TriNet Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; comparisons are with the third quarter and nine months ended September 30, 2020. TriNet provides HR, payroll, benefits and employment-risk services to small and medium-size businesses through a co-employment model.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $1.148B (+18%) | $975M | $3.308B (+11%) | $2.971B |
| Operating income | $105M (+133%) | $45M | $364M (+8%) | $338M |
| Net income | $77M (+133%) | $33M | $269M (+8%) | $250M |
| Diluted EPS | $1.16 | $0.48 | $4.03 | $3.66 |
| Adjusted EBITDA (non-GAAP) | $132M; 11.5% margin | $69M; 7.1% margin | $449M; 13.6% margin | $413M; 13.9% margin |
| Insurance cost ratio | 86% | 89% | 84% | 83% |
| Average worksite employees | 347,502 (+9%) | 317,737 | 333,839 (+3%) | 322,595 |
Q3 professional service revenue was $156M (+24%) and insurance service revenue was $992M (+17%). Revenue growth reflected higher worksite employee counts, rate increases and the absence of the prior-year Recovery Credit reduction. The Recovery Credit reduced Q3 2020 revenue by $48M; the company had fully recognized its $145M maximum by June 30, 2021. A separate 2021 Credit Program reduced revenue by $25M in Q1 2021.
Insurance costs rose 12% in Q3 and 12% for the first nine months. Management attributed higher costs to recovering medical utilization, increased worksite employee volume, and COVID-19 testing, treatment and vaccination costs. The quarterly insurance cost ratio improved because insurance revenue growth exceeded cost growth; the year-to-date ratio rose slightly. Operating expenses increased 12% in Q3 and 10% year to date, including higher sales and marketing, compensation, consulting and technology spending.
Cash flow, liquidity and debt
- For the first nine months, consolidated operating cash flow was a use of $16M, compared with a use of $40M in 2020. Corporate operating cash flow, a company-defined non-GAAP measure excluding worksite-employee-related balances, was $334M versus $308M. Worksite-employee-related operating cash flow was a use of $350M.
- Investing cash flow was a use of $145M, mainly investment purchases and $29M of capital expenditures. Financing cash flow was a source of $20M.
- At September 30, corporate working capital was $645M, up from $290M at year-end 2020. The balance sheet reported $525M of unrestricted cash and $322M of unrestricted investments. Total cash, cash equivalents and investments, including restricted amounts, were $2.063B; substantial restricted balances support payroll, benefits and insurance obligations.
- Debt was $495M, consisting of $500M principal of 3.50% senior notes due 2029, net of issuance costs. The company issued the notes in February, repaid and terminated its $370M term loan, and established a new $500M revolving facility. Remaining revolver capacity was $491M; no revolver borrowing was reported. TriNet said it was compliant with financial covenants.
- TriNet repurchased approximately 1.16 million shares for $94M during the nine months; $264M remained authorized for repurchases.
Outlook, risks and unusual items
The filing provides no specific numerical earnings or revenue guidance. Management said it believed available liquidity and ongoing corporate operating cash flows would meet foreseeable operating needs and commitments for at least the next 12 months. Initiatives included the Connect 360 service model, TriNet Financial Services Preferred, continued technology and process investment, and the 2021 Credit Program. Management highlighted record total worksite employees and continued hiring among existing clients.
Key uncertainties include the pandemic’s effects on clients and medical claims, volatility in health and workers’ compensation costs, and the difficulty of estimating claim severity and ultimate costs. TriNet bears workers’ compensation losses up to $1M per claim occurrence and assumes variability in health claims under risk-based policies. Other disclosed risks include client attrition, competition, technology and cybersecurity, regulatory compliance, and debt covenant requirements.
A class action alleging fiduciary breaches related to fees and investment oversight in two TriNet-sponsored 401(k) plans remained at an early stage; the company said it could not reasonably estimate a possible loss and believed the claims lacked merit. Other ordinary-course matters were accrued where probable, with management not expecting a material adverse effect, while noting outcomes remain uncertain. Separately, an IRS employment-tax-credit judgment of $15M plus interest in TriNet’s favor was affirmed on appeal; the IRS review-petition deadline passed without a petition, and TriNet said it would pursue recovery.
Most important facts for investors to verify
- Whether the unusually strong Q3 growth persists after the prior-year Recovery Credit comparison benefit rolls off.
- How medical utilization and claims experience affect the insurance cost ratio and earnings in subsequent periods.
- Whether the $64M combined Recovery Credit and 2021 Credit Program liability is settled as expected over the following 12 months.
- Use of cash, the pace of share repurchases, and compliance with debt covenants and revolving-facility terms.
- Developments in the 401(k) class action, other co-employment-related claims, and collection of the tax-credit judgment.