TriNet Group, Inc. — Q1 2020 Form 10-Q
Business and period: TriNet provides payroll, benefits, HR and employment-risk services to small and midsize businesses through a co-employment model. This unaudited report covers the three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise stated.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $1.048 billion | $934 million; up 12% |
| Professional service revenue | $156 million | $136 million |
| Insurance service revenue / insurance costs | $892 million / $765 million | $798 million / $683 million |
| Net service revenue (non-GAAP) | $283 million | $251 million; up 13% |
| Net insurance service revenue; net insurance margin | $127 million; 14% | $115 million; 14% |
| Operating income | $120 million | $82 million; up 46% |
| Net income; diluted EPS | $91 million; $1.31 | $63 million; $0.89 |
| Adjusted EBITDA; margin (non-GAAP) | $145 million; 51% of net service revenue | $108 million; 43% |
| Adjusted net income (non-GAAP) | $97 million | $69 million; up 41% |
| Average worksite employees | 336,348 | Up 8% |
Revenue and net service revenue growth reflected higher average worksite employees (WSEs), particularly in Technology and Professional Services, as well as pricing and mix. Operating income improved with higher revenue and 4% lower operating expenses. Net income increased 44%; diluted EPS increased 47%, also reflecting fewer weighted-average shares.
Cash flow: GAAP operating cash flow was negative $282 million, versus negative $142 million in Q1 2019, reflecting working-capital movements tied to WSE payroll, taxes and other client-related balances. Corporate operating cash flow, a non-GAAP measure, was positive $119 million, compared with $78 million. Investing cash outflow was $94 million, primarily reflecting net investment purchases; financing cash inflow was $185 million, including a $234 million revolver draw, partly offset by $40 million of share repurchases and debt repayment.
Balance sheet at March 31, 2020: Cash and cash equivalents were $521 million; unrestricted investments were $65 million current and $130 million noncurrent. Total cash, cash equivalents and investments were approximately $1.7 billion, including substantial restricted funds for payroll and insurance obligations. Working capital was $284 million, compared with $228 million at year-end 2019. Debt was $620 million, up from $391 million, including the $234 million revolver borrowing. The revolver balance was due by June 2023; TriNet reported compliance with its credit covenants.
Changes, outlook and risks
- The COVID-19 pandemic created significant uncertainty and began disrupting clients and prospects. Management expected furloughs, layoffs, reduced hiring, shutdowns and business failures to increase client attrition and reduce WSEs, particularly in Main Street and Professional Services.
- TriNet expected professional service, insurance service and total revenues to decrease in subsequent quarters, and said the downturn could constrain rate increases. It also expected operating expenses as a share of revenue to rise as revenue declined and customer-experience investments continued. The filing provides no numerical earnings or revenue guidance.
- TriNet said Q1 insurance costs did not include significant COVID-19-related costs, but expected testing and treatment costs in later quarters. Deferred medical care could reduce near-term utilization, while the timing and severity of later claims were difficult to predict. The company also noted potential state rules that could presume COVID-19 workers’ compensation claims to be covered.
- In response to the uncertainty, TriNet drew the remaining $234 million available under its revolver to bolster short-term reserves. Management stated that existing corporate cash, working capital and expected corporate operating cash flows should cover foreseeable operating and capital needs for at least 12 months.
- Other risks include the uncertain implementation and interpretation of new pandemic-related laws for PEOs, remote-work cybersecurity exposure, client payment and retention risks, and volatility in health and workers’ compensation claims. TriNet reported that offices closed and remote work began in mid-March.
- TriNet repurchased 747,417 shares for approximately $40 million and had about $495 million remaining under board repurchase authorizations. The board had approved a $300 million incremental increase in February 2020.
- Legal and tax matters: management said ordinary-course litigation and claims were accrued at its best estimate and were immaterial in aggregate, while noting an unfavorable outcome or reassessment could be material. An IRS dispute over employment tax credits remained on appeal; a 2018 judgment awarded TriNet $15 million plus interest, and oral arguments took place in March 2020.
Important facts for investors to verify
- How COVID-19 affected client attrition, WSE counts, revenue and margins in subsequent quarters, particularly in exposed verticals.
- Whether medical-care deferrals, later utilization and COVID-19 claims materially changed health and workers’ compensation costs or required additional carrier collateral.
- The composition and availability of reported liquidity: much of the cash and investments are restricted for WSE payroll, benefits or insurance obligations.
- Debt costs and covenant headroom after the revolver draw, including the effect of floating rates and the company’s hedging arrangements.
- Whether share repurchases continued at a pace consistent with liquidity needs and the stated purpose of offsetting equity-award dilution.
- The outcome of the employment-tax-credit appeal and any material developments in litigation or other contingencies.