UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20182019
or
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36373
TRINET GROUP INC.INC
(Exact Name of Registrant as Specified in its Charter)
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| Delaware | | 95-3359658 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| One Park Place, Suite 600 | | |
| Dublin, | CA | | 94568 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (510) (510) 352-5000
Securities registered pursuant to Section 12(b) of the Act: |
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common stock par value $0.000025 per share | TNET | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company”,company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | x | Accelerated filer | o |
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| Non-accelerated filer | o(do not check if a smaller reporting company) | Smaller reporting company | o☐ |
| | | | |
| | Emerging growth company | o | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes o No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x
The number of shares of Registrant’s Common Stock outstanding as of July 23, 201818, 2019 was 70,550,657.
69,935,199.
TRINET GROUP, INC.
Form 10-Q - Quarterly Report
For the Quarterly Period Ended June 30, 20182019
TABLE OF CONTENTS
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| | Form 10-Q Cross Reference | Page |
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| Part I, Item 1. | |
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| Part I, Item 2. | |
| Part I, Item 3. | |
| Part I, Item 4. | |
| Part II, Item 1. | |
| Part II, Item 1A. | |
| Part II, Item 2. | |
| Part II, Item 3. | |
| Part II, Item 4. | |
| Part II, Item 5. | |
| Part II, Item 6. | |
Glossary of Acronyms and Abbreviations
Acronyms and abbreviations are used throughout this report, particularly in Part I, Item 1. Unaudited Condensed Consolidated Financial Statements and Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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| AFS | Available-for-sale |
| ASC | Accounting standards codification |
| ASU | Accounting standards update |
| CEO | Chief Executive Officer |
| CFO | Chief Financial Officer |
| COPS | Cost of providing services |
| D&A | Depreciation and Amortization |
| EBITDA | Earnings before interest expense, taxes, depreciation and amortization of intangible assets |
| EPS | Earnings Per Share |
| ERISA | Employee Retirement Income Security Act of 1974 |
| FASB | Financial Accounting Standards Board |
| G&A | General and administrative |
| GAAP | Generally Accepted Accounting Principles in the United States |
| HR | Human Resources |
| IRS | Internal Revenue Service |
| ISR | Insurance service revenues |
| MD&A | Management's Discussion and Analysis of Financial Condition and Results of Operations |
| NISR | Net Insurance Service Revenues |
| NSR | Net service revenues |
| OE | Operating expenses |
| PFC | Payroll funds collected |
| PSR | Professional service revenues |
| ROU | Right-of-use |
| RSA | Restricted Stock Award |
| RSU | Restricted Stock Unit |
| SBC | Stock Based Compensation |
| S&M | Sales and marketing |
| SD&P | Systems development and programming |
| SEC | Securities and Exchange Commission |
| SMB | Small to midsize business |
| U.S. | United States |
| WSE | Worksite employee |
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| FORWARD LOOKING STATEMENTS AND OTHER FINANCIAL INFORMATION | |
Cautionary Note Regarding Forward-Looking Statements and Other Financial Information
For purposes of this Quarterly Report on Form 10-Q (Form 10-Q), the terms “TriNet," "the” “the Company,"” “we,” “us” and “our"“our” refer to TriNet Group, Inc., and its consolidated subsidiaries. This Form 10-Q contains statements that are not historical in nature, are predictive in nature, or that depend upon or refer to future events or conditions or otherwise contain forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by the use of words such as, but not limited to, "ability," “anticipate,” “believe,” “can,” “continue,” “could,” “design,” “estimate,” “expect,” “forecast,” “hope,” "impact," “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “strategy,” “target,” "value," “will,” “would” and similar expressions or variations intended to identify forward-looking statements.
Forward-looking statements are not guarantees of future performance, but are based on management’s expectations as of the date of this Form 10-Q and assumptions that are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from our current expectations and any past results, performance or achievements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements are discussed throughout our Annual Report on Form 10-K for the year ended December 31, 20172018 filed with the Securities and Exchange Commission (SEC)SEC on February 27, 2018 (201714, 2019 (2018 Form 10-K), including those appearing under the heading “Risk Factors” in Item 1A, and under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) in Item 7 of our 20172018 Form 10-K, as well as in our other periodic filings with the SEC. ThoseExamples of forward-looking statements include, among others: risks associated with changes in, uncertainty regarding, or adverse application of the complex laws and regulations that govern our business; our ability to be recognized as an employer of worksite employees under federal and state regulations; our ability to mitigate business risks associated with our co-employment relationship with our worksite employees; our ability to secure private and confidential client and worksite employee data and our information technology infrastructure against cyber-attacks and security breaches; our ability to manage unexpected changes in workers’ compensation and health insurance claims by worksite employees; fluctuation in our results of operation and stock price as a result of numerous factors, many of which are outside of our control, such as the volume and severity of our workers’ compensation and health insurance claims and the amount and timing of our insurance costs, operating expenses and capital expenditure requirements; failures or limitations in the business systems we rely upon; our ability to improve our technology to meet the expectations of our clients; our ability to properly manage our internal controls over financial reporting; our ability to effectively integrate businesses we have acquired and new businesses we may acquire in the future; the effects of volatility in the financial and economic environment on the businesses that make up our client base; our ability to effectively manage and improve our operational processes; market acceptance of our vertical strategy; our ability to manage our sales force effectively; the ability of our products and services to compete effectively in our industry; the concentration of our clients in certain geographies and industries; the outcome of existing and future legal proceedings; changes in our income tax positions or adverse outcomes from on-going and future audits; adverse changes in our insurance coverage or our relationships with key insurance carriers; our ability to manage our client attrition; our ability to comply with the restrictions of our credit facility and meet our debt obligations; the impact of concentrated ownership in our stock; and the effects of increased competition and our ability to compete effectively. These and other factors could cause our actual results to differ materially from our anticipated results. The information provided in this Form 10-Q is based upon the facts and circumstances known as of the date of this Form 10-Q, and any forward-looking statements made by us in this Form 10-Q speak only as of the date of this Form 10-Q. We undertake no obligation to revise or update any of the information provided in this Form 10-Q, except as required by law.
The MD&A of this Form 10-Q includes references to our performance measures presented in conformity with accounting principles generally accepted in the United States of America (GAAP)GAAP and other non-GAAP financial measures that we use to manage our business, to make planning decisions, to allocate resources and to use as performance measures in our executive compensation plans. Refer to the Non-GAAP Financial Measures in our Key Financial and Operating Metrics section within our MD&A for definitions and reconciliations from GAAP measures.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Overview
TriNet is a leading provider of human resources (HR) solutions for small to midsize businesses (SMBs). Under our co-employment model, we assume certain of the responsibilities of being an employer and help our clients mitigate employer-related risks and manage many of the complex and burdensome administrative and compliance responsibilities associated with employment.
Our solutions includeHR expertise, payroll processing, tax administration, access toservices, employee benefits and anemployment risk mitigation services for SMBs. We deliver a comprehensive suite of products and services, which allows our clients to administer and manage various HR-related functions, including compensation and benefits, payroll processing, employee data, health insurance and workers' compensation programs, and other transactional HR needs using our technology platform with online and mobile tools that allowHR, benefits and compliance expertise.
We also leverage our scale and industry-specific HR experience to design product and service offerings for SMBs in specific industries. We believe our industry-specific approach, which we call our vertical approach, is a key differentiator for us and creates additional value for our clients by allowing our product and worksite employees (WSEs)service offerings to store, view and manage their core HR-related information and efficiently conduct a variety of HR-related transactions anytime and anywhere.address the common HR needs in different client industries.
Significant Developments in 2018
Operational Highlights
Our consolidated results for the six months ended June 30, 2018second quarter and the first half of 2019 reflect our continued progress in attracting new customers to our industry-oriented (vertical) products, serving our existing customers and improving our brand awareness through marketing.
Our customers are our focus, and we are investing in our processes to ensure a stronger customer experience. We expect this investment will further enhance our value to our customers, support retention and provide further efficiency and scale for our operations. We started this work in 2018 and expect this to continue in the near-term.
During the first half of 2019 we:
experienced an improvement in retention as a result of our customer service initiatives,
benefited from our clients growing their WSEs,
saw an increase in new sales which delivered additional revenue growth,
continued to experience a change in our client mix with customers increasing their participation, or enrollment, in our insurance serviceservices offerings, combinedand
delivered profitable growth.
Our efforts to build a successful and enduring company include building and leveraging a strong national brand presence. Our branding strategy, Incredible Starts Here, is being augmented with higher WSE enrollment growth within our insurance offerings.
current campaign: People Matter. We experienced a decline in Average WSEs (defined as average monthly WSE's paid duringplace our customers at the period) forcenter of what we do, including placing our customers at the six months ended June 30, 2018 as compared to the first six months of 2017 primarily due to the migration of clients from our legacy (SOI) platform onto our common TriNet platform. The decline in Average WSEs from our platform migration was partially offset by new customer growth across allcenter of our core verticals and growth within our installed base.marketing.
In summary we:
Completed the migration of existing clients from the SOI platform onto our common TriNet platform, which will allow all our clients to benefit from our investment in platform and product improvements,
Launched TriNet Professional Services, our sixth vertical product, which addresses the HR needs of professional service firms such as consulting, advertising, and other expertise-driven companies.
Improved the financial performance of our vertical products by adding new clients with better sales representative retention.
Commenced with investment of corporate funds to generate interest income.
Refinanced term loans maturing July 2019 with a new $425 million term loan and secured a $250 million revolving credit facility.
Continued to benefit from changes executed in October 2017 for one of our health insurance carriers, where we converted an insurance carrier contract from a guaranteed-cost to risk-based insurance plan,
Continued to invest in improving our internal control environment to support our ongoing compliance with the requirements of Sarbanes-Oxley Act of 2002 (SOX), and
A TriNet subsidiary received a Certified Professional Employer Organization designation on July 1, 2018.
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MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Performance Highlights
Q2 2018
During the second quarter of 2018, we:
Served approximately 16,000 clients and co-employed Average WSEs of approximately 314,000, a 3% decrease in Average WSEs compared to the same period in 2017 and
Processed approximately $8.4 billion in payroll and payroll tax payments for our clients, an increase of 5% over the same period in 2017.
Our financial highlights for the second quarter of 2018, compared to the same period in 2017, include:
Total revenues increased 6% to $850 million and Net Service Revenues increased 10% to $220 million,
Operating income increased 34% to $76 million,
Our effective income tax rate decreased to 19%,
Net income increased 45% to $58 million, or $0.80 per diluted share and Adjusted Net Income increased 73% to $63 million, and
Adjusted EBITDA increased 36% to $99 million.
YTD2018
During the first half of 2018, we:
Co-employed Average WSEs of approximately 314,000, a 4% decrease in Average WSEs compared to the same period in 2017 and
Processed approximately $18.7 billion in payroll and payroll tax payments for our clients, an increase of 5% over the same period in 2017.
Our financial highlights for the first half of 2018, compared to the same period in 2017, include:
Total revenues increased 6% to $1.7 billion and Net Service Revenues increased 10% to $440 million,
Operating income increased 38% to $147 million,
Our effective income tax rate decreased to 19%,
Net income increased 63% to $112 million, or $1.55 per diluted share and Adjusted Net Income increased 78% to $121 million, and
Adjusted EBITDA increased 40% to $190 million.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Performance Highlights
Our results for the second quarter and the first half of 2019 are as follows (percentages, increases or reductions represent changes when compared to the same periods of 2018):
Q2 2019
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| | $935M | | $55M | | $231M |
| | Total revenues | | Operating income | | Net Service Revenue * |
| | 10 | % | increase | | (28 | )% | decrease | | 5 | % | increase |
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| | $46M | | $0.64 | | $50M |
| | Net income | | Diluted EPS | | Adjusted Net income * |
| | (22 | )% | decrease | | (20 | )% | decrease | | (21 | )% | decrease |
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| * | Non-GAAP measure as defined in the section below.
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| | 323,957 | | 318,874 | | $9.1B |
| | Total WSEs | | Average WSEs | | Payroll and payroll tax payments |
| | 2 | % | increase | | 2 | % | increase | | 9 | % | increase |
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During the second quarter of 2019, we continued to achieve year-over-year improvement in our WSE and revenue growth. The growth year-over-year reflects improvement in our new sales performance and customer retention by customers that choose to benefit from all of our service offerings. Increased hiring and enrollments by our customers and a change in mix of WSEs also contributed to the growth. We continue to price to the value of our services and, for our insurance offerings, to our expected risk. Operating income, adjusted net income and net income decreased due primarily to increases in insurance costs as a result of an increase in medical cost trend and health plan participation or enrollment, and increased operating expenses as a result of our growth initiatives and initiatives to improve client service, partially offset by a 10% increase in total revenues.
Average WSEs (defined as average monthly WSEs paid during the period) for the second quarter of 2019 increased 2% compared to the same period in 2018 driven by lower client attrition in our Main Street vertical, improved new sales and increased WSE hiring by our clients.
Our pricing strategy and change in mix of WSEs over the last year contributed to our growth of both PSR and ISR.
We continue to enhance our investment strategy to invest available liquid funds to improve our net income and to fund our corporate initiatives.
YTD2019
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| | $1.9B | | $137M | | $482M |
| | Total revenues | | Operating income | | Net Service Revenue * |
| | 9 | % | increase | | (7 | )% | decrease | | 9 | % | increase |
| | | | | | | | | |
| | $109M | | $1.53 | | $120M |
| | Net income | | Diluted EPS | | Adjusted Net income * |
| | (3 | )% | decrease | | (1 | )% | decrease | | (2 | )% | decrease |
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| * | Non-GAAP measure as defined in the section below.
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| | 315,817 | | $20.7B |
| | Average WSEs | | Payroll and payroll tax payments |
| | 1 | % | increase | | 11 | % | increase |
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Key Financial and Operating Metrics
The following key financial and operating metrics should be read in conjunction with our condensed consolidated financial statements and related notes included in this Form 10-Q.
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| (in millions, except per share and WSE data) | 2018 | | 2017 | | % Change | | 2018 | | 2017 | | % Change | 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change |
| Income Statement Data: | | | | | | | | | | | | | | | | | | | | | | | | |
| Total revenues | $ | 850 |
| | $ | 801 |
| | 6 | % | | $ | 1,711 |
| | $ | 1,608 |
| | 6 | % | | $ | 935 |
| | $ | 850 |
| | 10 |
| % | | $ | 1,869 |
| | $ | 1,711 |
| | 9 |
| % |
| Operating income | 76 |
| | 57 |
| | 34 |
| | 147 |
| | 106 |
| | 38 |
| | 55 |
| | 76 |
| | (28 | ) | | 137 |
| | 147 |
| | (7 | ) | |
| Net income | 58 |
| | 40 |
| | 45 |
| | 112 |
| | 69 |
| | 63 |
| | 46 |
| | 58 |
| | (22 | ) | | 109 |
| | 112 |
| | (3 | ) | |
| Diluted net income per share of common stock | 0.80 |
| | 0.56 |
| | 43 |
| | 1.55 |
| | 0.97 |
| | 60 |
| | 0.64 |
| | 0.80 |
| | (20 | ) | | 1.53 |
| | 1.55 |
| | (1 | ) | |
Non-GAAP measures (1): | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Service Revenues | 220 |
| | 201 |
| | 10 |
| | 440 |
| | 400 |
| | 10 |
| | 231 |
| | 220 |
| | 5 |
| | 482 |
| | 440 |
| | 9 |
| |
| Net Insurance Service Revenues | 105 |
| | 92 |
| | 14 |
| | 196 |
| | 171 |
| | 15 |
| | 104 |
| | 105 |
| | (2 | ) | | 219 |
| | 196 |
| | 11 |
| |
| Adjusted EBITDA | 99 |
| | 72 |
| | 36 |
| | 190 |
| | 137 |
| | 40 |
| | 85 |
| | 99 |
| | (16 | ) | | 193 |
| | 190 |
| | 1 |
| |
| Adjusted Net Income | 63 |
| | 37 |
| | 73 |
| | 121 |
| | 68 |
| | 78 |
| | 50 |
| | 63 |
| | (21 | ) | | 120 |
| | 121 |
| | (2 | ) | |
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| Operating Metrics: | | | | | | | | | | | | | | | | | | | | | | | | |
| Total WSEs payroll and payroll taxes processed | $ | 8,371 |
| | $ | 7,958 |
| | 5 | % | | $ | 18,690 |
| | $ | 17,774 |
| | 5 | % | | $ | 9,110 |
| | $ | 8,371 |
| | 9 |
| % | | $ | 20,732 |
| | $ | 18,690 |
| | 11 |
| % |
| Average WSEs | 313,845 |
| | 324,194 |
| | (3 | ) | | 314,203 |
| | 325,999 |
| | (4 | ) | | 318,874 |
| | 313,845 |
| | 2 |
| | 315,817 |
| | 314,203 |
| | 1 |
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| Total WSEs at period end | | 323,957 |
| | 318,921 |
| | 2 |
| | 323,957 |
| | 318,921 |
| | 2 |
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(1) | Refer to Non-GAAP Financial Measures section below for definitions and reconciliations from GAAP measures. |
(1) Refer to Non-GAAP Financial Measures section below for definitions and reconciliations from GAAP measures.
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| | Six Months Ended June 30, | | % |
| (in millions, except operating metrics data) | 2018 | | 2017 | | Change |
| Operating Metrics: | | | | | | |
| Total WSEs at period end | 318,921 |
| | 329,095 |
| | (3 | ) | % |
| Cash Flow Data: | | | | | | |
Net cash used in operating activities (1) | $ | (543 | ) | | $ | (204 | ) | | 167 |
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| Net cash used in investing activities | (166 | ) | | (9 | ) | | 1,682 |
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| Net cash used in financing activities | (36 | ) | | (45 | ) | | (22 | ) | |
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| (in millions) | June 30,
2019 | | December 31,
2018 | | % Change | |
| Balance Sheet Data: | | | | | | |
| Cash and cash equivalents | $ | 219 |
| | $ | 228 |
| | (4 | ) | % |
| Working capital | 236 |
| | 221 |
| | 7 |
| |
| Total assets | 2,318 |
| | 2,435 |
| | (5 | ) | |
| Long-term debt | 402 |
| | 413 |
| | (3 | ) | |
| Total liabilities | 1,879 |
| | 2,060 |
| | (9 | ) | |
| Total stockholders’ equity | 439 |
| | 375 |
| | 17 |
| |
| |
(1) | Prior year balance has been retrospectively adjusted for Accounting Standards Update (ASU) 2016-18. |
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| (in millions) | June 30,
2018 | | December 31,
2017 | | % Change | |
| Balance Sheet Data: | | | | | | |
| Cash and cash equivalents | $ | 202 |
| | $ | 336 |
| | (40 | ) | % |
| Working capital | 188 |
| | 234 |
| | (20 | ) | |
| Total assets | 2,015 |
| | 2,593 |
| | (22 | ) | |
| Notes and capital leases payable | 423 |
| | 423 |
| | — |
| |
| Total liabilities | 1,706 |
| | 2,387 |
| | (29 | ) | |
| Total stockholders’ equity | 309 |
| | 206 |
| | 50 |
| |
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| | | | | | | | | | | | |
| | Six Months Ended June 30, |
| (in millions) | 2019 | | 2018 | | % Change |
| Cash Flow Data: | | | | | | |
| Net cash used in operating activities | $ | (162 | ) | | $ | (543 | ) | | (70 | ) | % |
| Net cash used in investing activities | (25 | ) | | (166 | ) | | (86 | ) | |
| Net cash used in financing activities | (77 | ) | | (36 | ) | | 113 |
| |
Non-GAAP measure(1): | | | | | | |
| Corporate operating cash flows | 107 |
| | 108 |
| 169 |
| — |
| |
(1) Refer to Non-GAAP Financial Measures section below for definitions and reconciliations from GAAP measures.
Non-GAAP Financial Measures
In addition to financial measures presented in accordance with GAAP, we monitor other non-GAAP financial measures that we use to manage our business, to make planning decisions, to allocate resources, and to use as performance measures in our executive compensation plan. These key financial measures provide an additional view of our operational performance over the long-term and provide useful information that we use in order to maintain and grow our business.
The presentation of these non-GAAP financial measures is used to enhance the understanding of certain aspects of our financial performance. It isThey are not meant to be considered in isolation from, superior to, or as a substitute, for the directly comparable financial measures prepared in accordance with GAAP.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
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| Non-GAAP Measure | Definition | How We Use The Measure |
| Net Service Revenues | • Sum of professional service revenues and Net Insurance Service Revenues,
or total revenues less insurance costs. | • Provides a comparable basis of revenues on a net basis. Professional service revenues are representedpresented net of client payroll costs whereas insurance service revenues are presented gross of insurance costs for financial reporting purposes.
• Acts as the basis to allocate resources to different functions and evaluates the effectiveness of our business strategies by each business function.
• Provides a measure, among others, used in the determination of incentive compensation for management.
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| Net Insurance Service Revenues | • Insurance revenues less insurance costs. | • Is a component of Net Service Revenues. • Provides a comparable basis of revenues on a net basis. Professional service revenues are representedpresented net of client payroll costs whereas insurance service revenues are presented gross of insurance costs for financial reporting purposes. Promotes an understanding of our insurance services business by evaluating insurance service revenues net of our WSE related costs which are substantially pass-through for the benefit of our WSEs. Under GAAP, insurance service revenues and costs are recorded gross as we have latitude in establishing the price, service and supplier specifications. • We also sometimes refer to Net Insurance Service Margin, which is the ratio of Net Insurance Revenue to Insurance Service Revenue. |
| Adjusted EBITDA | • Net income, excluding the effects of: - income tax provision, - interest expense, - depreciation, - amortization of intangible assets, and - stock-based compensation expense.
| • Provides period-to-period comparisons on a consistent basis and an understanding as to how our management evaluates the effectiveness of our business strategies by excluding certain non-cash charges such as depreciation and amortization, and stock-based compensation recognized based on the estimated fair values. We believe these charges are either not directly resulting from our core operations or not indicative of our ongoing operations. • Enhances comparisons to prior periods and, accordingly, facilitates the development of future projections and earnings growth prospects. • Provides a measure, among others, used in the determination of incentive compensation for management. • We also sometimes refer to Adjusted EBITDA margin, which is the ratio of Adjusted EBITDA to Net Service Revenue.
|
| Adjusted Net Income | • Net income, excluding the effects of: - effective income tax rate (1), - stock-based compensation, - amortization of intangible assets, - non-cash interest expense (2), and - the income tax effect (at our effective tax rate (1)) of these pre-tax adjustments. | • Provides information to our stockholders and board of directors to understand how our management evaluates our business, to monitor and evaluate our operating results, and analyze profitability of our ongoing operations and trends on a consistent basis by excluding certain non-cash charges.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
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| Corporate Operating Cash Flows | • Net cash (used in) provided by operating activities, excluding the effects of:
- Assets associated with WSEs (accounts receivable, unbilled revenue, prepaid expenses and other current assets) and
- Liabilities associated with WSEs (client deposits, accrued wages, payroll tax liabilities and other payroll withholdings, accrued health benefit costs, accrued workers' compensation costs, insurance premiums and other payables, and other current liabilities).
| • Provides information that our stockholders and management can use to evaluate our cash flows from operations independent of the current assets and liabilities associated with our WSEs.
• Enhances comparisons to prior periods and, accordingly, used as a liquidity measure to manage liquidity between corporate and WSE related activities, and to help determine and plan our cash flow and capital strategies.
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| (1) | We have adjusted the non-GAAPNon-GAAP effective tax rate tois 26% for 2019 and 2018, from 41% for 2017 due primarily to a decrease in the statutory rate from 35% to 21%. These non-GAAP effective tax rates excludewhich excludes the income tax impact from stock-based compensation, changes in uncertain tax positions, and nonrecurring benefits or expenses from federal legislative changes. |
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| (2) | Non-cash interest expense represents amortization and write-off of our debt issuance costs. |
Reconciliation of GAAP to Non-GAAP Measures
The table below presents a reconciliation of Total revenues to Net Service Revenues: |
| | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (in millions) | 2019 | 2018 | | 2019 | 2018 |
| Total revenues | $ | 935 |
| $ | 850 |
| | $ | 1,869 |
| $ | 1,711 |
|
| Less: Insurance costs | 704 |
| 630 |
| | 1,387 |
| 1,271 |
|
| Net Service Revenues | $ | 231 |
| $ | 220 |
| | $ | 482 |
| $ | 440 |
|
The table below presents a reconciliation of Insurance service revenues to Net Insurance Service Revenues:
|
| | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (in millions) | 2019 | 2018 | | 2019 | 2018 |
| Insurance service revenues | $ | 808 |
| $ | 735 |
| | $ | 1,606 |
| $ | 1,467 |
|
| Less: Insurance costs | 704 |
| 630 |
| | 1,387 |
| 1,271 |
|
| Net Insurance Service Revenues | $ | 104 |
| $ | 105 |
| | $ | 219 |
| $ | 196 |
|
| Net Insurance Service Revenue Margin | 13 | % | 14 | % | | 14 | % | 13 | % |
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Reconciliation of GAAP to Non-GAAP Measures
The table below presents a reconciliation of Total revenues to Net Service Revenues: |
| | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended June 30, |
| (in millions) | 2018 | 2017 | | 2018 | 2017 |
| Total revenues | $ | 850 |
| $ | 801 |
| | $ | 1,711 |
| $ | 1,608 |
|
| Less: Insurance costs | 630 |
| 600 |
| | 1,271 |
| 1,208 |
|
| Net Service Revenues | $ | 220 |
| $ | 201 |
| | $ | 440 |
| $ | 400 |
|
The table below presents a reconciliation of Insurance service revenues to Net Insurance Service Revenues:
|
| | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (in millions) | 2018 | 2017 | | 2018 | 2017 |
| Insurance service revenues | $ | 735 |
| $ | 692 |
| | $ | 1,467 |
| $ | 1,379 |
|
| Less: Insurance costs | 630 |
| 600 |
| | 1,271 |
| 1,208 |
|
| Net Insurance Service Revenues | $ | 105 |
| $ | 92 |
| | $ | 196 |
| $ | 171 |
|
| Net Insurance Service Revenue Margin | 14 | % | 13 | % | | 13 | % | 12 | % |
The table below presents a reconciliation of Net income to Adjusted EBITDA:
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended June 30, | | Six Months Ended
June 30, |
| (in millions) | 2018 | 2017 | | 2018 | 2017 | 2019 | 2018 | | 2019 | 2018 |
| Net income | $ | 58 |
| $ | 40 |
| | $ | 112 |
| $ | 69 |
| $ | 46 |
| $ | 58 |
| | $ | 109 |
| $ | 112 |
|
| Provision for income taxes | 14 |
| 12 |
| | 27 |
| 28 |
| 10 |
| 14 |
| | 30 |
| 27 |
|
| Stock-based compensation | 10 |
| 8 |
| | 19 |
| 14 |
| 11 |
| 10 |
| | 20 |
| 19 |
|
| Interest expense and bank fees | 7 |
| 5 |
| | 13 |
| 10 |
| 6 |
| 7 |
| | 11 |
| 13 |
|
| Depreciation | 8 |
| 6 |
| | 16 |
| 13 |
| |
| Amortization of intangible assets | 2 |
| 1 |
| | 3 |
| 3 |
| |
| Depreciation and amortization of intangible assets | | 12 |
| 10 |
| | 23 |
| 19 |
|
| Adjusted EBITDA | $ | 99 |
| $ | 72 |
| | $ | 190 |
| $ | 137 |
| $ | 85 |
| $ | 99 |
| | $ | 193 |
| $ | 190 |
|
| Adjusted EBITDA Margin | 45 | % | 36 | % | | 43 | % | 34 | % | 36 | % | 45 | % | | 40 | % | 43 | % |
The table below presents a reconciliation of Net income to Adjusted Net Income:
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended June 30, | | Six Months Ended
June 30, |
| (in millions) | 2018 | 2017 | | 2018 | 2017 | 2019 | 2018 | | 2019 | 2018 |
| Net income | $ | 58 |
| 40 |
| | $ | 112 |
| 69 |
| $ | 46 |
| $ | 58 |
| | $ | 109 |
| $ | 112 |
|
| Effective income tax rate adjustment | (6 | ) | (9 | ) | | (10 | ) | (11 | ) | (5 | ) | (6 | ) | | (6 | ) | (10 | ) |
| Stock-based compensation | 10 |
| 8 |
| | 19 |
| 14 |
| 11 |
| 10 |
| | 20 |
| 19 |
|
| Amortization of intangible assets | 2 |
| 1 |
| | 3 |
| 3 |
| 2 |
| 2 |
| | 3 |
| 3 |
|
| Non-cash interest expense | 3 |
| 1 |
| | 4 |
| 1 |
| — |
| 3 |
| | — |
| 4 |
|
| Income tax impact of pre-tax adjustments | (4 | ) | (4 | ) | | (7 | ) | (8 | ) | (4 | ) | (4 | ) | | (6 | ) | (7 | ) |
| Adjusted Net Income | $ | 63 |
| $ | 37 |
| | $ | 121 |
| $ | 68 |
| $ | 50 |
| $ | 63 |
| | $ | 120 |
| $ | 121 |
|
The table below presents a reconciliation of net cash used in operating activities to corporate operating cash flows:
|
| | | | | | |
| | Six Months Ended
June 30, |
| (in millions) | 2019 | 2018 |
| Net cash used in operating activities | $ | (162 | ) | $ | (543 | ) |
| Change in WSE related other current assets | 52 |
| (1 | ) |
| Change in WSE related liabilities | 217 |
| 652 |
|
Corporate Operating Cash Flows
| $ | 107 |
| $ | 108 |
|
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Results of Operations
Operating Metrics
Worksite Employees (WSE)
Average WSE growth is a volume measure we use to monitor the performance of our business. Average WSEs decreased 3%increased 2% in the second quarter of 20182019 and decreased 4%increased 1% in the first half of 2018,2019, compared to the same periods in 2017. The declines in the Average WSE during2018. In the second quarter and first half of 2018 compared to the same periods in 2017 were the result of2019, we experienced reduced attrition including attrition from migrating certain of our clientsdue to our common platform, partially offset by WSE growth due tocustomer service initiatives, combined with stronger new sales performance in our Nonprofit vertical and strong hiringscontinued hiring within our installed base.base, especially in our Technology vertical.
Total WSE, definedWSEs can be used to estimate our beginning WSEs for the next period and, as WSEs paid at period end, comparisons have serveda result, can be used as an indicator of our potential future success in growing our business and retaining clients.
Anticipated revenues for future periods can diverge from the revenue expectation derived from Average WSEs or Total WSEs due to pricing differences across our HR solutions and insurance service offeringsservices and the degree to which clients and WSEs elect to participate in our solutions.solutions during future periods. In addition to focusing on growing our Average WSE and Total WSE counts, we also focus on pricing strategies, product participation and product differentiation to expand our revenue opportunities. We report the impact of client and WSE participation differences as a change in mix.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Total Revenues and Income
Our revenues consist of professional service revenues (PSR) and insurance service revenues (ISR). PSR representrepresents fees charged to clients for processing payroll-related transactions on behalf of our clients, access to our HR expertise, employment and benefit law compliance services, and other HR-related services. ISR consistconsists of insurance-related billings and administrative fees collected from clients and withheld from WSEs for workers' compensation insurance and health benefit insurance plans provided by third-party insurance carriers.
In addition to focusing on growing our Average WSE and Total WSE counts, we also focus on pricing strategies and product differentiation to expand our revenue opportunities. Monthly total revenues per Average WSE asis a measure we use to monitor the success of such strategies,our product and service pricing strategies. This measure increased 10% in both8% during the second quarter of 2019 compared to the same period in 2018, and increased 9% in the first half of 20182019, compared to the same period in 2018.
We also analyze changes in total revenue with the following measures:
Volume - the percentage change in period over period Average WSEs,
Rate - the combined percentage change in service fees for each vertical product and change in service fees associated with each insurance service offerings, and
Mix - the change in composition of Average WSEs within our verticals combined with the composition of our enrolled WSEs within our insurance service offerings.
The changes in total revenues attributed above to rate and mix during the second quarter and of first half of 2019, when compared to the same periods in 2017.
Q2 2018, - Q2 2017 Commentary
Total revenueswere $850 million for the second quarter of 2018, a 6% increase compared to the same periodprimarily driven by increases in 2017.
ISR increased 6% compared to the same quarter in 2017 to $735 million due primarily to increased participation in ourinsurance services fees and health plans, partially offset by a decline in Average WSEs.
PSR increased 6% compared to the same quarter in 2017 to $115 million due primarily to rate increases.
Operating income was $76 million in the second quarter of 2018, up 34% from the second quarter of 2017, primarily due to improvement in our ISR as noted above, partially offset by an increase insurance costs.
YTD 2018 - YTD 2017 Commentary
Total revenues were $1.7 billion for the first half of 2018, a 6% increase compared to the same period in 2017.
ISR increased 6% compared to the same period in 2017 to $1.5 billion due primarily to increased participation in our health plans, partially offset by a decline in Average WSEs.
PSR increased 7% compared to the same period in 2017 to $244 million due primarily to a change in mix towards higher priced vertical products.
Operating income was $147 million, in the first half of 2018, up 38% from the first half of 2017, primarily due to improvementplan enrollment in our insurance service revenues as noted above, partially offset by an increase in insurance costs.offerings.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Net Service RevenuesOperating Income
Net Service Revenues (totalOur operating income consists of total revenues less insurance costs)costs and OE. Our insurance costs include insurance premiums for coverage provided by insurance carriers, reimbursement of claims payments made by insurance carriers or third-party administrators, and changes in accrued costs related to contractual obligations with our workers' compensation and health benefit carriers. Our OE consists primarily of our corporate employees' compensation related expenses which includes payroll, payroll taxes, SBC, bonuses, commissions and other payroll-and benefits-related costs.
The tables below provide a comparable basisview of revenues on a net basis, act as the basis to allocate resources to different functions, and help us evaluate the effectivenesschanges in components of our business strategies by each business function.
Q2 2018 - Q2 2017 Commentary
Net Service Revenues were $220 millionoperating income for the second quarter of 2018, representing a 10% increase from the same period in 2017. This increase is primarily due to an increase in Net Insurance Service Revenues due to changes in the composition of our enrolled WSEs within our insurance offerings (ISR mix) partially offset by health plan participation costs (insurance cost mix). Additionally, Monthly Net Service Revenues per Average WSE increased over the same period in 2017.
YTD 2018 - YTD 2017 Commentary
Net Service Revenues were $440 million for theand first half of 2018, representing a 10% increase from2019, as compared to the same periodperiods in 2017. This increase is primarily due to an increase in Net Insurance Service Revenues due to changes in the composition of our enrolled WSEs within our insurance offerings (ISR mix) partially offset by health plan participation costs (insurance cost mix). Additionally, Monthly Net Service Revenues per Average WSE increased over the same period in 2017.
2018, respectively.
|
| | |
| (in millions) | |
| $76 | Second Quarter 2018 Operating Income |
| +85 | Higher total revenues primarily as a result of an increase in ISR fees and health plan enrollment. |
| -74 | Higher insurance costs primarily as a result of an increase in medical cost trend and health plan participation, or enrollment. |
| -32 | Higher OE primarily as a result of growth in the number of our corporate employees and costs associated with initiatives to improve customer experience and our growth initiatives. |
| $55 | Second Quarter 2019 Operating Income |
|
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| (in millions) | |
| $147 | YTD 2018 Operating Income |
| +158 | Higher total revenues primarily as a result of an increase in ISR fees and health plan enrollment. |
| -116 | Higher insurance costs primarily as a result of an increase in medical cost trend and health plan participation, or enrollment. |
| -52 | Higher OE primarily as a result of growth in the number of our corporate employees and costs associated with initiatives to improve customer experience and our growth initiatives. |
| $137 | YTD 2019 Operating Income |
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Professional Service Revenues (PSR)
Our clients are billed either based on a fee per WSE per month per transaction or on a percentage of the WSEs’ payroll. For those clients that are billed on a percentage of WSEs' payroll, as our clients' payrolls increase, our fees also increase. As such, payroll and payroll taxes processed, which includes recurring payrolls and non-recurring bonus payrolls, benefits, and associated payroll taxes may also be an indicator of our PSR growth.
Our investment in a vertical approach provides us the flexibility to offer our clients in different industries with varied services at different prices. Weprices, which we believe that this vertical approach will improve our ability to retain our customers, and potentially reducereduces the value of using WSEsAverage WSE and Total WSE counts as the only leading indicatorindicators of future potential revenue performance.
We present the percentagealso analyze changes in PSR usingwith the following measures:
Mix - the change in composition of Average WSEs across our verticals,
Rate - the percentage change in fees for each vertical, and
Volume - the percentage change in period over period Average WSEs,WSEs.
Rate -
The increase in PSR, for the percentage changessecond quarter and first half of 2019 compared to the same periods in prices for each2018, reflects the result of our vertical pricing strategy and
Mix - the ongoing change in compositionthe mix of Average WSEs within our verticals.WSEs. During the second quarter of 2019 and first half of 2019, we continued to experience WSE growth especially in our Professional Services and Technology verticals, while our Main Street vertical continued to shrink, but at a reduced rate when compared to the same periods in 2018.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Insurance Service Revenues (ISR)
ISR consists of insurance services-related billings and administrative fees collected from clients and withheld from WSE payroll for health benefits and workers' compensation insurance provided by third-party insurance carriers.
We presentuse the percentagefollowing measures to analyze changes in ISR using the following measures:ISR:
Volume - the percentage change in period over period Average WSEs,
Rate - the percentage changeschange in pricesfees associated with each of our insurance service offerings, and
Mix - all other changes including the composition of our enrolled WSEs within our insurance service offerings.offerings (health plan enrollment).
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Insurance Costs
Insurance costs include insurance premiums for coverage provided by insurance carriers, reimbursement of claims payments made by insurance carriers or third-party administrators, and changes in loss reservesaccrued costs related to contractual obligations with our workers' compensation and health benefit carriers.
We presentuse the percentagefollowing measures to analyze changes in insurance costs using the following measures:costs:
Volume - the percentage change in period over period Average WSEs,
Rate - the percentage changeschange in cost trend associated with our each of our insurance service offerings, and
Mix - all other changes including the composition of our enrolled WSEs within our insurance offerings.service offerings (health plan enrollment).
Insurance costs as a percentage of ISR was 86%
The increase in insurance cost rates during the second quarter and first half of 2018, consistent with2019, was primarily driven by an increase in medical cost trend, partially offset by lower administrative costs. We continued to experience favorable prior year development on our accrued workers' compensation costs of $11 million for the second quarter of 2017 and 87% in$16 million for the first half of 2018 compared2019, primarily due to 88%lower than expected claim severity. The 4% increase in insurance costs attributed to the same periodchange in mix during the second quarter and first half of 2017.2019 is consistent with the change in ISR mix which was a result of higher health plan enrollment.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Other Net Service Revenues
NSR provides us with a comparable basis of revenues on a net basis, acts as the basis to allocate resources to different functions and helps us evaluate the effectiveness of our business strategies by each business function.
NISR margin for the second quarter decreased by 1% due to increased insurance costs and the first half of 2019 remained consistent with the same periods in 2018.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Operating Expenses (OOE)
Other operating expensesOE includes cost of providing services (COPS), sales and marketing (S&M), general and administrative (G&A), and systems development and programming (SD&P) expenses. Other operating expenses excludes, and depreciation and amortization expenses.expenses (D&A).
We manage and monitor our other operating expenses and allocate resources across different business functions based on OOE as a percentage of Net Service RevenuesNSR which decreasedhas increased to 61%76% in the second quarter of 20182019 from 68%65% in the same period in 20172018 and decreasedincreased to 62%72% in the first half of 20182019 from 70%67% in the same period in 2017.of 2018.
AtWe had approximately 3,100 corporate employees as of June 30, 2018, we had approximately 2,800 corporate employees2019 in 4856 offices across the United States.U.S. Our corporate employees' compensation relatedcompensation-related expenses represent thea majority of our operating expenses.OE. Compensation costs for our corporate employees include payroll, payroll taxes, stock-based compensation,SBC, bonuses, commissions and other payrollpayroll- and benefits relatedbenefits-related costs.
The percentage of compensation related expenses to OOE Compensation expense for internal employees was 66% in the second quarter of 2018 and 2017, and increased to 67% in the first half of 2018 from 65% in the first half of 2017. The increase in the first half of the 2018 when compared to the same period in 2017 is due to decreased consulting costs associated with compliance initiatives and internal control remediation efforts.
We expect our OOE to increase in the foreseeable future due to expected growth, our continued strategy to develop new vertical products, continued platform integrations, and additional costs associated withprimarily driven by our continued efforts to improve our customer experience. Compensation-related expense represented 59% and 59% of our OE in the second quarters of 2019 and 2018, and 59% and 60% in the first halves of 2019 and 2018, respectively.
We expect our OE to increase for the foreseeable future from our continued efforts to improve our customer experience, and our systems processes, and internal controls.processes. These expenses may fluctuate as a percentage of our total revenues from period-to-period depending on the timing of when expenses are incurred.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Q2 2018 - Q2 2017 CommentaryWe analyze and present our OE based upon the business functions COPS, S&M, G&A and SD&P and depreciation and amortization. The charts below provide a view of the expenses of the business functions. Dollars are presented in millions and percentages represent year-over-year change.
Other operating expenses
COPS increased in the second quarter and the first half of 2019, when compared to the same periods in 2018, primarily due to increased headcount to support initiatives to improve the customer experience, enhancing our product offerings and process improvement initiatives.
S&M increased in the second quarter and the first half of 2019, when compared to the same periods in 2018, driven by increase in headcount, advertising expenses for our People Matter campaign, and commissions expense related to our growth in new sales.
G&A increased in the second quarter and the first half of 2019, when compared to the same periods in 2018, primarily driven by increased headcount to support operations, partially offset by a decrease in recruiting expenses.
The increase in SD&P and D&A in the second quarter and the first half of 2019, when compared to the same periods in 2018, remained consistent with the same periodour investments in 2017. Specific costs varied as follows:technology to support our customer service initiatives.
Total compensation costs decreased $1 million, or 1%, primarily due to a:
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▪ | decrease of $6 million in commission expense with the adoption of ASC Topic 606 in the first quarter of 2018. Refer to Note 1 in Item 1 of this Form 10-Q for additional details surrounding the impact of this adoption, |
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▪ | partially offset by a $5 million increase driven by increased headcount to support operational and compliance requirements, |
Consulting expenses decreased $2 million primarily due to a decrease in costs associated with payroll tax compliance initiatives.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
YTD 2018 - YTD2017CommentaryWe break out the change in expenses that make up our OE in the chart below:
Other operating expensesIncome (Expense)
Other income (expense) consists primarily of interest and dividend income from investments and interest expense under our credit facility.
Interest income increased to $7 million in the second quarter of 2019 and $13 million for the first half of 2019 from $3 million and $5 million in the same periods in 2018, respectively, as a result of a change in our investment strategy initiated in the second quarter of 2018 to improve our interest income.
We intend to continue to execute our investment strategy, which we expect will improve our interest income, net income, and our Adjusted EBITDA.
Interest expense, bank fees and other, remained consistent for the second quarter and first half of 2019 and 2018.
Provision for Income Taxes
Our effective income tax rate was 17% and 19% for the second quarter of 2019 and 2018, respectively, and 21% and 19% for the six months ended June 30, 2019 and 2018, respectively. The decrease when comparing the second quarter of 2019 with the same period in 2017. Specific costs varied as follows:
Total compensation costs increased $4 million, or 2%, primarily due to a:
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▪ | $19 million increase primarily associated with client services and information technology to support the growth and migration of clients to our common TriNet platform and headcount increase as a result of increased operational and compliance requirements, |
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▪ | partially offset by a decrease of $15 million in commission expense with the adoption of ASC Topic 606 in the first quarter of 2018. Refer to Note 1 in Item 1 of this Form 10-Q for additional details surrounding the impact of this adoption. |
Consulting expenses decreased $4 million2018 is primarily due to a one-time benefit associated with prior year tax expense. The increase in the year to date rates for 2019 when compared to the same period in 2018, consisted primarily from a decrease in costs associated with payroll tax compliance initiatives.benefits recognized from excess tax benefits related to stock-based compensation.
Other expenses decreased $4 million primarily due to compliance costs (including SOX costs), partially offset by an increase in recruiting.
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| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Other Income (Expense)
Other income (expense) in the second quarter and the first half of 2018 remained consistent with the same periods in 2017. Specific income (expense) items for the second quarter and first half of 2018 varied as follows:
Interest and dividend income increased $3 million primarily due to an increase in yields on our interest-bearing assets.
Partially offset by a $2 million increase in interest expense associated with the write-off of debt issuance costs related to the refinancing of our previous term loans.
Provision for Income Taxes
Our effective income tax rate was 19% and 24% for the three months ended June 30, 2018 and 2017, respectively, and 19% and 29% for the six months ended June 30, 2018 and 2017, respectively. The decreases consisted of tax benefits recognized from excess tax benefits related to stock-based compensation, an increase in excludable income for state income tax purposes and a reduction of the federal corporate income tax rate from 35% to 21% pursuant to the Tax Cuts and Jobs Act (TCJA) for the three months and six months ended June 30, 2018, as compared to the same periods in 2017.
Liquidity and Capital Resources
Liquidity
We report our liquidity separately between assets and liabilities that are WSE-related and our corporate assets and liabilities. We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to our clients, creditors and debt holders. Our liquid assets
Included in our balance sheets are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | June 30, 2018 | December 31, 2017 |
| (in millions) | Corporate | WSE | Total | Corporate | WSE | Total |
| Current assets | | | | | | |
| WSE-related assets | $ | — |
| $ | 352 |
| $ | 352 |
| $ | — |
| $ | 360 |
| $ | 360 |
|
| Cash and cash equivalents | 202 |
| — |
| 202 |
| 336 |
| — |
| 336 |
|
| Restricted cash, cash equivalents and investments | 15 |
| 614 |
| 629 |
| 15 |
| 1,265 |
| 1,280 |
|
| All other current assets | 66 |
| — |
| 66 |
| 15 |
| — |
| 15 |
|
| Current assets | $ | 283 |
| $ | 966 |
| $ | 1,249 |
| $ | 366 |
| $ | 1,625 |
| $ | 1,991 |
|
| | | | | | | |
| Current liabilities | | | | | | |
| WSE-related liabilities | $ | — |
| $ | 966 |
| $ | 966 |
| $ | — |
| $ | 1,618 |
| $ | 1,618 |
|
| All other current liabilities | 95 |
| — |
| 95 |
| 139 |
| — |
| 139 |
|
| Current liabilities | $ | 95 |
| $ | 966 |
| $ | 1,061 |
| $ | 139 |
| $ | 1,618 |
| $ | 1,757 |
|
| | | | | | | |
| Working capital | $ | 188 |
| $ | — |
| $ | 188 |
| $ | 227 |
| $ | 7 |
| $ | 234 |
|
Working capital for WSE-related assets and liabilities
We present our WSE-related assets and liabilities separately from our corporate assets and liabilities on our condensed consolidated balance sheets to better distinguish those assets and liabilities held by us to cover WSE-related obligations. WSE-related assets and liabilities primarily consist of current assets and current liabilities, respectively, resulting from transactions directly or indirectly associated with WSEs, including payroll and related taxes and withholdings, our sponsored workers' compensation and health insurance programs, and other benefit programs. Although we are not subject to regulatory restrictions that require us to do so, we distinguish and manage our corporate assets and liabilities separately from those current assets and liabilities held by us to satisfy our employer obligations associated with our WSEs as follows:
|
| | | | | | | | | | | | | | | | | | |
| | June 30, 2019 | December 31, 2018 |
| (in millions) | Corporate | WSE | Total | Corporate | WSE | Total |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 219 |
| $ | — |
| $ | 219 |
| $ | 228 |
| $ | — |
| $ | 228 |
|
| Investments | 76 |
| — |
| 76 |
| 54 |
| — |
| 54 |
|
| Restricted cash, cash equivalents and investments | 14 |
| 658 |
| 672 |
| 15 |
| 927 |
| 942 |
|
| Other current assets | 50 |
| 438 |
| 488 |
| 36 |
| 386 |
| 422 |
|
| Total current assets | $ | 359 |
| $ | 1,096 |
| $ | 1,455 |
| $ | 333 |
| $ | 1,313 |
| $ | 1,646 |
|
| | | | | | | |
| Total current liabilities | $ | 123 |
| $ | 1,096 |
| $ | 1,219 |
| $ | 112 |
| $ | 1,313 |
| $ | 1,425 |
|
| | | | | | | |
| Working Capital | $ | 236 |
| $ | — |
| $ | 236 |
| $ | 221 |
| $ | — |
| $ | 221 |
|
Working capital for WSE-related assets and liabilities
We designate funds to ensure that we have adequate current assets to satisfy our current WSE-related obligations.obligations associated with WSEs. We manage our WSE payroll and benefits obligations through collections of payments from our clients which generally occurs two to three days in advance of the client'sclient payroll date.dates. We regularly review our short-term WSE-related obligations associated with our WSEs (such as payroll and related taxes, insurance premium and claim payments) and designate funds required to fulfill these short-term obligations, which we refer to as payroll funds collected (PFC).PFC. PFC is included in current assets as restricted cash, cash equivalents and investments in our condensed consolidated financial statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS | |
investments.
We manage our sponsored benefit and workers' compensation insurance obligations by maintaining collateral funds in restricted cash, cash equivalents and investments. These collateral amounts are generally determined at the beginning of each plan year and we may be required by our insurance carriers to adjust the balanceour collateral balances when facts and circumstances change. We regularly review our collateral balances with our insurance carriers and anticipate funding further collateral in the future based upon our capital requirements. We classify our restricted cash, cash equivalents and investments as current and noncurrent assets to match against the anticipated paymenttiming of claims.claims payments.
Working capital for corporate purposes
We use the remainingour available cash and cash equivalents and cash from operations to satisfy our operational and regulatory requirements and to fund capital expenditures. We believe that our existing corporate cash and cash equivalents and positive working capital will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Corporate working capital as of June 30, 2018 decreased by $39 million from2019 increased compared to December 31, 2017, largely driven by increased investing activity. During the six-months ended June 30, 2018, we invested approximately $162 million of available cash in available-for-sale securities, a majority of which are classified as long-term assets. This decrease is partially offset by the timing of payments for corporate obligations.2018.
Capital Resources
Sources of Funds
We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments through existing liquid assets, continuing cash flows from operations,corporate operating activities, our borrowing capacity under our revolving credit facility and the potential issuance of debt or equity securities through our filed shelf registration statement.securities.
In June 2018 we refinanced approximately $415 million of, and repaid in full, our outstanding A and A-2 term loans (together, our 2014 Term Loans) under our previous credit agreement (our 2014 Credit Agreement). Our 2014 Term Loans were replaced with a $425 million term loan A (our 2018 Term Loan) under our new credit agreement (our 2018 Credit Agreement). We also replaced our previous $75 million revolving credit facility established under our 2014 Credit Agreement with a $250 million revolving credit facility under our 2018 Credit Agreement (our 2018 Revolver), which will be used solely for working capital and other general corporate purposes.
Each of our 2018 Term Loan and our 2018 Revolver mature in June 2023 and bear interest, at our option, either at a LIBOR rate, or the prime lending rate, plus an applicable margin subject to change in the future based on our leverage ratio, as set forth in our 2018 Credit Agreement. As of June 30, 2018, $425 million was outstanding under our 2018 Term Loan at and the full amount of our 2018 Revolver, less approximately $16 million representing an undrawn letter of credit, was available.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
We also have available a $250 million revolving credit facility. The total unused portion of the revolving credit facility was $234 million as of June 30, 2019.
Cash Flows
In January 2018, we adopted ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash, which significantly impacted our net cash provided by (used in) operating activities as changes in our restricted cash and cash equivalents balances are no longer included within operating cash activities.
The following table presents our cash flow activities for the stated periods:
| | | | Six Months Ended
June 30, | Six Months Ended June 30, |
| (in millions) | 2018 | 2017 | 2019 | 2018 |
| | Corporate | WSE | Total | Corporate | WSE | Total | Corporate | WSE | Total | Corporate | WSE | Total |
| Net cash provided by (used in): | | | | | | |
Operating activities (1) | $ | 108 |
| $ | (651 | ) | $ | (543 | ) | $ | 137 |
| $ | (341 | ) | $ | (204 | ) | $ | 107 |
| $ | (269 | ) | $ | (162 | ) | $ | 108 |
| $ | (651 | ) | $ | (543 | ) |
| Investing activities | (166 | ) | — |
| (166 | ) | (9 | ) | — |
| (9 | ) | (27 | ) | 2 |
| (25 | ) | (166 | ) | — |
| (166 | ) |
| Financing activities | (36 | ) | — |
| (36 | ) | (45 | ) | — |
| (45 | ) | (77 | ) | — |
| (77 | ) | (36 | ) | — |
| (36 | ) |
| Net increase (decrease) in cash and cash equivalents, unrestricted and restricted | $ | (94 | ) | $ | (651 | ) | $ | (745 | ) | $ | 83 |
| $ | (341 | ) | $ | (258 | ) | $ | 3 |
| $ | (267 | ) | $ | (264 | ) | $ | (94 | ) | $ | (651 | ) | $ | (745 | ) |
| Cash and cash equivalents, unrestricted and restricted: | | |
| Beginning of period | $ | 476 |
| $ | 1,262 |
| $ | 1,738 |
| $ | 278 |
| $ | 955 |
| $ | 1,233 |
| 425 |
| 924 |
| 1,349 |
| 476 |
| 1,262 |
| 1,738 |
|
| End of period | $ | 382 |
| $ | 611 |
| $ | 993 |
| $ | 361 |
| $ | 614 |
| $ | 975 |
| $ | 428 |
| $ | 657 |
| $ | 1,085 |
| $ | 382 |
| $ | 611 |
| $ | 993 |
|
| | | |
| Net increase (decrease) in cash and cash equivalents: | | |
| Unrestricted | $ | (134 | ) | $ | — |
| $ | (134 | ) | $ | 50 |
| $ | — |
| $ | 50 |
| $ | (9 | ) | $ | — |
| $ | (9 | ) | $ | (134 | ) | $ | — |
| $ | (134 | ) |
| Restricted | $ | 40 |
| $ | (651 | ) | $ | (611 | ) | $ | 33 |
| $ | (341 | ) | $ | (308 | ) | 12 |
| (267 | ) | (255 | ) | 40 |
| (651 | ) | (611 | ) |
| |
(1) | Prior year balances were retrospectively adjusted for Accounting Standards Update (ASU) 2016-18. |
Operating Activities
Components of net cash used in operating activities are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended
June 30, |
| (in millions) | 2018 | 2017 |
| | Corporate | WSE | Total | Corporate | WSE | Total |
| Net income | $ | 112 |
| $ | — |
| $ | 112 |
| $ | 69 |
| $ | — |
| $ | 69 |
|
| Depreciation and amortization | 24 |
| — |
| 24 |
| 16 |
| — |
| 16 |
|
| Stock-based compensation expense | 19 |
| — |
| 19 |
| 14 |
| — |
| 14 |
|
| Payment of interest | (8 | ) | — |
| (8 | ) | (8 | ) | — |
| (8 | ) |
| Income tax (payments) refunds, net | (24 | ) | — |
| (24 | ) | — |
| — |
| — |
|
| Collateral (paid to) refunded from insurance carriers, net | — |
| — |
| — |
| 5 |
| — |
| 5 |
|
| Changes in other operating assets | (13 | ) | 1 |
| (12 | ) | 29 |
| 42 |
| 71 |
|
| Changes in other operating liabilities | (2 | ) | (652 | ) | (654 | ) | 12 |
| (383 | ) | (371 | ) |
Net cash provided by (used in) operating activities (1) | $ | 108 |
| $ | (651 | ) | $ | (543 | ) | $ | 137 |
| $ | (341 | ) | $ | (204 | ) |
| |
(1) | Prior year balances were retrospectively adjusted for Accounting Standards Update (ASU) 2016-18. |
|
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| (in millions) | 2019 | 2018 |
| | Corporate | WSE | Total | Corporate | WSE | Total |
| Net income | $ | 109 |
| $ | — |
| $ | 109 |
| $ | 112 |
| $ | — |
| $ | 112 |
|
| Depreciation and amortization | 27 |
| — |
| 27 |
| 24 |
| — |
| 24 |
|
| Noncash lease expense | 10 |
| — |
| 10 |
| — |
| — |
| — |
|
| Stock-based compensation expense | 20 |
| — |
| 20 |
| 19 |
| — |
| 19 |
|
| Interest paid | (9 | ) | — |
| (9 | ) | (8 | ) | — |
| (8 | ) |
| Income tax payments, net | (33 | ) | — |
| (33 | ) | (24 | ) | — |
| (24 | ) |
| Changes in other operating assets | (29 | ) | (52 | ) | (81 | ) | (13 | ) | 1 |
| (12 | ) |
| Changes in other operating liabilities | 12 |
| (217 | ) | (205 | ) | (2 | ) | (652 | ) | (654 | ) |
| Net cash provided by (used in) operating activities | $ | 107 |
| $ | (269 | ) | $ | (162 | ) | $ | 108 |
| $ | (651 | ) | $ | (543 | ) |
Net
Year-over-year fluctuation in net cash used in operating activities from WSE-related activities was primarily driven by the timing of client payments, payroll amounts, collateral funding and insurance claim activities. Cash used in operating activities for WSE purposes increased by $310 million during the six months ended June 30, 2018, compared to the same period in 2017, and was primarily driven by timing of client payments, payments of payroll and payroll taxes, and related liabilities.collateral funding and insurance claim activities. We expect the changes in restricted cash and cash equivalents to correspond to WSE cash provided by (or used in) operations as we manage our WSE-related obligations associated with WSEs through restricted cash.
Our corporate operating cash flows remained flat when comparing the first half of 2019 to the same period in 2018.
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Cash provided by corporate operating activities decreased $29 million in the first half of 2018 compared to the same period in 2017 and was driven by the timing of corporate income tax payments as well as payments to vendors. The overall decrease was partially offset by a 63% increase in our net income.
We expect our tax payments to continue to increase in 2018 due to our inability to defer taxes as a result of new restrictions in the TCJA.
Investing Activities
Net cash used in investing activities in the first half of 2019 decreased, when compared to the same period of 2018, and 2017, respectively, primarily consisted ofdue to the decrease in purchases of investments partially offset by proceeds from the sale and maturity of restricted investments, and cash paid for capital expenditures.investments.
| | | | Six Months Ended
June 30, | Six Months Ended June 30, |
| (in millions) | 2018 | 2017 | 2019 | 2018 |
| Investments: | | |
| Purchases of investments | $ | 203 |
| $ | — |
| 65 |
| 203 |
|
| Proceeds from sale of investments | (39 | ) | — |
| |
| Proceeds from paydowns and maturity of investments | (24 | ) | (11 | ) | |
| Cash used in (provided by) investments | $ | 140 |
| $ | (11 | ) | |
| Proceeds from sale and maturity of investments | | (65 | ) | (63 | ) |
| Cash used in investments | | $ | — |
| $ | 140 |
|
| | | |
| Capital expenditures: | | |
| Software and hardware | $ | 13 |
| $ | 13 |
| $ | 18 |
| $ | 13 |
|
| Office furniture, equipment and leasehold improvements | 13 |
| 7 |
| 7 |
| 13 |
|
| Cash used in capital expenditures | $ | 26 |
| $ | 20 |
| $ | 25 |
| $ | 26 |
|
Investments
During the first half of 2018, we investedWe invest a portion of available cash in investment-grade securities with effective maturities less than five years that are classified on our condensed balance sheetsheets as investments. As of June 30, 2018,2019, we had approximately $162$193 million in corporate investments.
We also invest funds held as collateral to satisfy our long-term obligation towards the workers' compensation liabilities in U.S. long-term treasuries. These investments are classified on our condensed balance sheet includedsheets as restricted cash, cash equivalents and investments. We review the amount and the anticipated holding period of these investments regularly in conjunction with our estimated long-term workers' compensation liabilities and anticipated claims payment trend. As of June 30, 2018, we held approximately $808 million of restricted cash, cash equivalents and investments in noncurrent and current accounts, of which approximately $14 million is in U.S. long-term treasuries.
As of June 30, 2018,2019, we held approximately $1.1$1.3 billion in cash, cash equivalents and investments.investments of which $0.9 billion was restricted. Refer to Note 2 in Item 1 in this Form 10-Q for a summary of these funds.
Capital Expenditures
During the first half of 20182019 and 2017,2018, we continued to make investments in software and hardware, enhanced our existing products and platforms, and implemented legacy platform migrations.technology platform. We also incurred expenses related to the build out of our corporate officeheadquarters and our technology and client service centers. We expect capital investments in our software and hardware to continue in the future.
Financing Activities
Net cash used in financing activities in the first half of 2019 and 2018 consisted of our debt and equity-related activities.
|
| | | | | | |
| | Six Months Ended June 30, |
| (in millions) | 2019 | 2018 |
| Financing activities | | |
| Repurchase of common stock, net of issuance | $ | 66 |
| $ | 32 |
|
| Repayment of borrowings | 11 |
| 4 |
|
| Cash used in financing activities | $ | 77 |
| $ | 36 |
|
|
| |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | |
Financing Activities
Net cash used in financing activities in the first half of 2018 and 2017 consisted of our debt and equity related activities.
|
| | | | | | |
| | Six Months Ended
June 30, |
| (in millions) | 2018 | 2017 |
| Financing activities | | |
| Repurchase of common stock, net of issuance | $ | 32 |
| $ | 27 |
|
| Repayment of borrowings | 214 |
| 18 |
|
| Net proceeds from issuance of notes payable | (210 | ) | — |
|
| Cash used in financing activities | $ | 36 |
| $ | 45 |
|
In the first half of 2018 we refinancedFebruary 2019, our 2014 Term Loans with our 2018 Term loan as discussed previously. For additional information see Note 7 to our financial statements in this Form 10-Q.
The board of directors authorizes repurchases through anauthorized a $300 million incremental increase to our ongoing stock repurchase program initiated in May 2014, primarily to return value to our stockholders and to offset dilution from the issuance of stock under our equity-based incentive plan and employee stock purchase plan. During the six months ended June 30, 2018,first half of 2019, we repurchased 594,7991,175,609 shares of our common stock for approximately $30$62 million through our stock repurchase program. As of June 30, 2018,2019, approximately $106$313 million remained available for repurchase under all authorizations by our board of directors. We plan to use current cash and cash generated from ongoing operating activities to fund this share repurchase program.
Covenants
Our 2018 Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to us, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of indebtedness (other than our 2018 Term Loan and our 2018 Revolver), dividends, distributions and transactions with affiliates. It also contains financial covenants requiring us to maintain certain minimum interest coverage and maximum total leverage ratios, as set forth in our 2018 Credit Agreement. These covenants took effect on June 30, 2018. We were in compliance with thesethe financial covenants under theour credit facilities at June 30, 2018.2019. For more detailsinformation on the covenants under our 2018 Credit Agreement, seecredit facility, refer to Note 7 toin Part II, Item 8. Financial Statements and Supplementary Data, of our financial statements in this Form 10-Q.10-K.
Contractual Obligations
The following table summarizes changes in our significant contractual obligations associated with our debt refinance:
|
| | | | | | | | | | | | |
| | Payments Due by Period |
| (in millions) | Total | Less than 1 year | 1-3 years | 3-5 years |
Debt obligations (1) | $ | 510 |
| $ | 39 |
| $ | 79 |
| $ | 392 |
|
| |
(1) | Includes principal and the projected interest payments of our term loans, refer to Note 7 in Item 1 of this Form 10-Q for details. |
Off-Balance Sheet Arrangements
There hashave been no additional material changechanges in our off-balance sheet arrangements discussed in Part II, Item 77. Management's Discussion and Analysis of our 20172018 Form 10-K.
Critical Accounting Policies, Estimates and Judgments
During the first quarter of 2018,2019, we adopted ASC Topic 606.842. Refer to Note 1 in Item 1 of this Form 10-Q for disclosure of the changes related to this adoption. There have been no additional material changes to our critical accounting policies as discussed in our 20172018 Form 10-K.
Recent Accounting Pronouncements
Refer to Note 1 in Item 1 of this Form 10-Q.
|
| |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND CONTROLS AND PROCEDURES | |
Quantitative and Qualitative Disclosures About Market Risk
Our exposure to changes in interest rates relates primarily to our investment portfolio and outstanding floating rate debt. Changes in U.S. interest rates affect the interest earned on the Company’s cash, cash equivalents and investments and the fair value of the investments, as well as interest costs associated with our debt.
In the first quarter of 2018 our board of directors approved a corporate investment policy ("our Investment Policy") that allows usOn June 2019, we entered into an interest rate collar derivative transaction with no upfront premium. We use this derivative to invest our available cash in instruments that meet the credit quality, liquidity, diversification and other requirements set forth in our Investment Policy. Under our Investment Policy, the Company's investment portfolios must maintain a minimum average credit quality of AA minus by Standard & Poor's (or an equivalent nationally recognized statistical rating organization), maintain average effective maturity durations of less than 36 months (or less than 24 months in some cases), and satisfy diversification requirements intended to reduce overall investment consolidation. Due to the restrictions imposed by our Investment Policy, we believe that our exposure to losses resulting from credit risk is not significant. To provide a meaningful assessment of thehedge against interest rate risk on a portion of our outstanding floating rate debt. We have designated this derivative as a cash flow hedge. Our primary objective in purchasing and holding this derivative is to reduce our volatility of net earnings and cash flows associated with changes in the benchmark interest rate in our investment portfolio, weinterest rate payments. We do not enter into any derivatives for trading or other speculative purposes.
We performed a sensitivity analysis to determine the impact a change in interest rates would have on the valuecash flows of the investment portfoliocollar assuming a 100 basis point parallel shift in the yield curve.current LIBOR rate. Based on investment positionsthe terms and remaining settlements as of June 30, 2018,2019, a hypothetical 100 basis point decrease in one-month LIBOR across all maturities would not result in any cash payments by the Company while a hypothetical 100 basis point increase or decrease in interest ratesone-month LIBOR across all maturities would result in cash receipts of $6 million.
Our cash equivalents consist primarily of money market mutual funds, which are not significantly exposed to interest rate risk. Our AFS marketable securities are subject to interest rate risk because these securities generally include a $2 million incremental decline or increasefixed interest rate. As a result, the market values of these securities are affected by changes in the fair market valueprevailing interest rates. We attempt to limit our exposure to interest rate risk and credit risk, as our investment policy defines minimum credit quality, liquidity, diversification and other requirements for eligible investments. Our AFS marketable securities consist of the portfolio, respectively. Such losses would only be realized if we sold the investments prior to maturity.highly liquid, investment-grade securities. The risk of rate changes on investment balances was not significant at June 30, 2018.2019.
In June 2018, we refinanced our term loans which would have matured in July 2019 and replaced them with a term loan maturing in 2023. At June 30, 2018, after this refinancing,2019, we had total outstanding indebtednesslong-term debt of $425 million, of which $21 million is due within 12 months.$402 million. A 100 basis point increase or decrease in market interest rates would cause interest expense on our debt as of June 30, 20182019 to increase by $8 million or decrease by $19$15 million on an annualized basis, respectively.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have, with the participation of our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018. The term “disclosure controls and procedures,”2019, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, meansAct.
Based on the evaluation of our disclosure controls and other procedures as of a companyJune 30, 2019, our CEO and CFO have concluded that are designed to ensurethe Company’s disclosure controls and procedures were effective as of such date in ensuring that (i) information required to be disclosed by a companythe Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’sCompany’s management, including its principal executive officerthe CEO and principal financial officer, as appropriateCFO, to allow timely decisions regarding required disclosure. Based ondisclosure and (ii) such information is recorded, processed, summarized and reported within the evaluation of our disclosure controlstime periods specified in the SEC rules and procedures as of June 30, 2018, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were not effective as a result of a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.forms.
Notwithstanding the material weakness in our internal control over financial reporting, weWe have concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America. Additionally, the material weakness did not result in any restatements of our condensed consolidated financial statements or disclosures for any prior period.
Additional Analyses and Procedures and Remediation Plan
We are taking specific steps to remediate the material weakness identified by management and described in greater detail in our 2017 Form 10-K. Although we intend to complete the remediation process with respect to this material weakness 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.
Because the reliability of the internal control process requires repeatable execution, the successful remediation of this material weakness 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 already underway. 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 this weakness is remediated, we plan to perform additional analyses and other procedures to ensure that our condensed consolidated financial statements are prepared in accordance with GAAP.
Changes in Internal Control Over Financial Reporting
Other than the material weakness remediation efforts underway, thereThere 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 June 30, 2018,2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
|
| | | | | | | | | | | | | |
| (in millions, except share and per share data) | June 30,
2018 | | December 31,
2017 |
| Assets | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | | $ | 202 |
| | | $ | 336 |
|
| Investments | | 29 |
| | | — |
|
| Restricted cash, cash equivalents and investments | | 629 |
| | | 1,280 |
|
| Worksite employee related assets: | | | | | |
Unbilled revenue (net of advance collections of $14 and $12
at June 30, 2018 and December 31, 2017, respectively) | $ | 268 |
| | | $ | 297 |
| |
| Accounts receivable | 7 |
| | | 20 |
| |
| Prepaid insurance premiums and other insurance related receivables | 28 |
| | | 26 |
| |
| Other payroll assets | 49 |
| | | 17 |
| |
| Worksite employee related assets |
|
| 352 |
| |
|
| 360 |
|
| Prepaid expenses and other current assets | | 37 |
| | | 15 |
|
| Total current assets | | 1,249 |
| | | 1,991 |
|
| Investments, noncurrent | | 133 |
| | | — |
|
| Restricted cash, cash equivalents and investments, noncurrent | | 179 |
| | | 162 |
|
| Workers' compensation collateral receivable | | 40 |
| | | 39 |
|
| Property and equipment, net | | 79 |
| | | 70 |
|
| Goodwill and other intangible assets, net | | 312 |
| | | 315 |
|
| Other assets | | 23 |
| | | 16 |
|
| Total assets | | $ | 2,015 |
| | | $ | 2,593 |
|
| Liabilities and stockholders’ equity | | | | | |
| Current liabilities: | | | | | |
| Accounts payable and other current liabilities | | $ | 39 |
| | | $ | 59 |
|
| Accrued corporate wages | | 35 |
| | | 40 |
|
| Notes payable | | 21 |
| | | 40 |
|
| Worksite employee related liabilities: | | | | | |
| Accrued wages | $ | 269 |
| | | $ | 289 |
| |
| Client deposits | 28 |
| | | 52 |
| |
| Payroll tax liabilities and other payroll withholdings | 442 |
| | | 1,034 |
| |
Health benefits loss reserves (net of prepayments of $38 and $19
at June 30, 2018 and December 31, 2017, respectively) | 138 |
| | | 151 |
| |
Workers' compensation loss reserves (net of collateral paid of $5 and $6
at June 30, 2018 and December 31, 2017, respectively) | 67 |
| | | 67 |
| |
| Insurance premiums and other payables | 22 |
| | | 25 |
| |
| Worksite employee related liabilities |
|
| 966 |
| | | 1,618 |
|
| Total current liabilities | | 1,061 |
| | | 1,757 |
|
| Notes payable, noncurrent | | 402 |
| | | 383 |
|
Workers' compensation loss reserves (net of collateral paid of $15 and $17
at June 30, 2018 and December 31, 2017, respectively) | | 157 |
| | | 165 |
|
| Deferred income taxes | | 70 |
| | | 68 |
|
| Other liabilities | | 16 |
| | | 14 |
|
| Total liabilities | | 1,706 |
| | | 2,387 |
|
| Commitments and contingencies (see Note 10) | |
|
| | | |
| Stockholders’ equity: | | | | | |
Preferred stock
($0.000025 par value per share; 20,000,000 shares authorized; no shares issued and outstanding at June 30, 2018 and December 31, 2017) | | — |
| | | — |
|
Common stock and additional paid-in capital
($0.000025 par value per share; 750,000,000 shares authorized; 70,573,887 and 69,818,392 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively) | | 611 |
| | | 583 |
|
| Accumulated deficit | | (302 | ) | | | (377 | ) |
| Total stockholders’ equity | | 309 |
| | | 206 |
|
| Total liabilities and stockholders’ equity | | $ | 2,015 |
| | | $ | 2,593 |
|
|
| | | | | | | | |
| | | June 30, | | December 31, |
| (in millions, except share and per share data) | | 2019 | | 2018 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 219 |
| | $ | 228 |
|
| Investments | | 76 |
| | 54 |
|
| Restricted cash, cash equivalents and investments | | 672 |
| | 942 |
|
| Accounts receivable, net | | 10 |
| | 11 |
|
| Unbilled revenue, net | | 341 |
| | 304 |
|
| Prepaid expenses, net | | 64 |
| | 48 |
|
| Other current assets | | 73 |
| | 59 |
|
| Total current assets | | 1,455 |
| | 1,646 |
|
| Restricted cash, cash equivalents and investments, noncurrent | | 200 |
| | 187 |
|
| Investments, noncurrent | | 117 |
| | 135 |
|
| Property & equipment, net | | 89 |
| | 79 |
|
| Operating lease right-of-use asset | | 60 |
| | — |
|
| Goodwill | | 289 |
| | 289 |
|
| Other intangible assets, net | | 18 |
| | 21 |
|
| Other assets | | 90 |
| | 78 |
|
| Total assets | | $ | 2,318 |
| | $ | 2,435 |
|
| Liabilities and stockholders' equity | | | | |
| Current liabilities: | | | | |
| Accounts payable and other current liabilities | | $ | 40 |
| | $ | 45 |
|
| Long-term debt | | 22 |
| | 22 |
|
| Client deposits | | 67 |
| | 56 |
|
| Accrued wages | | 377 |
| | 352 |
|
| Accrued health insurance costs, net | | 143 |
| | 135 |
|
| Accrued workers' compensation costs, net | | 64 |
| | 67 |
|
| Payroll tax liabilities and other payroll withholdings | | 473 |
| | 729 |
|
| Operating lease liabilities | | 17 |
| | — |
|
| Insurance premiums and other payables | | 16 |
| | 19 |
|
| Total current liabilities | | 1,219 |
| | 1,425 |
|
| Long-term debt, noncurrent | | 380 |
| | 391 |
|
| Accrued workers' compensation costs, noncurrent, net | | 148 |
| | 158 |
|
| Deferred taxes | | 67 |
| | 68 |
|
| Operating lease liabilities, noncurrent | | 55 |
| | — |
|
| Other non-current liabilities | | 10 |
| | 18 |
|
| Total liabilities | | 1,879 |
| | 2,060 |
|
| Commitments and contingencies (see Note 6) | |
| |
|
| Stockholders' equity: | | | | |
| Preferred stock | | — |
| | — |
|
| ($0.000025 par value per share; 20,000,000 shares authorized; no shares issued or outstanding at June 30, 2019 and December 31, 2018) | | | | |
| Common stock and additional paid-in capital | | 667 |
| | 641 |
|
| ($0.000025 par value per share; 750,000,000 shares authorized; 69,991,145 and 70,596,559 shares issued and outstanding at June 30, 2019 and December 31, 2018) | | | | |
| Accumulated deficit | | (229 | ) | | (266 | ) |
| Accumulated other comprehensive income | | 1 |
| | — |
|
| Total stockholders' equity | | 439 |
| | 375 |
|
| Total liabilities & stockholders' equity | | $ | 2,318 |
| | $ | 2,435 |
|
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended June 30, | Six Months Ended June 30, |
| (in millions, except share and per share data) | 2018 | 2017 | | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 |
| Professional service revenues | $ | 115 |
| $ | 109 |
| | $ | 244 |
| $ | 229 |
| $ | 127 |
| $ | 115 |
| $ | 263 |
| $ | 244 |
|
| Insurance service revenues | 735 |
| 692 |
| | 1,467 |
| 1,379 |
| 808 |
| 735 |
| 1,606 |
| 1,467 |
|
| Total revenues | 850 |
| 801 |
| | 1,711 |
| 1,608 |
| 935 |
| 850 |
| 1,869 |
| 1,711 |
|
| Insurance costs | 630 |
| 600 |
| | 1,271 |
| 1,208 |
| 704 |
| 630 |
| 1,387 |
| 1,271 |
|
| Cost of providing services (exclusive of depreciation and amortization of intangible assets) | 51 |
| 51 |
| | 108 |
| 107 |
| |
| Cost of providing services | | 63 |
| 51 |
| 127 |
| 108 |
|
| Sales and marketing | 41 |
| 46 |
| | 80 |
| 95 |
| 52 |
| 41 |
| 98 |
| 80 |
|
| General and administrative | 31 |
| 28 |
| | 62 |
| 54 |
| 36 |
| 31 |
| 72 |
| 62 |
|
| Systems development and programming | 11 |
| 12 |
| | 24 |
| 22 |
| 13 |
| 11 |
| 25 |
| 24 |
|
| Depreciation | 8 |
| 6 |
| | 16 |
| 13 |
| |
| Amortization of intangible assets | 2 |
| 1 |
| | 3 |
| 3 |
| |
| Depreciation and amortization of intangible assets | | 12 |
| 10 |
| 23 |
| 19 |
|
| Total costs and operating expenses | 774 |
| 744 |
| | 1,564 |
| 1,502 |
| 880 |
| 774 |
| 1,732 |
| 1,564 |
|
| Operating income | 76 |
| 57 |
| | 147 |
| 106 |
| 55 |
| 76 |
| 137 |
| 147 |
|
| Other income (expense): | | | | |
| Interest expense, bank fees and other, net | (4 | ) | (5 | ) | | (8 | ) | (9 | ) | |
| Interest expense, bank fees and other | | (6 | ) | (7 | ) | (11 | ) | (13 | ) |
| Interest income | | 7 |
| 3 |
| 13 |
| 5 |
|
| Income before provision for income taxes | 72 |
| 52 |
| | 139 |
| 97 |
| 56 |
| 72 |
| 139 |
| 139 |
|
| Income tax expense | 14 |
| 12 |
| | 27 |
| 28 |
| 10 |
| 14 |
| 30 |
| 27 |
|
| Net income | $ | 58 |
| $ | 40 |
| | $ | 112 |
| $ | 69 |
| $ | 46 |
| $ | 58 |
| $ | 109 |
| $ | 112 |
|
| Other comprehensive income, net of tax | | 1 |
| 1 |
| 1 |
| — |
|
| Comprehensive income | $ | 58 |
| $ | 40 |
| | $ | 112 |
| $ | 69 |
| $ | 47 |
| $ | 59 |
| $ | 110 |
| $ | 112 |
|
| | | | | |
| Net income per share: | | | | |
| Basic | $ | 0.82 |
| $ | 0.58 |
| | $ | 1.59 |
| $ | 1.00 |
| $ | 0.65 |
| $ | 0.82 |
| $ | 1.56 |
| $ | 1.59 |
|
| Diluted | $ | 0.80 |
| $ | 0.56 |
| | $ | 1.55 |
| $ | 0.97 |
| $ | 0.64 |
| $ | 0.80 |
| $ | 1.53 |
| $ | 1.55 |
|
| Weighted average shares: | | | |
| | |
| Basic | 70,448,809 |
| 69,029,749 |
| | 70,250,273 |
| 68,770,976 |
| 69,703,792 |
| 70,448,809 |
| 69,806,319 |
| 70,250,273 |
|
| Diluted | 72,561,891 |
| 71,167,177 |
| | 72,404,539 |
| 71,101,716 |
| 71,074,751 |
| 72,561,891 |
| 71,151,219 |
| 72,404,539 |
|
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS' EQUITY
(Unaudited)
|
| | | | | | |
| | Six Months Ended
June 30, |
| (in millions) | 2018 | 2017 |
| Operating activities | | |
| Net income | $ | 112 |
| $ | 69 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Depreciation and amortization | 24 |
| 16 |
|
| Stock-based compensation | 19 |
| 14 |
|
| Changes in operating assets and liabilities: | | |
| Prepaid income taxes | 2 |
| 28 |
|
| Prepaid expenses and other current assets | (23 | ) | (3 | ) |
| Workers' compensation collateral receivable and other noncurrent assets | (6 | ) | 5 |
|
| Accounts payable and other current liabilities | (14 | ) | 5 |
|
| Accrued corporate wages | (5 | ) | 7 |
|
| Workers' compensation loss reserves and other noncurrent liabilities | (4 | ) | (5 | ) |
| Worksite employee related assets | 4 |
| 43 |
|
| Worksite employee related liabilities | (652 | ) | (383 | ) |
| Net cash used in operating activities | (543 | ) | (204 | ) |
| Investing activities | | |
| Purchases of marketable securities | (203 | ) | — |
|
| Proceeds from sale of marketable securities | 39 |
| — |
|
| Proceeds from maturity of marketable securities | 24 |
| 11 |
|
| Acquisitions of property and equipment | (26 | ) | (20 | ) |
| Net cash used in investing activities | (166 | ) | (9 | ) |
| Financing activities | | |
| Repurchase of common stock | (30 | ) | (30 | ) |
| Proceeds from issuance of common stock on exercised options | 5 |
| 6 |
|
| Proceeds from issuance of common stock on employee stock purchase plan | 3 |
| 2 |
|
| Awards effectively repurchased for required employee withholding taxes | (10 | ) | (5 | ) |
| Proceeds from issuance of notes payable, net | 210 |
| — |
|
| Payments for extinguishment of debt | (204 | ) | — |
|
| Repayment of notes payable | (10 | ) | (18 | ) |
| Net cash used in financing activities | (36 | ) | (45 | ) |
| Net decrease in cash and cash equivalents, unrestricted and restricted | (745 | ) | (258 | ) |
| Cash and cash equivalents, unrestricted and restricted: | | |
| Beginning of period | 1,738 |
| 1,233 |
|
| End of period | $ | 993 |
| $ | 975 |
|
| | | |
| Supplemental disclosures of cash flow information | | |
| Interest paid | $ | 8 |
| $ | 8 |
|
| Income taxes paid, net | 24 |
| — |
|
| Supplemental schedule of noncash investing and financing activities | | |
| Payable for purchase of property and equipment | $ | 2 |
| $ | 2 |
|
| Supplemental schedule of cash and cash equivalents | | |
| Net increase (decrease) in unrestricted cash and cash equivalents | $ | (134 | ) | $ | 50 |
|
| Net decrease in restricted cash and cash equivalents | (611 | ) | (308 | ) |
|
| | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | 2018 | 2019 | 2018 |
| Total Stockholders' Equity, beginning balance | $ | 406 |
| $ | 262 |
| | $ | 375 |
| $ | 206 |
|
| Common Stock and Additional Paid-In Capital | | | | | |
| Beginning balance | 651 |
| 595 |
| | 641 |
| 583 |
|
| Issuance of common stock from exercise of stock options | 1 |
| 3 |
| | 2 |
| 6 |
|
| Issuance of common stock for employee stock purchase plan | 4 |
| 3 |
| | 4 |
| 3 |
|
| Stock-based compensation expense | 11 |
| 10 |
| | 20 |
| 19 |
|
| Ending balance | 667 |
| 611 |
| | 667 |
| 611 |
|
| | | | | | |
| Accumulated Deficit | | | | | |
| Beginning balance | (245 | ) | (332 | ) | | (266 | ) | (377 | ) |
| Net income | 46 |
| 58 |
| | 109 |
| 112 |
|
| Cumulative effect of accounting change | — |
| — |
| | — |
| 3 |
|
| Repurchase of common stock | (24 | ) | (22 | ) | | (62 | ) | (30 | ) |
| Awards effectively repurchased for required employee withholding taxes | (6 | ) | (6 | ) | | (10 | ) | (10 | ) |
| Ending balance | (229 | ) | (302 | ) | | (229 | ) | (302 | ) |
| | | | | | |
| Accumulated Other Comprehensive Loss | | | | | |
| Beginning balance | — |
| (1 | ) | | — |
| — |
|
| Other comprehensive income | 1 |
| 1 |
| | 1 |
| — |
|
| Ending balance | 1 |
| — |
| | 1 |
| — |
|
| Total Stockholders' Equity, ending balance | $ | 439 |
| $ | 309 |
| | $ | 439 |
| $ | 309 |
|
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| | | | |
| | Six Months Ended June 30, |
| (in millions) | 2019 | 2018 |
| Operating activities | | |
| Net income | 109 |
| 112 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Depreciation and amortization | 27 |
| 24 |
|
| Noncash lease expense | 10 |
| — |
|
| Stock-based compensation | 20 |
| 19 |
|
| Changes in operating assets and liabilities: | | |
| Accounts receivable | 3 |
| 11 |
|
| Unbilled revenue | (36 | ) | 35 |
|
| Prepaid expenses | (18 | ) | (9 | ) |
| Other assets | (30 | ) | (45 | ) |
| Accounts payable and other current liabilities | (11 | ) | (28 | ) |
| Client deposits | 10 |
| (24 | ) |
| Accrued wages | 25 |
| (28 | ) |
| Accrued health insurance costs | 9 |
| (13 | ) |
| Accrued workers' compensation costs | (13 | ) | (8 | ) |
| Payroll taxes payable and other payroll withholdings | (256 | ) | (588 | ) |
| Operating lease liabilities | (9 | ) | — |
|
| Other liabilities | (2 | ) | (1 | ) |
| Net cash used in operating activities | (162 | ) | (543 | ) |
| Investing activities | | |
| Purchases of marketable securities | (65 | ) | (203 | ) |
| Proceeds from sale and maturity of marketable securities | 65 |
| 63 |
|
| Acquisitions of property and equipment | (25 | ) | (26 | ) |
| Net cash used in investing activities | (25 | ) | (166 | ) |
| Financing activities | | |
| Repurchase of common stock | (62 | ) | (30 | ) |
| Proceeds from issuance of common stock from employee stock purchase plan | 4 |
| 3 |
|
| Proceeds from issuance of common stock from exercised options | 2 |
| 5 |
|
| Awards effectively repurchased for required employee withholding taxes | (10 | ) | (10 | ) |
| Proceeds from issuance of notes payable, net | — |
| 210 |
|
| Payments for extinguishment of debt | — |
| (204 | ) |
| Repayment of debt | (11 | ) | (10 | ) |
| Net cash used in financing activities | (77 | ) | (36 | ) |
| Net decrease in unrestricted and restricted cash and cash equivalents | (264 | ) | (745 | ) |
| Cash and cash equivalents, unrestricted and restricted: | | |
| Beginning of period | 1,349 |
| 1,738 |
|
| End of period | 1,085 |
| 993 |
|
| | | |
| Supplemental disclosures of cash flow information | | |
| Interest paid | 9 |
| 8 |
|
| Income taxes paid, net | 33 |
| 24 |
|
| Supplemental schedule of noncash investing and financing activities | | |
| Payable for purchase of property and equipment | 8 |
| 2 |
|
See accompanying notes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
TriNet Group, Inc. (TriNet, or the Company, we, our and us), a professional employer organization, (PEO) founded in 1988, provides comprehensive human resources (HR) solutions for small to midsize businesses (SMBs) under a co-employment model. 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, employment and benefit law compliance, and other HR-related services. Through the co-employment relationship, we are the employer of record for mostcertain employment-related administrative and regulatory purposes for the worksite employees, including:
compensation through wages and salaries,
employer payroll-related tax payments,
employee payroll-related tax withholdings and payments,
employee benefit programs, including health and life insurance, and others, and
workers' compensation coverage.
Our clients are responsible for the day-to-day job responsibilities of the worksite employees (WSEs).WSEs.
We operate in one reportable segment. All of our service revenues are generated from external clients. Less than 1% of our revenue is generated outside of the U.S.
Basis of Presentation
These unaudited condensed consolidated financial statements (Financial Statements) and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Rules and Regulations of the Securities and Exchange Commission (SEC).Commission. Certain information and note disclosures included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, that are normal and recurring in nature, necessary for fair financial statement presentation. The results of operations for the three and the six months ended June 30, 20182019 are not necessarily indicative of the operating results anticipated for the full year. These Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of our Annual Report on Form 10-K for the year ended December 31, 2017 (20172018 (2018 Form 10-K).
Reclassifications
Certain prior year amounts have been reclassified to conform to current period presentation. These reclassifications include short-term restricted cash, cash equivalents and investments previously classified as WSE-related assets and now presented within restricted cash, cash equivalents and investments. Refer to the accounting policy below for a description of amounts currently included in restricted cash, cash equivalents, and investments.
Reclassifications
Certain prior year amounts have been reclassified to conform to current period presentation. Effects on the cash flow statement due to reclassifications are summarized below:
|
| | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| (in millions) | As previously reported | Reclassified amounts | As revised |
| Operating activities | | | |
| Accounts receivable | $ | — |
| $ | 11 |
| $ | 11 |
|
| Unbilled revenue | — |
| 35 |
| 35 |
|
| Prepaid income taxes | 2 |
| (2 | ) | — |
|
| Prepaid expenses and other current assets | (23 | ) | 23 |
| — |
|
| Prepaid expenses | — |
| (9 | ) | (9 | ) |
| Workers' compensation collateral receivable | (6 | ) | 6 |
| — |
|
| Accounts payable and other current liabilities | (14 | ) | (14 | ) | (28 | ) |
| Client deposits | — |
| (24 | ) | (24 | ) |
| Accrued wages | — |
| (28 | ) | (28 | ) |
| Accrued corporate wages | (5 | ) | 5 |
| — |
|
| Accrued health insurance costs | — |
| (13 | ) | (13 | ) |
| Accrued workers' compensation costs | — |
| (8 | ) | (8 | ) |
| Workers' compensation loss reserves and other non-current liabilities | (4 | ) | 4 |
| — |
|
| Payroll taxes payable and other payroll withholdings | — |
| (588 | ) | (588 | ) |
| Worksite employee related assets | 4 |
| (4 | ) | — |
|
| Worksite employee related liabilities | (652 | ) | 652 |
| — |
|
| Other assets | — |
| (45 | ) | (45 | ) |
| Other liabilities | — |
| (1 | ) | (1 | ) |
Effects on the consolidated statements of income and comprehensive income due to reclassifications are summarized below:
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | Six months ended |
| | June 30, 2018 | June 30, 2018 |
| (in millions) | As previously reported | Reclassified amounts | As revised | As previously reported | Reclassified amounts | As revised |
| Depreciation | $ | 8 |
| $ | (8 | ) | $ | — |
| $ | 16 |
| $ | (16 | ) | $ | — |
|
| Amortization of intangible assets | 2 |
| (2 | ) | — |
| 3 |
| (3 | ) | — |
|
| Depreciation and amortization of intangible assets | — |
| 10 |
| 10 |
| — |
| 19 |
| 19 |
|
| Interest expense, bank fees and other, net | (4 | ) | 4 |
| — |
| (8 | ) | 8 |
| — |
|
| Interest expense, bank fees and other | — |
| (7 | ) | (7 | ) | — |
| (13 | ) | (13 | ) |
| Interest income | — |
| 3 |
| 3 |
| — |
| 5 |
| 5 |
|
| Other comprehensive income, net of tax | — |
| 1 |
| 1 |
| — |
| — |
| — |
|
| Comprehensive income | 58 |
| 1 |
| 59 |
| 112 |
| — |
| 112 |
|
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect certain reported amounts and related disclosures. Significant estimates include:
liability for unpaid losses and loss adjustment expenses (loss reserves)(accrued workers' compensation costs) related to workers' compensation and workers' compensation collateral receivable,
accrued health insurance loss reserves,costs,
liability for insurance premiums payable,
valuation of the investment portfolio,
impairments of goodwill and other intangible assets,
income tax assets and liabilities, and
liability for legal contingencies.
These estimates are based on historical experience and on various other assumptions that we believe to be reasonable from the facts available to us. Some of the assumptions are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial statements could be materially affected.
Accrued Health Insurance Costs
Revenue RecognitionWe sponsor and administer a number of fully insured, risk-based employee benefit plans, including group health, dental, and vision as an employer plan sponsor under section 3(5) of the ERISA. In the six months ended June 30, 2019, the majority of our group health insurance costs related to risk-based plans. Our remaining group health insurance costs were for guaranteed-cost policies.
On January 1, 2018, we adopted Accounting Standards Codification Topic 606 (ASC Topic 606) usingAccrued health insurance costs are established to provide for the modified retrospective method applied to those contracts which were not completed asestimated unpaid costs of January 1, 2018. Resultsreimbursing the carriers for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, whilepaying claims within the comparative prior period amounts are not restated and continue to be reporteddeductible layer in accordance with statements previously accountedrisk-based health insurance policies. These accrued costs include estimates for reported losses, plus estimates for claims incurred but not paid. We assess accrued health insurance costs regularly based upon independent actuarial studies that include other relevant factors such as current and historical claims payment patterns, plan enrollment and medical trend rates.
In certain carrier contracts we are required to prepay the expected claims activity for subsequent periods. These prepaid balances by agreement permit net settlement of obligations and offset the accrued health insurance costs. As of June 30, 2019 and December 31, 2018, prepayments included in accrued health insurance costs were $39 million and $33 million, respectively. When the prepaid is in excess of our recorded liability, the net asset position is included in prepaid expenses. As of June 30, 2019 and December 31, 2018, accrued health insurance costs included in prepaid expenses were $51 million and $50 million, respectively.
Derivative Instruments
In June 2019, we entered into a interest rate collar derivative transaction with no upfront premium to mitigate the risk of changes in interest rates on our floating rate debt. This derivative, for which we have elected and qualify for cash flow hedge accounting, is recorded on the balance sheet at its fair value. Changes in the derivative’s fair value are recorded each period in other comprehensive income until the underlying monthly interest payment and the corresponding portion of the derivative are settled, at which point changes in fair value are recorded in net income. We evaluate this derivative each quarter to determine that it remains effective by comparing the remaining cash flows of the derivative against the related interest payments of our floating rate debt. We do not enter into any derivatives for trading or other speculative purposes.
Leases
We adopted ASU 2016-02 - Leases (ASC 842) effective January 1, 2019 using the optional transition method, under Accounting Standards Codification Topic 605.
Upon adoptionwhich we recognized the cumulative effects of ASC Topic 606, we recorded a $1 million cumulative effectinitially applying the standard as an adjustment to the opening balance of retained earnings as ofon January 1, 2018. Impacts from adoption of the new standard on our revenue recognition include:
Our annual service contracts2019 with our clients that are cancellable with 30 days' notice are initially considered 30-day contracts under the new standard;
Professional service revenues are recognized on an output basis which results in recognition at the time payroll is processed;
Our non-refundable set up fees are no longer deferred but accounted for asunchanged comparative periods. As part of our transaction price and are allocated among professional service revenues and insurance services revenues; andthis adoption, we elected the following practical expedients:
The majority of sales commissions relatednot to onboarding new clientsreassess 1) whether any contracts that were previously expensed are capitalized as contract assets and amortized overexisted prior to adoption have or contain leases, 2) the estimated customer life.
Revenues are recognized when control of the promised services are transferred to our clients, in an amount that reflects the consideration that we expect to receive in exchange for services. We generate allclassification of our revenue from contracts with customers. We disaggregate revenues into professional services revenues and insurance services revenues as reported on the condensed consolidated statements of operations and comprehensive income. Generally, both the client and the Company may terminate the contract without penalty by providing a 30-day notice.existing leases or 3) initial direct costs for existing leases,
Performance Obligations
At contract inception, we assessto use the services promisedpractical expedient of using hindsight to determine the lease terms and evaluate any impairments in our contracts with customers and identify a performance obligation for each distinct promise to transfer to the customer a service or bundle of services. We determined that the following distinct services represent separate performance obligations:
Payroll and payroll tax processing,
Health benefits services,right-of-use assets upon transition, and
Workers’ compensation services.
Payrollnot separately record non-lease and payroll tax processing performance obligations include services to process payroll and payroll tax-related transactions on behalf of our clients. Revenues associated with this performance obligation are reported as professional service revenues and recognized using an output methodlease components for all leases in which we act as a lessee.
We determine if a new contractual arrangement is a lease at contract inception. If a contract contains a lease, we evaluate whether it should be classified as an operating or a finance lease. If applicable as a lease, we record our lease liabilities and ROU assets based on the controlfuture minimum lease payments over the lease term and only include options to renew a lease in the minimum lease payments if it is reasonably certain that we will exercise that option. For certain leases with original terms of twelve months or less we recognize the promised services is considered transferred when a client's payroll is processed by uslease expense as incurred and its WSEs are paid. Professional service revenues are stated net of the gross payroll and payroll tax amounts funded by our clients. Although we assume the responsibilities to process and remit the payroll and payroll related obligations, we do not assume employment-related responsibilities such as determining the amount of the payrollrecognize lease liabilities and related payroll obligations. As a result, we are the agent in this arrangement for revenue recognition purposes.ROU assets.
Health benefits and workers' compensation services include performance obligations to provide TriNet-sponsored health benefits and workers' compensation insurance coverage through insurance policies provided by third-party insurance carriers and settle high deductible amounts on those policies. Revenues associated with these performance obligations are reported as insurance services revenues and are recognized using the output method over the period of time that the client and WSEs are covered under TriNet-sponsored insurance policies.
We control the selection of health benefits and workers' compensation coverage made available, insurance services revenues are reported gross as we are the principal in this arrangement for revenue recognition purposes. See Item 8 Note 1 inmeasure our 2017 Form 10-K for further discussion on our accounting policy for insurance costs.
We generally charge new customers a nominal upfront non-refundable fee to recover our costs to set up the client on our TriNet platform for payroll processing and other administrative services, such as benefit enrollments. These fees are accounted for as part of our transaction price and are allocated among the performance obligations based on their relative standalone selling price.
Variable Consideration and Pricing Allocation
Our contracts with customers generally do not include any variable consideration. However, from time to time, we may offer incentive credits to our clients considered to be variable consideration including incentive credits issued related to contract renewals. Incentive credits are recorded as a reduction to revenue as part of the transaction price at contract inception when there is a basis to reasonably estimate the amount of the incentive credit and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. These incentive credits are allocated among the performance obligations based on their relative standalone selling price.
We allocate the total transaction price to each performance obligationlease liabilities based on the estimated relative standalone selling prices offuture minimum lease payments discounted over the promised services underlying each performance obligation. The transaction price for payroll and payroll tax processing performance obligations are determined upon establishment of the contract that contains the final terms of the sale, including the description and price of each service purchased. The estimated service feelease term. We determine our discount rate at lease inception using our incremental borrowing rate, which is calculated based on observable inputs and includeour outstanding term debts that are collateralized by certain corporate assets.As of June 30, 2019, the following key assumptions: target profit margin, pricing strategies includingweighted-average rate used in discounting the mix of services purchased and competitive factors, and customer and industry specifics.lease liability was 4.6%.
The transaction price for health benefits insurance and worker’s compensation insurance performance obligations is determined during the new client on-boarding and enrollment processesWe measure our ROU assets based on the typesassociated lease liabilities adjusted for any lease incentives such as tenant improvement allowances and classify operating ROU assets in other assets in our condensed consolidated balance sheet. For operating leases, we recognize expense for lease payments on a straight-line basis over the lease term.
Recent Accounting Pronouncements
Recently adopted accounting guidance
Leases -In February of benefits coverage2016, the clientsFASB issued ASC 842, which replaced existing lease guidance under GAAP. Under this guidance, we recognize on our condensed balance sheet lease liabilities representing the present value of future lease payments and WSEs have elected andan associated right-of-use asset representing our right to use or control the applicable risk profileuse of specified assets for the client. We estimate our service fees based on actuarial forecastslease term for any operating lease with a term greater than one year.
The impact of our adoption of ASC 842 did not have a material impact on our income statement or cash flow statement. The impact on our condensed balance sheets is as follows:
|
| | | | | | | | | | | | |
| | | June 30, 2019 |
| (in millions) | | As reported | | Balance Using Previous Standard | | Increase (Decrease) |
| Balance sheet | | | | | | |
| Assets | | | | | | |
| Operating lease right-of-use assets | | $ | 60 |
| | $ | — |
| | $ | 60 |
|
| Liabilities | | | | | | |
| Operating lease liabilities | | 17 |
| | — |
| | 17 |
|
| Operating lease liabilities, noncurrent | | 55 |
| | 11 |
| | 44 |
|
| Equity | | | | | | |
| Accumulated deficit | | (229 | ) | | — |
| | (229 | ) |
Recently issued accounting pronouncements
Credit Losses - In June 2016, the FASB issued ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326), which requires financial assets to be presented at the net amount expected insurance premiums and claim costs, and to amountsbe collected. We will be required to coveruse forward-looking information when evaluating an allowance for our costs to administer these programs.
We require our clients to prefund payroll and related taxesaccounts receivable, unbilled revenue and other withholding liabilities before payroll is processed or duefinancial assets measured at amortized cost. Topic 326 also modifies the impairment guidance for payment. Underavailable-for-sale debt securities to require an allowance for credit losses. We will adopt Topic 326 effective January 1, 2020 using a modified retrospective approach through a cumulative-effect adjustment to retained earnings. We are currently evaluating the provisionimpact of this standard on our contracts with customers, we generally will process the payment of a client’s payroll only when the client successfully funds the amount required. As a result, there is no financing arrangementconsolidated financial statements, including accounting policies, processes and systems.
for the contracts, however, certain contracts to provide payroll and payroll tax processing services permit the client to pay certain payroll tax components ratably over a 12-month period rather than as payroll tax is determined on wages paid, which may be considered a significant financing arrangement under ASC Topic 606. However, as the period between our performing the service under the contract and when the client pays for the service is less than one year, we have elected as a practical expedient, not to adjust the transaction price.
Contract Costs
We recognize as deferred commission expense the incremental cost to obtain a contract with a client for certain components under our commission plans for sales representatives and channel partners that are directly related to new customers onboarded as we expect to recover these costs through future service fees. Such assets will be amortized over the estimated average client tenure. These commissions are earned on the basis of the revenue generated from payroll and payroll tax processing performance obligations. When the commission on a renewal contract is not commensurate with the commission on the initial contract, such commission will be capitalized and amortized over the estimated average client tenure. If the commission for both initial contract and renewal contracts are commensurate, such commissions are expensed in the contract period. When the amortization period is less than one year, we apply practical expedient to expense sales commissions in sales and marketing expenses in the period incurred. The below table summarizes the amounts capitalized and amortized during the three and six months ended June 30, 2018:
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 |
| (in millions) | Capitalized | Amortized | Capitalized | Amortized |
| Deferred commission costs | $ | 7 |
| $ | 1 |
| $ | 16 |
| $ | 1 |
|
Certain commission plans will pay a commission on estimated professional service revenues over the first 12 months of the contract with customers. The portion of commission paid in excess of the actual commission earned in that period is recorded as prepaid commission. When the prepaid commission is considered earned, it is classified as a deferred commission expense and subject to amortization.
We do not have material contract assets and contract liabilities as of June 30, 2018. We require our clients to prefund payroll and related liabilities before payroll is processed or due for payment. If a client fails to fund payroll or misses the funding cut-off, at our sole discretion, we may pay the payroll and the resulting unfunded payroll is recognized as accounts receivable on the accompanying consolidated balance sheets. When client payment is received in advance of our performance under the contract, such amount is recorded as client deposits.
Restricted Cash, Cash Equivalents and Investments
Restricted cash, cash equivalents and investments presented on our condensed consolidated balance sheets include:
corporate cash and cash equivalents in trust accounts functioning as security deposits for our insurance carriers,
payroll funds collected represents cash collected in advance from clients which we designate as restricted for the purpose of funding WSE payroll and payroll taxes and other payroll related liabilities, and
amounts held in trust for current and future premium and claim obligations with our insurance carriers, which amounts are held in trust according to the terms of the relevant insurance policies and by the local insurance regulations of the jurisdictions in which the policies are in force.
Investments
Our investments are classified as available-for-sale and are carried at estimated fair value.
Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss), net of deferred income taxes. The amortized cost of debt investments 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. We use the specific identification method to determine the realized gains and losses on the sale of available-for-sale securities. Realized gains and losses are included in other income in the accompanying consolidated statements of income and comprehensive income.
We assess our investments for an other-than-temporary impairment loss due to a decline in fair value or other market conditions. We review several factors to determine whether a loss is other than temporary, such as the length and extent of the fair value decline, the financial condition and near-term prospects of the issuer and whether we have the intent to sell or will more likely than not be required to sell before the securities' anticipated recovery, which may be at maturity. If management determines that a security is impaired under these circumstances, the impairment recognized in earnings is measured as the entire difference between the amortized cost and the then-current fair value.
We have investments within our unrestricted and our restricted accounts. Unrestricted investments are recorded on the balance sheet as current or noncurrent based upon the remaining time to maturity, and investments subject to WSE restrictions are classified as current or noncurrent based on the expected payout of the related liability.
Concentrations of Credit Risk
Financial instruments subject to concentrations of credit risk include cash, cash equivalents and investments (unrestricted and restricted), accounts receivable, and amounts due from insurance carriers. We maintain these financial assets principally in domestic financial institutions. We perform periodic evaluations of the relative credit standing of these institutions. Our 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.
Recent Accounting Pronouncements
Recently adopted accounting guidance
Revenue Recognition - 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 for the transfer of promised goods or services to customers that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard provides a five-step analysis of transactions to determine when and how revenue is recognized.
We have adopted the new standard effective January 1, 2018 using the modified retrospective method. For further discussion of our adoption of ASC Topic 606, including our operating results under the new standard, see Revenue Recognition section above.
The impact from the adoption of ASC Topic 606 to our condensed consolidated income statements and balance sheets is as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 |
| (in millions, except per share data) | As Reported | Balance Using Previous Standard | Increase (Decrease) | As Reported | Balance Using Previous Standard | Increase (Decrease) |
| Income statement | | | | | | |
| Revenue | | | | | | |
| Professional service revenues | $ | 115 |
| $ | 115 |
| $ | — |
| $ | 244 |
| $ | 242 |
| $ | 2 |
|
| Total revenues | 850 |
| 850 |
| — |
| 1,711 |
| 1,709 |
| 2 |
|
| Expense | | | | | | |
| Sales and marketing expense | | | | | | |
| Commissions expense | 8 |
| 14 |
| (6 | ) | 12 |
| 27 |
| (15 | ) |
| Total expense | 774 |
| 780 |
| (6 | ) | 1,564 |
| 1,579 |
| (15 | ) |
| Income before provision for income taxes | 72 |
| 66 |
| 6 |
| 139 |
| 122 |
| 17 |
|
| Income tax expense | 14 |
| 12 |
| 2 |
| 27 |
| 23 |
| 4 |
|
| Net income | 58 |
| 54 |
| 4 |
| 112 |
| 99 |
| 13 |
|
| Basic earnings per share | 0.82 |
| 0.77 |
| 0.05 |
| 1.59 |
| 1.41 |
| 0.18 |
|
| Diluted earnings per share | $ | 0.80 |
| $ | 0.75 |
| $ | 0.05 |
| $ | 1.55 |
| $ | 1.37 |
| $ | 0.18 |
|
|
| | | | | | | | | |
| | June 30, 2018 |
| (in millions) | As reported | Balance Using Previous Standard | Increase (Decrease) |
| Balance sheet | | | |
| Assets | | | |
| Cash and cash equivalents | $ | 202 |
| $ | 208 |
| $ | (6 | ) |
| Restricted cash, cash equivalents and investments | 629 |
| 623 |
| 6 |
|
| Unbilled revenue (net of advance collections) | 268 |
| 274 |
| (6 | ) |
| Prepaid expenses and other current assets | 37 |
| 29 |
| 8 |
|
| Other assets | 23 |
| 17 |
| 6 |
|
| Liabilities | | |
|
|
| Accounts payable and other current liabilities | 39 |
| 43 |
| (4 | ) |
| Deferred income taxes | 70 |
| 68 |
| 2 |
|
| Other liabilities | 16 |
| 20 |
| (4 | ) |
| Equity | | |
|
|
| Retained earnings | $ | (302 | ) | $ | (316 | ) | $ | 14 |
|
Statement of Cash Flows - In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 addresses diversity in practice from entities classifying and presenting transfers between cash and restricted cash as operating, investing or financing activities or as a combination of those activities in the statement of cash flows. The ASU requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the Statement of Cash Flows. As a result, transfers between such categories are no longer be presented in the Statement of Cash Flows. We adopted ASU 2016-18 on January 1, 2018 using the retrospective method.
Recently issued accounting pronouncements
Lease arrangements -In February 2016, the FASB issued ASU 2016-02-Leases. The amendment requires that lease arrangements longer than 12 months result in an entity recognizing lease assets and lease liabilities and most significantly impacts those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The amendment is effective for annual reporting periods and interim periods within those years beginning after December 15, 2018. We currently anticipate adoption of the new standard effective January 1, 2019.
We anticipate this standard will have a material impact on our condensed consolidated financial statements. While we continue to assess all potential impacts of the standard, we anticipate that there will be a material increase to assets and lease liabilities for existing property leases representing our nationwide office locations not already included on our condensed consolidated balance sheets.
NOTE 2. CASH, CASH EQUIVALENTS AND INVESTMENTS
Under the terms of the agreements with certain of our workers' compensation and health benefit insurance carriers, we are required to maintain collateral in trust accounts for the benefit of specified insurance carriers and to reimburse the carriers’ claim payments within our deductible layer. We invest a portion of the collateral amounts in marketable securities. We report the current and noncurrent portions of these trust accounts as restricted cash, cash equivalents and investments on the consolidated balance sheets.
We require our clients to prefund their payroll and related taxes and other withholding liabilities before payroll is processed or due for payment. This prefund is included in restricted cash, cash equivalents and investments as payroll funds collected, which is designated to pay pending payrolls, payroll tax liabilities and other WSE-related liabilities.payroll withholdings.
We also invest available corporate funds, primarily in fixed income securities which meet the requirements of our corporate investment policy and are classified as available for sale (AFS).
Our total cash, cash equivalents and investments are summarized below:
|
| | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 | December 31, 2018 |
| (in millions) | Cash and cash equivalents | Available-for-sale marketable securities | Total | Cash and cash equivalents | Available-for-sale marketable securities | Certificate of deposits | Total |
| Cash and cash equivalents | $ | 219 |
| $ | — |
| $ | 219 |
| $ | 228 |
| $ | — |
| $ | — |
| $ | 228 |
|
| Investments | — |
| 76 |
| 76 |
| — |
| 54 |
| — |
| 54 |
|
| Restricted cash, cash equivalents and investments | | |
|
| | | |
|
|
| Insurance carriers' security deposits | 14 |
| — |
| 14 |
| 15 |
| — |
| — |
| 15 |
|
| Payroll funds collected | 519 |
| — |
| 519 |
| 783 |
| — |
| — |
| 783 |
|
| Collateral for health benefits claims | 75 |
| — |
| 75 |
| 75 |
| — |
| — |
| 75 |
|
| Collateral for workers' compensation claims | 63 |
| 1 |
| 64 |
| 66 |
| 1 |
| — |
| 67 |
|
| Collateral to secure standby letter of credit | — |
| — |
| — |
| — |
| — |
| 2 |
| 2 |
|
| Total restricted cash, cash equivalents and investments | 671 |
| 1 |
| 672 |
| 939 |
| 1 |
| 2 |
| 942 |
|
| Investments, noncurrent | — |
| 117 |
| 117 |
| — |
| 135 |
| — |
| 135 |
|
| Restricted cash, cash equivalents and investments, noncurrent | | |
|
| | | |
|
|
| Collateral for workers' compensation claims | 195 |
| 5 |
| 200 |
| 182 |
| 5 |
| — |
| 187 |
|
| Total | $ | 1,085 |
| $ | 199 |
| $ | 1,284 |
| $ | 1,349 |
| $ | 195 |
| $ | 2 |
| $ | 1,546 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2018 | December 31, 2017 |
| (in millions) | Cash and cash equivalents | Available-for-sale marketable securities | Certificate of deposits | Total | Cash and cash equivalents | Available-for-sale marketable securities | Certificate of deposits | Total |
| Cash and cash equivalents | $ | 202 |
| $ | — |
| $ | — |
| $ | 202 |
| $ | 336 |
| $ | — |
| $ | — |
| $ | 336 |
|
| Investments | — |
| 29 |
| — |
| 29 |
| — |
| — |
| — |
| — |
|
| Restricted cash, cash equivalents and investments | | | | | | | | |
| Insurance carriers security deposits | 15 |
| — |
| — |
| 15 |
| 15 |
| — |
| — |
| 15 |
|
| Payroll funds collected | 449 |
| — |
| — |
| 449 |
| 1,095 |
| — |
| — |
| 1,095 |
|
| Collateral for health benefits claims | 75 |
| — |
| — |
| 75 |
| 69 |
| — |
| — |
| 69 |
|
| Collateral for workers' compensation claims | 87 |
| 1 |
| — |
| 88 |
| 98 |
| 1 |
| — |
| 99 |
|
| Collateral to secure standby letter of credit | — |
| — |
| 2 |
| 2 |
| — |
| — |
| 2 |
| 2 |
|
| Total restricted cash, cash equivalents and investments | 626 |
| 1 |
| 2 |
| 629 |
| 1,277 |
| 1 |
| 2 |
| 1,280 |
|
| Investments, noncurrent | — |
| 133 |
| — |
| 133 |
| — |
| — |
| — |
| — |
|
| Restricted cash, cash equivalents and investments, noncurrent | | | | | | | | |
| Collateral for workers' compensation claims | 165 |
| 14 |
| — |
| 179 |
| 125 |
| 37 |
| — |
| 162 |
|
| Total | $ | 993 |
| $ | 177 |
| $ | 2 |
| $ | 1,172 |
| $ | 1,738 |
| $ | 38 |
| $ | 2 |
| $ | 1,778 |
|
NOTE 3. INVESTMENTS
All of our investment securities that have a contractual maturity date greater than three months are classified as available-for-sale (AFS).AFS. The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of our investments as of June 30, 20182019 and December 31, 2017 are presented below:
|
| | | | | | | | | | | | |
| | June 30, 2018 |
| (in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| Asset-backed securities | $ | 38 |
| $ | — |
| $ | — |
| $ | 38 |
|
| Corporate bonds | 87 |
| — |
| — |
| 87 |
|
U.S. government agencies and government- sponsored agencies | 6 |
| — |
| — |
| 6 |
|
| U.S. treasuries | 34 |
| — |
| — |
| 34 |
|
| Exchange traded fund | 1 |
| — |
| — |
| 1 |
|
| Other debt securities | 11 |
| — |
| — |
| 11 |
|
| Total | $ | 177 |
| $ | — |
| $ | — |
| $ | 177 |
|
|
| | | | | | | | | | | | |
| | December 31, 2017 |
| (in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| U.S. treasuries | $ | 37 |
| $ | — |
| $ | — |
| $ | 37 |
|
| Exchange traded fund | 1 |
| — |
| — |
| 1 |
|
| Total | $ | 38 |
| $ | — |
| $ | — |
| $ | 38 |
|
Investments in a continuous unrealized loss position for less than 12 months and 12 months or more as of June 30, 2018 and December 31, 2017 are presented below.
| | | | June 30, 2018 | | | | | | | | | | | | | | | | | |
| | Less than 12 months | 12 months or more | Total | June 30, 2019 | December 31, 2018 |
| (in millions) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| Asset-backed securities | $ | 26 |
| $ | — |
| $ | — |
| $ | — |
| $ | 26 |
| $ | — |
| $ | 35 |
| $ | — |
| $ | — |
| $ | 35 |
| $ | 33 |
| $ | — |
| $ | — |
| $ | 33 |
|
| Corporate bonds | 82 |
| — |
| — |
| — |
| 82 |
| — |
| 94 |
| 1 |
| — |
| 95 |
| 99 |
| — |
| — |
| 99 |
|
| U.S. government agencies and government-sponsored agencies | 5 |
| — |
| — |
| — |
| 5 |
| — |
| |
U.S. government agencies and government- sponsored agencies | | 5 |
| — |
| — |
| 5 |
| 7 |
| — |
| — |
| 7 |
|
| U.S. treasuries | 20 |
| — |
| 10 |
| — |
| 30 |
| — |
| 58 |
| 1 |
| — |
| 59 |
| 46 |
| — |
| — |
| 46 |
|
| Exchange traded fund | | 1 |
| — |
| — |
| 1 |
| 1 |
| — |
| — |
| 1 |
|
| Other debt securities | 2 |
| — |
| — |
| — |
| 2 |
| — |
| 4 |
| — |
| — |
| 4 |
| 9 |
| — |
| — |
| 9 |
|
| Total | $ | 135 |
| $ | — |
| $ | 10 |
| $ | — |
| $ | 145 |
| $ | — |
| $ | 197 |
| $ | 2 |
| $ | — |
| $ | 199 |
| $ | 195 |
| $ | — |
| $ | — |
| $ | 195 |
|
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Less than 12 months | 12 months or more | Total |
| (in millions) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses |
| U.S. treasuries | $ | 5 |
| $ | — |
| $ | 24 |
| $ | — |
| $ | 29 |
| $ | — |
|
| Total | $ | 5 |
| $ | — |
| $ | 24 |
| $ | — |
| $ | 29 |
| $ | — |
|
Gross unrealized losses as of June 30, 2019 and December 31, 2018 were not material.
Unrealized losses on fixed income securities are principally caused by changes in interest rates and the financial condition of the issuer. In analyzing an issuer's financial condition, we consider whether the securities are issued by the federal government or its agencies, whether downgrades by credit rating agencies have occurred, and industry analysts' reports. As we have the ability to hold these investments until maturity, or for the foreseeable future, no decline was deemed to be other-than-temporary.
The fair value of debt investments by contractual maturity (actual Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties)penalties.
The fair value of debt investments by contractual maturity are shown below.below:
|
| | | | | |
| (in millions) | | June 30, 2019 | |
| One year or less | | $ | 81 |
| |
| Over one year through five years | | 103 |
| |
| Over five years through ten years | | 7 |
| |
| Over ten years | | 7 |
| |
| Total fair value | | $ | 198 |
| |
|
| | | | | | | | | | | | | | | |
| | June 30, 2018 |
| (in millions) | One year or less | Over One Year Through Five Years | Over Five Years Through Ten Years | Over Ten Years | Fair Value |
| Asset-backed securities | $ | 2 |
| $ | 32 |
| $ | 3 |
| $ | 1 |
| $ | 38 |
|
| Corporate bonds | 24 |
| 63 |
| — |
| — |
| 87 |
|
| U.S. government agencies and government-sponsored agencies | 2 |
| — |
| — |
| 4 |
| 6 |
|
| U.S. treasuries | 2 |
| 32 |
| — |
| — |
| 34 |
|
| Other debt securities | — |
| — |
| — |
| 11 |
| 11 |
|
| Total | $ | 30 |
| $ | 127 |
| $ | 3 |
| $ | 16 |
| $ | 176 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 |
| (in millions) | One year or less | Over One Year Through Five Years | Over Five Years Through Ten Years | Over Ten Years | Fair Value |
| U.S. treasuries | $ | — |
| $ | 37 |
| $ | — |
| $ | — |
| $ | 37 |
|
| Total | $ | — |
| $ | 37 |
| $ | — |
| $ | — |
| $ | 37 |
|
There wereThe gross proceeds from sales and maturities of AFS securities for the three and six months ended June 30, 2019 and June 30, 2018 are presented below. We had immaterial gross realized gains and losses from sales of investments for the three and six months periods ended June 30, 20182019 and 2017.
The fair value of our investments in an unrealized loss position represented 83% and 78% of the total fair value of all investments as of June 30, 2018 and December 31, 2017, respectively.2018.
Our asset-backed securities include auto loan/lease, credit card, and equipment leases with investment-grade ratings. |
| | | | | | | | | | | | |
| | Three Months Ended June 30, | Six Months Ended June 30, |
| (in millions) | 2019 | 2018 | 2019 | 2018 |
| Gross proceeds from sales | $ | 14 |
| $ | — |
| $ | 28 |
| $ | 39 |
|
| Gross proceeds from maturities | 19 |
| 10 |
| 36 |
| 24 |
|
Our corporate bonds include investment-grade debt securities from a wide variety of issuers, industries, and sectors.
Our U.S. government agencies and government-sponsored agencies securities primarily include commercial mortgage-backed securities and mortgage backed securities consisting of Federal Home Loan Mortgage Corporation and Federal National Mortgage Association securities with investment-grade ratings.
Our other debt securities primarily include mortgage-backed securities with investment-grade ratings issued by institutions without federal backing.
NOTE 4. LEASES
Our leasing activities predominantly consist of leasing office space that we occupy, which we have classified as operating leases. Our leases are comprised of fixed payments with remaining lease terms of 1 to 9.3 years, some of which include options to extend for up to 15 years. As of June 30, 2019, we have not included any options to extend or cancel in the calculation of our lease liability or ROU asset. We do not have any significant residual value guarantees or restrictive covenants in our leases.
During the second quarter of 2019, we recognized operating lease expense of $5 million and we recognized $10 million during the first half of 2019.
During the second quarter of 2019, we paid $4 million to reduce operating lease liabilities and $8 million during the first half of 2019. During the second quarter of 2019, we recognized $5 million in new operating lease liabilities in exchange for ROU assets and we recognized $17 million during the first half of 2019.
As of June 30, 2019, the weighted average remaining lease term on our operating leases was 6.2 years. Future minimum lease payments as of June 30, 2019 and December 31, 2018 were as follows:
|
| | | | | | |
| (in millions) | June 30, 2019 (2) | December 31, 2018 (3) |
2019(1) | $ | 10 |
| $ | 18 |
|
| 2020 | 18 |
| 17 |
|
| 2021 | 11 |
| 11 |
|
| 2022 | 10 |
| 9 |
|
| 2023 | 9 |
| 8 |
|
| 2024 | 6 |
| 5 |
|
| 2025 and thereafter | 19 |
| 20 |
|
| Total future minimum lease payments | $ | 83 |
| $ | 88 |
|
| Less: imputed interest | (11 | ) | N/A(4) |
|
| Total operating lease liabilities | 72 |
| N/A(4) |
|
| Current portion | 17 |
| N/A(4) |
|
| Non-current portion | 55 |
| N/A(4) |
|
(1) The remaining payments as of June 30, 2019 exclude those made during the six months ended June 30, 2019.
| |
| (2) | Presented in accordance with ASC 842, which excludes base payments of $4 million for leases that do not yet have a commencement date. |
(3) Presented in accordance with ASC 840.
(4) N/A - Not Applicable under ASC 840.
As of June 30, 2019, we have entered into two leases that have not commenced for terms up to 5 years. Those leases will require minimum lease payments over their terms of $4 million.
NOTE 5. ACCRUED WORKERS' COMPENSATION LOSS RESERVESCOSTS
The following table summarizes the accrued workers’ compensation loss reservecost activity for the three and six months ended June 30, 20182019 and 2017:2018:
| | | | Three Months Ended June 30, | Six Months Ended
June 30, | Three Months Ended
June 30, | Six Months Ended
June 30, |
| (in millions) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 |
| Total loss reserves, beginning of period | $ | 250 |
| $ | 260 |
| $ | 255 |
| $ | 255 |
| |
| Total accrued costs, beginning of period | | $ | 236 |
| $ | 250 |
| $ | 238 |
| $ | 255 |
|
| Incurred | | |
| Current year | 19 |
| 20 |
| 39 |
| 48 |
| 16 |
| 19 |
| 35 |
| 39 |
|
| Prior years | (6 | ) | 1 |
| (13 | ) | 1 |
| (11 | ) | (6 | ) | (16 | ) | (13 | ) |
| Total incurred | 13 |
| 21 |
| 26 |
| 49 |
| 5 |
| 13 |
| 19 |
| 26 |
|
| Paid | | |
| Current year | (2 | ) | (5 | ) | (2 | ) | (6 | ) | (2 | ) | (2 | ) | (3 | ) | (2 | ) |
| Prior years | (17 | ) | (21 | ) | (35 | ) | (43 | ) | (15 | ) | (17 | ) | (30 | ) | (35 | ) |
| Total paid | (19 | ) | (26 | ) | (37 | ) | (49 | ) | (17 | ) | (19 | ) | (33 | ) | (37 | ) |
| Total loss reserves, end of period | $ | 244 |
| $ | 255 |
| $ | 244 |
| $ | 255 |
| |
| Total accrued costs, end of period | | $ | 224 |
| $ | 244 |
| $ | 224 |
| $ | 244 |
|
The following summarizes workers' compensation liabilities on the condensed consolidated balance sheets:
|
| | | | | | |
| (in millions) | June 30, 2019 | December 31, 2018 |
| Total accrued costs, end of period | $ | 224 |
| $ | 238 |
|
| Collateral paid to carriers and offset against accrued costs | (12 | ) | (13 | ) |
| Total accrued costs, net of carrier collateral offset | $ | 212 |
| $ | 225 |
|
| | | |
Payable in less than 1 year
(net of collateral paid to carriers of $3 at June 30, 2019 and December 31, 2018) | $ | 64 |
| $ | 67 |
|
Payable in more than 1 year
(net of collateral paid to carriers of $9 and $10 at June 30, 2019 and December 31, 2018, respectively) | 148 |
| 158 |
|
| Total accrued costs, net of carrier collateral offset | $ | 212 |
| $ | 225 |
|
|
| | | | | | |
| (in millions) | June 30,
2018 | December 31,
2017 |
| Total loss reserves, end of period | $ | 244 |
| $ | 255 |
|
| Collateral paid to carriers and offset against loss reserves | (20 | ) | (23 | ) |
| Total loss reserves, net of carrier collateral offset | $ | 224 |
| $ | 232 |
|
| | | |
Payable in less than 1 year
(net of collateral paid to carriers of $5 and $6 at June 30, 2018 and December 31, 2017, respectively) | $ | 67 |
| $ | 67 |
|
Payable in more than 1 year
(net of collateral paid to carriers of $15 and $17 at June 30, 2018 and December 31, 2017, respectively) | 157 |
| 165 |
|
Total loss reserves, net of carrier collateral offset
| $ | 224 |
| $ | 232 |
|
Incurred claims related to prior years represent changes in estimates for ultimate losses on workers' compensation claims. For the three and six months ended June 30, 2018,2019, the favorable developmentchange was primarily due to lower than expected severitya decrease in estimate of reported claims associated with officeultimate losses related to older plan years and non-office worker WSEs in recent accident years.the recognition of current year development of ultimate losses.
As of June 30, 20182019 and December 31, 2017,2018, we had $62$55 million and $63$57 million, respectively, of collateral held by insurance carriers of which $20$12 million and $23$13 million, respectively, was offset against accrued workers' compensation loss reservescosts as the agreements permit and are net settled of insurance obligations against collateral held. Collateral paid to each carrier for a policy year in excess of our loss reserves is recorded as workers' compensation collateral receivable.
NOTE 5. FINANCIAL INSTRUMENTS6. COMMITMENTS AND FAIR VALUE MEASUREMENTSCONTINGENCIES
Fair ValueContingencies
In August 2015, Howard Welgus, a purported stockholder, filed a putative securities class action lawsuit, Welgus v. TriNet Group, Inc., et. al., under the Securities Exchange Act of Financial Instruments
Fair value is defined as an exit price, representing1934 in the amount that would be receivedU.S. District Court for the Northern District of California. On December 18, 2017, the district court granted TriNet’s motion to sell an asset or paiddismiss the complaint, which had been amended in April 2016 and again in March 2017, in its entirety, without leave to transferamend. Plaintiff filed a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
Our financial assets recorded at fair value on a recurring basis comprisenotice of available-for-sale marketable securities and certificates of deposits. We measure certain financial assets at fair value for disclosure purposes, as well as on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. Our other current financial assets and our other current financial liabilities, including cash and cash equivalents, restricted cash and cash equivalents, WSE related assets and liabilities excluding insurance loss reserves, line of credit and accrued corporate wages, have fair values that approximate their carrying value due to their short-term nature.
Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observabilityappeal of the inputs available indistrict court’s order on January 17, 2018 and oral arguments were held before the market to measure fair value, summarized as follows:
Level 1—observable inputs for identical assets or liabilities, such as quoted prices in active markets,
Level 2—inputs other thanNinth Circuit Court of Appeals on March 14, 2019. On March 26, 2019, the quoted prices in active markets that are observable either directly or indirectly,
Level 3—unobservable inputs in which there is little or no market data, which requires that we develop our own assumptions.
The fair value hierarchy requires us to maximizeNinth Circuit Court of Appeals affirmed the usedistrict court’s dismissal of observable inputs and minimize the use of unobservable inputs when measuring fair value. We classify our cash equivalents, debt securities and notes payable in the fair value hierarchy based on the lowest level input that is significant to the fair value measurementamended complaint in its entirety. The deadline for Plaintiff-Appellant to petition the U.S. Supreme Court to review the decision by the Court of Appeals expired on June 24, 2019 and the litigation is therefore terminated.
We use an independent pricing sourceare and, from time to determinetime, have been and may in the fair valuefuture become involved in various litigation matters, legal proceedings, and claims arising in the ordinary course of its available-for-sale securities included as Level 2. For purposes of valuing our securities, the independent pricing source utilizes the following market approach by investment class:
Money market funds are valued on a spreadbusiness, including disputes with our clients or discount rate basis,
Asset-backed securities are valued using historicalvarious class action, collective action, representative action, and projected prepayments speed and loss scenarios and spreads obtainedother proceedings arising from the new issue market, dealer quotesnature of our co-employment relationship with our clients and trade prices,WSEs in which we are named as a defendant. In addition, due to the nature of our co-employment relationship with our clients and WSEs, we could be subject to liability for federal and state law violations, even if we do not participate in such violations. While our agreements with our clients contain indemnification provisions related to the conduct of our clients, we may not be able to avail ourselves of such provisions in every instance. We have accrued our current best estimates of probable losses with respect to these matters, which are individually and in aggregate immaterial to our consolidated financial statements.
U.S. treasuries, corporate bonds, and other debt securities are pricedWhile the outcome of the matters described above cannot be predicted with certainty, management currently does not believe that any such claims or proceedings will have a materially adverse effect on our consolidated financial position, results of operations, or cash flows. However, the unfavorable resolution of any particular matter or our reassessment of our exposure for any of the above matters based on dealer quotes from multiple sources, and
US government agencies and government sponsored agencies are priced using LIBOR/swap curves, credit spreads and interest rate volatilities.
We have not adjusted the pricesadditional information obtained from the independent pricing service and we believe the prices received from the independent pricing service are representative of the prices that would be received to sell the assets at the measurement date (exit price).
We did not have any Level 3 financial instruments as of June 30, 2018 and December 31, 2017. There were no transfers between levels as of June 30, 2018 and December 31, 2017.
Fair Value Measurements on a Recurring Basis
The following table summarizes our financial instruments by significant categories and fair value measurement on a recurring basis as of June 30, 2018 and December 31, 2017.
|
| | | | | | | | | |
| (in millions) | Level 1 | Level 2 | Total |
| June 30, 2018 | | | |
| Cash equivalents: | | | |
| Money market funds | $ | 1 |
| $ | — |
| $ | 1 |
|
| U.S. treasuries | — |
| 7 |
| 7 |
|
| Total cash equivalents | 1 |
| 7 |
| 8 |
|
| Investments: | | | |
| Asset-backed securities | — |
| 38 |
| 38 |
|
| Corporate bonds | — |
| 87 |
| 87 |
|
| U.S. government agencies and government-sponsored agencies | — |
| 6 |
| 6 |
|
| U.S. treasuries | — |
| 20 |
| 20 |
|
| Other debt securities | — |
| 11 |
| 11 |
|
| Total investments | — |
| 162 |
| 162 |
|
| Restricted cash equivalents: | | | |
| Money market mutual funds | 229 |
| — |
| 229 |
|
| Commercial paper | 21 |
| — |
| 21 |
|
| Total restricted cash equivalents | 250 |
| — |
| 250 |
|
| Restricted investments: | | | |
| U.S. treasuries | — |
| 14 |
| 14 |
|
| Exchange traded fund | 1 |
| — |
| 1 |
|
| Certificate of deposit | — |
| 2 |
| 2 |
|
| Total restricted investments | 1 |
| 16 |
| 17 |
|
| Total investments and restricted cash equivalents and investments | $ | 252 |
| $ | 185 |
| $ | 437 |
|
| | | | |
| December 31, 2017 | | | |
| Restricted cash equivalents: | | | |
| Money market mutual funds | $ | 199 |
| $ | — |
| $ | 199 |
|
| Commercial paper | 21 |
| — |
| 21 |
|
| Total restricted cash equivalents | 220 |
| — |
| 220 |
|
| Restricted investments: | | | |
| U.S. treasuries | 37 |
| — |
| 37 |
|
| Exchange traded fund | 1 |
| — |
| 1 |
|
| Certificate of deposit | — |
| 2 |
| 2 |
|
| Total restricted investments | 38 |
| 2 |
| 40 |
|
| Total restricted cash equivalents and investments | $ | 258 |
| $ | 2 |
| $ | 260 |
|
Fair Value of Financial Instruments Disclosure
Notes Payable
The carrying value of our notes payable at June 30, 2018 and December 31, 2017 was $425 million. The estimated fair values of our notes payable at June 30, 2018 and December 31, 2017 were $423 million and $428 million, respectively. These valuations are considered Level 2 in the hierarchy for fair value measurement and are basedfuture could have a material impact on quoted market prices.our consolidated financial position, results of operations, or cash flows.
NOTE 6.7. STOCKHOLDERS’ EQUITY
Common Stock
The following table presents a rollforward of our common stock for the three and six months ended June 30, 2019 and 2018:
|
| | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2019 | 2018 | 2019 | 2018 |
| Shares issued and outstanding, beginning balance | 70,079,747 |
| 70,363,251 |
|
| 70,596,559 |
| 69,818,392 |
|
| Issuance of common stock from vested restricted stock units | 213,991 |
| 389,875 |
|
| 500,710 |
| 1,000,141 |
|
| Issuance of common stock from exercise of stock options | 58,491 |
| 263,464 |
|
| 139,773 |
| 469,894 |
|
| Issuance of common stock for employee stock purchase plan | 112,623 |
| 84,525 |
|
| 112,623 |
| 84,525 |
|
| Repurchase of common stock | (392,700 | ) | (434,766 | ) |
| (1,175,609 | ) | (594,799 | ) |
| Awards effectively repurchased for required employee withholding taxes | (81,007 | ) | (92,462 | ) |
| (182,911 | ) | (204,266 | ) |
| Shares issued and outstanding, ending balance | 69,991,145 |
| 70,573,887 |
|
| 69,991,145 |
| 70,573,887 |
|
Equity-Based Incentive Plans
Our 2019 Equity Incentive Plan (the 2019 Plan), approved in May 2019, replaced our 2009 Equity Incentive Plan (2009 Plan)and provides for the grantgrants of options (both non-qualified and incentive stock awards, includingoptions), stock options,appreciation rights, restricted stock, units (time-based and performance-based), restricted stockRSUs, performance awards (time-based and performance-based)(each as defined in the 2019 Plan) and other equitycash- and stock-based awards. The number of sharesShares available for grant under this 2009 Plan as of June 30, 2018 was2019 were approximately 12 million.2,839,430.
The following table summarizes stock option activity under our 2009 Plan for the six months ended June 30, 2018:
|
| | |
| Number
of Shares |
Balance at December 31, 2017 | 1,296,863 |
|
Exercised | (469,894 | ) |
Forfeited | (17,846 | ) |
Balance at June 30, 2018 | 809,123 |
|
Exercisable at June 30, 2018 | 766,294 |
|
The aggregate intrinsic value of stock options outstanding was $35 million and $41 million as of June 30, 2018 and December 31, 2017, respectively.
In March 2018, the Equity Award Committee of the Compensation Committee granted awards of time-based restricted stock (RSAs) and performance-based restricted stock (PRSAs) to the Company's named executive officers. A recipient of RSAs owns the underlying shares of common stock upon grant and some of the benefits of ownership, such as voting and dividend rights, but the recipient may not sell those shares and realize any value on a sale, until all time-based and performance-based restrictions have been satisfied or lapsed.
For non-new hire equity awards our RSAs and restricted stock units (RSUs) are eligible to vest in equal installments on a quarterly basis over four years, subject to continued employment through the applicable vesting dates. The PRSAs are earned based on the extent to which we meet or exceed certain annual growth rate percentages. Our PRSAs granted in 2018 are designed with a single-year performance period subject to subsequent multi-year vesting requirements. Fifty percent of the shares earned (if any) during performance period (January 1, 2018 to December 31, 2018) will vest on December 31, 2019 and the remaining shares earned (if any) will vest on December 31, 2020. The following tables summarize RSU, performance-based restricted stock unit (PSU), RSA, and PRSA activity under our 2009 Plan for the six months ended June 30, 2018:
|
| | | | | | | | | | |
| | RSUs | PSUs |
| | Number of Units | Weighted-Average Grant Date Fair Value | Number of Units | Weighted-Average Grant Date Fair Value |
| Nonvested at December 31, 2017 | 2,249,661 |
| $ | 24.83 |
| 453,674 |
| $ | 30.72 |
|
| Granted | 585,484 |
| 47.36 |
| 23,842 |
| 47.61 |
|
| Vested | (545,292 | ) | 25.09 |
| (82,066 | ) | 33.51 |
|
| Forfeited | (200,961 | ) | 26.76 |
| (65,557 | ) | 31.60 |
|
| Nonvested at June 30, 2018 | 2,088,892 |
| $ | 30.89 |
| 329,893 |
| $ | 31.08 |
|
Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs)
Time-based RSUs and RSAs generally vest over a four-year term. Performance-based RSUs and RSAs are subject to vesting requirements based on certain financial performance metrics as defined in the grant notice. Actual number of shares earned may range from 0% to 200% of the target award. Awards granted in 2019 and 2018 are based on a single-year performance period subject to subsequent multi-year vesting with 50% of the shares earned vesting in one year after the performance period and the remaining shares in the year after.
The following table summarizes RSU and RSA activity under our equity-based plans for the six months ended June 30, 2019:
|
| | | | | | | | | | |
| | RSUs | RSAs |
| | Number of Units | Weighted-Average Grant Date Fair Value | Number of Units | Weighted-Average Grant Date Fair Value |
| Nonvested at December 31, 2018 | 1,737,554 |
| $ | 32.83 |
| 346,792 |
| $ | 49.13 |
|
| Granted | 724,172 |
| 60.58 |
| — |
| — |
|
| Vested | (511,813 | ) | 30.34 |
| (31,248 | ) | 50.61 |
|
| Forfeited | (106,737 | ) | 36.52 |
| (11,103 | ) | 49.35 |
|
| Nonvested at June 30, 2019 | 1,843,176 |
| $ | 44.18 |
| 304,441 |
| $ | 49.11 |
|
|
| | | | | | | | | | |
| | RSAs | PRSAs |
| | Number of Units | Weighted-Average Grant Date Fair Value | Number of Units | Weighted-Average Grant Date Fair Value |
| Nonvested at December 31, 2017 | — |
| $ | — |
| — |
| $ | — |
|
| Granted | 116,559 |
| 49.12 |
| 256,224 |
| 48.98 |
|
| Vested | (4,560 | ) | 47.61 |
| — |
| — |
|
| Nonvested at June 30, 2018 | 111,999 |
| $ | 49.81 |
| 256,224 |
| $ | 48.98 |
|
Stock-BasedEquity-Based Compensation
Stock-based compensation expense is measured based on the fair value of the stock optionaward on the grant date and recognized over the requisite service period for each separately vesting portion of the stock option award. Stock-based compensation expense and other disclosures for stock-based awards made to our employees pursuant to the equity plans was as follows:
|
| | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (in millions) | 2019 | 2018 | | 2019 | 2018 |
| Cost of providing services | $ | 2 |
| $ | 2 |
| | $ | 4 |
| $ | 4 |
|
| Sales and marketing | 1 |
| 2 |
| | 1 |
| 4 |
|
| General and administrative | 7 |
| 5 |
| | 13 |
| 9 |
|
| Systems development and programming costs | 1 |
| 1 |
| | 2 |
| 2 |
|
| Total stock-based compensation expense | $ | 11 |
| $ | 10 |
| | $ | 20 |
| $ | 19 |
|
|
| | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (in millions) | 2018 | 2017 | | 2018 | 2017 |
| Cost of providing services | $ | 2 |
| $ | 2 |
| | $ | 4 |
| $ | 4 |
|
| Sales and marketing | 2 |
| 2 |
| | 4 |
| 3 |
|
| General and administrative | 5 |
| 3 |
| | 9 |
| 5 |
|
| Systems development and programming costs | 1 |
| 1 |
| | 2 |
| 2 |
|
| Total stock-based compensation expense | $ | 10 |
| $ | 8 |
| | $ | 19 |
| $ | 14 |
|
| Income tax benefit related to stock-based compensation expense | $ | 3 |
| $ | 3 |
| | $ | 5 |
| $ | 5 |
|
| Tax benefit realized from stock options exercised and similar awards | $ | 7 |
| $ | 10 |
| | $ | 13 |
| $ | 16 |
|
Stock Repurchases
TheIn February 2019, our board of directors authorizes repurchases through anauthorized a $300 million incremental increase to our ongoing stock repurchase program initiated in May 2014. During the six months ended June 30, 2018,2019, we repurchased 594,7991,175,609 shares of common stock for approximately $30$62 million. As of June 30, 2018,2019, approximately $106$313 million remained available for further repurchases of our common stock under our ongoing stock repurchase program under all authorizations from our board of directors.directors under this program.
NOTE 8. INCOME TAXES
Our effective income tax rate was 17% and 19% for the second quarter of 2019 and 2018, respectively, and 21% and 19% for the six months ended June 30, 2019 and 2018, respectively. The decrease when comparing the second quarter of 2019 with the same period in 2018, is primarily due to a one-time benefit associated with prior year tax expense. The increase in the year to date rates for 2019 when compared to the same period in 2018, consisted primarily from a decrease in tax benefits recognized from excess tax benefits related to stock-based compensation.
During the six months ended June 30, 2019, there was an increase of $1 million in our unrecognized tax benefits. The total amount of gross interest and penalties accrued was immaterial. It is reasonably possible the amount of the unrecognized benefit could increase or decrease within the next twelve months, which would have an impact on net income.
NOTE 7. NOTES PAYABLE
As of June 30, 2018 and December 31, 2017, notes payable consisted of the following:
|
| | | | | | | | | | | | |
| (in millions) | June 30,
2018 | December 31,
2017 | Annual
Contractual
Interest Rate | Effective Interest Rate | Maturity
Date |
| Term Loan A | $ | — |
| $ | 303 |
| | | | July 2019 |
| Term Loan A-2 | — |
| 122 |
| | | | July 2019 |
| 2018 Term Loan A | 425 |
| — |
| 3.78 | % | (1) | 3.88 | % | June 2023 |
| Total term loans | 425 |
| 425 |
| | | | |
| Deferred loan costs | (2 | ) | (2 | ) | | | | |
| Less: current portion | (21 | ) | (40 | ) | | | | |
| Notes payable, noncurrent | $ | 402 |
| $ | 383 |
| | | | |
| |
(1) | Bears interest at LIBOR plus 1.625% or the prime rate plus 0.625% at our option in the first full fiscal quarter of the term loan, thereafter subject to certain rate adjustments based on our total leverage ratio. |
In June 2018 we refinanced approximately $415 million of, and repaid in full, our outstanding A and A-2 term loans (together, our 2014 Term Loans) under our previous credit agreement (our 2014 Credit Agreement). Our 2014 Term Loans were replaced with a $425 million term loan A (our 2018 Term Loan) under our new credit agreement (our 2018 Credit Agreement). We also replaced our previous $75 million revolving credit facility established under our 2014 Credit Agreement with a $250 million revolving credit facility under our 2018 Credit Agreement (our 2018 Revolver), which will be used solely for working capital and other general corporate purposes. As part of this approximately $415 million refinancing transaction, $204 million was recorded as an extinguishment, and $211 million was rolled over into the 2018 Term Loan and was treated as a debt modification. As of June 30, 2018, $425 million was outstanding under our 2018 Term Loan and the full amount of our 2018 Revolver, less approximately $16 million representing an undrawn letter of credit, was available.
We incurred approximately $4 million in fees and acquisition costs related to our June 2018 refinancing, of which we capitalized approximately $3 million allocated proportionally between our 2018 Term Loan and 2018 Revolver. As a result of this modification, we expensed approximately $2 million in new and existing fees.
Interest on our 2018 Term Loan is payable quarterly. We are required to pay a quarterly commitment fee on the daily unused amount of the commitments under our 2018 Revolver, as well as fronting fees and other customary fees for letters of credit issued under our 2018 Revolver, which is subject to adjustments based on our total leverage ratio.
Borrowings under our 2018 Term Loan and 2018 Revolver are secured by substantially all of our assets, other than excluded assets as defined in our 2018 Credit Agreement, which includes certain customary assets, assets held in trusts as collateral and WSE related assets.
We are permitted to make voluntary prepayments at any time without payment of a premium. 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), and (ii) net cash proceeds from certain non-ordinary course asset sales and casualty and condemnation proceeds (subject to reinvestment rights and other exceptions).
Our 2018 Term Loan will be repaid in quarterly installments in aggregate annual amounts as follows (in millions):
|
| | | | | | | | | | | | | | | | | | |
| | Year ending December 31, | |
| | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter |
| Term loan repayments | $ | 11 |
| $ | 21 |
| $ | 21 |
| $ | 21 |
| $ | 21 |
| $ | 330 |
|
Our 2018 Credit Agreement contains customary representations and warranties, and customary affirmative and negative covenants applicable to us, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of indebtedness (other than our 2018 Term Loan and our 2018 Revolver), dividends, distributions and transactions with affiliates.
Our 2018 Credit Agreement restricts our ability to make certain types of payments including dividends and stock repurchases and other similar distributions, though such payments may generally be made as long as our total leverage ratio remains below 3.00 to 1.00 after the effect of these payments and there exists no default under the New Credit Agreement.
The financial covenants under our 2018 Credit Agreement require us to maintain a minimum consolidated interest coverage ratio of at least 3.50 to 1.00 at each quarter end and a maximum total leverage ratio of 3.50 to 1.00. In the event of an acquisition the maximum ratio can be raised to 4.00 to 1.00 for four consecutive quarters. We were in compliance with these financial covenants under the credit facilities at June 30, 2018.
NOTE 8. EARNINGS PER SHARE (EPS)
The following table presents the computation of our basic and diluted EPS attributable to our common stock:
|
| | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (in millions, except per share data) | 2018 | 2017 | | 2018 | 2017 |
| Net income | $ | 58 |
| $ | 40 |
| | $ | 112 |
| $ | 69 |
|
| Weighted average shares of common stock outstanding | 70 |
| 69 |
| | 70 |
| 69 |
|
| Basic EPS | $ | 0.82 |
| $ | 0.58 |
| | $ | 1.59 |
| $ | 1.00 |
|
| | | | | | |
| Net income | $ | 58 |
| $ | 40 |
| | $ | 112 |
| $ | 69 |
|
| Weighted average shares of common stock | 70 |
| 69 |
| | 70 |
| 69 |
|
| Dilutive effect of stock options and restricted stock units | 3 |
| 2 |
| | 2 |
| 2 |
|
| Weighted average shares of common stock outstanding | 73 |
| 71 |
| | 72 |
| 71 |
|
| Diluted EPS | $ | 0.80 |
| $ | 0.56 |
| | $ | 1.55 |
| $ | 0.97 |
|
| | | | | | |
| Common stock equivalents excluded from income per diluted share because of their anti-dilutive effect | — |
| — |
| | 1 |
| — |
|
NOTE 9. INCOME TAXES
Our effective income tax rate was 19% and 24% for the three months ended June 30, 2018 and 2017, respectively, and 19% and 29% for the six months ended June 30, 2018 and 2017, respectively. The decreases consisted of tax benefits recognized from excess tax benefits related to stock-based compensation, an increase in excludable income for state income tax purposes and a reduction of the federal corporate income tax rate from 35% to 21% pursuant to the Tax Cuts and Jobs Act (TCJA).
During the six months ended June 30, 2018, there was a de minimis increase in our unrecognized tax benefits. The total amount of gross interest and penalties accrued was immaterial. Our unrecognized tax benefits are not expected to change significantly during the next 12 months.
We are subject to tax in U.S. federal and various state and local jurisdictions, as well as Canada. We are not subject to any material income tax examinations in federal or state jurisdictions for tax years prior to January 1, 2011.2012. We previously paid Notices of Proposed Assessments disallowing employment tax credits totaling $11 million, plus interest of $4 million in connection with the IRS examination of Gevity HR, Inc. and its subsidiaries, which was acquired by TriNet in June 2009. ThisTriNet filed suit in June 2016 to recover the disallowed credits, and the issue is being resolved through the litigation process. While TriNet and the U.S. filed cross motions for summary judgment in federal district court. On September 17, 2018, the federal district court granted TriNet's motion for summary judgment and denied the U.S.'s motion. On January 18, 2019, the federal district court entered judgment in favor of TriNet in the amount of $15 million, plus interest. The U.S. filed a notice of appeal of the federal district court's decision on March 18, 2019. The U.S. filed its opening brief in the court of appeals on June 10, 2019 and we continue to supportfiled our position andanswering brief on July 24, 2019. We will continue to vigorously defend our position through the litigation process, we anticipate our recovery of the refund to likely be less than the total amount in dispute.process.
NOTE 10. COMMITMENTS AND CONTINGENCIES9. EARNINGS PER SHARE (EPS)
Lease CommitmentsThe following table presents the computation of our basic and diluted EPS attributable to our common stock:
We lease office facilities, including our headquarters and other facilities, and equipment under non-cancellable operating leases. For detail of these commitments refer to Note 13 in Part II, Item 8 in our 2017 Form 10-K. |
| | | | | | | | | | | | |
| | Three Months Ended
June 30, | Six Months Ended
June 30, |
| (in millions, except per share data) | 2019 | 2018 | 2019 | 2018 |
| Net income | $ | 46 |
| $ | 58 |
| $ | 109 |
| $ | 112 |
|
| Weighted average shares of common stock outstanding | 70 |
| 70 |
| 70 |
| 70 |
|
| Basic EPS | $ | 0.65 |
| $ | 0.82 |
| $ | 1.56 |
| $ | 1.59 |
|
| Net income | $ | 46 |
| $ | 58 |
| $ | 109 |
| $ | 112 |
|
| Weighted average shares of common stock outstanding | 70 |
| 70 |
| 70 |
| 70 |
|
| Dilutive effect of stock options and restricted stock units | 1 |
| 3 |
| 1 |
| 2 |
|
| Weighted average shares of common stock outstanding | 71 |
| 73 |
| 71 |
| 72 |
|
| Diluted EPS | $ | 0.64 |
| $ | 0.80 |
| $ | 1.53 |
| $ | 1.55 |
|
| | | | | |
| Common stock equivalents excluded from income per diluted share because of their anti-dilutive effect | — |
| — |
| 1 |
| 1 |
|
NOTE 10. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
We use an independent pricing source to determine the fair value of our AFS. The independent pricing source utilizes various pricing models for each asset class; including the market approach. The inputs and assumptions for the pricing models are market observable inputs including trades of comparable securities, dealer quotes, credit spreads, yield curves and other market-related data.
We have not adjusted the prices obtained from the independent pricing service and we believe the prices received from the independent pricing service are representative of the prices that would be received to sell the assets at the measurement date (exit price).
The carrying value of the Company's cash equivalents and restricted cash equivalents approximate their fair values due to their short-term maturities. The Company's restricted investments are valued using quoted market prices and multiple dealer quotes.
We did not have any Level 3 financial instruments recognized in our balance sheet as of June 30, 2019 and December 31, 2018. There were no transfers between levels as of June 30, 2019 and December 31, 2018.
Fair Value Measurements on a Recurring Basis
The following table summarizes our financial instruments by significant categories and fair value measurement on a recurring basis as of June 30, 2019 and December 31, 2018.
|
| | | | | | | | | |
| (in millions) | Level 1 | Level 2 | Total |
| June 30, 2019 | | | |
| Cash equivalents: | | | |
| Money market mutual funds | $ | 89 |
| $ | — |
| 89 |
|
| Total cash equivalents | 89 |
| — |
| 89 |
|
| Investments: | | | |
| Asset-backed securities | — |
| 35 |
| 35 |
|
| Corporate bonds | — |
| 95 |
| 95 |
|
| U.S. government agencies and government-sponsored agencies | — |
| 5 |
| 5 |
|
| U.S. treasuries | — |
| 54 |
| 54 |
|
| Other debt securities | — |
| 4 |
| 4 |
|
| Total investments | — |
| 193 |
| 193 |
|
| Restricted cash equivalents: | | | |
| Money market mutual funds | 43 |
| — |
| 43 |
|
| Commercial paper | 18 |
| — |
| 18 |
|
| Total restricted cash equivalents | 61 |
| — |
| 61 |
|
| Restricted investments: | | | |
| U.S. treasuries | — |
| 5 |
| 5 |
|
| Exchange traded fund | 1 |
| — |
| 1 |
|
| Certificate of deposit | — |
| — |
| — |
|
| Total restricted investments | 1 |
| 5 |
| 6 |
|
| Total unrestricted and restricted cash equivalents and investments | $ | 151 |
| $ | 198 |
| $ | 349 |
|
|
| | | | | | | | | |
| (in millions) | Level 1 | Level 2 | Total |
| December 31, 2018 | | | |
| Cash equivalents | | | |
| Money market mutual funds | $ | 4 |
| $ | — |
| $ | 4 |
|
| U.S. treasuries | — |
| 1 |
| 1 |
|
| Total cash equivalents | 4 |
| 1 |
| 5 |
|
| Investments | | | |
| Asset-backed securities | — |
| 33 |
| 33 |
|
| Corporate bonds | — |
| 99 |
| 99 |
|
| U.S. government agencies and government-sponsored agencies | — |
| 7 |
| 7 |
|
| U.S. treasuries | — |
| 41 |
| 41 |
|
| Other debt securities | — |
| 9 |
| 9 |
|
| Total investments | — |
| 189 |
| 189 |
|
| Restricted cash equivalents: | | | |
| Money market mutual funds | 48 |
| — |
| 48 |
|
| Commercial paper | 20 |
| — |
| 20 |
|
| Total restricted cash equivalents | 68 |
| — |
| 68 |
|
| Restricted investments: | | | |
| U.S. treasuries | — |
| 5 |
| 5 |
|
| Exchange traded fund | 1 |
| — |
| 1 |
|
| Certificate of deposit | — |
| 2 |
| 2 |
|
| Total restricted investments | 1 |
| 7 |
| 8 |
|
| Total unrestricted and restricted cash equivalents and investments | $ | 73 |
| $ | 197 |
| $ | 270 |
|
Credit FacilitiesFair Value of Financial Instruments Disclosure
We maintainLong-Term Debt
Our long-term debt is a $250 million revolving credit facility which includes capacity for a $20 million swingline facility. Lettersfloating rate debt and the fair value of credit issued pursuant to the revolving credit facility reduce the amount available for borrowing under the revolving credit facility. The total unused portionour floating rate debt approximates its carrying value (exclusive of the revolving credit facility was $234 million as of June 30, 2018.
The terms of the credit agreement governing the revolving credit facility require us to maintain certain financial ratios at each quarter end. We were in compliance with these covenantsissuance costs) at June 30, 2018.2019. The fair value of our floating rate debt is estimated based on a discounted cash flow, which incorporates credit spreads and market interest rates to estimate the fair value and is considered Level 3 in the hierarchy for fair value measurement.
Derivative Instruments
In June 2019, we entered into an interest rate collar derivative transaction with no upfront premium to mitigate the risk of changes in interest rates on the interest payments on a portion of our floating rate debt. If short-term interest rates increase, we will incur higher interest expense on any future outstanding balances of floating rate debt. We also haveuse this derivative as part of our interest rate risk management strategy and designated it as a $5 million linecash flow hedge. If interest rates rise above the cap strike rate on the contract, we will receive variable-rate amounts and if interest rates fall below the floor strike rate on the contract, we will pay variable-rate amounts.
The following table summarizes the fair value of credit facility to secure standby letters of credit related to our workers' compensation obligations. Atderivative instruments at June 30, 2018, the total unused portion of the credit facility was $3 million.2019:
Standby Letters of Credit |
| | | | | | | | | | | |
| | June 30, 2019 |
| | | | | Fair Market Value |
| (in millions) | Hedge type | Final settlement date | Notional amount | Other current assets | Accounts payable and other current liabilities |
| Derivatives designated as hedging instruments | | | | | |
| Collar - LIBOR | Cash flow | May 2022 | $ | 213 |
| $ | — |
| $ | — |
|
| | | | | | |
We have two standby letters of credit totaling $18 million provided as collateral for our workers’ compensation obligations. At June 30, 2018, the facilities were not drawn down.
Contingencies
In August 2015, Howard Welgus, a purported stockholder, filed a putative securities class action lawsuit, Welgus v. TriNet Group, Inc., et. al., under the Securities Exchange Act of 1934 in the United States District Court for the Northern District of California. The complaint was later amended in April 2016 and again in March 2017. On December 18, 2017, the district court granted TriNet’s motion to dismiss the amended complaint in its entirety, without leave to amend. Plaintiff filed a notice of appeal of the district court’s order on January 17, 2018. Plaintiff-Appellant filed his opening appeal brief before the Ninth Circuit Court of Appeals on April 27, 2018. TriNet filed a responsive brief on June 29, 2018. Plaintiff-Appellant’s reply brief is due August 20, 2018. We see no basis for reversal of the district court's decision. We are unable to reasonably estimate the possible loss or expense, or range of losses and expenses, if any, arising from this litigation.
We are and, from time to time, have been and may in the future become involved in various litigation matters, legal proceedings, and claims arising in the ordinary course of our business, including disputes with our clients or various class action, collective action, representative action, and other proceedings arising from the nature of our co-employment relationship with our clients and WSEs in which we are named as a defendant. In addition, due to the nature of our co-employment relationship with our clients and WSEs, we could be subject to liability for federal and state law violations, even if we do not participate in such violations. While our agreements with our clients contain indemnification provisions related to the conduct of our clients, we may not be able to avail ourselves of such provisions in every instance. We have accrued our current best estimates of probable losses with respect to these matters, which are individually and in aggregate immaterial to our consolidated financial statements.
While the outcome of the matters described above cannot be predicted with certainty, management currently does not believe that any such claims or proceedings or the above mentioned securities class action will have a materially adverse effect on our consolidated financial position, results of operations, or cash flows. However, the unfavorable resolution of any particular matter or our reassessment of our exposure for any of the above matters based on additional information obtained in the future could have a material impact on our consolidated financial position, results of operations, or cash flows.
The pre-tax effect of derivative instruments for the three and six months ended June 30, 2019 is insignificant and we estimate that an insignificant amount of net derivative gains or losses included in other comprehensive income will be reclassified into earnings within the following 12 months. There were no cash flows associated with the derivative for the three months and six months ended June 30, 2019.
As of June 30, 2019, we do not hold, nor have we posted, any collateral related to the above derivative instrument.
The interest rate collar derivative is classified as Level 2 in the fair value hierarchy as its value is determined using observable inputs such as forward LIBOR curves.
Legal Proceedings
For the information required in this section, refer to Note 106 in the condensed consolidated financial statements and related notes included in this Form 10-Q.
Risk Factors
There have been no material changes in our risk factors disclosed in Part 1, Item 1A, of our 20172018 Form 10-K.
Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities
Not applicable.
(b) Use of Proceeds from Sales of Unregistered Securities
Not applicable.
(c) Issuer Purchases of Equity Securities
The following table provides information about our purchases of TriNet common stock during the quarter ended June 30, 2018:2019:
|
| | | | | | | | | | | | | |
| Period | Total Number of
Shares Purchased (1) | | Weighted Average Price
Paid Per Share | | Total Number of
Shares
Purchased as Part of Publicly
Announced Plans (2) | | Approximate Dollar Value ($ millions)
of Shares that May Yet be Purchased
Under the Plans (2) |
| April 1 - April 30, 2018 | 188,566 |
| | $ | 48.64 |
| | 175,700 |
| | $ | 120 |
|
| May 1 - May 31, 2018 | 245,496 |
| | $ | 52.68 |
| | 165,900 |
| | $ | 112 |
|
| June 1 - June 30, 2018 | 93,166 |
| | $ | 55.39 |
| | 93,166 |
| | $ | 106 |
|
| Total | 527,228 |
| | | | 434,766 |
| |
|
|
| | | | | | | | | | | | | |
| Period | Total Number of
Shares Purchased (1) | | Weighted Average Price
Paid Per Share | | Total Number of
Shares
Purchased as Part of Publicly
Announced Plans (2) | | Approximate Dollar Value ($ millions)
of Shares that May Yet be Purchased
Under the Plans (2) |
| April 1- April 30, 2019 | 146,761 |
| | $ | 60.91 |
| | 144,500 |
| | $ | 329 |
|
| May 1 - May 31, 2019 | 238,763 |
| | $ | 62.08 |
| | 161,200 |
| | $ | 319 |
|
| June 1 - June 30, 2019 | 88,183 |
| | $ | 65.91 |
| | 87,000 |
| | $ | 313 |
|
| Total | 473,707 |
| |
|
| | 392,700 |
| |
|
| |
(1) | Includes shares surrendered by employees to us to satisfy tax withholding obligations that arose upon vesting of restricted stock units granted pursuant to approved plans. |
| |
(2) | We repurchased a total of approximately $22 million of our outstanding common stock during the three months ended June 30, 2018. |
(1) Includes shares surrendered by employees to us to satisfy tax withholding obligations that arose upon vesting of RSUs granted pursuant to approved plans.
(2) We repurchased a total of approximately $25 million of our outstanding common stock during the period ended June 30, 2019.
As of June 30, 2018,2019, we had approximately $106$313 million remaining for repurchases under our stock repurchase program. Stock repurchases under the program are primarily intended to offset the dilutive effect of share-based employee incentive compensation. The purchases were funded from existing cash and cash equivalents balances.
Our stock repurchases and dividends are subject to certain restrictions under the terms of our 2018 Credit Agreement.credit facility. For more information about our 2018 Credit Agreementcredit facility and our stock repurchases, refer to Notes 67 and 79 in Part I,II, Item 18. Financial Statements and Supplementary Data of thisour 2018 Form 10-Q.10-K.
Defaults Upon Senior Securities
Not applicable.
Mine Safety Disclosures
Not applicable.
Other Information
Not applicable.
Exhibits
Incorporated herein by reference is a list of the exhibits contained in the Exhibit Index below.
EXHIBIT INDEX
|
| | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
| Exhibit No. | | Exhibit | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
| 10.1 | | | | 8-K | | 001-36373 | | 10.1 | | 6/22/2018 | | |
| 31.1 | | | | | | | | | | | | X |
| 31.2 | | | | | | | | | | | | X |
32.1* | | | | | | | | | | | | X |
101.INS | | XBRL Instance Document | | | | | | | | | | |
101.SCH | | XBRL Taxonomy Extension Schema Linkbase Document | | | | | | | | | | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | |
|
| | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
| Exhibit No. | | Exhibit | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
| 10.1 | | | | | | | | | | | | X |
| 10.2 | | | | | | | | | | | | X |
| 31.1 | | | | | | | | | | | | X |
| 31.2 | | | | | | | | | | | | X |
32.1* | | | | | | | | | | | | X |
101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | | | |
101.SCH | | XBRL Taxonomy Extension Schema Linkbase Document | | | | | | | | | | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | |
|
| | |
| | | |
| * | Document has been furnished, is deemed not filed and is not to be incorporated by reference into any of TriNet Group, Inc.’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | TRINET GROUP, INC. |
| | |
Date: July 30, 201825, 2019 | | By: | /s/ Burton M. Goldfield |
| | | | Burton M. Goldfield |
| | | | Chief Executive Officer |
| | | | |
Date: July 30, 201825, 2019 | | By: | /s/ Richard Beckert |
| | | | Richard Beckert |
| | | | Chief Financial Officer |
| | | | |
Date: July 30, 201825, 2019 | | By: | /s/ Michael P. Murphy |
| | | | Michael P. Murphy |
| | | | Chief Accounting Officer |
