TriNet Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparative period is the three months ended March 31, 2021. Unaudited results. TriNet provides PEO-based HR, payroll, benefits and compliance services to SMBs, and added cloud-based HCM services through its February 2022 acquisition of Zenefits.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Professional service revenue | $194 million | $153 million |
| Insurance service revenue | $1,024 million | $907 million |
| Total revenue | $1,218 million | $1,060 million |
| Operating income | $204 million | $138 million |
| Net income | $146 million | $101 million |
| Diluted EPS | $2.21 | $1.51 |
| Adjusted EBITDA (non-GAAP) | $242 million; 19.9% margin | $163 million; 15.4% margin |
| Adjusted net income (non-GAAP) | $168 million | $111 million |
| Insurance cost ratio | 80% | 83% |
| Net cash from operating activities | $214 million | $(175) million |
| Corporate operating cash flows (non-GAAP) | $193 million | $131 million |
| Cash used in investing activities | $(213) million | $(3) million |
| Cash used in financing activities | $(353) million | Cash provided: $56 million |
| Working capital | $305 million | $700 million at Dec. 31, 2021 |
| Debt | $495 million carrying value | $495 million at Dec. 31, 2021 |
As of March 31, 2022, TriNet reported $235 million of unrestricted cash and cash equivalents and $319 million of unrestricted investments. Total cash, cash equivalents and investments, including restricted balances, were approximately $1.9 billion; much of the restricted amount supports WSE payroll, benefits and insurance obligations. The $500 million senior notes mature in 2029. The company reported $491 million available under its $500 million revolving facility and compliance with its financial covenants.
Changes versus the prior comparable period
- Revenue rose 15%; professional service revenue increased 27% and insurance service revenue increased 13%. Average WSEs grew 7%, while total WSEs grew 7%. Zenefits contributed $6 million of professional service revenue for approximately 1.5 months.
- Operating income increased 48%, and net income increased 45%. Higher revenue was partly offset by a $72 million increase in insurance costs and a $20 million increase in operating expenses.
- The insurance cost ratio improved by 3 percentage points. Q1 2021 was affected by $37 million of customer credits ($12 million Recovery Credit and $25 million 2021 Credit Program); TriNet recognized no such revenue reductions in Q1 2022.
- Operating cash flow improved from a $175 million use to $214 million provided, with substantial period-to-period changes in WSE-related payroll and liability timing. Corporate operating cash flows rose 47%.
- Unrestricted cash declined $377 million during the quarter, principally due to the Zenefits acquisition and share repurchases. Working capital fell $395 million from year-end.
Outlook, management commentary and risks
The filing does not provide numerical full-year guidance. Management said it expects available corporate cash, ongoing corporate operating cash flows and potential financing to meet reasonably foreseeable needs, and believes liquidity is sufficient for at least the next 12 months. It expects continued investment in software and hardware.
Management attributed revenue growth to higher WSEs, pricing increases, favorable client mix and expiration of pandemic-era credits. Medical utilization increased, alongside WSE growth and COVID-19 testing, treatment and vaccination costs; utilization remained below pre-pandemic levels, and Omicron-related constraints on care access affected the quarter. TriNet cautioned that claims frequency, severity, medical trends and insurance costs are difficult to predict and could materially affect results. Large customers leaving because they outgrew the PEO model or were acquired contributed to higher WSE attrition.
- Zenefits: Acquired February 15 for a $209 million purchase price, including $192 million cash and $17 million in TriNet stock. Preliminary allocation included $139 million of nondeductible goodwill and $96 million of intangible assets; valuation remains subject to the measurement period. The acquisition generated $10 million of transaction and integration costs in Q1.
- Share repurchases: TriNet repurchased approximately $347 million of shares during Q1, including a tender offer for 3,653,690 shares at $86.50 per share. Approximately $217 million remained authorized for future repurchases at quarter-end.
- Contingencies: A retirement-plan ERISA class action is pending; the company said it could not reasonably estimate a possible loss or range. Other ordinary-course matters were accrued where probable and individually and collectively immaterial, but an unfavorable outcome or reassessment could materially affect results.
- Other risks: PEO co-employment and regulatory exposure, client attrition, insurance-carrier relationships and claims, cyber and privacy risks, competition, acquisition integration, and economic or COVID-19 effects. The filing reported no material changes to the risk factors in the 2021 Form 10-K.
Important facts for investors to verify
- How medical and workers’ compensation claim trends develop, and whether the 80% insurance cost ratio is sustainable as utilization normalizes.
- Whether WSE growth, pricing and client retention continue, including the impact of larger clients exiting the PEO model.
- Zenefits’ integration, customer growth and contribution to revenue and profitability; also track final purchase accounting and goodwill/intangible asset assumptions.
- Corporate liquidity after the acquisition and substantial repurchases, distinguishing unrestricted funds from restricted WSE and insurance balances; monitor remaining buyback activity and revolver availability.
- Developments in the ERISA class action and any changes to the company’s assessment of legal or other contingencies.