TriNet Group, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. TriNet provides HR, payroll, compliance, benefits and insurance services to small and medium-sized businesses through a co-employment model. At quarter-end it served more than 11,000 clients and approximately 302,000 worksite employees (WSEs).
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $640.0m | $525.0m | $1,265.6m | $1,033.9m |
| Professional service revenue | $97.8m | $82.3m | $194.8m | $165.1m |
| Insurance service revenue | $542.2m | $442.7m | $1,070.8m | $868.8m |
| Insurance costs | $518.0m | $400.2m | $1,001.2m | $781.4m |
| Net service revenue* | $122.0m | $124.8m | $264.4m | $252.6m |
| Operating income | $6.0m | $20.0m | $37.0m | $45.3m |
| Net income (loss) | $(1.3)m | $6.2m | $14.5m | $7.8m |
| Adjusted EBITDA* | $24.7m | $39.4m | $74.8m | $83.7m |
| Operating margin on net service revenue* | 5% | 16% | 14% | 18% |
*Non-GAAP measure as defined by the company. Total revenue includes insurance billings; net service revenue subtracts insurance costs.
- Q2 revenue rose 22% year over year, but net service revenue fell 2%, operating income fell, and the quarter recorded a net loss. Six-month revenue rose 22% and net service revenue rose 5%, while operating income and Adjusted EBITDA declined.
- Insurance costs grew faster than insurance revenue: 29% versus 22% in Q2 and 28% versus 23% for the first half. Management attributed this to WSE growth, higher average insurance cost per WSE, medical costs and more large acute claims.
- WSEs increased 17% year over year to 302,375; sales representatives increased 25% to 486. Average insurance service revenue per WSE increased 5% in Q2 and 4% for the half, while average insurance cost per WSE increased 11% and 9%, respectively.
Cash, debt and liquidity
- Cash and cash equivalents were $128.4m at June 30, 2015, down from $134.3m at year-end 2014. The balance sheet also reported $97.4m of restricted cash and investments; these funds are not equivalent to unrestricted corporate cash.
- Six-month operating cash flow was $45.2m, compared with $53.7m a year earlier. Investing used $10.3m, primarily for property and equipment; financing used $40.6m, including $35.2m of debt repayments and $30.4m of share repurchases.
- Debt and capital lease obligations totaled $509.8m, including $20.3m current; $59.5m of the $75m revolving facility was unused. The company reported compliance with credit-facility covenants at quarter-end. Debt is secured and bears variable interest rates.
- Working-capital balances include large WSE-related payroll and benefits assets and liabilities that fluctuate with payroll timing. Total liabilities exceeded assets by $7.9m, leaving a stockholders’ deficit.
Outlook, risks and unusual items
- No specific numerical revenue or earnings guidance is provided. Management expects insurance costs and service costs to rise with WSE growth; it also expects continued investment in sales and marketing, technology and compliance.
- Management describes seasonality in client additions and attrition, including January peaks, and typically higher health-claim volumes in the second and third quarters. Large claims may cause further quarterly volatility.
- The Q2 effective tax rate was 201.5%, primarily reflecting a $2.0m deferred-tax revaluation from a regulatory tax-law change against low pretax income. The six-month effective rate was 47.4%.
- The company disputes IRS assessments involving $10.5m of employment tax credits relating to acquired Gevity; it had paid the assessments and expected the matter likely to proceed to litigation. No reserve was recorded because management believed it was more likely than not to prevail.
- TriNet faces multiple class, collective and representative lawsuits related to its WSE relationships. Management could not estimate a possible loss range, but stated it did not then believe pending matters were reasonably likely to have a material adverse effect.
- Additional risks include health-care reform uncertainty, client attrition, competition, acquisition integration, variable-rate debt and interest-rate exposure, and potential claims or costs related to employment-law and insurance obligations. Management stated disclosure controls were effective and reported no material control changes during the quarter.
Important facts for investors to verify
- Whether large medical claims and rising insurance costs continue to pressure net insurance service revenue and margins.
- WSE growth, client retention and the productivity of the expanded sales force, alongside higher sales and marketing spending.
- Cash generation after workers’ compensation collateral requirements, debt service, capital spending and repurchases; distinguish restricted funds from available corporate cash.
- Debt balances, variable-rate exposure, covenant headroom and scheduled repayments.
- Developments and potential financial exposure in the employment-tax-credit dispute and WSE-related lawsuits.
- How management’s stated growth and investment expectations translate into future profitability; this filing provides no numerical guidance.