operating losses that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a
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 federal and state resulting from stock option exercises was $4.6$14.1 million and $19.3 million, respectively at December 31, 2014.2015. When realized, excess windfall tax benefits are credited to additional paid-in capital. The provision for income taxes for the year ended December 31, 2014 current tax benefit2015 included $20.7 million of $26.3 million is net of $9.7 million excess tax benefit resulting from stock option exercises 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 not provided for U.S. federal income and foreign withholding taxes on its Canadian subsidiary’s undistributed earnings of $1.9$2.6 million as of December 31, 2014,2015, because the Company intends to reinvest such earnings
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
| | Quarter ended | | |
| | March 31 | | | June 30 | | | September 30 | | | December 31 | | |
2014 | | | | | | | | | | | | | | | | | |
Total revenues | | $ | 508,912 | | | $ | 525,006 | | | $ | 555,951 | | | $ | 603,662 | | |
Insurance costs | | | 381,157 | | | | 400,195 | | | | 428,184 | | | | 476,779 | | |
Operating income | | | 25,277 | | | | 20,029 | | | | 21,246 | | | | 20,239 | | |
Net income | | | 1,540 | | | | 6,221 | | | | 725 | | (1) | | 7,011 | | |
Basic net income per share | | | 0.03 | | | | 0.09 | | | | 0.01 | | | | 0.10 | | |
Diluted net income per share | | | 0.03 | | | | 0.09 | | | | 0.01 | | | | 0.10 | | |
2013 | | | | | | | | | | | | | | | | | |
Total revenues | | $ | 351,070 | | | $ | 363,432 | | | $ | 448,117 | | | $ | 481,656 | | |
Insurance costs | | | 253,912 | | | | 269,217 | | | | 343,464 | | | | 359,992 | | |
Operating income | | | 21,583 | | | | 13,932 | | | | 7,287 | | | | 23,535 | | |
Net income | | | 10,537 | | | | 4,343 | | | | (7,740 | ) | (2) | | 6,007 | | (2) |
Basic net income per share | | | 0.22 | | | | 0.09 | | | | (0.60 | ) | | | 0.11 | | |
Diluted net income per share | | | 0.20 | | | | 0.08 | | | | (0.60 | ) | | | 0.11 | | |
(1)
| Included in the results of the third quarter of 2014 is the write-off of debt issuance costs and pre-payment premium 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
|
(2)
| Includes the acquisition of Ambrose Employer Group, LLC during the third and fourth quarter of 2013. Please read Note 4, “Business Combinations,” for additional information.
|
|
| | | | | | | | | | | | | | | |
| | Quarter ended |
| | March 31 | | June 30 | | September 30 | | December 31 |
| 2015 | | | | | | | |
| Total revenues | $ | 625,578 |
| | $ | 640,007 |
| | $ | 668,008 |
| | $ | 725,695 |
|
| Insurance costs | $ | 483,203 |
| | $ | 517,994 |
| | $ | 534,481 |
| | $ | 576,698 |
|
| Operating income | $ | 31,041 |
| | $ | 5,985 |
| | $ | 11,682 |
| | $ | 29,609 |
|
| 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 | | | | | | | |
| Total revenues | $ | 508,912 |
| | $ | 525,006 |
| | $ | 555,951 |
| | $ | 603,662 |
|
| Insurance costs | $ | 381,157 |
| | $ | 400,195 |
| | $ | 428,184 |
| | $ | 476,779 |
|
| Operating income | $ | 25,277 |
| | $ | 20,029 |
| | $ | 21,246 |
| | $ | 20,239 |
|
| Net income | $ | 1,540 |
| | $ | 6,221 |
| | $ | 725 |
| (1) | $ | 7,011 |
|
| Basic net income per share | $ | 0.03 |
| | $ | 0.09 |
| | $ | 0.01 |
| | $ | 0.10 |
|
| Diluted net income per share | $ | 0.03 |
| | $ | 0.09 |
| | $ | 0.01 |
| | $ | 0.10 |
|
(1) Included in the results of the third quarter of 2014 is the write-off of debt issuance costs and pre-payment premium 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.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and
Procedures.Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31,
2014.2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are 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 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’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,
2014,2015, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were
not effective
atas a result of the
reasonable assurance level.material weaknesses in our internal control over financial reporting described below.
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.
Management’s Report on Internal Control Over Financial Reporting
This report does not include a report of management’s assessment regarding
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is designed 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 attestation reportassessment 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 transition period established by ruleslack 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 SECdesign 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
newly public companies.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) 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 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 misstatement 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 accuracy 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, based on the COSO criteria.
/s/ Ernst & Young LLP
San Francisco, California
March 31, 2016
Additional Analyses and Procedures and Remediation Plan
As a result of the material weaknesses described above, 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 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.
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, our management may decide to take additional measures to address 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
asthe identification of the material weaknesses described
below,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) of the Exchange Act that occurred during the quarter ended December 31,
20142015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As described below, we have implemented changes to our disclosure controls and procedures and internal control over financial reporting to remediate the material weakness identified below.Remediation Efforts on Previously Identified Material Weakness
In preparing and reviewing our consolidated financial statements as of and for the nine months ended September 30, 2013 and in connection with our restatement of previously issued consolidated financial statements for the years ended December 31, 2010 and 2011, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting related to accounting for income taxes. 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 financial statements will not be prevented or detected on a timely basis. The material weakness identified related to our incorrectly recording a deferred tax asset in connection with our accounting for our acquisition of Ambrose that should have been recorded as goodwill as of September 30, 2013, and to incorrectly recording a true-up to the income tax provision in 2011 related to the allocation of stock compensation between qualified and nonqualified stock options that should have been identified and recorded in 2010. As such, our controls over financial reporting were not designed or operating effectively, and as a result there were adjustments required in connection with closing our books and records and preparing our consolidated financial statements for the nine months ended September 30, 2013 and a restatement was required for our consolidated financial statements for 2010 and 2011.
In response to this material weakness, we hired a Director of Income Tax Accounting, who reports directly to our Chief Accounting Officer, we engaged external technical advisers with expertise in accounting for income taxes to assist us with the evaluation of complex tax issues, and we improved our process, procedures and documentation standards relating to the preparation of income tax provision calculations. We continue to assess and develop our tax professionals to provide appropriate technical and accounting expertise commensurate with our needs to properly consider and apply GAAP for income taxes.
We believe our remediation efforts resulted in the elimination of the previously identified material weakness. While this material weakness has been remediated, we cannot assure you that we have identified all of our existing material weaknesses, or that we will not in the future have additional material weaknesses. We have dedicated resources to the design, implementation, documentation and testing of our internal controls. We will continue to evaluate the effectiveness of our internal controls, including our internal control over accounting for income taxes, and will continue to make changes that we believe will strengthen our internal controls to ensure that our financial statements continue to be fairly stated in all material respects.
Neither we nor our independent registered public accounting firm has performed an evaluation of our internal control over financial reporting during any period in accordance with the provisions of the Sarbanes-Oxley Act. In light of the material weakness that was identified in 2013 as a result of the limited procedures performed, we believe that it is possible that, had we and our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses or significant control deficiencies may have been identified.
Item 9B. Other Information.
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 20152016 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2014.2015.
Item 11. Executive Compensation.
Information required by this item is incorporated by reference to TriNet Group Inc.’s Proxy Statement for its 20152016 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2014.2015.
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 20152016 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2014.2015.
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 20152016 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2014.2015.
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
20152016 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31,
2014.2015.
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.(2) Financial statement schedules.
SCHEDULE
II—VALUATIONII-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, 2014 | | 865 | | | 947 | | | | — | | | | (1,424 | ) | | 388 | |
Year ended December 31, 2013 | | 819 | | | 839 | | | | — | | | | (793 | ) | | 865 | |
Year ended December 31, 2012 | | 221 | | | | 805 | | | | 335 | | | | (542 | ) | | 819 | |
Tax Valuation Allowance | | | | | | | | | | | | | | | | | | | | |
Year ended December 31, 2014 | | | 5,194 | | | | 1,751 | | | | — | | | | — | | | | 6,945 | |
Year ended December 31, 2013 | | | 1,547 | | | | 2,451 | | | | 1,196 | | | | — | | | | 5,194 | |
Year ended December 31, 2012 | | | 431 | | | | (18 | ) | | | 1,399 | | | | (265 | ) | | | 1,547 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | 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 |
|
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, State of California, on the
30th31st day of March,
2015.2016. |
| | | |
| TRINET GROUP, INC. |
| |
By:
Date: March 31, 2016 | | By: | /s/ BURTON M. GOLDFIELD |
| | Burton M. Goldfield |
| | | Burton M. Goldfield |
| | | Chief Executive Officer |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Burton M. Goldfield, William Porter and
Gregory L. Hammond,Brady Mickelsen, and each of them, as his true and lawful attorneys-in-fact and agents, each with the full power of substitution, for him and in his 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 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
|
| | | | |
Signature | | Title | | Date |
| | | | |
/s/ BURTON M. GOLDFIELD | | Chief Executive Officer (principal executive officer) | | March 30, 2015 31, 2016 |
Burton M. Goldfield | | |
| | | | |
/s/ WILLIAM PORTER | | Chief Financial Officer (principal financial and accounting officer) | | March 30, 2015 31, 2016 |
William Porter | | |
| | | | |
/s/ Katherine August-deWilde | | Director | | March 31, 2016 |
Katherine August-deWilde | | | March 30, 2015
|
| | | | |
/s/Martin Babinec | | Director | | March 30, 2015 31, 2016 |
Martin Babinec | | |
| | | | |
/s/H. Raymond Bingham | | Director | | March 30, 2015 31, 2016 |
H. Raymond Bingham | | |
| | | | |
/s/Kenneth Goldman Paul Chamberlain | | Director | | March 30, 2015 31, 2016 |
Kenneth Goldman
Paul Chamberlain | | |
| | | | |
/s/ Kenneth Goldman | | Director | | March 31, 2016 |
| Kenneth Goldman | | |
| | | | |
| /s/ David C. Hodgson | | Director | | March 30, 2015 31, 2016 |
David C. Hodgson | | |
| | | | |
/s/John H. Kispert | | Director | | March 30, 2015 31, 2016 |
John H. Kispert | | |
| | | | |
/s/Wayne B. Lowell | | Director | | March 30, 2015 31, 2016 |
Wayne B. Lowell | | |
| | | | Incorporated by Reference | | | | |
Exhibit
No. | | Description of Exhibit | | Form | | | File No. | | | Exhibit | | | Filing
Date | | | 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 | | | | | |
| | | | | | |
2.3* | | Agreement and Plan of Merger by and among TriNet Group, Inc., Gin Acquisition, Inc. and Gevity HR, Inc., dated March 4, 2009. | | | 8-K | | | | 000-22701 | | | | 2.1 | | | | 3/6/2009 | | | | | |
| | | | | | |
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 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 | | | | | |
| | | | | | |
10.5 | | 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 | | | | | |
| | | | | | |
10.6 | | 2014 Employee Stock Purchase Plan. | | | S-1/A | | | | 333-192465 | | | | 10.7 | | | | 3/14/2014 | | | | | |
| | | | | | |
10.7 | | 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 | | | | | |
| | | | | | |
10.8 | | Employment Agreement, dated November 9, 2009, between Burton M. Goldfield and TriNet Group, Inc. | | | S-1/A | | | | 333-192465 | | | | 10.9 | | | | 2/13/2014 | | | | | |
| | | | | | |
10.9 | | Employment Agreement, dated November 9, 2009, between Gregory Hammond and TriNet Group, Inc. | | | S-1/A | | | | 333-192465 | | | | 10.10 | | | | 2/13/2014 | | | | | |
| | | | | | |
10.10 | | Employment Agreement, dated August 23, 2010, between William Porter and TriNet Group, Inc. | | | S-1/A | | | | 333-192465 | | | | 10.11 | | | | 2/13/2014 | | | | | |
|
| | | | | | | | | | | | | |
| | | | | 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
Date | | | Filed
Herewith | |
| | | | | | |
10.11 | | Employment Agreement, dated March 5, 2012, between John Turner and TriNet Group, Inc. | | | S-1/A | | | | 333-192465 | | | | 10.12 | | | | 2/13/2014 | | | | | |
| | | | | | |
10.12 | | 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 | | | | | |
| | | | | | |
10.13 | | 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 | | | | | |
| | | | | | |
10.14 | | 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 | |
*
| Filed as Exhibit 2.1 to the current report on Form 8-K of Gevity HR, Inc. filed with the Securities and Exchange Commission on March 6, 2009 (file no. 000-22701) and incorporated herein by reference.
|
|
| | | | | | | | | | | | | |
| | | | | 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 |
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| * | 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. |
**
| 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.
|
100
92
