TriNet Group, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. TriNet provides HR, payroll, benefits, insurance and compliance services to small and midsize businesses through a co-employment model. Less than 1% of revenue is generated outside the U.S. Financial results are unaudited.
Financial and operating performance
| Metric | Q3 2017 | Q3 change | Nine months 2017 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $819.3 million | +6% | $2.427 billion | +8% |
| Net Service Revenues (non-GAAP) | $205.9 million | +28% | $605.9 million | +28% |
| Operating income | $62.8 million | +117% | $169.1 million | +108% |
| Net income | $42.8 million | +194% | $111.5 million | +190% |
| Diluted EPS | $0.60 | $0.20 prior year | $1.57 | $0.53 prior year |
| Adjusted EBITDA (non-GAAP) | $80.3 million | +77% | $216.0 million | +66% |
- Insurance service revenue was $706.8 million in Q3 (+7%) and $2.086 billion year to date (+9%). Professional service revenue was $112.5 million in Q3 (+2%) and $341.3 million year to date (+3%). Insurance costs rose 1% in Q3 and 3% year to date, slower than insurance revenue growth. Management attributed improved insurance economics to greater health-plan participation and fees per participant, alongside slower claims-cost growth and reduced administrative costs.
- Operating margin was approximately 7.7% in Q3, versus 3.8% a year earlier; year-to-date margin was approximately 7.0%, versus 3.6%. These percentages are calculated from reported revenue and operating income.
- Average worksite employees (WSEs) were 324,043 in Q3, down 2%; the nine-month average was 325,347, essentially flat. Payroll and payroll taxes processed were $8.1 billion in Q3 (+5%) and $25.8 billion year to date (+4%). Average monthly revenue per WSE increased 9% in Q3 and 8% year to date.
- Net cash provided by operating activities was $159.0 million for the first nine months, up 97%. Investing activities used $14.8 million and financing activities used $65.1 million. Capital expenditures were $29.2 million. Cash and cash equivalents increased $79.5 million to $263.5 million.
- At September 30, cash was $263.5 million, working capital was $186.8 million, and notes and capital leases payable were $431.7 million. Total assets were $1.837 billion and total liabilities were $1.705 billion. The $75 million revolving credit facility had $59.5 million unused; the company reported compliance with its financial covenants.
Changes, outlook and notable items
- Growth in net service revenue and operating income substantially exceeded total-revenue growth, reflecting improved net insurance service revenue. However, Q3 WSE counts declined and year-to-date WSE levels were flat; management cited client migration to a common platform, higher attrition and moderated new-client growth.
- Other operating expenses increased 10% in Q3 and 13% year to date, including spending on technology and vertical products, platform integration, compliance and internal-control remediation. Management expects operating expenses to rise in the foreseeable future.
- TriNet Main Street, aimed at hospitality, retail and manufacturing clients, launched in July 2017. In October, the company announced a 2017 client fee-credit program, expected to be delivered in Q1 2018 and recorded as a reduction of revenue; the filing gives no amount. Also in October, it changed terms with a health insurer and became responsible for claim reimbursements within its deductible layer.
- No specific earnings or revenue guidance is provided. Management stated that existing corporate cash, working capital and operating cash flows should meet working-capital and capital-expenditure needs for at least 12 months. It expects continued investment in software and hardware.
- Disclosure controls were deemed ineffective as of September 30 because of material weaknesses in internal control over financial reporting. Remediation is underway, but management could not estimate its completion timeline or assure success; it reported no related restatement of prior-period financial statements.
- A putative securities class action alleging misstatements or omissions concerning health-insurance and workers’ compensation claims was pending, with a motion to dismiss under submission. The company could not reasonably estimate potential losses. Separately, litigation concerns $10.5 million of employment-tax-credit assessments plus $4.0 million interest; TriNet said it believed it was more likely than not to prevail and had recorded no reserve.
- Workers’ compensation loss reserves were $249.1 million gross, or $221.7 million net of carrier collateral. The company noted that reserve estimates and insurance collateral requirements may change. It also entered a 10-year office lease commitment of approximately $32.4 million, beginning February 2018.
- The effective tax rate declined to 26.3% in Q3 and 28.2% year to date, from 38.4% and 41.8%, respectively, reflecting tax benefits and other discrete items. The company cautioned that results for the quarter are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether revenue and earnings growth persist if health-plan participation, pricing, claims costs or insurance fees change.
- WSE trends, including the effects of platform migration, attrition and the TriNet Main Street launch.
- Progress and effectiveness of internal-control remediation, including any further disclosures or costs.
- Potential financial exposure from the securities class action, employment-tax litigation and workers’ compensation or health-benefit claims.
- The eventual cost and revenue impact of the October insurer-contract change and 2017 client fee-credit program.
- Cash availability after accounting for restricted and WSE-related funds, debt repayments, collateral needs, planned investment and stock repurchases.