TriNet Group, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparison is Q1 2016 unless otherwise noted. TriNet provides HR, payroll, benefits, insurance, and compliance services to small and midsize businesses through a co-employment model. It operates in one segment, with less than 1% of revenue generated outside the U.S.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $807.6 million | $732.9 million | +10% |
| Net Service Revenues (non-GAAP) | $199.0 million | $163.3 million | +22% |
| Operating income | $49.5 million | $25.9 million | +91% |
| Net income | $28.7 million | $11.6 million | +148% |
| Diluted EPS | $0.41 | $0.16 | +156% |
| Adjusted EBITDA (non-GAAP) | $63.3 million | $42.2 million | +50% |
| Operating cash flow | $75.9 million | $40.4 million | +88% |
- Insurance service revenue rose 11% to $687.5 million; professional service revenue increased 7% to $120.1 million. Insurance costs increased 7% to $608.6 million. Net Insurance Service Revenues (non-GAAP) grew 55% to $78.8 million.
- Average worksite employees (WSEs) increased 3% to 327,803; period-end WSEs were 330,731, up 2%. Payroll and payroll taxes processed increased 4% to $9.8 billion. Average monthly revenue per WSE rose 7%.
- Operating expenses increased 9% overall, while other operating expenses increased 11% to $137.0 million. Management said revenue growth outpaced these expenses; other operating expenses were 71% of Net Service Revenues versus 79% a year earlier.
- The effective tax rate declined to 36.0% from 44.4%, primarily reflecting tax benefits from adopting share-based payment accounting guidance and state tax changes, partly offset by changes in uncertain tax positions.
Balance sheet, cash flow, and capital
- At March 31, 2017, cash and cash equivalents were $216.1 million, up from $184.0 million at year-end. Working capital was $159.9 million. Total assets were $1.87 billion and total liabilities were $1.83 billion.
- Notes and capital leases payable were $449.9 million, down from $459.1 million at December 31, 2016. Stockholders’ equity was $42.5 million.
- Cash used in investing activities was $6.8 million, including $10.5 million of capital expenditures, compared with $5.6 million used in Q1 2016. Cash used in financing was $37.1 million, primarily reflecting $27.6 million of share repurchases and $9.6 million of debt repayments.
- TriNet had $136.9 million of restricted cash, cash equivalents, and investments in WSE-related assets, plus $127.7 million of long-term restricted cash, cash equivalents, and investments. The $75 million revolving credit facility had $59.5 million unused; the company reported compliance with its financial covenants.
Outlook, risks, and unusual items
- No quantified full-year guidance is provided. Management expects operating expenses to continue increasing as it supports growth, develops vertical products, integrates platforms, and remediates internal controls. It also expects continued software and hardware investment. Management said available corporate liquidity and operating cash flows should cover working capital and capital expenditure needs for at least 12 months.
- Disclosure controls and procedures were deemed ineffective at quarter-end because of material weaknesses in internal control over financial reporting. Management is pursuing remediation but cannot estimate when it will be complete or assure success; additional procedures are being performed. The filing says the weaknesses did not cause prior-period restatements.
- A putative securities class action concerning alleged disclosure of health-insurance and workers’ compensation claims trends remained pending; TriNet said it could not reasonably estimate any possible loss. Management did not believe the litigation would have a material adverse effect, but acknowledged an unfavorable outcome could be material.
- TriNet is litigating an IRS-related dispute over $10.5 million of employment tax credits, plus $4.0 million of interest and penalties previously paid. Management believes it is more likely than not to prevail and has not recorded a reserve for the receivable.
- Workers’ compensation reserves and collateral depend on estimates of claims and loss development. Total workers’ compensation loss reserves were $260.3 million before carrier collateral offsets, compared with $254.6 million at year-end.
- Adoption of share-based payment guidance in 2017 produced a $0.3 million cumulative increase to retained earnings and affected income tax accounting. TriNet anticipated material financial-statement impacts from forthcoming lease and revenue-recognition standards; adoption of the new revenue standard was planned for January 1, 2018, with the full retrospective method anticipated.
Important facts for investors to verify
- Progress and evidence of remediation of the material weaknesses, and whether disclosure controls are ultimately deemed effective.
- Subsequent trends in insurance costs, claims experience, workers’ compensation reserves, and collateral requirements relative to insurance service revenues.
- Cash generation and liquidity after repurchases, debt repayments, capital investment, and restricted-cash requirements.
- Developments in the securities litigation and the employment tax-credit dispute, including any change in estimated exposure or reserve treatment.
- Implementation impacts and transition readiness for the new revenue and lease accounting standards.
Non-GAAP measures are management-defined and should be considered alongside, not as substitutes for, GAAP results.