TriNet(US:TNET)2021-10-25 20:46Part I - Financial Information This section provides TriNet Group, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis for the periods ended September 30, 2021 Unaudited Condensed Consolidated Financial Statements This section presents TriNet Group, Inc.'s unaudited condensed consolidated financial statements as of September 30, 2021, and for the three and nine-month periods then ended, including detailed notes Condensed Consolidated Financial Statements The core financial statements show net income of $77 million for Q3 2021 and $269 million for the nine months, with total assets of $3.07 billion and stockholders' equity increasing to $809 million Q3 & YTD 2021 Income Statement Highlights (in millions) | Metric | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Total revenues | $1,148 | $3,308 | | Operating income | $105 | $364 | | Net income | $77 | $269 | | Diluted EPS | $1.16 | $4.03 | Balance Sheet Highlights (in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total current assets | $2,201 | $2,160 | | Total assets | $3,069 | $3,043 | | Total liabilities | $2,260 | $2,436 | | Total stockholders' equity | $809 | $607 | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies and financial statement line items, covering revenue recognition, restricted cash, investment portfolio, long-term debt, legal contingencies, and stock-based compensation - The company's Recovery Credit program, providing client discounts, was fully recognized as of June 30, 2021, with a total impact of $145 million, while a separate 2021 Credit Program resulted in a $25 million accrual in YTD 2021129132 - As of September 30, 2021, the company held $1.2 billion in restricted cash, cash equivalents, and investments, primarily as collateral for workers' compensation and health benefits claims, and to prefund client payrolls136138 - In February 2021, the company issued $500 million of 3.50% senior unsecured notes due 2029 to repay its 2018 Term Loan and concurrently entered into a new $500 million revolving credit facility154156 - A class action lawsuit was filed against directors of certain TriNet subsidiaries regarding fiduciary obligations for retirement plans, which the company believes is without merit and cannot reasonably estimate any possible loss161 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The MD&A provides management's perspective on TriNet's financial performance, highlighting strong Q3 2021 revenue and income growth driven by increased Worksite Employees (WSEs) and effective cost management, along with liquidity and capital resources Executive Summary TriNet reported strong Q3 2021 performance with significant year-over-year increases in revenues, operating income, and net income, driven by a record-high Total Worksite Employee (WSE) count and strategic operational achievements Q3 2021 Performance Highlights (vs. Q3 2020) | Metric | Value | % Change | | :--- | :--- | :--- | | Total revenues | $1.1B | +18% | | Operating income | $105M | +133% | | Net income | $77M | +133% | | Diluted EPS | $1.16 | +142% | | Average WSEs | 347,502 | +9% | YTD 2021 Performance Highlights (vs. YTD 2020) | Metric | Value | % Change | | :--- | :--- | :--- | | Total revenues | $3.3B | +11% | | Operating income | $364M | +8% | | Net income | $269M | +8% | | Diluted EPS | $4.03 | +10% | | Average WSEs | 333,839 | +3% | - Key operational achievements in the first nine months of 2021 include growing Total WSEs to a record high, establishing the 2021 Credit Program, introducing TriNet Financial Services Preferred, launching the 'Connect 360' service model, and completing a $500 million senior notes offering to refinance debt22 Results of Operations For Q3 2021, total revenues grew 18% to $1.15 billion, driven by a 9% increase in Average WSEs and reduced Recovery Credits, leading to a 133% surge in operating income to $105 million and an Insurance Cost Ratio (ICR) decrease to 86% Financial Summary (in millions) | Metric | Q3 2021 | Q3 2020 | % Change | YTD 2021 | YTD 2020 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenues | $1,148 | $975 | 18% | $3,308 | $2,971 | 11% | | Insurance costs | $851 | $759 | 12% | $2,400 | $2,137 | 12% | | Operating expenses | $192 | $171 | 12% | $544 | $496 | 10% | | Operating income | $105 | $45 | 133% | $364 | $338 | 8% | | Net income | $77 | $33 | 133% | $269 | $250 | 8% | - The growth in total revenues was primarily driven by higher Average WSEs, rate increases, and a significant year-over-year decrease in revenue reduction from the 2020 Recovery Credit program5253 - Insurance costs rose due to increased medical services utilization in 2021 compared to suppressed levels in 2020 caused by the pandemic, combined with costs for COVID-19 testing, treatment, and vaccination6465 - Operating expenses increased mainly due to higher sales and marketing costs, including the TriNet PeopleForce conference, increased payroll taxes, and higher compensation and consulting expenses to improve client experience and systems587274 Non-GAAP Financial Measures The company uses non-GAAP measures like Adjusted EBITDA and Adjusted Net Income to evaluate performance, with Adjusted EBITDA increasing 91% to $132 million in Q3 2021 and Adjusted Net Income growing 123% to $87 million Reconciliation of Net Income to Adjusted EBITDA (in millions) | | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income | $77 | $33 | $269 | $250 | | Adjusted EBITDA | $132 | $69 | $449 | $413 | Reconciliation of Net Income to Adjusted Net Income (in millions) | | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income | $77 | $33 | $269 | $250 | | Adjusted Net Income | $87 | $39 | $302 | $274 | Liquidity and Capital Resources TriNet maintains sufficient liquidity by managing corporate assets separately from WSE obligations, with corporate working capital increasing to $645 million and $334 million in corporate operating cash flow generated in the first nine months of 2021 Working Capital Breakdown (in millions) | | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Corporate Working Capital | $645 | $290 | | WSE Working Capital | $0 | $0 | | Total Working Capital | $645 | $290 | - Corporate working capital increased by $355 million from year-end 2020, driven by a $224 million increase in corporate cash and a $98 million increase in corporate investments84 YTD 2021 Cash Flow Summary (in millions) | Activity | Corporate | WSE | Total | | :--- | :--- | :--- | :--- | | Operating activities | $334 | $(350) | $(16) | | Investing activities | $(133) | $(12) | $(145) | | Financing activities | $20 | $0 | $20 | - In February 2021, the company issued $500 million in 3.50% Senior Notes due 2029, using the proceeds to repay its 2018 Term Loan and for general corporate purposes, and also entered a new $500 million revolving credit facility99100 - During the first nine months of 2021, the company repurchased 1,155,707 shares of its common stock for approximately $94 million, with $264 million remaining available for future repurchases as of September 30, 202198 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure on its investment portfolio, which is managed by investing in liquid, investment-grade securities with short durations, and was not material as of September 30, 2021 - The primary market risk is interest rate risk on the company's investment portfolio, which consists of liquid, investment-grade securities109110 - The company attempts to limit interest rate and credit risk by adhering to an investment policy that sets minimum requirements for credit quality, liquidity, and diversification110 Controls and Procedures The company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting identified during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2021113 - No material changes to the internal control over financial reporting were identified during the third quarter of 2021115 Part II - Other Information This section provides additional information on legal proceedings, risk factors, and equity security sales and repurchases Legal Proceedings This section refers to Note 7 of the condensed consolidated financial statements for details on legal proceedings, including a class action lawsuit related to retirement plans that the company believes is without merit - Information regarding legal proceedings is detailed in Note 7 of the financial statements178 - The primary legal matter discussed is a class action lawsuit filed in September 2020 concerning fiduciary obligations under ERISA for two retirement plans available to worksite employees161 Risk Factors The company states that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020, and its Form 10-Q for the quarter ended June 30, 2021 - There were no material changes in risk factors from those disclosed in the 2020 Form 10-K and the Q2 2021 Form 10-Q177 Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2021, TriNet repurchased approximately $20 million of its common stock as part of a board-authorized program, with $264 million remaining available for future repurchases as of September 30, 2021 Issuer Purchases of Equity Securities (Q3 2021) | Period | Total Shares Purchased | Weighted Avg. Price | Shares Purchased Under Plan | Remaining Authorization ($M) | | :--- | :--- | :--- | :--- | :--- | | July 2021 | 64,972 | $79.95 | 64,690 | $278 | | August 2021 | 212,630 | $87.88 | 165,766 | $264 | | September 2021 | 618 | $91.51 | — | $264 | | Total | 278,220 | | 230,456 | | - The company repurchased a total of approximately $20 million of its stock during the three months ended September 30, 2021182 - As of September 30, 2021, approximately $264 million remained available for repurchase under the company's stock repurchase program, which has no expiration date181