TriNet Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. TriNet provides payroll, benefits, HR and employment-risk services to small and midsize businesses through a co-employment model.
Financial performance
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Total revenue | $948M (+1%) | $935M | $1,996M (+7%) | $1,869M |
| Operating income | $173M | $55M | $293M | $137M |
| Net income | $126M | $46M | $217M | $109M |
| Diluted EPS | $1.87 | $0.64 | $3.13 | $1.53 |
| Net Service Revenue (non-GAAP) | $335M | $231M | $618M | $482M |
| Adjusted EBITDA (non-GAAP) | $199M | $85M | $344M | $193M |
| Net Insurance Service Revenue (non-GAAP) | $214M | $104M | $341M | $219M |
- Q2 Adjusted EBITDA margin was 59% of Net Service Revenue, versus 36% a year earlier. Net insurance margin was 26%, versus 13%.
- Q2 professional service revenue was $121M, down from $127M; insurance service revenue was $827M, up from $808M. The filing reports total revenue after recognizing a $56M Recovery Credit reduction.
- Average worksite employees (WSEs) fell 2% year over year in Q2; total WSEs were down 3%. H1 average WSEs increased 3% year over year.
- Operating expenses were $162M in Q2, down from $176M, reflecting spending discipline and lower consulting, travel, marketing and other costs.
Cash, debt and liquidity
- At June 30, corporate working capital was $364M, up from $228M at December 31, 2019. Cash and cash equivalents were $637M; unrestricted investments totaled $204M. Total cash, cash equivalents and investments were $1.78B, including funds restricted for WSE payroll and insurance obligations.
- Total debt was $614M, compared with $391M at year-end 2019, including a $234M revolving-credit draw in March and approximately $380M of term debt. The revolver matures in June 2023; the company reported compliance with its financial covenants.
- For H1, GAAP operating cash flow was negative $130M, versus negative $162M. Corporate operating cash flow, a non-GAAP measure excluding WSE-related working-capital movements, was $315M, versus $107M. Investing cash outflow was $121M and financing cash inflow was $122M.
- TriNet repurchased approximately $100M of shares in H1; about $435M remained authorized for repurchases. Management said existing corporate liquidity and operating cash flows should meet foreseeable needs, including for at least the next 12 months.
Changes, outlook and risks
- Q2 profit and net service revenue rose sharply, primarily because COVID-19-related reductions in medical-service use lowered health claims costs. Utilization began returning toward typical levels by quarter-end; management expects use of deferred services to increase, making future claims costs and net insurance revenue uncertain.
- The $56M Recovery Credit is a discount for eligible clients on future services, with the ultimate amount tied to future net insurance performance. It is recorded as a liability for unsatisfied performance obligations and is intended to support client retention. The company plans to recognize revenue reductions over the program’s life, currently planned for one year, while eligible credits may be used over two years.
- COVID-19 disrupted SMB clients through furloughs, layoffs, reduced hiring, shutdowns and business failures. TriNet reported slower Q2 revenue and new-sales growth, higher WSE attrition, and expects slower growth in total, professional-service and insurance-service revenue in subsequent periods. It also expects operating expenses as a percentage of revenue to rise.
- Risks include unpredictable health and workers’ compensation claims, client attrition and inability to pay, continued economic disruption, changing COVID-19 laws and guidance, remote-work cybersecurity threats, and possible service impacts. TriNet also warned that employment litigation and its shared EPLI retention costs could increase.
- In July 2020, TriNet announced its acquisition of Little Bird HR, a PEO serving charter schools. The filing does not provide financial terms. A separate IRS tax-credit refund dispute was under appeal; the company had obtained a $15M judgment plus interest, but stated recovery remained uncertain. Other recorded litigation accruals were described as immaterial.
Important facts for investors to verify
- Whether medical utilization and claims costs normalize, and how that affects insurance margins and earnings.
- Recovery Credit estimates, future revenue reductions, and whether the program improves client retention.
- Subsequent WSE trends, client attrition, new sales and revenue growth as the pandemic affects SMBs.
- Availability of corporate liquidity after distinguishing unrestricted funds from payroll and insurance-restricted assets, and the cost and repayment of debt.
- Terms and financial impact of the Little Bird HR acquisition, and the outcome of the IRS refund appeal.