UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2016
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36373
TRINET GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1100 San Leandro Blvd., Suite 400, San Leandro, CA
(Address of principal executive offices)
95-3359658
(I.R.S. Employer
Identification No.)
94577
(Zip Code)
Registrant’s telephone number, including area code: (510) 352-5000
Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.000025 Per Share; Common stock traded on the New York Stock
Exchange.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained,
to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
(do not check if a smaller reporting company)
Smaller reporting company
Accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares
of common stock on The New York Stock Exchange on June 30, 2016, was $865,320,029.
The number of shares of Registrant’s Common Stock outstanding as of February 23, 2017 was 68,268,207.
Portions of the Registrant’s Definitive Proxy Statement to be issued in connection with its Annual Meeting of Stockholders, scheduled to be held on May 18,
2017, are incorporated by reference into Part III of this Form 10-K.
TRINET GROUP, INC.
Form 10-K - Annual Report
For the Year End December 31, 2016
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships, Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
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31
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Cautionary Note Regarding Forward-Looking Statements
For purposes of this Annual Report, the terms “TriNet," "the Company," “we,” “us” and “our" refer to TriNet Group, Inc.,
and its consolidated subsidiaries. This Annual Report on Form 10-K contains statements that are not historical in nature,
are predictive in nature, or that depend upon or refer to future events or conditions or otherwise contain forward-looking
statements within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by the use of words such as,
but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,”
“seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-
looking statements. Examples of forward-looking statements include, among others, TriNet’s expectations regarding:
the growth of our customer base, our ability to roll out additional product offerings as and when planned, our ability to
make enhancements to our technology platform, our ability to remediate the material weaknesses in our internal controls
over financial reporting, our ability to execute on our vertical market strategy and penetrate the market for human
resources (HR) solutions for small to midsize businesses, and other expectations, outlooks and forecasts on our future
business, operational and financial performance.
Forward-looking statements are not guarantees of future performance, but are based on management’s expectations
as of the date of this report and assumptions that are inherently subject to uncertainties, risks and changes in
circumstances that are difficult to predict. Forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause actual results, performance or achievements to be materially different from our current
expectations and any past results, performance or achievements. Important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking statements include:
•
•
•
•
•
•
•
•
•
•
•
•
risks associated with the market acceptance of outsourcing the HR function, and the anticipated benefits associated
with the use of a bundled HR solution;
changes to and our ability to comply with laws and regulations, including both those applicable to the co-employment
relationship as well as those applicable to our clients’ businesses and their employees;
the amendment, repeal, replacement or continuing implementation of the Affordable Care Act and other health
care reform, which may be more challenging in a changing political environment;
our ability to maintain the security of our information technology (IT) infrastructure against cyber-attacks and security
breaches;
our ability to manage unexpected changes in workers’ compensation and health insurance claims by worksite
employees;
the unpredictable nature of our costs and operating expenses, in particular our workers’ compensation and health
insurance costs;
our ability to remediate the material weaknesses in our internal controls over financial reporting;
our ability to effectively acquire and integrate new businesses;
our ability to gain new clients, and our clients’ ability to grow and gain more employees;
volatility in the financial and economic environment to small and mid-sized businesses;
the effects of increased competition and our ability to compete effectively; and
our ability to comply with the restrictions of our credit facility and meet our debt obligations.
Any of these factors, as well as such other factors as discussed in Item 1A, and throughout Part II, Item 7 of this Annual
Report on Form 10-K (Form 10-K), as well as in our periodic filings with the Securities and Exchange Commission
(SEC), could cause our actual results to differ materially from our anticipated results. The information provided in this
Form 10-K is based upon the facts and circumstances known at this time, and any forward-looking statements made
by us in this Form 10-K speak only as of the date on which they are made. All information provided in this report is as
of the date of this report and we undertake no duty to update this information except as required by law.
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Item 1. Business
General
PART I
TriNet is a leading provider of human resources (HR) solutions for small to midsize businesses (SMBs). Under our co-
employment model, we assume many of the complex and burdensome responsibilities of being an employer, helping
our clients minimize employer-related risks and manage administrative and compliance responsibilities associated
with employment. We provide an HR technology platform with online and mobile tools that allow our clients and their
worksite employees (WSEs) to efficiently store, view and manage their core HR-related information and conduct a
variety of HR-related transactions anytime and anywhere. We utilize our size and scale to provide our clients with a
broad range of employee benefit and insurance programs generally not available to individual SMBs. In addition, our
service teams help with talent management, recruiting and training, performance management, employee onboarding
and terminations, benefits enrollment and support, claims administration and employment practices risk management.
We also monitor employer-related developments and assist clients in complying with applicable local, state and federal
regulations.
Our strategy is to provide industry-specific products and services to help clients address their HR needs and allow
them to focus on operating and growing their businesses. We believe our industry-oriented (vertical) approach is a
key differentiator for us and delivers significant benefits to our clients. This allows our sales force, product development
and service teams to tailor product and service offerings to the specific industry needs of our clients. As of December
31, 2016, we have introduced four verticals - TriNet Financial Services, TriNet Life Sciences, TriNet Nonprofit and
TriNet Technology - and we intend to continue to develop and offer new industry vertical products in the future.
TriNet was founded in 1988 and has significantly grown the number of clients we serve, both organically and through
strategic acquisitions, including our acquisitions of SOI Holding, Inc. (SOI) and Park Avenue Holding, Inc. (Accord) in
2012 and Ambrose Employer Group, LLC (Ambrose) in 2013. For the year ended December 31, 2016, we processed
$34 billion in payroll payments for approximately 13,900 clients with about 338,000 WSEs in all 50 states, the District
of Columbia and Canada.
Products and Services
We deliver a comprehensive suite of products and services which allow our clients and their WSEs to administer and
manage HR-related compensation and benefits, including payroll, health insurance and worker's compensation
programs, through our technology platform.
Our comprehensive HR products and solutions include the following common capabilities:
TECHNOLOGY
PLATFORM
Technology Platform
HR EXPERTISE
BENEFITS
COMPLIANCE
Our HR technology platform, with online and mobile tools allows our clients and WSEs to store, view and manage core
HR information and administer a variety of HR transactions, such as payroll processing, tax administration, employee
onboarding and termination, compensation reporting, expense management, and benefits enrollment and
administration.
Our strategy is to continue to invest in product development and improve the functionality, experience and ease of use
of our products and services for clients and their WSEs. We have transformed the way we deliver our products and
services though a full-service online and mobile platform, with standard Application Programming Interfaces (API) for
integrating selected third-party software offerings and with an improved client experience for key processes. We will
continue to integrate functionality and retire legacy software systems inherited from acquisitions and migrate clients
to our primary TriNet software system. We believe the continued improvement of our technology platform and the
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consolidation of legacy systems allows us to drive operating efficiencies and improve the user experience by providing
a unified view of all pertinent HR information.
During 2016, 2015 and 2014 we invested approximately $52.7 million, $38.7 million and $32.4 million, respectively,
developing our technology solutions.
HR Expertise
We use the collective insights and experience of our teams of HR, benefits, risk management and compliance
professionals to help clients mitigate many of the administrative, regulatory and practical risks associated with their
responsibilities as employers, including talent management, recruiting and training, performance management,
employee onboarding and terminations, benefits enrollment and support, claims administration and employment
practices risk management. Our HR teams provide access to templates, handbooks, process guidelines, employee
relations consultation, investigation support, and employee communications. Each of our clients and WSEs have
access to varying levels of service and support from our HR experts ranging from call center support for basic questions
to pooled specialized resources and to onsite consulting and services, depending on the needs of the client and their
WSEs. In addition, our teams of in-house HR professionals can also provide additional, incremental consulting and
other services upon request.
Under our vertical strategy, we continue to tailor our product and service offerings to specific industries by identifying
common needs and leveraging scale and shared experience to provide more efficient, relevant offerings. For example,
our fourth vertical product, TriNet Technology, is specifically targeted to help support the talent recruiting, equity
compensation and foreign employee immigration needs with applicant tracking systems, immigration services for
employees requiring work visas and online tools to help clients manage equity compensation plans that SMBs in other
industries do not face. We now offer four industry specific product offerings: TriNet Technology, TriNet Financial Services,
TriNet Life Sciences and TriNet Nonprofit.
Benefits
We offer our clients and WSEs access to a broad range of TriNet-sponsored benefit and insurance programs that many
of our clients may be unable to obtain for their WSEs on their own and that are compliant with state, local, and federal
regulations. Our insurance services offerings include plan design and administration, enrollment management, and
WSE and client communications relating to our sponsored benefits and insurance programs.
We pay premiums to third-party insurance carriers for WSE insurance benefits and reimburse the insurance carriers
and third-party administrators for claims payments made on our behalf within our insurance deductible layer, where
applicable.
Employee Benefit Plans: We sponsor and administer several fully-insured, risk based employee benefit plans, including
group health, dental, vision and life insurance as an employer plan sponsor under Section 3(5) of the Employee
Retirement Income Security Act (ERISA). We also offer other benefit programs to our clients and WSEs, including
flexible spending accounts, retirement plans, Consolidated Omnibus Budget Reconciliation Act (COBRA) benefits,
individual life insurance, a legal services plan, commuter benefits, home insurance, critical illness insurance, pet
insurance and auto insurance. For further discussion of our fully-insured programs including policies where we
reimburse our carriers for certain amounts relating to claims, refer to Note 1 in Part II, Item 8 of this Form 10-K.
Workers' Compensation: We provide fully-insured workers' compensation insurance coverage for our clients and WSEs
through insurance policies that we negotiate with our third-party insurance carriers. Additionally, we help clients manage
their risk by providing risk management services, including performing workplace assessment, safety consultation,
accident investigation and other risk management services at our client locations to help prevent workplace accidents
that could lead to claims. We also provide services to help remediate such claims when they occur.
We manage the deductible risk that we assume in connection with these policies by being selective in the types of
businesses that we take on as new clients, by monitoring claims data and the performance of our carriers and third-
party claims management services and vendors and by providing risk management services for existing clients.
Employment Practices Liability Insurance (EPLI): We provide EPLI coverage for our clients through insurance policies
that we obtain from our third-party EPLI insurance carrier. These policies provide coverage for certain claims that arise
in the course of the employment relationship such as discrimination, harassment, and certain other employee claims,
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with a per-claim retention amount. For most of our clients, the retention amount is split between the client and TriNet,
with the client paying its portion of the retention amount first.
While we do not provide legal representation to our clients, our clients can benefit from the extensive experience of
our employment law specialists and HR professionals who assist clients in implementing HR best practices to avoid
employment practices liability claims and in managing, processing and responding to such claims. For claims covered
by our EPLI insurance, actual litigation defense is conducted by one of several outside employment law firms with
whom we and our EPLI carriers have previously negotiated rates, established billing guidelines and invoice review
processes. We have also developed a case management protocol to efficiently and effectively defend such claims.
Compliance
Our products and services are designed to help our clients comply with local, state and federal employment and benefit
laws. Often these changes are staggered and require additional guidance from a variety of local, state or federal
agencies, making compliance a continuous challenge. We monitor employer-related developments and assist clients
in complying with changing regulations and requirements at all levels, from changes in local minimum wage and family
leave ordinances to sweeping reforms such as the Patient Protection and Affordable Care Act (ACA). Each component
of our HR solutions is designed with compliance in mind, whether it is payroll processing and tax administration, HR
services focused on creating a compliant workplace, or offering ACA-compliant benefit plans.
Our Co-Employment Model
We operate under a co-employment business model, under which employment-related responsibilities are contractually
allocated between us and our clients. This model allows clients and WSEs to receive the full benefit of our employee
benefit plan offerings. Each of our clients enters into a client service agreement with us that defines the suite of
professional and insurance services and benefits to be provided by us, the fees payable to us, and the division of
responsibilities between us and our clients as co-employers. The division of responsibilities under our client service
agreements is typically as follows:
TriNet Responsibilities
We assume responsibility for, and manage certain risks associated with:
•
•
remittance to WSEs of salaries, wages and certain other compensation, as reported and paid to us by the client,
related tax reporting and remittance to tax authorities and processing of garnishment and wage deduction orders.
Unlike a payroll service provider, we issue each WSE a payroll check drawn on our bank accounts,
report the wages, withhold and deposit the associated payroll taxes as the employer on information reporting and
payroll tax returns,
• maintenance of workers' compensation insurance and workers' compensation claims processing,
•
•
•
•
provision and administration of group health, welfare, and retirement benefits to WSEs under TriNet-sponsored
insurance plans,
compliance with applicable law for employee benefits offered to WSEs,
processing of unemployment claims, and
provision of certain HR policies, including an employee handbook describing the co-employment relationship.
Client Responsibilities
Our clients are responsible for employment-related responsibilities that we do not assume, including:
•
•
•
•
day-to-day management of their worksites and WSEs,
compliance with laws associated with the classification of employees as exempt or non-exempt, such as overtime
pay and minimum wage law compliance,
accurate and timely reporting to TriNet of compensation and deduction information, including information relating
to hours worked, rates of pay, salaries, wages and certain other compensation,
accurate and timely reporting to TriNet of information relating to workplace injuries, employee hires and termination,
and certain other information relevant to TriNet’s services,
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•
•
•
•
provision and administration of any employee benefits not provided by TriNet (e.g., equity incentive plans),
compliance with all laws and regulations applicable to the clients' workplace and business, including work eligibility
laws, laws relating to workplace safety or the environment, laws relating to family and medical leave, laws pertaining
to employee organizing efforts and collective bargaining and employee termination notice requirements,
payment of TriNet invoices which include wages to WSEs and applicable employment taxes and service fees, and
all other matters for which TriNet does not assume responsibility under the client service agreement, such as
intellectual property ownership and protection and liability for products produced and/or services provided.
As a result of our co-employment relationship with each of our WSEs, we are liable for payment of salary, wages and
certain other compensation to the WSEs as reported and paid to us by the client and are responsible for providing
specified employee benefits to such persons to the extent provided in each client service agreement and under federal
and state law. In most instances, clients are required to remit payment prior to the applicable payroll date by wire
transfer or automated clearinghouse transaction (ACH).
We also assume responsibility for payment and liability for the withholding and remittance of federal and state income
and employment taxes with respect to salaries, wages and certain other compensation paid to WSEs, although we
reserve the right to seek recourse against our clients for any liabilities arising out of their conduct. We perform these
functions as the employer for federal employment tax purposes, since our clients transfer legal control over these
payroll functions to us. Except to the extent applicable federal and state laws otherwise provide, the client may be held
ultimately liable for those obligations if we fail to remit taxes and the bonding security provided by the Employer Services
Assurance Corporation (ESAC) is not sufficient to satisfy the obligation.
Sales and Marketing
We sell our solutions primarily through our direct sales organization. We have aligned our sales organization by industry
vertical with the goal of growing profitable market share in our targeted industries. This vertical approach deepens our
network of relationships and gives us an understanding of the unique HR needs facing SMBs in those industries.
The number of sales representatives in the field has grown substantially in recent years, through both internal hiring
and through onboarding sales representatives from acquired businesses, from 224 sales representatives as of
December 31, 2012 to 452 sales representatives as of December 31, 2016. We recruit and seek to hire sales
professionals who have experience in specific industry vertical markets, and with a background in selling business
services such as accounting, HR or sales solutions. As of December 31, 2016, we had 49 regional field sales offices.
We sponsor and participate in associations and events around the country and utilize these forums to target specific
vertical and geographic markets. We also generate sales opportunities within key industry verticals, through marketing
alliances and other indirect channels, such accounting firms, venture capital firms, incubators, insurance brokers, and
other vertical market industry associations. Additionally, we utilize digital marketing programs, including digital
advertising, search and email marketing, to create awareness and interest in our products.
Recently, we have expanded our focus on various channel relationships and alliances that drive referrals to our direct
sales force. Finally, our sales representatives benefit from building strong relationships with prospects during the sales
and client service processes, resulting in referrals to new prospects as well as direct support through providing reference
calls in regard to our products and services.
Legal and Regulatory
Our business operates in a complex environment created by the numerous federal, state and local laws and regulations
relating to labor and employment matters, benefit plans and income and employment taxes. The following summarizes
what we believe are the most important legal and regulatory aspects of our business:
Federal Regulations
Employer Status
We sponsor our employee benefit plan offerings as the “employer” of our WSEs under the Internal Revenue Code of
1986 (the Code), and ERISA. The multiple definitions of “employer” under both the Code and ERISA are not clear and
most are defined in part by complex multi-factor tests under common law. We believe that we qualify as an “employer”
of our WSEs in the U.S. under both the Code and ERISA, as well as various state regulations, but this status could
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be subject to challenge by various regulators. For additional information on employer status and its impact on our
business and results of operations, refer to Item 1A of this Form 10-K, under the heading - If we are not recognized
as an employer of worksite employees under federal and state regulations, or are deemed to be an insurance agent
or third-party administrator, we and our clients could be adversely impacted.
Affordable Care Act and Health Care Reform
The Patient Protection and Affordable Care Act (ACA) was signed into law in March 2010. The ACA implemented
sweeping health care reforms with staggered effective dates from 2010 through 2020, and many provisions in the Act
require the issuance of additional guidance from the U.S. Department of Labor (DOL), the Internal Revenue Service
(IRS), the U.S. Department of Health and Human Services and the states. There could be significant changes to the
ACA and health care in general in 2017 and beyond, including the potential modification, amendment or repeal of the
ACA. For additional information on the ACA and its impact on our business and results of operations, refer to Item 1A
of this Form 10-K, under the heading - Our business is subject to numerous complex state and federal laws, and
changes in, uncertainty regarding, or adverse application of these laws could adversely affect our business.
Health Insurance Portability and Accountability Act
Maintaining the security of our WSEs information is important to TriNet as we sponsor employee benefit plans and
may have access to personal health information of our WSEs. The manner in which we manage protected health
information (PHI) is subject to the Health Insurance Portability and Accountability Act of 1996 (HIPAA), and the Health
Information Technology for Economic and Clinical Health Act of 2009 (HITECH Act). HIPAA contains substantial
restrictions and health data privacy, security and breach notification requirements with respect to the use and disclosure
of PHI. Further, under the HITECH Act there are steep penalties and fines for HIPAA violations. Our health plans are
covered entities under HIPAA, and we are therefore required to comply with HIPAA's portability, privacy, and security
requirements.
However, only our Flexible Spending Accounts and SOI dental plans come into direct contact with PHI. The other
health information we possess is anonymized and accessed through a secured third-party database. For additional
information on how we maintain the confidentiality of our clients' and WSEs' personal data and PHI and the potential
impact to our business if we fail to protect our WSEs' PHI, refer to Item 1A of this Form 10-K, under the heading -
Cyber-attacks or security breaches could result in reduced revenue, increased costs, liability claims or damage to our
reputation.
Certified Professional Employer Organization (PEO)
With passage of the Small Business Efficiency Act in 2014, the U.S. Congress clarified the employer status of PEOs
who voluntarily become certified under this law for federal tax purposes under the Code. The IRS has started accepting
applications for certification under the Code, and we intend to apply for certification, even though final regulations for
the certification program have not yet been issued.
State Regulations
Forty-two states have adopted provisions for licensing, registration, certification or recognition of co-employers, and
others are considering such regulation. Such laws vary from state to state but generally provide for monitoring or
ensuring the fiscal responsibility of PEOs, and in some cases codify and clarify the co-employment relationship for
unemployment, workers' compensation and other purposes under state laws. We believe we are in compliance in all
material respects with the requirements in all 42 states.
We must also comply with state unemployment tax requirements where our clients are located. State unemployment
taxes are based on taxable wages and tax rates assigned by each state. The tax rates vary by state and are determined,
in part, based on our prior years’ compensation and unemployment claims experience in each state. Certain rates are
also determined, in part, by each client’s own compensation and unemployment claims experience. In addition, states
have the ability under law to increase unemployment tax rates, including retroactively, to cover deficiencies in the
unemployment tax funds.
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Strategic Acquisitions
Historically, we have pursued strategic acquisitions to both expand our product capabilities and supplement our growth
across geographies and certain industry verticals. Our acquisition targets have included other bundled HR providers
as well as technology companies or technology product offerings to supplement or enhance our existing HR solutions.
We intend to continue to pursue strategic acquisitions that will enable us to add new clients and WSEs, expand our
presence in certain geographies or industry verticals and offer our clients and WSEs more comprehensive and attractive
products and services.
Client Industries and Geographies
Our clients are distributed across a variety of industries including technology, life sciences, not-for-profit, professional
services, financial services, property management, retail, manufacturing, and hospitality. Our clients execute annual
service contracts with us that automatically renew. Generally, our clients may cancel these contracts with thirty to ninety
days' notice and we may cancel these contracts with thirty days' notice.
We conduct our business primarily in the United States of America (U.S.), with more than 99% of our total revenues
being attributable to WSEs in the U.S. and the remainder being attributable to WSEs in Canada. Substantially all our
long-lived assets are located in the U.S.
Seasonality
Our business is affected by seasonality in business activity and WSE behavior. Clients generally change their payroll
service providers at the beginning of the payroll tax year and as a result, we have historically experienced our highest
volumes of new and exiting clients in the month of January. Other periods of client changes coincide with a client's
benefit program renewal.
Competition
Our competitors include large PEOs such as the TotalSource unit of Automatic Data Processing, Inc. and Insperity,
Inc., as well as specialized and smaller PEOs and similar HR service providers with PEO operations. If and to the
extent that we and other companies providing these services are successful in growing our businesses, we anticipate
that future competitors will enter this industry.
In addition to competition from other PEOs, we also face significant competition from companies that serve part of a
clients’ HR needs. These forms of competition include providers of endpoint HR services, employee benefit exchanges
that provide benefits administration services and insurance brokers who allow third-party HR systems to integrate with
their insurance services platform. Such competitors may have greater marketing and financial resources than we have,
and may be better positioned than we are in certain markets. Increased competition in our industry could result in price
reductions or loss of market share, any of which could harm our business. We expect that we will continue to experience
competitive pricing pressure.
We believe the principal competitive factors in our market include client satisfaction, ease of client setup and on-
boarding, breadth and depth of benefit plans, vertical market expertise, total cost of service, brand awareness and
reputation, ability to innovate and respond to client needs rapidly, online and mobile solutions, and subject matter
expertise. We believe that we compete favorably on the basis of each of these factors.
Intellectual Property
We own or license from third parties' various computer software, as well as other intellectual property rights, used in
our business. Generally, we protect our intellectual property rights through the use of confidentiality and non-disclosure
agreements and policies with our employees and third-party partners and vendors, although we currently have one
pending U.S. patent application covering our technology. We also own registered trademarks in the U.S., Canada and
the European Union covering our name and other trademarks and logos that we believe are materially important to
our operations.
Corporate Employees
We refer to our employees that we do not co-employ with our clients as our corporate employees. We had approximately
2,600 corporate employees as of December 31, 2016. None of our corporate employees are covered by a collective
bargaining agreement.
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Corporate and Other Available Information
We were incorporated in 1988 as TriNet Employer Group, Inc., a California corporation. We reincorporated as TriNet
Merger Corporation, a Delaware corporation, in 2000 and during that year changed our name to TriNet Group, Inc.
Our principal executive offices are located at 1100 San Leandro Blvd., Suite 400, San Leandro, CA 94577 and our
telephone number is (510) 352-5000. Our website address is www.trinet.com. Information contained in or accessible
through our website is not a part of this report.
On the Investor Relations page of our Internet website at http://www.trinet.com, we make available, free of charge, our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to
those reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports,
proxy and information statements and other information regarding issuers that file electronically with the SEC
at www.sec.gov. The contents of these websites are not incorporated into this report and are not part of this report.
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RISK FACTORS
Item 1A. Risk Factors
Our business is subject to numerous complex laws, and changes in, uncertainty regarding, or adverse application of
these laws could negatively affect our business.
The products and services we provide to our clients are governed by numerous complex federal, state and local laws
and regulations, including those described under the heading "Legal and Regulatory" in Item 1 of this Form10-K. Many
of these laws (such as ERISA and federal and state employment tax laws, wage and hour laws, anti-discrimination
laws, etc.) may not result in a consistent approach at the federal, state and local level, do not specifically address
PEOs and co-employment relationships or may allow significant regulatory interpretation and discretion in enforcement.
As a result, there is uncertainty in how they might be applied to our operations and those of our clients and WSEs.
New laws, changes in existing laws, or adverse application or interpretation (in courts, agencies or otherwise) of new
or existing laws regarding our co-employment relationship with our clients and WSEs could reduce or eliminate the
need for, or benefit provided by, some or all of the services we provide or require us to make significant changes in
our methods of doing business and providing services, which could have a material adverse effect on our financial
condition and results of operations. Regulatory changes could affect the extent and type of employee benefits employers
can or must provide employees, the amount and type of taxes employers and employees are required to pay or the
time within which employers must remit taxes to the applicable tax authority. For example, continued uncertainty
regarding the implementation and future of health care reform in the U.S. under the ACA, any successor to the ACA,
related or similar state laws, and the regulations adopted or to be adopted thereunder, has the potential to substantially
change the health insurance market for SMBs and how such employers provide health insurance to their employees,
which could have a materially adverse effect on our ability to attract and retain our clients. In addition, there could be
significant changes to the ACA in 2017 and beyond, including the potential modification, amendment or repeal of the
ACA. Changes to the ACA could also result in new or amended regulations being introduced at the state or local level.
Changes in, or uncertainty regarding, the ACA and other health care reforms could impact our business and we are
not able to predict the direction or ultimate impact of health care reform on our business operations.
Similarly, state regulatory authorities generally impose licensing requirements on companies acting as insurance agents
or third-party administrators, such as those that handle health or retirement plan funding and claim processing. We do
not believe that our current activities require such licensing, but if regulatory authorities in any state determine that we
are acting as an insurance agent or as a third-party administrator, we may need to hire additional personnel to manage
regulatory compliance and become obligated to pay annual regulatory fees, which could have a material adverse effect
on our financial condition and results of operations.
Our co-employment relationship with our worksite employees exposes us to business risks.
We are the co-employer of our WSEs. As the co-employer of our WSEs, we assume certain obligations and
responsibilities of an employer. For instance, we are responsible for providing benefits to our WSEs regardless of
whether the cost of providing benefits exceeds the fees received from our clients. Under certain circumstances, it could
be argued that we are, or we may be found to be, responsible for paying salaries, wages and related payroll taxes of
our WSEs, regardless of whether our client timely remits payments to us.
We co-employ people in our clients' workplaces. Our ability to control the workplace environment of our clients is
limited. As a co-employer of our WSEs, there is a possibility that we may be subject to liability for violations of employment
or other laws and other acts and omissions by our clients or WSEs, who may be deemed to be our agents, even if we
do not participate in any such acts or violations.
We seek to mitigate these risks through our client agreements and with employment practices liability insurance
coverage. Our agreements with our clients establish the contractual division of responsibilities between us and our
clients and that they will indemnify us for any liability attributable to their own or our WSEs' conduct, however, we may
not be able to effectively enforce or collect on these contractual obligations. In addition, we maintain employment
practices insurance to limit our and our clients' exposure to various WSE related claims, but we are still responsible
for any deductible layer under such insurance and such insurance generally excludes coverage for claims relating to
the classification of employees as exempt or non-exempt, other wage and hour issues, and employment contract
disputes, among other things. We cannot assure you that our insurance will be sufficient in amount or scope to cover
all claims that may be asserted against us and for which we are unable to obtain indemnification from our clients.
Negative publicity relating to events or activities attributed to us, our corporate employees, our WSEs, or others
associated with any of these parties, whether or not justified, may tarnish our reputation and reduce the value of our
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brand. In addition, if our brand is negatively impacted, it may have a material adverse effect on our business, including
creating challenges in retaining clients or attracting new clients and hiring and retaining employees.
If we are not recognized as an employer of worksite employees under federal and state regulations, or are deemed to
be an insurance agent or third-party administrator, we and our clients could be adversely impacted.
In order to sponsor our employee benefit plan offerings for our WSEs, we must qualify as an employer of our WSEs
for certain purposes under the Code and ERISA. In addition, our status as an employer is important for purposes of
ERISA’s preemption of certain state laws. The definition of employer under various laws is not uniform, and under both
the Code and ERISA, the term is defined in part by complex multi-factor tests.
Generally, these tests are designed to evaluate whether an individual is an independent contractor or employee and
they provide substantial weight to whether a purported employer has the right to direct and control the details of an
individual's work. Some factors that the IRS has considered important in the past have included the employer’s degree
of behavioral control (the extent of instructions, training and the nature of the work), the financial control and the
economic aspects of the relationship, and the intent of the parties, as evidenced by the specific benefit, contract,
termination and other similar arrangements between the parties and the on-going versus project-oriented nature of
the work to be performed. However, a definitive judicial interpretation of “employer” in the context of PEOs has not
been established. For ERISA purposes, for example, courts have held that test factors relating to ability to control and
supervise an individual are less important, while the U.S. Department of Labor has issued guidance that certain entities
in the HR outsourcing industry do not qualify as common law employers for ERISA purposes. Although we believe that
we qualify as an employer of our WSEs under ERISA and the U.S. Department of Labor has not provided guidance
otherwise, we are not able to predict the outcome of any future regulatory challenge.
If we were found not to be an employer for ERISA purposes, it could adversely affect the manner in which we are able
to provide employee benefits to our WSEs. Similarly, to qualify for favorable tax treatment under the Code, certain
employee benefit plans such as 401(k) retirement plans and cafeteria plans must be established and maintained by
an employer for the exclusive benefit of its employees. All of our 401(k) retirement plans are operated pursuant to
guidance provided by the IRS and we have received favorable determination letters from the IRS confirming the qualified
status of the plans. However, the IRS uses its own complex, multi-factor test to ascertain whether an employment
relationship exists between a worker and a purported employer. Although we believe that we qualify as an employer
of our WSEs under the Code, we cannot assure you that the IRS will not challenge this position or continue to provide
favorable determination letters. Moreover, the IRS' 401(k) guidance and qualification requirements are not applicable
to the operation of our cafeteria plans.
If we are not recognized as an employer under the Code or ERISA, we may be required to change the method by
which we report and remit payroll taxes to the tax authorities and the method by which we provide, or discontinue
providing, certain employee benefits to our WSEs, which could have a material adverse effect on our business and
results of operations.
We must also qualify as an employer of our WSEs under state regulations, which govern licensing, certification and
registration requirements for PEOs. Forty-two states have passed such laws and other states may implement such
requirements in the future. While we believe that we qualify as an employer of our WSEs under these state regulations,
these requirements vary from state to state and change frequently and if we are not able to satisfy existing or future
licensing requirements or other applicable regulations of any states, we may be prohibited from doing business in that
state.
Cyber-attacks or security breaches could result in reduced revenue, increased costs, liability claims or damage to our
reputation.
Maintaining the security of our IT infrastructure and the confidentiality of our, our clients' and WSEs' personal data and
information is paramount for us and our clients. Clients using our technology platform rely on the security of our IT
infrastructure to ensure the reliability of our products and services and the protection of their and their WSEs data. We
use and store significant personal data and confidential information about our clients, WSEs and employees, including
bank account and social security numbers, tax return data, certain medical information, retirement account information
and payroll data. Threats to security can take a variety of forms. Hackers may develop and deploy viruses, worms and
other malicious software programs that attack our networks and data centers. Sophisticated organizations or individuals
may launch targeted attacks using novel methods to gain access to our networks, applications and confidential data.
Although we rely on standard security systems, development practices and third-party assessment service to provide
the security and authentication necessary to effect secure transmission of data, these threats may result in breaches
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RISK FACTORS
of our network or data security, disruptions of our internal systems and business applications, impairment of our ability
to provide services to our customers, product development delays, harm to our competitive position from the
compromise of confidential business information, or other negative impacts on our business.
Maintaining the security of our WSEs' information is particularly important to us as a sponsor of employee benefit plans
with access to certain personal health information. The manner in which we manage protected health information (PHI)
is subject to HIPAA and the HITECH Act. Although we maintain, and actively seek to improve, security measures and
infrastructure designed to protect against unauthorized access to this sensitive data, cyber-attacks and security
breaches remain a significant threat to our business. Any security breach could result in the access, public disclosure,
loss or theft of the confidential and personal data of our clients and WSEs, which could negatively affect our ability to
attract new clients, cause existing clients to terminate their agreements with us, result in reputational damage and
subject us to lawsuits, regulatory fines, or other actions or liabilities which could materially and adversely affect our
business and operating results.
In providing our services, we also rely on third-party service providers and products, such as insurance carriers, to
process sensitive information about our clients, WSEs and employees. Through contractual provisions, we take steps
to require that our service providers protect sensitive information. However, we cannot provide assurances as to the
security steps taken by such providers. Any security breach or other disruption of our third-party service providers that
results in an inadvertent disclosure or loss of confidential information could adversely affect our reputation and our
business.
We devote resources to defend against security threats, both to our internal IT systems and those of our customers.
We focus our defense efforts on the following cyber-security discipline areas:
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security threat detection and prevention,
data loss prevention,
identity and access management,
audit, policies and controls, and
product security.
The cost of these precautionary measures could reduce our operating margins.
Any cyber-attack or security breach that accesses or discloses sensitive data may affect negatively our reputation and
our client relationships, and the cost of remediating any attack, breach or disclosure could have a material adverse
effect on our business.
Unexpected changes in workers' compensation and health insurance claims by worksite employees could harm our
business.
Our insurance costs, which make up a significant portion of our overall costs, are impacted significantly by our WSEs’
health and workers' compensation insurance claims experience. We establish reserves to provide for the estimated
costs of reimbursing our workers' compensation and health insurance carriers under our insurance policies, but the
volume and severity of claims activity is inherently unpredictable. If we experience a sudden or unexpected increase
in claim activity, our costs could increase, and it could be more difficult to secure replacement insurance policies on
competitive terms once our current policies expire. Estimating these reserves involves our consideration of a number
of factors and requires significant judgment. If there is an unexpected increase in the severity or frequency of claims
activity of our WSEs (including activity arising from any of a number of factors that affect claim activity levels, such as
changes in general economic conditions, claims differing significantly from expectations for new and existing clients,
proposed and enacted regulatory changes, and terrorism, disease outbreaks or other catastrophic events ), or if we
subsequently receive updated information indicating insurance claims were higher than previously estimated and
reported, our insurance costs could be higher in that period or subsequent periods as we adjust our reserves accordingly,
which could have a material adverse effect on our business. We have experienced insurance cost variability due to
claims activity in the past and could have similar or worse experience in the future.
Our fully-insured agreements with our health insurance carriers include non-guaranteed cost policies that typically
include limits to our exposure for individual claims, which are referred to as pooling limits, and limits to our maximum
aggregate exposure for claims in each policy year. Refer to Note 1 in Part II, Item 8 of this Form 10-K for further
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RISK FACTORS
discussion of these policies. We have experienced variability, and may experience variability in the future, in the amounts
that we are required to pay our health insurance carriers for group health insurance expenses incurred by WSEs within
our deductible layer under non-guaranteed cost policies, based on continually changing trends in the frequency and
severity of claims. These historical trends may change, and other seasonal trends and variability may develop, which
may make it more difficult for us to manage this aspect of our business and which may have a material adverse effect
on our business.
Client unemployment tax rates can change based on factors outside of our control, which could adversely affect client
retention and growth.
We must comply with federal unemployment tax regulations and state unemployment tax regulations where our clients
are located. Unemployment taxes are generally based on taxable wages. The tax rates vary by state and are determined,
in part, based on our prior years’ compensation and unemployment claims experience in each state. Certain rates are
also determined, in part, by each client’s own compensation and unemployment claims experience. In addition, some
states can retroactively increase unemployment tax rates to cover deficiencies in the unemployment tax funds, and
federal unemployment taxes can be retroactively increased in states that have failed to timely repay federal
unemployment loans. It may be difficult for us to recover increased taxes from our clients in the event of such retroactive
tax increases.
In addition, adverse U.S. economic conditions and associated reductions in employment levels can place strain on
unemployment systems, which has resulted in substantial increases in state and federal unemployment tax rates over
the past few years and this trend may continue. In some states, our clients may face higher rates as a result of these
increases under a co-employment relationship with us than they would alone. While we have taken steps to mitigate
the risk of fluctuations in state and federal unemployment tax rates, including reporting and remitting unemployment
insurance taxes or contributions at the client level and/or under the client’s own account number in approximately 40
states, unexpected state and federal unemployment tax increases or regulatory changes could adversely affect our
ability to retain existing clients or attract new clients.
Our results of operations may fluctuate as a result of numerous factors, many of which are outside of our control.
Our future operating results are subject to quarterly variations based upon a variety of factors, many of which are not
within our control, including, without limitation:
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•
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•
•
•
•
•
the volume and severity of health and workers' compensation insurance claims by our WSEs, recorded as part of
our insurance costs, and the timing of related claims information provided by our insurance carriers,
the amount and timing of our other insurance costs, operating expenses and capital expenditures
the number of our new clients initiating service and the number of WSEs employed by each new client,
the loss or merger of existing clients,
reduction in the number of WSEs employed by existing clients,
the timing of client payments and payment defaults by clients,
costs associated with our acquisitions of companies, assets and technologies,
payments or drawdowns on our credit facility,
unanticipated expenses such as litigation or other dispute-related settlement payments,
expenses we incur for geographic and service expansion,
changes in laws or adverse interpretation of laws increasing our regulatory compliance costs,
changes in our effective tax rate, and
the impact of new accounting pronouncements.
Many of the above factors are discussed in more detail elsewhere in this “Risk Factors” section and in Part II, Item 7
of this Form 10-K. Many of these factors are outside our control, and the variability and unpredictability of these factors
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RISK FACTORS
have in the past and could in the future cause us to fail to meet our expectations and the expectations of investors and
any industry analysts who cover our shares for revenues or other results of operations for a given period, which could
result in a decline in our share price and reduced liquidity in our shares. In addition, the occurrence of one or more of
these factors might cause our results of operations to vary widely, which could lead to negative impacts on our margins,
short-term liquidity or ability to retain or attract key personnel, and could cause other unanticipated issues, including
a downgrade of our shares by or change in opinion of industry analysts and a related decline in our share price.
Accordingly, we believe that quarter-to-quarter and annual comparisons of our revenues, results of operations and
cash flows may not be meaningful and should not be relied upon as an indication of our future performance.
Any failure in our business systems could reduce the quality of our business services, which could harm our reputation
and expose us to liability.
Our business systems rely on the complex integration of numerous hardware and software subsystems to manage
client transactions including the processing of employee, payroll and benefits data. These systems can be disrupted
by, among other things, equipment failures, computer server or systems failures, network outages, malicious acts,
software errors or defects, vendor performance problems, power failures, natural disasters, terrorist actions or similar
events. Any delay or failure in our systems that impairs our ability to communicate electronically with our clients,
employees or vendors or our ability to store or process data could harm our reputation and our business. For example,
errors in our products and services, such as the erroneous denial of healthcare benefits or delays in making payroll,
could expose our clients to liability claims from improperly serviced WSEs, for which we may be contractually obligated
to provide indemnification.
In addition, the software, hardware and networking technologies we use must be frequently and rapidly upgraded in
response to technological advances, competitive pressures and consumer expectations. To succeed, we need to
effectively develop, or license from third parties, and integrate these new technologies as they become available to
improve our services. We rely on enterprise software applications licensed from third parties that are upgraded from
time to time. Any difficulties we encounter in adapting application upgrades to our systems could harm our performance,
delay or prevent the successful development, introduction or marketing of new services.
New products or upgrades may not be released according to schedule, or may contain defects when released. Difficulties
in integrating new technologies could result in adverse publicity, loss of sales, delay in market acceptance of our
services, or client claims against us, any of which could harm our business. We could also incur substantial costs in
modifying our services or infrastructure to adapt to these changes. In addition, we could lose market share if our
competitors develop technologically superior products and services.
We have identified material weaknesses in our internal control over financial reporting that could, if not remediated,
result in material misstatements in our financial statements.
In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2016,
we have identified and concluded that we continue to have material weaknesses relating to our internal control over
financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated
financial statements will not be prevented or detected on a timely basis. Refer to Part II, Item 9A in this Form 10-K for
more details. While the material weaknesses described in that section create a reasonable possibility that an error in
financial reporting may go undetected, after extensive review and the performance of additional analysis and other
procedures, no material adjustments, restatement or other revisions to our previously issued financial statements were
required.
As further described in Part II, Item 9A of this form 10-K below, we are taking specific steps to remediate the material
weaknesses that we identified by implementing and enhancing our control procedures. These material weaknesses
will not be remediated until all necessary internal controls have been implemented, repeatably tested and determined
to be operating effectively. In addition, we may need to take additional measures, including system migration and
automation, to address the material weaknesses or modify the remediation steps, and we cannot be certain that the
measures we have taken, and expect to take, to improve our internal controls will be sufficient to address the issues
identified, to ensure that our internal controls are effective or to ensure that the identified material weaknesses will not
result in a material misstatement of our annual or interim consolidated financial statements. Implementing any
appropriate changes to our internal controls may distract our officers and employees and require material cost to
implement new process or modify our existing processes. Moreover, other material weaknesses or deficiencies may
develop or be identified in the future. If we are unable to correct material weaknesses or deficiencies in internal controls
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RISK FACTORS
in a timely manner, our ability to record, process, summarize and report financial information accurately and within the
time periods specified in the rules and forms of the U.S. Securities and Exchange Commission, will be adversely
affected. This failure could negatively affect the market price and trading liquidity of our common stock, lead to delisting,
cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations
and penalties, and generally materially and adversely impact our business and financial condition.
We have acquired, and may in the future acquire, other businesses and technologies, which can divert management's
attention and create integration risks and other risks for our business.
We have completed numerous acquisitions of other businesses and technologies, and we expect that we will continue
to grow through similar future acquisitions. Such acquisitions involve numerous other risks, including:
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identifying attractive acquisition candidates,
over-valuing and over-paying for acquisition candidates,
integrating the operations, systems, technologies, services and personnel of the acquired companies, including
the migration of WSEs from an acquired company’s technology platform to ours,
establishing or maintaining internal controls, procedures and policies relating to the acquired systems and
processes, including the potential for actual or perceived control weaknesses associated with or arising from the
acquisitions and integration of acquired systems,
diversion of management’s attention from other business concerns,
litigation resulting from activities of the acquired company, including claims from terminated employees, clients,
former stockholders and other third parties,
insufficient revenues to offset increased expenses associated with the acquisitions and unanticipated liabilities of
the acquired companies,
insufficient indemnification or security from the selling parties for legal liabilities that we may assume in connection
with our acquisitions,
entering markets in which we have no prior experience and may not succeed,
risks associated with foreign acquisitions, such as communication and integration problems resulting from
geographic dispersion and language and cultural differences, compliance with foreign laws and regulations and
general economic or political conditions in other countries or regions,
potential loss of key employees of the acquired companies, and
impairment of relationships with clients and employees of the acquired companies or our clients and employees
as a result of the integration of acquired operations and new management personnel.
If we fail to integrate newly acquired businesses effectively, we might not achieve the growth, service enhancement
or operational efficiency objectives of the acquisitions, and our business, results of operations and financial condition
could be harmed.
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RISK FACTORS
We may pay for acquisitions by issuing additional shares of our common stock, which would dilute our stockholders,
or by issuing debt, which could include terms that restrict our ability to operate our business or pursue other opportunities
and subject us to meaningful debt service obligations. We may also use significant amounts of cash to complete
acquisitions. To the extent that we complete acquisitions in the future, we likely will incur future depreciation and
amortization expenses associated with the acquired assets. We may also record significant amounts of intangible
assets, including goodwill, which could become impaired in the future. Any such impairment charges would adversely
affect our results of operations.
Our SMB clients are particularly affected by volatility in the financial and economic environment, which could harm our
business.
Our clients are small and mid-sized businesses that we believe can be particularly susceptible to changes in the level
of overall economic activity in the markets in which we operate. During periods of weak economic conditions, small
business failures tend to increase and employment levels tend to decrease. Current or potential clients may react to
weak or forecasted weak economic conditions by reducing employee headcount or wages, bonuses or benefits levels,
any of which would affect our revenues, and may affect our margins, because we may be unable to reduce our operating
expenses sufficiently enough or quickly enough to offset the drop in revenues. It is difficult for us to forecast future
demand for our services due to the inherent difficulty in forecasting the direction, strength and length of economic
cycles. These conditions may affect the willingness of our clients and potential clients to pay outside vendors for services
like ours, and may impact their ability to pay their obligations to us on time, or at all. In addition, as a result of
macroeconomic factors, interest rates may become more volatile. Rising interest rates may negatively affect our net
income due to increased interest expense. Increased interest rate volatility could also negatively impact our clients'
and prospects' access to credit. If businesses have difficulty obtaining credit, business growth and new business
formation may be impaired, which could also harm our business.
Even modest downturns in economic activity on a regional or national level could have a material adverse effect on
our financial condition or results of operations.
Our business and operations have experienced rapid growth in recent periods, and if we are unable to effectively
manage this growth, our business and results of operations may suffer.
We have experienced rapid growth and have significantly expanded our operations in recent periods, which has placed
a strain on our management and our administrative, operational and financial infrastructure. Managing this growth
requires us to further refine our operational, financial and management controls and reporting systems and procedures.
Our ability to effectively manage any significant growth of our business will depend on a number of factors, including
our ability to do the following:
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effectively recruit, integrate, train and motivate new employees, while retaining our existing employees, maintaining
the beneficial aspects of our corporate culture and effectively executing our business plan,
satisfy our existing clients and identify and acquire new clients,
enhance the breadth and quality of our services,
continue to improve our operational, financial and management controls, and
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• make sound business decisions in light of the scrutiny associated with operating as a public company.
These activities will require significant operating and capital expenditures and allocation of valuable management and
employee resources, and we expect that our growth will continue to place significant demands on our management
and on our operational and financial infrastructure.
Our future financial performance and our ability to execute on our business plan will depend, in part, on our ability to
effectively manage any future growth. We cannot assure you that we will be able to do so in an efficient or timely
manner, or at all. In particular, any failure to successfully implement systems enhancements and improvements will
likely negatively impact our ability to manage our expected growth, ensure uninterrupted operation of key business
systems and comply with the rules and regulations that are applicable to public companies. If we fail to manage our
growth effectively, our costs and expenses may increase more than we expect them to, which in turn could harm our
business, financial condition and results of operations.
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RISK FACTORS
If our vertical strategy is unsuccessful, we may not be able to grow our business at historical rates we experienced.
We have developed an industry vertical business strategy and we plan to continue to devote significant resources and
time in pursuit of this strategy. Under our industry vertical strategy, our sales force, product development, and service
teams are increasingly focused on specific business sectors. We cannot assure you that our industry vertical approach
will resonate with our existing and prospective clients or that we will target the right industries or implement our strategy
in a timely and effective manner. If our vertical strategy is unsuccessful, our business may not grow at the rate that we
anticipate, which could have a material adverse effect on our financial condition and results of operations.
We have rapidly grown our direct sales force historically and we currently expect to rely on this sales force to promote
our industry vertical strategy and sell our solutions. Competition for skilled sales personnel is intense, and we cannot
assure you that we will be successful in attracting, training and retaining qualified sales personnel, or that our newly
hired sales personnel will function effectively, either individually or as a group. In addition, our newly hired sales
personnel are typically not productive for some period of time following their hiring. This results in increased near-term
costs to us relative to the sales contributions of these newly hired sales personnel. If we are unable to effectively train
our sales force and benefit from greater productivity of our sales representatives, or if our sales force is otherwise
unable to sell our solutions as we anticipate, our revenues likely will not increase at the rate that we anticipate, which
could have a material adverse effect on our business, financial condition and results of operations.
We are subject to legal proceedings that may result in adverse outcomes.
We are subject to claims, suits, government investigations, and proceedings arising from the ordinary course of our
business. Refer to Note 13 in Part II, Item 8 of this Form 10-K for additional information about the legal proceedings
we are currently involved in and future proceedings that we may face. Current and future legal proceedings may result
in substantial costs and may divert management’s attention and resources, which may seriously harm our business,
results of operations, financial condition and liquidity.
Changes in our income tax positions or adverse outcomes resulting from on-going or future tax audits, which could
harm our business, operating results, financial condition and prospects.
Significant judgments and estimates are required in determining our provision for income taxes and other tax liabilities.
Our provision for income taxes, results of operations and cash flows may be impacted if any of our tax positions are
challenged and successfully disputed by the tax authorities. In determining the adequacy of our tax provision, we
assess the likelihood of adverse outcomes that could result if our tax positions were challenged by the IRS and other
tax authorities. The tax authorities in the U.S. regularly examine our income and other tax returns. Refer to Note 12 in
Part II, Item 8 of this Form 10-K for additional details regarding our on-going tax examinations and disputes. The
ultimate outcome of tax examinations and disputes cannot be predicted with certainty. Should the IRS or other tax
authorities assess additional taxes as a result of these or other examinations, we may be required to record charges
to operations that could have a material impact on our results of operations, financial position or cash flows.
Adverse changes in our relationships with key vendors, particularly our employee benefit and workers' compensation
insurance carriers, could harm our business.
Our success depends in part on our ability to establish and maintain arrangements and relationships with the key
vendors that supply us with essential components of our services, particularly including the insurance carriers that
provide health and workers' compensation insurance coverage for our WSEs. Failure by these service providers, for
any reason, to deliver their services in a timely or cost effective manner could result in material interruptions to our
operations, impact client relations, and result in significant penalties or other liabilities to us. If any of these vendors
decide to terminate their relationship with us, particularly our employee benefit carriers, we may have difficulty obtaining
replacement services at reasonable rates or on a timely basis, if at all. The loss of any one or more of our key vendors,
or our inability to partner with certain vendors that are better-known or more desirable to our clients or potential clients,
could have a material adverse effect on our financial condition and results of operations.
For example, if we are unable to maintain and offer competitive health and/or workers' compensation insurance rates
to our clients through well-known insurance carriers, it could affect our ability to attract and retain clients, which would
have a material adverse effect on our business. Where we offer our clients and their WSEs group health insurance
policies with respect to which our carriers set the premiums and for which we are not responsible for any deductible,
the rates set by our carriers on such policies may not be competitive. Further, for policies with respect to which we
agree to reimburse our carriers for any claims that they pay within an agreed-upon deductible layer, we may not be
able to control costs through the deductible layer in a way that would make our rates competitive. In addition, broad
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RISK FACTORS
adoption of our services in certain geographies or industries may make it more difficult for us to obtain competitive
health and/or workers' compensation insurance rates due to concentration of clients within a particular geography or
industry.
We are subject to client attrition.
We regularly experience client attrition due to a variety of factors, including cost, client merger and acquisition activity,
increases in administrative fees and insurance costs, client business failure, effects of competition and clients deciding
to bring their HR administration in-house. Our standard client service agreement can be cancelled by us or by the
client without penalty with 30 days’ prior written notice. Clients who intend to cease doing business with us often elect
to do so effective as of the beginning of a calendar year. As a result, we have historically experienced our largest
concentration of client attrition in the first quarter of each year. In addition, we experience higher levels of client attrition
in connection with renewals of the health insurance we provide for WSEs in the event that such renewals result in
increased premiums that we pass on to our clients. If we were to experience client attrition in excess of our historic
annual attrition rate, it could have a material adverse effect on our business, financial condition and results of operations.
The terms of our credit facility may restrict our current and future operations, which would impair our ability to respond
to changes in our business and to manage our business.
Our credit facility contains, and any future indebtedness of ours would likely contain, a number of restrictive covenants
that impose significant operating and financial restrictions on us subject to customary exceptions, including restricting
our ability to:
•
•
•
incur, assume or guarantee additional debt,
pay dividends or distributions or redeem or repurchase capital stock,
incur or assume liens,
• make loans, investments and acquisitions,
•
•
•
•
•
•
•
•
engage in sales of assets and subsidiary stock,
enter into sale-leaseback transactions,
enter into certain transactions with affiliates,
enter into certain hedging agreements,
enter into new lines of business,
prepay certain indebtedness,
transfer all or substantially all of our assets or enter into merger or consolidation transactions with another person,
and
enter into agreements that prohibit the incurrence of liens or the payment by our subsidiaries of dividends and
distributions.
Our failure to comply with these restrictions and the other terms and conditions under our credit facility could result in
a default, which in turn could result in the termination of the lenders’ commitments to extend further credit to us under
our credit facility and acceleration of a substantial portion of our indebtedness then outstanding under our credit facility.
If that were to happen, we may not be able to repay all of the amounts that would become due under our indebtedness
or refinance our debt, which could materially harm our business and force us to seek bankruptcy protection.
Atairos, our largest stockholder, may have significant influence over our Company, and the existing ownership of capital
stock, and thus the voting control, remains concentrated in our executive officers, directors and their affiliates, which
limits your ability to influence corporate matters.
On February 1, 2017, an entity affiliated with Atairos Group, Inc. (together with its affiliates, “Atairos”) became our
largest stockholder when it acquired the shares of TriNet common stock previously held by General Atlantic. In
connection with this transaction, we appointed Michael J. Angelakis, the Chairman and CEO of Atairos, to our board
19
RISK FACTORS
of directors and agreed to nominate Mr. Angelakis or another designee of Atairos reasonably acceptable to our
Nominating and Corporate Governance Committee for election at future annual meetings until Atairos’ beneficial
ownership falls below 15% of our common stock. As of February 1, 2017, Atairos beneficially owned approximately
28.5% of our outstanding common stock, and all of our directors, officers and their affiliates, including Atairos, beneficially
own, in the aggregate, approximately 41.1% of our outstanding common stock. As a result, of the foregoing, Atairos,
particularly when acting with our executive officers, directors and their affiliates who beneficially owned in the aggregate,
approximately 41.1% of our outstanding common stock, will be able to exert substantial influence on all matters requiring
stockholder approval, including the election of directors and approval of significant corporate transactions, such as a
merger or other sale of our company or its assets. This concentration of ownership could limit the ability of other
stockholders to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring
control over us.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company
more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market
price of our common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of
control or changes in our management. Our amended and restated certificate of incorporation and bylaws include
provisions that:
•
•
•
•
•
•
•
•
•
establish a classified board of directors so that not all members of our board of directors are elected at one time;
permit our board of directors to establish the number of directors,
provide that directors may only be removed “for cause”,
require super-majority voting to amend some provisions in our certificate of incorporation and bylaws,
authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a
stockholder rights plan,
eliminate the ability of our stockholders to call special meetings of stockholders,
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of
our stockholders,
provide that our board of directors is expressly authorized to make, alter or repeal our bylaws, and
establish advance notice requirements for nominations for election to our board of directors or for proposing matters
that can be acted upon by stockholders at annual stockholder meetings.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current
management by making it more difficult for our stockholders to replace members of our board of directors, which is
responsible for appointing the members of our management. In addition, because we are incorporated in Delaware,
we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits
a Delaware corporation from engaging in any of a broad range of business combinations with any holder of at least
15% of our capital stock for a period of three years following the date on which the stockholder became a 15%
stockholder.
Most of our clients are concentrated in certain geographies and a relatively small number of industries, making us
vulnerable to downturns in those geographies and industries.
Most of our clients are concentrated in certain geographies and operate in a relatively small number of industries,
including the technology, life sciences, not-for-profit, professional services, financial services, real estate, retail,
manufacturing, and hospitality industries. As a result, if any of those geographic regions or specific industries suffers
a downturn, the portion of our business attributable to clients in that region or industry could be adversely affected,
which could have a material adverse effect on our financial condition or results of operations.
20
RISK FACTORS
Our industry is highly competitive, which may limit our ability to maintain or increase our market share or improve our
results of operations.
We face significant competition on a national and regional level from a number of companies purporting to deliver a
range of bundled services that are generally similar to the services we provide, including large professional employer
organizations such as the TotalSource business unit of Automatic Data Processing, Inc. and Insperity, Inc., as well as
specialized and small professional employer organization service providers. If and to the extent that we and other
companies providing these services are successful, we anticipate that future competitors will enter this industry. Some
of our current, and any future, competitors have or may have greater marketing and financial resources than we have,
and may be better positioned than we are in certain markets. Increased competition in our industry could result in price
reductions or loss of market share, any of which could harm our business. We expect that we will continue to experience
competitive pricing pressure. If we cannot compete effectively, our market share, business, results of operations and
financial condition may suffer.
In addition to competition from other professional employer organizations, we also face significant competition in the
form of companies serving their HR needs in both traditional and non-traditional manners. These forms of competition
include:
• HR and information systems departments and personnel of companies that perform their own administration of
employee benefits, payroll and HR,
•
•
providers of certain endpoint HR services, including payroll, employee benefits and business process outsourcers
with high-volume transaction and administrative capabilities, such as Automatic Data Processing, Inc., Paychex,
Inc. and other third-party administrators,
employee benefit exchanges that provide benefits administration services over the Internet to companies that
otherwise maintain their own employee benefit plans; and
•
insurance brokers who allow third party HR systems to integrate with their platform.
We believe that our services are attractive to many SMBs in part because of our ability to provide access to TriNet-
sponsored workers' compensation, health care and other benefits programs to them on a cost-effective basis. We
compete with insurance brokers and other providers of this coverage in this regard, and our offerings must be priced
competitively with those provided by these competitors in order for us to attract and retain our clients.
We may not be successful in convincing potential clients that the use of our services is a superior, cost-effective means
of satisfying their HR obligations relative to the way in which they currently satisfy these obligations.
If we cannot compete effectively against other professional employer organizations or against the alternative means
by which companies meet their HR obligations, or if we are unable to convince clients or potential clients of the
advantages of our offerings, our market share and business may suffer, resulting in a material, adverse effect on our
financial condition and results of operations.
Our stock price may be volatile or may decline regardless of our operating performance, resulting in substantial losses
for our stockholders.
The market price of our common stock has been, and is likely to continue to be, volatile for the foreseeable future.
Since shares of our common stock were sold in our initial public offering in March 2014 at a price of $16.00 per share,
the daily closing price of our common stock in 2016 ranged from $11.10 to $26.64 per share through December 31,
2016. The market price of our common stock may fluctuate significantly in response to numerous factors, many of
which are beyond our control, including the factors listed below and other factors described in this “Risk Factors”
section:
•
•
•
actual or anticipated fluctuations in our results of operations,
any financial projections we provide to the public, any changes in these projections or our failure to meet these
projections,
failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any
securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors,
21
RISK FACTORS
•
•
•
•
•
•
•
•
•
•
ratings changes by any securities analysts who follow our company,
announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint
ventures or capital commitments,
changes in operating performance and stock market valuations of other business services companies generally,
or those in our industry in particular,
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole,
changes in our board of directors or management,
sales of large blocks of our common stock, including sales by our executive officers, directors and significant
stockholders,
lawsuits threatened or filed against us,
short sales, hedging and other derivative transactions involving our capital stock,
general economic conditions in the United States and abroad, and
other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue
to affect the market prices of equity securities of many business services companies. Stock prices of many business
services companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those
companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility.
Securities litigation could subject us to substantial costs, divert resources and the attention of management from our
business and adversely affect our business, results of operations and financial condition.
Item 1B. Unresolved Staff Comments
None.
22
PROPERTIES
Item 2. Properties
We lease space for 53 offices in various states in the U.S., including the following:
Corporate:
• San Leandro, California
Technology Center:
• Austin, Texas
Client Service Centers:
• Pleasanton, California
• Bradenton, Florida
• Reno, Nevada
• Fort Mill, South Carolina
All of these leases expire at various times up through 2024. We believe that our leases are sufficient for our current
purposes and long term growth and expansion goals.
Item 3. Legal Proceedings
For the information required in this section, refer to Note 13 in Part II, Item 8 of this Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
23
STOCK ACTIVITIES
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Market Information and Holders of Record
Our common stock has been listed on the New York Stock Exchange under the symbol “TNET” since March 2014. The
following table sets forth for the periods indicated the high and low sale prices per share of our common stock as reported
on the New York Stock Exchange:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year 2016
Year 2015
High
Low
High
Low
$
$
$
$
18.78 $
20.86 $
22.65 $
26.32 $
12.28 $
14.57 $
20.53 $
17.80 $
37.88 $
37.27 $
26.88 $
20.05 $
30.04
25.23
16.33
16.79
On February 23, 2017, the last reported sales price of our common stock on the New York Stock Exchange was $26.35
per share. As of February 23, 2017, we had 42 holders of record of our common stock per Computershare Trust Company
N.A., our transfer agent. The actual number of stockholders is greater than this number of record holders, and includes
stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This
number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividend Policy
We have not declared or paid cash dividends in 2016 or 2015. Payment of cash dividends, if any, in the future will be
at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition,
operating results, contractual restrictions under our credit facility (refer to Note 8 in Item 8 of this Form 10-K), capital
requirements, business prospects and other factors our board of directors may deem relevant.
24
STOCK ACTIVITIES
Performance Graph
The following graph compares the cumulative return on our common stock since the initial public offering in March
2014 with the cumulative return on the S&P 500 Index and a Peer Group Index.
COMPARISON OF 33 MONTH CUMULATIVE TOTAL RETURN
Among TriNet Group, Inc., the S&P 500 Index, and a Peer Group*
* The Peer Group Index consists of the following companies:
Automatic Data Processing, Inc.
Insperity, Inc.
Barrett Business Services, Inc.
Intuit, Inc.
Paychex, Inc.
Heartland Payment Systems Inc. historically was included in the Peer Group Index. It is excluded from the graph above
because it was acquired in April 2016 and ceased to be an SEC registrant.
25
STOCK ACTIVITIES
Issuer Purchases of Equity Securities
The following table provides information about our purchases of TriNet common stock during the fourth quarter of
2016:
Period
October 1 - October 31, 2016
November 1 - November 30, 2016
December 1 - December 31, 2016
Total
Total Number of
Shares Purchased
Average Price
Paid Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
Approximate Dollar
Value
of Shares that May
Yet Be Purchased
Under the Plans
850,935 $
59,621 $
419,852 $
1,330,408
20.47
22.20
25.14
849,790 $
20,483,156
— $
70,483,156
414,675 $
60,024,244
1,264,465
In 2016, our board of directors approved a $100 million incremental increase to our ongoing stock repurchase program
with no expiration date. We repurchased a total of approximately $71.6 million of our outstanding common stock in
2016. As of December 31, 2016, approximately $60.0 million remained available from previous authorizations approved
by the board of directors. Stock repurchases under the program are primarily intended to offset the dilutive effect of
share-based employee incentive compensation. In 2016, we repurchased shares using a Rule 10b5-1 plan. The
purchases were funded from existing cash and cash equivalents balances.
Our stock repurchases and dividends are subject to certain restrictions under the terms of our credit facility. For more
information about our stock repurchases and dividends, refer to Note 8 and Note 9 in Item 8 of this Form 10-K.
26
SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
The following selected consolidated financial and other data should be read in conjunction with Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations as well as our audited consolidated financial
statements and related notes included in Item 8 of this Form 10-K.
(in thousands, except per share data)
Income Statement Data:
Total revenues
Operating income
Net income
Diluted net income per share of common stock
Non-GAAP measures (1):
Net Service Revenues (1)
Net Insurance Service Revenues (1)
Adjusted EBITDA (1)
Adjusted Net income (1)
Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Total liabilities
Convertible preferred stock
Total stockholders’ equity (deficit)
Cash Flow Data:
Year Ended December 31,
2016
2015
2014
2013
2012
$ 3,060,313 $ 2,659,288 $ 2,193,531 $ 1,644,275 $ 1,019,061
123,958
61,406
0.85
646,561
199,806
186,554
86,694
78,317
31,695
0.44
546,912
145,625
151,340
70,720
86,791
15,497
0.22
507,216
165,142
165,319
74,392
66,337
13,147
0.24
417,690
145,318
136,027
57,456
$
184,004 $
166,178 $
134,341 $
94,356 $
156,771
112,428
121,290
81,528
2,095,143
2,092,449
2,340,580
1,434,738
61,828
31,832
0.63
269,036
120,803
95,362
47,431
63,749
61,340
887,727
301,334
830,407
122,878
2,060,553
2,084,368
2,366,339
1,705,100
—
34,590
—
8,081
—
122,878
(25,759)
(393,240)
(65,558)
Notes and capital leases payable
459,054
493,935
545,150
818,877
Net cash provided by operating activities
$
144,532 $
130,599 $
151,899 $
100,721 $
80,542
Net cash used in investing activities
Net cash provided by (used in) financing activities
(27,122)
(99,371)
(37,689)
(60,752)
(45,427)
(212,438)
(262,608)
(66,372)
142,377
214,190
(1)
Refer to Non-GAAP Financial Measures section below for definition and reconciliation from GAAP measures.
27
SELECTED FINANCIAL DATA
Significant Transactions Affecting Comparability Between Periods
Business Acquisitions
Equity and Debt Activities
2014
None
• In March, we completed our initial public offering (IPO) by issuing
15,000,000 shares of common stock and received $216.8 million net
proceeds.
• As a result of the IPO, all our preferred shares were converted into
common stock.
• With the IPO proceeds, the outstanding second lien term loan of $190.0
million was fully paid off.
2013
• We acquired Ambrose for a total of
$195.0 million.
• The board of directors declared and paid total special dividends of $357.7
million.
• In August, the outstanding credit facility was amended and restated with:
- A $750.0 million first lien credit facility including a $175.0 million three-
year term loan (B-1 term loan), a $455.0 million seven-year term loan (B-2
term loan) and a $75.0 million revolving facility, and
- A $190.0 million second lien seven-year-six-month term loan.
2012
• We acquired SOI, Accord, and App7,
Inc. (ExpenseCloud), for a total of
$220.0 million.
• The board of directors declared and paid total special dividends of $75.0
million.
• In March, we entered into a credit facility with a $140.0 million five-year term
loan and a $35.0 million five-year revolving facility.
• In October, our then outstanding credit facility was amended and restated
with a $150.0 million five-year term loan, a $150.0 million six-year term loan
and a $50.0 million revolving facility.
Non-GAAP Financial Measures
In addition to the selected financial measures presented in accordance with U.S. Generally Accepted Accounting
Principles (GAAP), we monitor other non-GAAP financial measures to manage our business, make planning decisions,
allocate resources and as performance measures in our executive compensation plan. These key financial measures
provide an additional view of our operational performance over the long term and provide useful information in order
to maintain and grow our business.
The presentation of the non-GAAP financial measures is to enhance the understanding of certain aspects of our
financial performance. It is not meant to be considered in isolation, superior to, or as a substitute for the directly
comparable financial measures prepared in accordance with GAAP.
28
SELECTED FINANCIAL DATA
Non-GAAP Measure
Net Service Revenues
Definition
• Sum of professional service revenues and
Net Insurance Service Revenues, or total
revenues less insurance costs.
Net Insurance Service Revenues
• Insurance revenues less insurance costs.
Adjusted EBITDA
• Net income, excluding the effects of:
- income tax provision,
- interest expense,
- depreciation,
- amortization of intangible assets,
- stock-based compensation expense and,
- in 2014, secondary offering costs related
to offering of shares
from existing
stockholders.
Adjusted Net Income
• Net income, excluding the effects of:
- effective income tax rate (1),
- stock-based compensation,
- amortization of intangible assets,
- non-cash interest expense (2),
- debt prepayment premium,
- in 2014, secondary offering costs related
to offering of shares
from existing
stockholders, and
- the income tax effect (at our effective tax
rate (1)) of these pre-tax adjustments.
How We Use The Measure
• Provides a comparable basis of revenues on
a net basis. Professional service revenues
are represented net of client payroll costs
whereas insurance service revenues are
presented gross of insurance costs for
financial reporting purposes.
• Acts as the basis to allocate resources to
different
the
effectiveness of our business strategies by
each business function, and
functions and evaluates
• Provides a measure, among others, used in
the determination of incentive compensation
for management.
• Is a component of Net Service Revenues,
and
• Provides a comparable basis of revenues on
a net basis. Professional service revenues
are represented net of client payroll costs
whereas insurance service revenues are
presented gross of insurance costs for
financial reporting purposes. Promotes an
understanding of our insurance services
business by evaluating insurance service
revenues net of our WSE related costs which
are substantially pass-through for the benefit
of our WSEs. Under GAAP, insurance
service revenues and costs are recorded
gross as we have latitude in establishing the
price, service and supplier specifications.
• Provides period-to-period comparisons on a
consistent basis and an understanding as to
how our management evaluates
the
effectiveness of our business strategies by
excluding certain non-cash charges such as
depreciation and amortization that have
fluctuated significantly over the past five
years, and stock-based compensation
recognized based on the estimated fair
values. We believe these charges are not
directly resulting from our core operations or
indicative of our ongoing operations.
• Enhances comparisons to prior periods and,
accordingly, facilitates the development of
future projections and earnings growth
prospects, and
• Provides a measure, among others, used in
the determination of incentive compensation
for management.
• Provides information to our stockholders and
board of directors to understand how our
management evaluates our business, to
monitor and evaluate our operating results,
and analyze profitability of our ongoing
operations and trends on a consistent basis
by excluding certain non-cash charges as
described above, debt payment premiums
and our secondary offering costs as these are
not directly resulting from our core operations
or indicative of our ongoing operations.
(1)
For purposes of our non-GAAP financial presentation, as a result of a 2015 increase in New York City tax rates and an increase in blended
state rates, we have adjusted the non-GAAP effective tax rate to 42.5% for 2016, from 41.5% for 2015 and 39.5% for 2014. These non-
GAAP effective tax rates exclude income tax on non-deductible stock-based compensation and discrete items including the cumulative
effect of state legislative changes.
(2)
Non-cash interest expense represents amortization and write-off of our debt issuance costs.
29
SELECTED FINANCIAL DATA
Reconciliation of GAAP to Non-GAAP Measures
The table below presents a reconciliation of total revenues to Net Service Revenues:
(in thousands)
Total revenues
Less: Insurance costs
Net Service Revenues
Year Ended December 31,
2016
2015
2014
2013
2012
$ 3,060,313 $ 2,659,288 $ 2,193,531 $ 1,644,275 $ 1,019,061
2,413,752
2,112,376
1,686,315
1,226,585
750,025
$
646,561 $
546,912 $
507,216 $
417,690 $
269,036
The table below presents a reconciliation of insurance service revenues to Net Insurance Service Revenues:
(in thousands)
Insurance service revenues
Less: Insurance costs
Year Ended December 31,
2016
2015
2014
2013
2012
$ 2,613,558 $ 2,258,001 $ 1,851,457 $ 1,371,903 $
870,828
2,413,752
2,112,376
1,686,315
1,226,585
750,025
Net Insurance Service Revenues
$
199,806 $
145,625 $
165,142 $
145,318 $
120,803
The table below presents a reconciliation of net income to Adjusted EBITDA:
(in thousands)
Net income
Provision for income taxes
Stock-based compensation
Interest expense and bank fees
Depreciation
Amortization of intangible assets
Secondary offering costs
Adjusted EBITDA
Year Ended December 31,
2016
2015
2014
2013
2012
$
61,406 $
31,695 $
15,497 $
13,147 $
43,046
26,497
20,257
19,351
15,997
—
28,315
17,923
19,449
14,612
39,346
—
17,579
10,960
54,193
13,843
52,302
945
7,937
6,113
45,724
11,737
51,369
—
31,832
20,344
4,360
9,709
11,676
17,441
—
$
186,554 $
151,340 $
165,319 $
136,027 $
95,362
The table below presents a reconciliation of net income to Adjusted Net Income:
(in thousands)
Net income
Effective income tax rate adjustment
Stock-based compensation
Amortization of intangible assets
Non-cash interest expense
Debt prepayment premium
Secondary offering costs
Year Ended December 31,
2016
2015
2014
2013
2012
$
61,406 $
31,695 $
15,497 $
13,147 $
31,832
(1,346)
26,497
15,997
3,827
—
—
3,411
17,923
39,346
3,610
—
—
4,514
10,960
52,302
21,880
3,800
945
—
6,113
51,369
13,577
—
—
—
4,360
17,441
3,768
—
—
Income tax impact of pre-tax adjustments
(19,687)
(25,265)
(35,506)
(26,750)
(9,970)
Adjusted Net Income
$
86,694 $
70,720 $
74,392 $
57,456 $
47,431
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Executive Overview
We are a leading provider of comprehensive HR solutions for SMBs under a co-employment, or PEO model. We offer
a comprehensive HR solution to our clients using cloud based software systems, enabled with our HR professionals
and expertise in combination with competitive benefit offerings, insurance coverage and risk mitigation services. In
2016 we:
•
•
•
•
•
served over 13,900 clients, co-employed approximately 338,000 WSEs and we increased our Total WSEs 4%
over 2015,
processed over $34 billion in payroll and payroll tax payments for our clients in 2016 with an increase of 12% over
2015,
reorganized our sales force by adding national vertical sales leaders and focused our marketing and product
development efforts on an industry vertical basis,
launched three vertical products - TriNet Technology, TriNet Nonprofit and TriNet Financial Services, and
completed the consolidation of the Accord and Ambrose legacy platforms through the migration of our clients to
the TriNet platform and retirement of these legacy software platforms.
Our financial highlights for the 2016 year include:
• Total revenues increased 15% to $3.1 billion, while Net Service Revenues increased 18% to $646.6 million,
• Operating Income increased 58% to $124.0 million,
• Net income increased 94% to $61.4 million, or $0.85 per diluted share, while Adjusted Net Income increased 23%
to $86.7 million,
• Adjusted EBITDA increased 23% to $186.6 million, and
• Cash provided by operating activities increased 11% to $144.5 million.
Our Vertical Approach
Our vertical approach enables us to provide better HR solutions and services tailored to the specific needs of clients
in these verticals. In addition to sales and marketing, our client services and product development teams are increasingly
focused on specific industry verticals. We believe this vertical approach is an important competitive differentiator for
TriNet.
We sell our services primarily through our direct sales organization, which consists of sales representatives who focus
on serving clients in specific industry vertical markets. Our sales representatives are supported by marketing, inside
sales, lead generation and lead incubation efforts as well as referral networks.
Historically, year over year comparison of our Total Sales Representatives has served as an indicator of our success
in growing our business. During 2016, the vertical sales leaders consciously slowed down hiring while they assessed,
recalibrated, and realigned their sales teams. Going forward, we expect to grow the salesforce strategically within the
assigned vertical markets. While having a productive direct sales force is important to the success of our business,
we no longer rely on the absolute number of sales representatives by itself as an indicator of the growth of our revenues
or our business overall.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
Our Technology
We made significant investments in our proprietary, cloud-based HR systems, including implementing client information
and management software to provide our clients with enhanced features and functionality. In addition, we invested in
a common technology platform as it is an important enabler of our products. It allows us to offer industry–specific
solutions in a scalable manner while delivering frequent enhancements that benefit all clients. In 2016, we completed
the consolidation and retirement of two of our three legacy platforms that we acquired (Accord and Ambrose). We plan
to consolidate our remaining legacy acquired platform (SOI) onto our TriNet platform in 2017.
For 2016, our systems development and programming costs were $31.4 million, representing 1% of our total revenues
and 5% of our Net Service Revenues. Combined with our technology related capital expenditures, our total technology
investment was $62.1 million, representing 2% of our total revenues and 10% of our Net Service Revenues.
We plan to continue to invest to upgrade and improve technology offerings, including enhancements of our online
interface and mobile applications to provide better client and individual WSE experience.
Insurance
We have added senior insurance management and in-house actuarial capabilities to allow us to improve our risk
monitoring and management of our insurance pricing with the expectation that we can continue to provide a cost
effective and competitive solution to clients that is priced to the risk incurred. In 2015, we started an effort to reprice
our insurance service offerings to our clients. With this substantially complete, total revenues increased 15% to $3.1
billion and Net Insurance Service Revenue increased 37% to $199.8 million in 2016.
Our People
As we grow, we continue to invest in our employees and their capabilities. In 2016, for example, we increased our in-
house Risk Management expertise, most notably through investing in our actuarial pricing and claims management
employees as well as in our internal financial control functions. We also continued to invest in growing our sales
functions, hiring and retaining sales reps with industry experience, which resulted in a direct sales organization of over
450 direct sales representatives. From 2015 to 2016, we incurred additional salary and salary related costs of $51
million.
We will continue to search, select and hire people to serve our current clients and find new clients as our business
grows and add to our skills and capabilities in order to provide innovative HR solutions for our clients.
We expect our employee-related expenses will continue to grow in absolute dollar amounts in the foreseeable future
as we continue to drive our growth through vertical product delivery and platform integrations, while also working to
improve our systems and processes and gain efficiencies.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
The following table summarizes our results of operations for the three years ended December 31, 2016. For details of
the critical accounting judgments and estimates that could affect the Results of Operations, see the Critical Accounting
Judgments and Estimates section within Management's Discussion and Analysis (MD&A).
(in thousands, except operating metrics data)
2016
2015
2014
2016 vs.
2015
2015 vs.
2014
Year Ended December 31,
% Change
$
446,755 $
401,287 $
342,074
11%
17%
Consolidated Statements of Income:
Professional service revenues
Insurance service revenues
Total revenues
Insurance costs
Cost of providing services (exclusive of depreciation and
amortization of intangible assets)
Sales and marketing
General and administrative
Systems development and programming
Amortization of intangible assets
Depreciation
Total costs and operating expenses
Operating income
Other income (expense):
2,613,558
2,258,001
1,851,457
3,060,313
2,659,288
2,193,531
2,413,752
2,112,376
1,686,315
190,444
173,714
91,659
31,438
15,997
19,351
150,694
166,759
69,626
27,558
39,346
14,612
134,256
139,997
53,926
26,101
52,302
13,843
2,936,355
2,580,971
2,106,740
123,958
78,317
86,791
Interest expense and bank fees
(20,257)
(19,449)
(54,193)
Other, net
Income before provision for income taxes
Income tax expenses
Net income
751
104,452
43,046
1,142
60,010
28,315
$
61,406 $
31,695 $
478
33,076
17,579
15,497
16
15
14
26
4
32
14
(59)
32
14
58
4
(34)
74
52
22
21
25
12
19
29
6
(25)
6
23
(10)
(64)
139
81
61
94%
105%
Non-GAAP measures (1):
Net Service Revenues (1)
Net Insurance Service Revenues (1)
Adjusted EBITDA (1)
Adjusted Net income (1)
$
646,561 $
546,912 $
507,216
199,806
186,554
86,694
145,625
151,340
70,720
165,142
165,319
74,392
18%
37
23
23
Operating Metrics:
Total WSEs payroll and payroll taxes processed (in
billions)
Total WSEs
Average WSEs
$
34.3 $
30.6 $
25.6
12%
337,885
326,850
324,399
303,917
288,312
261,431
4
8
(1)
Refer to Non-GAAP measures definitions and reconciliations from GAAP measures in Item 6. Selected Financial Data.
8%
(12)
(8)
(5)
20%
13
16
33
MANAGEMENT'S DISCUSSION AND ANALYSIS
Revenues and Income
2016 - 2015 Commentary
Total revenues were $3.1 billion, a 15% increase from 2015:
• Professional service revenues were $446.8 million an increase of 11% over 2015 as a result of an Average WSEs
growth of 8% with the remainder due to price increases.
•
Insurance service revenues grew 16% over 2015 to $2.6 billion. Service price increases in combination with the
8% growth in Average WSEs accounted for the year over year growth.
Net Service Revenues was $646.6 million representing an 18% increase from 2015. Net Insurance Service revenues
represented 31% of Net Service Revenues and grew 37% over 2015 with Insurance Service revenues per Average
WSE increasing by 8% but Insurance Costs per Average WSE increasing by only 6%.
Operating Income was $124.0 million and 58% better than 2015, primarily due to improvement in our service revenues,
especially our insurance services business as noted above, partially offset by a 12% increase in operating expenses
used to support our growth as detailed below.
Net Income increased 94% to $61.4 million, or $0.85 per diluted share.
Adjusted Net Income increased $16.0 million, a 23% increase from 2015, primarily due to increased operating income
as described above, offset by higher income tax expenses.
2015 - 2014 Commentary
Total revenues in 2015 were $2.7 billion, a 21% increase from 2014:
• Professional service revenues was $401.3 million an increase of 17% over 2014. The increase was mainly
attributable to our 16% growth in Average WSEs and an increase in WSEs from verticals with higher average
revenue per WSE.
•
Insurance revenues grew 22% over 2014 to $2.3 billion. The increase was primarily due to our WSEs growth and
an increase of 5% in average insurance service revenues per WSE.
Net Service Revenues was $546.9 million, an 8% increase from 2014. This was the result of a 17% growth in professional
service revenues, partially offset by a 12% decrease in Net Insurance Service Revenues which represented 27% of
the total. In 2015, we recorded an increase of 25% in insurance costs primarily related to medical claims which exceeded
our 16% growth in Average WSEs and 22% increase in Insurance Service Revenues overall.
Operating Income was $78.3 million, 10% decrease from 2014, primarily due to 23% increase in total cost and operating
expenses compared to growth of only 21% in total revenues as described above.
Net Income increased 105% to $31.7 million, or $0.44 per diluted share, primarily due to reduction of $34.7 million
in interest expense and bank fees, partially offset by decrease in operating income as described above.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS
Adjusted Net Income decreased 5% from 2014, primarily due to decrease in the income before provision for income
taxes after adjusting the non-GAAP reconciling items, and increase of non-GAAP tax rate from 39.5% for 2014 to
41.5% for 2015 as a result of an increase in New York City tax rates and blended state rates in 2015.
Average WSE
Total WSE
Average WSE growth
2016
8%
2015
16%
Average monthly total revenue per WSE
2016
$780
2015
$729
2014
$699
Historically, year over year Total WSEs comparison has served as an indicator of our success in growing our business,
both organically and through the integration of acquired businesses, and retaining clients. Average WSE growth is
another volume measure we use to monitor the performance of our business. However, anticipated revenues for future
periods can diverge from total WSEs paid due to pricing differences across our HR solutions and services. In addition
to driving the growth in WSE count, we also focus on pricing strategies and product differentiation to maximize our
revenue opportunities. Average monthly total revenues per WSE, as a measure to monitor the success of such pricing
strategies, has increased 7% in 2016 versus 4% in 2015.
Professional Service Revenues (PSR)
Revenue Growth
2016
11%
2015
17%
Monthly PSR per Average WSE
2016
$114
2015
$110
2014
$109
Payroll and payroll taxes processed
2016
2015
2014
$34 billion
$31 billion
$26 billion
In 2016, our professional service revenues represented 15% of total revenues unchanged from 2015 and 69% of Net
Service Revenues which is a reduction of 4% over 2015 reflecting our improved performance of Net Insurance Service
Revenues from our repricing efforts.
Our clients are billed either based on a fee per WSE per month, per transaction or a percentage of the WSEs’ payroll.
Our investment in a vertical approach provides us the flexibility to offer clients in different industries with different
services at different prices. This vertical approach will allow us to address specific needs for different vertical clients,
improve our revenue retention rate but potentially reduce the value of WSEs as a leading indicator of future revenue
performance.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS
Insurance Service Revenues (ISR)
Insurance Service Revenues Growth
2016
16%
2015
22%
Monthly ISR per Average WSE
2016
$666
2015
$619
2014
$590
Insurance service revenues represented 85% of total revenues with growth of 16% in 2016 versus 22% in 2015. The
slower growth in insurance service revenues was mainly attributable to an 8% growth in Average WSEs for 2016
compared with 16% growth in Average WSEs for 2015.
In 2016, we strengthened our insurance offering with new leadership and a new actuarial team to improve our pricing
and operating effectiveness. We completed the repricing of medical insurance for our existing clients in 2016 which
now fully reflects our insurance experience in 2015. Average insurance service revenues per WSE increased by 8%
in 2016 and 5% in 2015.
Insurance Costs
Insurance Costs Growth
2016
14%
2015
25%
Insurance Costs per Average WSE
2016
$615
2015
$579
2014
$538
2016 - 2015 Commentary
Insurance costs increased 14% in 2016 as a result of an 8% increase in Average WSEs, increased workers'
compensation costs per WSE, including $28.2 million of workers' compensation costs from loss development relating
to prior accident years.
2015 - 2014 Commentary
Insurance costs increased 25% in 2015 as a result of a 16% increase in Average WSEs, increases in the volume and
severity of medical claims and $26.4 million in workers' compensation costs from loss development relating to prior
accident years.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS
Other Operating Expenses (OOE)
Other operating expenses includes cost of providing services (COPS), sales and marketing (S&M), general and
administrative (G&A), systems development and programming (SD&P) expenses.
Operating Expense Growth
2016
18%
2015
17%
% of Total Revenues
2016
16%
2016
75%
2015
16%
% of Net Service Revenue
2015
76%
2014
16%
2014
70%
We have approximately 2,600 corporate employees as of December 31, 2016 in 53 offices across the U.S. Our
corporate employees' compensation related expenses represent 70% of our operating expenses in 2016 and 2015
and 72% in 2014.
We manage our expenses and allocate resources across different business functions based on percentage of Net
Service Revenues which has increased from 70% in 2014 to 76% in 2015 and 75% in 2016. The increase was primarily
due to lower revenue in 2015, and increased expenses in the following:
37
MANAGEMENT'S DISCUSSION AND ANALYSIS
2016 - 2015 Commentary
Operating costs increased $72.6 million or 18% as part of our continued investment in supporting our infrastructure
and our capabilities to our clients. Specific costs increased as follows:
• Compensation costs for our corporate employees includes payroll, payroll taxes, stock-based compensation,
bonuses, commissions and other payroll and benefits related costs. Total compensation costs increased $51.0
million or 15% primarily due to increases in our
client services functions to support the growth and migration of clients from legacy platforms to TriNet
platform,
risk services functions to strengthen our insurance business management by hiring new leaders and
actuarial teams,
technology function to support product delivery and platform integration, and
other supporting functions as a result of increased operational and compliance requirement for a growing
public company.
• Accounting and other professional fees increased $8.1 million in 2016 in connection with significant time and
resources required for our internal control remediation efforts and audit of our internal controls as required by
Section 404 of the Sarbanes-Oxley Act.
• Consulting expenses included costs associated with reviewing and administering our insurance programs, as well
as consulting firms engaged in enhancing our product offerings.
• Costs capitalized as internally developed software increased $10.1 million in 2016 primarily associated with product
delivery and platform integration.
• Other expenses increased $13.8 million in 2016 and included office leases and IT infrastructure costs to support
the increased operational requirements.
We expect our operating expenses to continue to increase in the foreseeable future due to expected growth, our
strategy to develop new vertical products and platform integrations. We will continue to improve our systems, processes
and internal controls to gain efficiencies. These expenses may fluctuate as a percentage of our total revenues from
period to period depending on the timing of those expenses.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS
2015 - 2014 Commentary
Operating costs increased $60.4 million or 17% in 2015. Significant increases include:
• Total compensation costs for our corporate employees increased $37.0 million primarily in
sales and marketing function as a result of our growth in direct sales channels, primarily the addition of
new sales representatives,
client services professionals to support the growth of our clients and WSEs, and
stock-based compensation costs to attract and retain our people.
• Accounting and other professional fees increased $7.2 million in 2015 including in connection with implementation
of Section 404 of the Sarbanes-Oxley Act.
• Consulting expenses included costs associated with consulting firms engaged in enhancing our product offerings.
• Costs capitalized as internally developed software increased $4.8 million in 2015 primarily associated with product
delivery and platform integration initiatives.
• Other expenses increased $14.9 million in 2015 and included
IT infrastructure costs to support the increased operational requirements,
marketing events to focus on market verticals and penetration,
travel expenses, meetings, recruiting expenses to support growth in sales force, and
broker commission costs resulted from increased revenues.
Amortization of Intangible Assets
Amortization of intangible assets represents costs associated with acquired companies' developed technologies, client
lists, trade names and contractual agreements. Amortization expenses decreased 59% in 2016 and 25% in 2015, as
a result of the 2016 revision to the expected useful life of certain client lists and trademarks related to our previous
acquisitions and expiration of other acquisition related intangible assets.
Depreciation
Depreciation expense increased 32% in 2016 and 6% in 2015 which was a result of our continuous investment in
technology products and platforms.
Other Income (Expense)
Other income (expense) consists primarily of interest expense under our credit facility and capital leases, and non-
cash debt issuance cost amortization. It increased 4% in 2016 due primarily to the write-off of debt issuance costs
resulting from the refinance of our term loan in July 2016; and decreased 64% in 2015 which was primarily due to
lower outstanding debts. Interest expense for 2014 was significantly higher due to the acceleration of loan fee
amortization resulting from our refinancing activities, and a prepayment premium related to our partial repayment of
the credit facilities.
We may seek to amend our credit facility, including if available terms become more favorable. We may also seek
additional borrowings to fund acquisitions or accelerate the payment of principal on outstanding debt. As such, our
interest expense may fluctuate as a percentage of our total revenues from period to period depending on the timing
of those borrowing and or repayment activities.
Provision for Income Taxes
Our effective tax rates (ETR) were 41.2% for 2016, 47.2% for 2015 and 53.2% for 2014.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS
2016 - 2015 Commentary
Our ETR decreased 6.0% in 2016 from 47.2% in 2015 primarily due to the following:
•
•
•
5.7% decrease attributable to revaluation of deferred taxes resulting from state legislative changes enacted in
2015,
2.4% decrease in state income taxes from an increase in excludable income for state income tax purposes,
1.2% decrease from discrete benefits recorded in 2016 associated with prior year state income tax expense resulting
from a state tax return to provision (RTP) adjustment relating to audit premiums paid for worker’s compensation
insurance, partially offset by a
•
1.5% increase from net operating loss adjustment recorded in 2015.
We anticipate our ETR to be consistent going forward provided there are no significant tax reforms enacted or excess
tax benefits from our equity incentive plans when we adopt ASU 2016-09.
2015 - 2014 Commentary
The ETR decrease from 53.2% for 2014 to 47.2% for 2015 includes:
•
•
•
•
3.2% decrease attributable to disqualifying dispositions on previously non-deductible stock-based compensation,
2.6% decrease due to a revaluation of deferred taxes resulting from state legislative changes enacted in 2014,
1.5% decrease from net operating loss adjustments due to apportionment changes, partially offset by a
2.8% increase in state income taxes resulting from state legislative changes.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
Liquidity
We manage our liquidity separately between assets and liabilities that are WSE related from our corporate assets and
liabilities.
WSE related assets and liabilities primarily consist of current assets and liabilities resulting from transactions directly
or indirectly associated with WSEs, including payroll and related taxes and withholdings, our sponsored workers'
compensation and health insurance programs, and other benefit programs. Our cash flows related to WSE payroll and
benefits is generally matched by advance collection from our clients which is reported as payroll funds collected within
WSE related assets.
We reported our corporate cash and cash equivalents on the consolidated balance sheets separately from WSE related
assets. We rely on our corporate cash and cash equivalents and cash from operations to satisfy our operational and
regulatory requirements and fund capital expenditures. Our credit facilities have been primarily used to fund acquisitions.
We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations
to clients, creditors and debt holders.
Our liquid assets are as follows:
(in thousands)
Cash and cash equivalents
Working capital:
Corporate working capital
WSE related assets, net of WSE related liabilities
Year Ended December 31,
2016
2015
$
184,004 $
166,178
151,295
5,476
108,539
3,889
We had corporate cash and cash equivalents of $184.0 million and $166.2 million as of December 31, 2016 and 2015,
respectively. The increase was primarily due to the cash generated from operations during the year ended December
31, 2016. We believe that our existing corporate cash and cash equivalents, working capital and cash provided by
operating activities will be sufficient to meet our working capital and capital expenditure needs for at least the next
12 months.
We manage our sponsored benefit and workers' compensation insurance obligations by maintaining funds in restricted
cash, cash equivalents and investments as collateral. As of December 31, 2016, we had $129.8 million of restricted
cash, cash equivalents and investments included in WSE related assets and $130.5 million of marketable securities
designated as long-term restricted cash, cash equivalents and investments on the consolidated balance sheets. These
collateral amounts are generally determined at the beginning of each plan year and we may be required by our insurance
carriers to adjust the balance when facts and circumstances change. We regularly review the collateral balances with
our insurance carriers, and anticipate funding further collateral as needed based on program development.
Capital Resources
Sources of Funds
We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments
through existing liquid assets, continuing cash flows from operations, our borrowing capacity under the revolving credit
facility and the potential issuance of debt or equity securities.
In July 2016, we refinanced our existing tranche B term loan, originally scheduled to mature in July 2017, with tranche
A-2 term loans, pursuant to an amendment to the Amended and Restated First Lien Credit Agreement (Credit
Agreement). As of December 31, 2016, $462.9 million of the term loans were outstanding including a $330.5 million
term loan A at 3.250% per annum and $132.5 million term loan A-2 at 3.125% per annum maturing in July 2019.
We also have available a $75.0 million revolving credit facility. The total unused portion of the revolving credit facility
was $59.5 million as of December 31, 2016. This revolving credit facility is expected to be used for working capital and
other general corporate purposes.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS
Uses of Funds
In 2016, we repurchased approximately 3.4 million shares of our common stock for $71.6 million. As of December 31,
2016, $60.0 million remained available for repurchase under the program, which is not subject to an expiration date.
Cash Flows
We generated positive cash flows from operating activities during 2016, 2015 and 2014. We also have the ability to
generate cash through our financing arrangements under our credit facility to meet short-term funding requirements.
The following table presents our cash flows activities for the stated periods:
(in thousands)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rates on cash and cash equivalents
Net increase in cash and cash equivalents
Operating Activities
Year Ended December 31,
2016
2015
2014
$
$
144,532 $
130,599 $
(27,122)
(99,371)
(213)
(37,689)
(60,752)
(321)
17,826 $
31,837 $
151,899
(45,427)
(66,372)
(115)
39,985
Components of net cash provided by operating activities are as follows:
(in thousands)
Operating income
Depreciation and amortization
Stock-based compensation expense
Payment of interest
Income taxes (payments) refunds, net
Collateral (paid to) refunded from insurance carriers, net
Changes in deferred taxes
Changes in other operating assets and liabilities
Excess tax benefits from equity incentive plan activity
Year Ended December 31,
2016
2015
2014
$
123,958 $
78,317 $
39,175
26,497
(15,420)
(39,285)
(25,057)
41,772
(2,469)
(4,639)
52,817
17,923
(15,224)
(2,005)
9,918
14,954
(5,431)
(20,670)
86,791
84,403
10,960
(32,051)
3,809
(8,408)
43,842
(27,784)
(9,663)
Net cash provided by operating activities
$
144,532 $
130,599 $
151,899
The period to period fluctuation in changes in other operating assets and liabilities is primarily driven by timing of
payments related to WSE related assets and liabilities, our accounts payable and accrued expenses related to our
trade creditors, and corporate employee compensation related payables.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS
Investing Activities
Net cash used in investing activities primarily consists of cash paid for capital expenditures, and purchases of
investments, offset partially by proceeds from the sales of investments.
(in thousands)
Capital expenditures:
Software and hardware
Office furniture, equipment and leasehold improvements
Cash used in capital expenditures
Investments:
Purchases of restricted investments
Proceeds from maturity of restricted investments
Cash provided by (used in) investments
Year Ended December 31,
2016
2015
2014
30,677 $
12,830 $
8,973
5,727
39,650 $
18,557 $
13,798
5,363
19,161
(14,959) $
(41,939) $
(24,875)
27,787
27,557
—
12,828 $
(14,382) $
(24,875)
$
$
$
$
Our most significant capital expenditures have been investments in our software and hardware to introduce new
products, enhance existing products and platforms, as well as platform integrations. In 2016, we introduced TriNet
Technology, TriNet Nonprofit, and TriNet Financial Services vertical products. In addition, we completed integrating
our legacy Accord and Ambrose platforms into the TriNet platform. We expect such capital investment will continue in
the future.
We invest cash held as collateral to satisfy our long-term obligation towards the workers' compensation liabilities in
U.S. long-term treasuries and mutual funds. Such investments are classified as available for sale investments and
included as restricted cash, cash equivalents and investments in the balance sheet. The amount of investment and
the anticipated holding period is reviewed regularly in conjunction with our estimated long-term workers' compensation
liabilities and anticipated claims payment trend.
Financing Activities
Net cash used in financing activities consisted primarily of repayment of debt and repurchases of our common stock,
partially offset by proceeds from new borrowings and exercises of stock options.
Historically we funded business acquisitions and special dividends through borrowings under credit facilities which
may fluctuate from period to period. We may seek to amend the current credit facilities as they expire, as needed by
the business or if market conditions become more favorable, with interest rates or terms that may not necessarily be
more favorable than the current interest rates or terms.
The board of directors from time to time authorizes stock repurchases of our outstanding common stock in order to
offset dilution from the issuance of stock under our equity-based incentive plan and employee stock purchase plan.
Refer to Note 9 in Item 8 of this Form 10-K for details of our equity plans. As of December 31, 2016, approximately
$60.0 million remained available for repurchase.
Shares repurchased under the plan
Amounts (in thousands)
Year Ended December 31,
2016
2015
2014
3,414,675
1,895,625
$
71,604 $
48,364 $
490,419
15,009
In 2014, we received $216.8 million net proceeds from our IPO and it was used to pay off a portion of then outstanding
credit facilities.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS
Covenants
The Credit Agreement contains customary representations and warranties and customary affirmative and negative
covenants applicable to us and our subsidiaries. It also contains financial covenants that require us to maintain: (1) a
minimum consolidated interest coverage ratio of at least 3.50 to 1.00 and (2) a maximum total leverage ratio of 4.25
to 1.00 through December 31, 2016, 3.75 to 1.00 through December 31, 2017 and 3.50 to 1.00 thereafter. As of
December 31, 2016, we were in compliance with these financial covenants.
In order to meet various states’ licensing requirements and maintain accreditation by the ESAC, we are subject to
various minimum working capital and net worth requirements. As of December 31, 2016 and 2015, we believe we have
fully complied in all material respects with all applicable state regulations regarding minimum net worth, working capital
and all other financial and legal requirements. Further, we have maintained positive working capital throughout each
of the periods covered by the financial statements.
Contractual Obligations
The following table summarizes our significant contractual obligations as of December 31, 2016:
(in thousands)
Debt obligations (1)
Workers' compensation obligations (2)
Operating lease obligations (3)
Purchase obligations (4)
Payments Due by Period
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
$
503,323 $
53,715 $
449,608 $
— $
277,853
64,644
11,505
96,110
15,274
5,078
84,678
25,649
6,427
35,726
16,839
—
—
61,339
6,882
—
Total
$
857,325 $
170,177 $
566,362 $
52,565 $
68,221
(1) Includes principal and the projected interest payments of our term loans, see Note 8 in Item 8 of this Form 10-K for details.
(2) Represents estimated payments that are expected to be made to carriers for various workers' compensation program under the contractual
obligations. These obligations include the costs of reimbursing the carriers for paying claims within the deductible layer in accordance with the
workers' compensation insurance policy as well as premiums and other liabilities.
(3) Includes various facilities and equipment leases under various operating lease agreements.
(4) Our purchase obligations primarily consist of software licenses, maintenance agreements and sales and marketing events pertaining to
various contractual agreements.
In the normal course of business, we make representations and warranties that guarantee the performance of services
under service arrangements with clients. Historically, there have been no material losses related to such guarantees.
In addition, in connection with our IPO, we have entered into indemnification agreements with our officers and directors,
which require us to defend and, if necessary, indemnify these individuals for certain pending or future legal claims as
they relate to their services provided to us. Such indemnification obligations are not included in the table above.
Off-Balance Sheet Arrangements
As of December 31, 2016, we did not have any material off-balance sheet arrangements that are reasonably likely to
have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital
resources.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS
Critical Accounting Judgments and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP, which require us to make estimates,
judgments, and assumptions that affect reported amounts of assets, liabilities, revenues and expenses, and the related
disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances. Some of the assumptions are highly
uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated
financial statements could be materially affected. For additional information about our accounting policies, refer to Note
1 in Item 8 of this Form 10-K.
Recent Accounting Pronouncements
Refer to Note 1 in Item 8 of this Form 10-K for additional information related to recent accounting pronouncements.
Insurance Loss Reserves
We have purchased fully-insured workers' compensation and health benefits coverage for our employees and WSEs.
As part of these insurance policies, we bear claims costs up to a defined deductible amount and as a result, we establish
insurance reserves including both known and incurred but not reported (IBNR) costs. As workers' compensation costs
for a particular period are not known for many years after the losses have occurred these loss reserves represent our
best estimate of unpaid claim losses and loss adjustment expenses within the deductible layer in accordance with our
insurance policies.
We have appointed external actuaries to evaluate, review and recommend estimates of our workers' compensation
and health benefits loss reserves. The loss reserve studies performed by these qualified actuaries analyze historical
claims data to develop a range of potential ultimate losses using loss development, expected loss ratio and frequency/
severity methods in accordance with Actuarial Standards of Practice. Loss methods are applied to classes or segments
of the loss data organized by policy year and risk class.
Key judgments and evaluations in arriving at loss estimates by segment and the reserve selection overall include:
•
•
•
•
the selection of models used and the relative weights given to selection model used for each policy year,
the underlying assumptions of loss development factor (LDF) used in these models,
the effect of any changes claims handling processes,
evaluation of loss (medical and indemnity) cost trends, costs from changes in the risk exposure being evaluated
and any applicable changes in legal, regulatory or judicial environment.
We review and evaluate these judgments and the associated recommendations in concluding the adequacy of loss
reserves. Where adjustments are necessary these are recorded in the period in which the adjustments are identified.
Workers' Compensation Loss Reserves
Under our policies, we are responsible for reimbursing the insurance carriers for workers' compensation losses up to
$1 million per claim occurrence (Deductible Layer). We use external actuaries to evaluate, review and recommend
workers' compensation loss reserves on a quarterly basis. The data is segmented by class and state and analyzed by
policy year; states where we have small exposure are aggregated into a single segment.
We use a combination of loss development, expected loss ratio and frequency/severity methods which include the
following inputs, assumptions and analytical techniques:
• TriNet historical loss experience, exposure data and industry loss experience,
•
•
•
•
inputs of WSEs’ job responsibilities and location,
historical frequency and severity of workers' compensation claims,
an estimate of future cost trends to establish expected loss ratios for subsequent accident years,
expected loss ratios for the latest accident year or prior accident years, adjusted for the loss trend, the effect of
rate changes and other quantifiable factors, and
•
loss development factors to project the reported losses for each accident year to an ultimate basis.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS
Final claim settlements may vary materially from the present estimates, particularly when those payments may not
occur until well into the future. In our experience, plan years related to workers' compensation programs may take 10
years or more to be fully settled. Certain assumptions used in estimating these reserves are highly judgmental. Our
loss reserves, results of operations and financial condition can be materially impacted if actual experience differs from
the assumptions used in establishing these reserves.
Health Benefits Loss Reserves
We sponsor and administer a number of fully-insured, risk based employee benefit plans, including group health,
dental, vision and life insurance as an employer plan sponsor under section 3(5) of the ERISA. Approximately 62% by
premium of our 2016 policies relate to fully-insured policies where we reimburse our health insurers for claims incurred
within a per person deductible layer up to a maximum aggregate exposure limit per policy. These deductible dollar
limits and maximum limits vary by carrier and year.
Costs covered by these insurance plans generally develop on average within three to six months so loss reserves
include estimates of reported losses and claims incurred but not yet paid (IBNP). Data is segmented and analyzed by
insurance carrier.
To estimate health benefits loss reserves we use a number of inputs, assumptions and analytical techniques:
• TriNet historical loss claims payment patterns,
•
•
per employee per month claims costs, and
plan enrollment and medical trend rates.
These reserves may vary in subsequent quarters from the amount estimated. Our loss reserves, results of operations
and financial condition can be materially impacted if actual experience differs from our key assumptions used in
establishing these reserves.
46
QUANTITATIVE AND QUALITATIVE DISCLOSURES
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We had restricted investments and interest bearing receivables in connection with workers' compensation premiums
totaling $56.3 million as of December 31, 2016. Included in this amount were $53.6 million in time deposits and U.S.
Treasuries. Our investments are made for capital preservation purposes and these interest-earning instruments carry
a degree of interest rate risk. Our future investment income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if we are forced to sell securities prior to maturity or declines in fair value are
determined to be other-than-temporary. Fluctuations in the value of our investment securities caused by a change in
interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized
only if we sell the underlying securities. To date, fluctuations in interest income have not been significant.
We had total outstanding indebtedness of $462.9 million as of December 31, 2016, of which $38.3 million is due within
12 months. We are exposed to market risk from changes in interest rates on our debt. Depending upon the borrowing
option chosen, the interest charged is generally based upon the prime lending rate or LIBOR plus an applicable margin.
If interest rates in effect at December 31, 2016 increased or decreased 100 basis points, our interest expense for 2017
through 2019 would correspondingly increase or decrease by $10.7 million.
47
FINANCIAL STATEMENTS
Item 8. Financial Statements and Supplementary Data
TRINET GROUP, INC.
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Note 1. Description of Business and Significant Accounting Policies
Note 2. Cash, Cash Equivalents and Investments
Note 3. Worksite Employee-Related Assets and Liabilities
Note 4. Workers' Compensation Loss Reserves
Note 5. Property and Equipment, Net
Note 6. Goodwill and Other Intangible Assets
Note 7. Financial Instruments and Fair Value Measurements
Note 8. Notes and Capital Leases Payable
Note 9. Stockholders' Equity
Note 10. Earnings Per Share
Note 11. 401(k) Plan
Note 12. Income Taxes
Note 13. Commitments and Contingencies
Note 14. Related Party Transactions
Note 15. Quarterly Financial Data (Unaudited)
49
51
52
53
54
55
56
56
65
66
67
68
68
69
70
71
74
75
76
79
80
80
48
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of TriNet Group, Inc.
We have audited the accompanying consolidated balance sheet of TriNet Group, Inc. and subsidiaries (the "Company")
as of December 31, 2016, and the related consolidated statements of income, comprehensive income, stockholders’
equity (deficit), and cash flows for the year then ended. Our audit also included the financial statement schedule listed
in the Index at Item 15, pertaining to the year ended December 31, 2016. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion
on the financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
TriNet Group, Inc. and subsidiaries as of December 31, 2016, and the results of their operations and their cash flows
for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule pertaining to the year ended December 31, 2016, when
considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company's internal control over financial reporting as of December 31, 2016, based on the criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated February 28, 2017 expressed an adverse opinion on the Company's
internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 28, 2017
49
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of TriNet Group, Inc.
We have audited the accompanying consolidated balance sheet of TriNet Group, Inc. as of December 31, 2015, and
the related consolidated statements of income, comprehensive income, stockholders’ equity (deficit) and cash flows
for each of the two years in the period ended December 31, 2015. Our audits also included the financial statement
schedule listed at Item 15(a). These financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of TriNet Group, Inc. at December 31, 2015, and the consolidated results of their operations and their cash
flows for each of the two years in the period ended December 31, 2015, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Francisco, California
March 31, 2016
50
FINANCIAL STATEMENTS
TRINET GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, 2016 December 31, 2015
Assets
Current assets:
Cash and cash equivalents
Restricted cash and cash equivalents
Prepaid income taxes
Prepaid expenses
Other current assets
Worksite employee related assets
Total current assets
Workers' compensation collateral receivable
Restricted cash, cash equivalents and investments
Property and equipment, net
Goodwill
Other intangible assets, net
Other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Accrued corporate wages
Notes and capital leases payable, net
Other current liabilities
Worksite employee related liabilities
Total current liabilities
Notes and capital leases payables, net, noncurrent
Workers' compensation loss reserves
(net of collateral paid $22,377 and $15,129 at December 31, 2016 and 2015,
respectively)
Deferred income taxes
Other liabilities
Total liabilities
Commitments and contingencies (see Note 13)
Stockholders’ equity:
Preferred stock
($0.000025 par value per share; 20,000,000 shares authorized; no shares
issued and outstanding at December 31, 2016 and 2015)
Common stock and additional paid-in capital
($0.000025 par value per share; 750,000,000 shares authorized; 69,015,690
and 70,371,425 shares issued and outstanding at December 31, 2016 and
2015, respectively)
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes.
$
$
$
$
184,004 $
14,569
42,381
10,784
2,145
1,281,471
1,535,354
31,883
130,501
58,622
289,207
31,074
18,502
166,178
14,557
4,105
8,579
1,359
1,373,386
1,568,164
29,204
101,806
37,844
289,207
46,772
19,452
2,095,143 $
2,092,449
22,541 $
30,937
36,559
12,551
1,275,995
1,378,583
422,495
159,301
92,373
7,801
2,060,553
12,904
28,963
32,970
11,402
1,369,497
1,455,736
460,965
105,481
54,641
7,545
2,084,368
—
—
535,132
(499,938)
(604)
34,590
2,095,143 $
494,397
(485,595)
(721)
8,081
2,092,449
51
Year Ended December 31,
2015
2014
2016
$
446,755 $
401,287 $
2,613,558
3,060,313
2,413,752
190,444
173,714
91,659
31,438
15,997
19,351
2,936,355
123,958
2,258,001
2,659,288
2,112,376
150,694
166,759
69,626
27,558
39,346
14,612
2,580,971
78,317
342,074
1,851,457
2,193,531
1,686,315
134,256
139,997
53,926
26,101
52,302
13,843
2,106,740
86,791
(20,257)
751
104,452
43,046
(19,449)
1,142
60,010
28,315
(54,193)
478
33,076
17,579
61,406 $
31,695 $
15,497
0.88 $
0.85 $
0.45 $
0.44 $
0.24
0.22
70,159,696
71,972,486
70,228,159
72,618,069
56,160,539
59,566,773
$
$
$
FINANCIAL STATEMENTS
TRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
Professional service revenues
Insurance service revenues
Total revenues
Insurance costs
Cost of providing services (exclusive of depreciation and amortization of
intangible assets)
Sales and marketing
General and administrative
Systems development and programming
Amortization of intangible assets
Depreciation
Total costs and operating expenses
Operating income
Other income (expense):
Interest expense and bank fees
Other, net
Income before provision for income taxes
Income tax expenses
Net income
Net income per share:
Basic
Diluted
Weighted average shares:
Basic
Diluted
See accompanying notes.
52
FINANCIAL STATEMENTS
TRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on investments
Foreign currency translation adjustments
Total other comprehensive income (loss), net of tax
Year Ended December 31,
2015
2014
2016
$
61,406 $
31,695 $
15,497
47
70
117
(86)
(321)
(407)
(8)
(115)
(123)
Comprehensive income
$
61,523 $
31,288 $
15,374
See accompanying notes.
53
FINANCIAL STATEMENTS
TRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except per share data)
Shares
Amount
Shares
Amount
Preferred Stock
Common Stock and
Additional Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
(Deficit)
Balance at December 31, 2013
9,516,427 $ 122,878 15,259,540 $
74,160 $
(467,209) $
(191) $
(393,240)
Net income
Other comprehensive loss
Issuance of common stock for vested restricted stock
units
Issuance of common stock under employee stock
purchase plan
—
—
—
—
—
—
—
—
—
—
4,250
—
—
—
249,494
3,393
Conversion of preferred stock
(9,516,427)
(122,878) 38,065,708
122,878
Issuance of common stock from exercise of stock
options
Issuance of common stock, net of IPO cost
Stock-based compensation expense
Repurchase of common stock
Awards effectively repurchased for required employee
withholding taxes
Excess tax benefits from equity incentive plan activity
Realized tax benefit of deductible IPO transaction costs
Special dividend
Balance at December 31, 2014
Net income
Other comprehensive loss
Issuance of common stock for vested restricted stock
units
Issuance of common stock under employee stock
purchase plan
Issuance of common stock from exercise of stock
options
Stock-based compensation expense
Repurchase of common stock
Awards effectively repurchased for required employee
withholding taxes
Excess tax benefits from equity incentive plan activity
Realized tax benefit of deductible IPO transaction costs
Balance at December 31, 2015
Net income
Other comprehensive income
Issuance of common stock for vested restricted stock
units
Issuance of common stock under employee stock
purchase plan
Issuance of common stock from exercise of stock
options
Stock-based compensation expense
Repurchase of common stock
Awards effectively repurchased for required employee
withholding taxes
Excess tax benefits from equity incentive plan activity
Balance at December 31, 2016
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 1,712,278
2,193
— 15,091,074
217,796
—
—
—
—
—
—
—
10,660
(490,419)
(80,599)
—
—
—
—
—
9,663
1,939
—
—
—
—
—
—
—
106,136
—
—
—
272,836
5,315
— 2,112,131
7,166
—
—
17,742
— (1,895,625)
—
—
—
(35,379)
—
—
20,670
822
—
—
—
—
—
—
695,253
—
—
—
283,644
4,506
— 1,297,812
5,272
—
—
26,318
— (3,414,675)
(217,769)
—
—
—
4,639
—
—
—
—
— 69,811,326
442,682
(468,127)
— 70,371,425
494,397
(485,595)
15,497
—
—
—
—
—
—
(15,009)
(1,431)
—
—
25
31,695
—
—
—
—
—
(48,364)
(799)
—
—
61,406
—
—
—
—
—
(71,604)
(4,145)
—
—
(123)
—
—
—
—
—
—
—
—
—
—
(314)
—
(407)
—
—
—
—
—
—
—
—
(721)
—
117
—
—
—
—
—
—
—
15,497
(123)
—
3,393
122,878
2,193
217,796
10,660
(15,009)
(1,431)
9,663
1,939
25
(25,759)
31,695
(407)
—
5,315
7,166
17,742
(48,364)
(799)
20,670
822
8,081
61,406
117
—
4,506
5,272
26,318
(71,604)
(4,145)
4,639
— 69,015,690 $ 535,132 $
(499,938) $
(604) $
34,590
See accompanying notes.
54
FINANCIAL STATEMENTS
TRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Stock-based compensation
Excess tax benefits received from equity incentive plan activity
Deferred income taxes
Accretion of workers' compensation and leases fair value adjustment
Changes in operating assets and liabilities:
Restricted cash and cash equivalents
Prepaid income taxes
Prepaid expenses and other current assets
Workers' compensation collateral receivable
Other assets
Accounts payable
Accrued corporate wages and other current liabilities
Workers' compensation loss reserves
Worksite employee related assets
Worksite employee related liabilities
Net cash provided by operating activities
Investing activities
Acquisitions of businesses
Purchases of marketable securities
Proceeds from maturity of marketable securities
Purchase of property and equipment
Net cash used in investing activities
Financing activities
Proceeds from issuance of common stock, net of issuance costs
Repurchase of common stock
Proceeds from issuance of common stock on exercised options
Proceeds from issuance of common stock on employee stock purchase plan
Awards effectively repurchased for required employee withholding taxes
Proceeds from issuance of notes payable
Payments for extinguishment of debt
Repayment of notes and capital leases payable
Payment of debt issuance costs
Excess tax benefits received from equity incentive plan activity
Tax credit received for deductible IPO transaction costs
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information
Interest paid
Income taxes paid (refund), net
Supplemental schedule of noncash investing and financing activities
Payable for purchase of property and equipment
Allowance for tenant improvements
See accompanying notes.
55
Year Ended December 31,
2016
2015
2014
$
61,406 $
31,695 $
15,497
39,175
26,497
(4,639)
41,772
—
(41,535)
(37,715)
(2,991)
(2,679)
262
9,158
3,247
54,161
91,915
(93,502)
144,532
(300)
(14,959)
27,787
(39,650)
(27,122)
—
(71,604)
5,272
4,506
(4,145)
57,978
(57,563)
(37,078)
(1,376)
4,639
—
(99,371)
(213)
17,826
166,178
$
184,004 $
52,817
17,923
(20,670)
14,954
(639)
(17,991)
24,494
1,313
3,152
(14,527)
287
5,616
31,483
261,750
(261,058)
130,599
(4,750)
(41,939)
27,557
(18,557)
(37,689)
—
(48,364)
7,166
5,315
(799)
—
—
(45,562)
—
20,670
822
(60,752)
(321)
31,837
134,341
166,178 $
84,403
10,960
(9,663)
43,842
(1,090)
(6,880)
(23,387)
(7,389)
(5,413)
8,004
5,212
7,749
29,822
(862,699)
862,931
151,899
—
(24,875)
—
(20,552)
(45,427)
217,796
(15,009)
2,193
3,393
(1,431)
—
—
(273,856)
(11,060)
9,663
1,939
(66,372)
(115)
39,985
94,356
134,341
$
$
15,420 $
39,285
15,224 $
2,005
32,051
(3,809)
823 $
—
344 $
1,290
1,257
—
FINANCIAL STATEMENTS
TRINET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
TriNet Group Inc. (TriNet or we, our and us), a professional employer organization (PEO) founded in 1988, provides
comprehensive human resources (HR) solutions for small to midsize businesses (SMBs) under a co-employment
model. These HR solutions include bundled services, such as multi-state payroll processing and tax administration,
employee benefits programs, including health insurance and retirement plans, workers' compensation insurance and
claims management, employment and benefit law compliance, and other services. Through the co-employment
relationship, we are the employer of record for most administrative and regulatory purposes, including:
•
•
•
•
compensation through wages and salaries,
employer payroll-related taxes payment,
employee payroll-related taxes withholding and payment,
employee benefit programs including health and life insurance, and others, and
• workers' compensation coverage.
Our clients are responsible for the day-to-day job responsibilities of the worksite employees (WSEs).
We operate in one reportable segment. All of our service revenues are generated from external clients. Less than 1%
of revenue is generated outside of the U.S.
Basis of Presentation
Our consolidated financial statements are prepared in conformity with generally accepted accounting principles (GAAP)
in the United States of America. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that
affect certain reported amounts and related disclosures. Significant estimates include:
•
•
•
•
•
•
liability for unpaid losses and loss adjustment expenses (loss reserves) related to workers' compensation and
workers' compensation collateral receivable,
health insurance loss reserves,
liability for insurance premiums payable,
impairments of goodwill and other intangible assets,
income tax assets and liabilities, and
liability for legal contingencies.
These estimates are based on historical experience and on various other assumptions that we believe to be reasonable
from the facts available to us. Some of the assumptions are highly uncertain at the time of estimation. To the extent
actual experience differs from the assumptions used, our consolidated financial statements could be materially affected.
56
FINANCIAL STATEMENTS
Revenue Recognition
Professional service revenues represent fees charged to clients for processing payroll-related transactions on behalf
of our clients, access to our HR expertise, employment and benefit law compliance services and other HR related
services. Professional service revenues are recognized in the period the services are rendered and earned under
service arrangements with clients, where service fees are fixed or determinable, and collectability is reasonably assured.
Under the accounting rules, we are not considered the primary obligor with respect to WSEs payroll and payroll tax
payments and therefore, these payments are not reflected as either revenue or expense in our consolidated statements
of income. The gross payroll and payroll tax payments made on behalf of our clients, combined, were $34.3 billion,
$30.6 billion and $25.6 billion for the years ended December 31, 2016, 2015, and 2014, respectively.
We generally charge an upfront non-refundable set-up fee which is recognized on a straight-line basis over the estimated
average client tenure.
Insurance service revenues consist of insurance-related billings and administrative fees collected from clients and
withheld from WSEs for workers' compensation insurance and health benefit insurance plans provided by third-party
insurance carriers. Insurance service revenues are recognized in the period amounts are due and where collectability
is reasonably assured.
The professional service revenues and insurance service revenues are each considered separate units of accounting
for administrative services and insurance related benefits billed to the majority of our clients. For clients billed through
a bundled invoice, the selling price of significant deliverables is determined based on the best estimate of the selling
price.
Insurance Costs
Our fully-insured insurance plans are provided by third-party insurance carriers under guaranteed-cost or risk-based
insurance policies. Under guaranteed-cost policies, our carriers establish the premiums and we are not responsible
for any deductibles. Under risk-based policies, we agree to reimburse our carriers for any claims paid within an agreed-
upon deductible layer.
Insurance costs include insurance premiums for coverage provided by insurance carriers, reimbursement of claims
payments made by insurance carriers or third-party administrators, and changes in loss reserves related to our workers'
compensation and health benefit insurance.
At policy inception, annual workers' compensation premiums are estimated based on projected wages over the duration
of the policy period and the risk categories of the WSEs. As actual wages are realized, the amounts paid for premiums
may differ from the estimates that we recorded, creating an asset or liability throughout the policy year. Such asset or
liability is reported on our consolidated balance sheets as prepaid insurance premiums or insurance premiums payable,
respectively.
Workers' Compensation Loss Reserves
We have secured fully-insured insurance policies with insurance carriers for our clients and WSEs that obligate us to
reimburse the insurance carriers for losses up to $1 million per claim occurrence (deductible layer). Workers'
compensation insurance reserves represent our liability for unpaid losses and loss adjustment expenses. These
reserves are established to provide for the estimated ultimate costs of paying claims within the deductible layer in
accordance with worker's compensation insurance policies. These reserves include estimates for reported and incurred
but not reported (IBNR) losses, and expenses associated with processing and settling the claims. In establishing these
reserves, we use an independent actuary to provide an estimate of undiscounted future cash payments that would be
made to settle the claims based upon:
• TriNet's historical loss experience, exposure data, and industry loss experience,
•
•
•
inputs including WSE job responsibilities and location,
historical frequency and severity of workers' compensation claims,
an estimate of future cost trends to establish expected loss ratios for subsequent accident years,
57
FINANCIAL STATEMENTS
•
expected loss ratios for the latest accident year or prior accident years, adjusted for the loss trend, the effect of
rate changes and other quantifiable factors, and
•
loss development factors to project the reported losses for each accident year to an ultimate basis.
We assess the workers' compensation loss reserves on a quarterly basis. For each reporting period, changes in the
actuarial methods and assumptions resulting from changes in actual claims experience and other trends are
incorporated into the workers' compensation loss reserves. Adjustments to previously established reserves are reflected
in the results of operations for the period in which the adjustment is identified. Such adjustments could be significant,
reflecting any variety of new and adverse or favorable trends. Accordingly, final claim settlements may vary materially
from the present estimates, particularly when those payments may not occur until well into the future. In our experience,
plan years related to workers' compensation programs may take ten years or more to be settled.
We do not discount workers' compensation loss reserves. Claim costs expected to be paid within one year are recorded
as workers' compensation reserves included in short-term WSE related liabilities. Claim costs expected to be paid
beyond one year are included in long-term liabilities.
Insurance carriers are responsible for administering and paying claims. We are responsible for reimbursing each carrier
up to a deductible limit per occurrence.
We have collateral agreements with various insurance carriers where either we retain custody of funds in trust accounts
which we record as restricted cash and cash equivalents, or remit funds to carriers. Collateral whether held by us, or
the carriers, is used to settle our insurance and claim deductible obligations to them. Collateral is calculated by policy
year and remains restricted until the policy year is fully settled. Collateral paid to carriers, by agreement permits net
settlement of obligations against collateral held, which we record net of our loss reserves (Carrier Collateral Offset).
Any excess funds held by carriers over our recorded loss reserves by policy year can be returned to us based on the
agreements with them. Based on the estimated timing of return, such excess funds are recorded as workers'
compensation collateral receivable, in WSE related assets or in long-term assets.
Health Benefits Loss Reserves
We sponsor and administer a number of fully-insured, risk based employee benefit plans, including group health,
dental, and vision as an employer plan sponsor under section 3(5) of the Employee Retirement Income Security Act
(ERISA). Approximately 38% of our 2016 group health insurance premiums were for guaranteed-cost policies which
are fully-insured policies where we are not responsible for any deductible. The remaining 62% by premium of our 2016
policies relate to fully-insured policies where we reimburse our health insurers for claims incurred within a per person
deductible layer up to a maximum aggregate exposure limit per policy. These deductible dollar limits and maximum
limits vary by carrier and year.
Health benefits loss reserves are established to provide for the estimated unpaid costs of reimbursing the carriers for
paying claims within the deductible layer in accordance with health insurance policies. These reserves include estimates
for reported losses, plus estimates for claims incurred but not paid. We assess reserves regularly based upon
independent actuarial studies that include other relevant factors such as current and historical claims payment patterns,
plan enrollment and medical trend rates.
Under certain policies, based on plan performance, we may be entitled to receive refunds of premiums which we
recognize in accordance with the policy terms. We estimate these refunds based on premium and claims data and
record as a reduction in the insurance costs on the consolidated statements of income and prepaid health plan expenses
in WSE related assets on the consolidated balance sheets. As of December 31, 2016 and 2015, we had $8.6 million
and $6.8 million, respectively, included within WSE related assets as prepaid insurance premiums.
Cash and Cash Equivalents
Cash and cash equivalents include bank deposits and short-term, highly liquid investments. Investments with original
maturity dates of three months or less are considered cash equivalents.
58
FINANCIAL STATEMENTS
Restricted Cash, Cash Equivalents and Investments
Restricted cash and cash equivalents presented on our consolidated balance sheets represents our corporate cash
and cash equivalents in trust accounts functioning as security deposits for our insurance carriers. These deposits are
not used for settling insurance premiums or claims payments.
WSE related assets also includes restricted cash, cash equivalents and investments held in trust for current and future
premium and claim obligations with our insurance carriers. Amounts are held in trust according to the terms of the
relevant insurance policies and by the local insurance regulations of the jurisdictions in which the policies are in force.
Investments
We have investments primarily in marketable securities including U.S. treasuries, which are classified as available for
sale and are carried at estimated fair value. Unrealized gains and losses are reported as a component of accumulated
other comprehensive income (loss), net of deferred income taxes. The amortized cost of marketable securities is
adjusted for amortization of premiums and accretion of discounts from the date of purchase to maturity or sale. Such
amortization is included in interest income as an addition to or deduction from the coupon interest earned on the
investments. We use the specific identification method to determine the realized gains and losses on the sale of
available for sale securities. Realized gains and losses are included in other income in the accompanying consolidated
statements of income.
We assess our investments for an other-than-temporary impairment loss due to a decline in fair value or other market
conditions. We review several factors to determine whether a loss is other than temporary, such as the length and
extent of the fair value decline, the financial condition and near-term prospects of the issuer and whether we have the
intent to sell or will more likely than not be required to sell before the securities' anticipated recovery, which may be at
maturity. If management determines that a security is impaired under these circumstances, the impairment recognized
in earnings is measured as the entire difference between the amortized cost and the then-current fair value.
Fair Value of Financial Instruments
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based
measurement that should be determined based on assumptions that market participants would use in pricing an asset
or a liability.
Our financial assets recorded at fair value on a recurring basis are comprised of available for sale marketable securities
and certificates of deposits. We measure certain financial assets at fair value for disclosure purposes, as well as on a
nonrecurring basis when they are deemed to be other-than-temporarily impaired. Our other current financial assets
and our other current financial liabilities, including cash and cash equivalents, restricted cash and cash equivalents,
WSE related assets and liabilities excluding insurance loss reserves, line of credit and accrued corporate wages, have
fair values that approximate their carrying value due to their short-term nature.
Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value
hierarchy based on the observability of the inputs available in the market to measure fair value, summarized as follows:
•
•
•
Level I—observable inputs for identical assets or liabilities, such as quoted prices in active markets,
Level II—inputs other than the quoted prices in active markets that are observable either directly or indirectly,
Level III—unobservable inputs in which there is little or no market data, which requires that we develop our own
assumptions.
The fair value hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. We classify our cash equivalents, debt securities and notes payable in the fair value
hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.
WSE related Assets and Liabilities
Current assets and liabilities resulted from transactions directly or indirectly associated with WSEs, including payroll
and related taxes and withholdings, our sponsored workers' compensation and health insurance programs, and other
benefit programs, are reported in WSE related assets and liabilities on the consolidated balance sheets. These assets
59
FINANCIAL STATEMENTS
and liabilities are reported separately from our corporate assets and liabilities to better distinguish our corporate position
from those assets and liabilities held by us to fund client payrolls.
Unbilled Revenue
We recognize WSE payroll and payroll tax liabilities in the period in which the WSEs perform work. When clients' pay
periods cross reporting periods, we accrue the portion of the unpaid WSE payroll and the corresponding payroll tax
liabilities associated with the work performed prior to period-end. These estimated payroll and payroll taxes liabilities
as accrued wages in WSE related liabilities. The associated receivables, including estimated revenues, offset by
advance collections from clients, are recorded as unbilled revenues in WSE related assets.
Accounts Receivable
Our accounts receivable recorded in WSE related assets, represent outstanding gross billings to clients, net of an
allowance for doubtful accounts. We establish an allowance for doubtful accounts based on historical experience, the
age of the accounts receivable balances, credit quality of clients, current economic conditions and other factors that
may affect clients’ ability to pay, and charge-off amounts when they are deemed uncollectible.
Property and Equipment
We record property and equipment at historical cost and compute depreciation using the straight-line method over the
estimated useful lives of the assets or the lease terms, generally three to five years for software and office equipment,
five to seven years for furniture and fixtures, and the shorter of the asset life or the remaining lease term for leasehold
improvements. We expense the cost of maintenance and repairs as incurred and capitalize leasehold improvements.
We capitalize internal and external costs incurred to develop internal-use computer software during the application
development stage. Application development stage costs include license fees paid to third-parties for software use,
software configuration, coding, and installation. Capitalized costs are amortized on a straight-line basis over the
estimated useful life, typically ranging from three to five years, commencing when the software is placed into service.
We expense costs incurred during the preliminary project stage, as well as general and administrative, overhead,
maintenance and training costs, and costs that do not add functionality to existing systems. For the years ended
December 31, 2016, 2015 and 2014, internally developed software costs capitalized were $21.3 million, $11.2 million
and $6.3 million respectively.
We periodically assess the likelihood of unsuccessful completion of projects in progress, as well as monitor events or
changes in circumstances, which might suggest that impairment has occurred and recoverability should be evaluated.
An impairment loss is recognized if the carrying amount of the asset is not recoverable and exceeds the future net
cash flows expected to be generated by the asset.
Goodwill and Other Intangible Assets
Our goodwill and identifiable intangible assets with indefinite useful lives are not amortized, but are tested for impairment
on an annual basis or when an event occurs or circumstances change in a way to indicate that there has been a
potential decline in the fair value of the reporting unit. Goodwill impairment is determined by comparing the estimated
fair value of the reporting unit to its carrying amount, including goodwill. Our business is largely homogeneous and,
as a result, all goodwill is associated with one reporting unit within our reportable segment.
Annually, we perform a qualitative assessment to determine whether it is more likely than not that the fair value of the
reporting unit has declined below carrying value. This assessment considers various financial, macroeconomic, industry,
and reporting unit specific qualitative factors. We perform our annual impairment testing in the fourth quarter. Based
on the results of our reviews, no impairment loss was recognized in the results of operations for the years ended
December 31, 2016, 2015 and 2014.
Intangible assets with finite useful lives are amortized over their respective estimated useful lives ranging from two to
ten years using either the straight-line method or an accelerated method. Intangible assets are reviewed for indicators
of impairment at least annually and evaluated for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Based on the results of our reviews, no impairment loss
was recognized in the results of operations for the years ended December 31, 2016, 2015 and 2014.
60
FINANCIAL STATEMENTS
Impairment of Long-Lived Assets
We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An asset is considered impaired if the carrying amount exceeds
the undiscounted future net cash flows the asset is expected to generate. An impairment charge is recognized for the
amount by which the carrying amount of the assets exceeds its fair value. Assets to be disposed of are reported at the
lower of the carrying amount or fair value, less selling costs.
Advertising Costs
We expense the costs of producing advertisements at the time production occurs, and expense the cost of running
advertisements in the period in which the advertising space or airtime is used as sales and marketing expense.
Advertising costs were $6.4 million, $8.2 million, and $7.3 million for the years ended December 31, 2016, 2015 and
2014, respectively.
Stock-Based Compensation
We have three types of stock-based awards to employees: restricted stock units (time based and performance based),
stock options and an employee stock purchase plan. Compensation expense associated with restricted stock units is
based on the fair value of common stock on the date of grant. Compensation expense associated with stock options
and employee stock purchase plan are based on the estimated grant date fair value method using the Black-Scholes
option pricing model. Expense is recognized using a straight-line amortization method over the respective vesting
period for awards that are ultimately expected to vest. Accordingly, stock-based compensation has been reduced for
estimated forfeitures. When estimating forfeitures, we consider voluntary termination behavior as well as trends of
actual forfeitures. A tax benefit from stock-based compensation is recognized in additional paid in capital to the extent
that an incremental tax benefit is realized.
Income Taxes
We account for our provision for income taxes using the asset and liability method, under which we recognize income
taxes payable or refundable for current year and deferred tax assets and liabilities for future tax effect of events that
have been recognized in our financial statements or tax returns. We measure our current and deferred tax assets and
liabilities based on provision of enacted tax laws of those jurisdictions in which we operate. The effect of changes in
tax laws and regulations, or interpretations, is recognized in our consolidated financial statements in the period that
includes the enactment date.
We recognize deferred tax assets and liabilities based on temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and amounts used for income tax purposes, as well as the expected
benefits of using net operating loss and other carryforwards. We are required to establish a valuation allowance when
it is determined more likely than not that the deferred tax assets will not be realized. Provision for income taxes may
change when estimates used in determining valuation allowances change or when receipt of new information indicates
the need for adjustment in valuation allowances. Changes in valuation allowances are reflected as a component of
provision for income taxes in the period the change is enacted.
We recognize a reserve for uncertain tax positions taken or expected to be taken in a tax return when it is concluded
that tax positions are not more likely than not to be sustained upon examination by taxing authorities, including resolution
of any related appeals or litigation processes, based on the technical merits of the positions. Assumptions, judgment
and the use of estimates are required in determining if the more likely than not standard has been met when developing
the provision for income taxes and in determining the expected benefit. The tax benefits of the position recognized in
the financial statements are then measured based on the largest amount of benefit that is greater than 50% likely to
be realized upon settlement with a taxing authority. Unrecognized tax benefits due to tax uncertainties that do not meet
the minimum probability threshold are included as other liabilities and are charged to earnings in the period that such
determination is made. We recognize interest and penalties related to uncertain tax positions as a component of income
tax expense. Accrued interest and penalties are included in other liabilities on the consolidated balance sheet.
Concentrations of Credit Risk
Financial instruments subject to concentrations of credit risk include cash, cash equivalents and investments (including
payroll funds collected), accounts receivable, and amounts due from insurance carriers. We maintain these financial
61
FINANCIAL STATEMENTS
assets principally in domestic financial institutions. We perform periodic evaluations of the relative credit standing of
these institutions. Our exposure to credit risk in the event of default by the financial institutions holding these funds is
limited to amounts currently held by the institution in excess of insured amounts.
Under the terms of professional services agreements, clients agree to maintain sufficient funds or other satisfactory
credit at all times to cover the cost of their current payroll, all accrued paid time off, vacation or sick leave balances,
and other vested wage and benefit obligations for all their work site employees. We generally require payment from
our clients on or before the applicable payroll date.
For certain clients, we require an indemnity guarantee payment (IGP) supported by a letter of credit, bond, or a certificate
of deposit from certain financial institutions. The IGP typically equals the total payroll and service fee for one average
payroll period.
As of December 31, 2016, no client accounted for more than 10% of total accounts receivable. As of December 31,
2015, one client accounted for 12% of total accounts receivable. No client accounted for more than 10% of total
revenues in the years ended December 31, 2016, 2015 and 2014. Bad debt expense, net of recoveries was $1.3
million, $2.0 million and $1.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Recent Accounting Pronouncements
Recently adopted accounting guidance
Debt issuance costs - In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2015-03-Simplifying the Presentation of Debt Issuance Costs, and, in August 2015, the FASB issued
ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit
Arrangements. These ASUs require debt issuance costs related to a recognized debt liability to be presented in the
balance sheet as a direct deduction from the carrying amount of that debt, which is consistent with the presentation
of debt discounts and premiums. The presentation and subsequent measurement of debt issuance costs associated
with lines of credit, may be presented as an asset and amortized ratably over the term of the line of credit arrangement,
regardless of whether there are outstanding borrowings on the arrangement. The recognition and measurement
guidance for debt issuance costs are not affected by these ASUs.
We adopted these ASUs as of March 31, 2016. The adoption of these ASUs resulted in a reclassification of unamortized
debt issuance costs of $2.4 million from other current assets to current portion of notes and capital leases payable
and $3.4 million from other assets to notes and capital leases payable, less current portion, as of December 31, 2015.
Unamortized debt issuance costs related to our revolving credit facility will remain classified within other assets in the
accompanying consolidated balance sheets. The adoption of this guidance did not have any impact on our consolidated
statements of income, comprehensive income or cash flows.
Recent issued accounting pronouncements
Lease arrangements - In February 2016, the FASB, issued ASU 2016-02-Leases. The amendment requires that lease
arrangements longer than 12 months result in an entity recognizing lease assets and lease liabilities. Most significant
impact is on those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures
are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty
of cash flows arising from leases.
The amendment is effective for annual reporting periods, and interim periods within those years beginning after
December 15, 2018. Early adoption is permitted, the new standard will be effective for us beginning January 1, 2018.
We will be required to recognize and measure leases at the beginning of the earliest period presented using a modified
retrospective approach. We currently anticipate early adoption of the new standard effective January 1, 2018 in
conjunction with our adoption of the new revenue standard. Our ability to early adopt is dependent on system readiness
and the completion of our analysis of information necessary to restate prior period financial statements.
As of December 31, 2016, we had a total of $64.6 million non-cancelable operating lease commitments. We anticipate
this standard will have a material impact on our consolidated financial statements. While we are continuing to assess
all potential impacts of the standard, we currently believe the most significant impact relates to our accounting for
equipment, office and data-center operating leases.
62
FINANCIAL STATEMENTS
Financial Instruments - In January 2016, the FASB issued ASU 2016-01-Recognition and Measurement of Financial
Assets and Financial Liabilities. The amendment addresses various aspects of the recognition, measurement,
presentation, and disclosure for financial instruments. The amendment is effective for annual reporting periods, and
interim periods within those years beginning after December 15, 2017. Early adoption by public entities is permitted
only for certain provisions. We are currently in the process of evaluating the impact of the adoption of this standard on
our consolidated financial statements.
Revenue Recognition - In May 2014, the FASB issued ASU 2014-09-Revenue from Contracts with Customers, which
will replace most existing revenue recognition guidance under GAAP. The core principle of the guidance is that an
entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
standard provides a five-step analysis of transactions to determine when and how revenue is recognized. In July 2015,
the FASB deferred the effective date to annual reporting periods, and interim periods within those years, beginning
after December 15, 2017. Early adoption at the original effective date of December 15, 2016 is permitted. The
amendments may be applied retrospectively or as a cumulative-effect adjustment as of the date of adoption. In March,
April and May 2016, the FASB issued ASU 2016-08 Principal versus Agent Considerations (Reporting Revenue Gross
versus Net), ASU 2016-10 Identifying Performance Obligations and Licensing, ASU 2016-12 Narrow-Scope
Improvements and Practical Expedients and ASU 2016-20 Technical Corrections and Improvements, respectively,
providing further clarification to be considered when implementing ASU 2014-09. The guidance permits two methods
of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with
the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-
up transition method). We currently anticipate adopting the standard using the full retrospective method to restate each
prior reporting period presented.
The new standard will be effective for us beginning January 1, 2018. Our ability to adopt using the full retrospective
method is dependent on system readiness and the completion of our analysis of information necessary to restate prior
period financial statements.
We anticipate this standard will have a material impact on our consolidated financial statements. While we are continuing
to assess all potential impacts of the standard, we currently believe the adoption will have material impact on our
accounting for sales commission expense, income tax provision and deferred taxes. We anticipate that certain client
acquisition costs will be deferred over the expected client tenure. Additionally, we are assessing whether it remains
appropriate to accrue assets and liabilities for unprocessed client payrolls where WSEs have performed work during
the period. We expect our professional service revenues and insurance service revenues remain substantially
unchanged. The actual revenue recognition treatment required under the standard will be dependent on contract-
specific terms, and may vary in some instances from recognition at the time of billing.
Share-based payments - In March 2016, the FASB issued ASU 2016-09-Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting, as part of the Simplification Initiative. Under this
standard, among other changes, income tax benefits and deficiencies with respect to stock-based compensation will
be recognized as income tax expense or benefit in the income statement, excess tax benefits will be classified as an
operating activity on the statement of cash flows and stock-based compensation awards can qualify as equity awards
even if the entity permits tax withholdings greater than the statutory minimum. ASU 2016-09 is effective for fiscal years
beginning after December 15, 2016, including interim periods within that reporting period. We will adopt the guidance
effective January 1, 2017.
The adoption of ASU 2016-09 is expected to impact income taxes expenses on our 2017 consolidated statements of
income and the operating and financing cash flows on the consolidated statements of cash flows. The magnitude of
such impacts are dependent upon our future grants of stock-based compensation, the stock price in relation to the fair
value of awards on grant date, and the exercise behavior of the equity compensation holders. The Company will
retrospectively adopt the presentation in the consolidated statements of cash flows, resulting in $4.6 million and $20.7
million increase in operating cash flows and decrease in financing cash flows for the years ended December 31, 2016
and 2015, respectively. We expect the remaining adjustments will not have a material effect on our consolidated financial
statements.
63
FINANCIAL STATEMENTS
Statement of Cash Flows - In November and August 2016, the FASB issued (ASU) 2016-18 - Statement of Cash Flows
(Topic 230): Restricted Cash and 2016-15-Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments. The new guidance is intended to reduce diversity in practice in how restricted cash and other
certain transactions are classified in the statement of cash flows. The amendments are effective for annual reporting
periods, and interim periods within those years beginning after December 15, 2017. Early adoption is permitted, provided
that all of the amendments are adopted in the same period. The guidance requires application using a retrospective
transition method.
As of December 31, 2016 and 2015, we had total restricted cash, restricted cash equivalents and payroll funds collected
of $1.0 billion. Currently, changes in these balances are presented as operating cash activities in the consolidated
statements of cash flows. Under the new guidance, changes in these amounts will be included with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated
statements of cash flows.
64
FINANCIAL STATEMENTS
NOTE 2. CASH, CASH EQUIVALENTS AND INVESTMENTS
Under the terms of the agreements with certain of our workers' compensation and health benefit insurance carriers,
we are required to maintain collateral in trust accounts for the benefit of specified insurance carriers and to reimburse
the carriers’ claim payments within our deductible layer. We invest a portion of the collateral amounts in marketable
securities. We report the current portion of these trust accounts as restricted cash and cash equivalents in WSE related
assets, and long term portion as restricted cash, cash equivalents and investments on the consolidated balance sheets.
We require our clients to prefund their payroll and related taxes and other withholding liabilities before payroll is
processed or due for payment. This prefund is included in WSE related assets as payroll funds collected which is
designated to pay pending payrolls and other WSE related liabilities.
Our total corporate and WSE related cash, cash equivalents and investments are summarized below:
(In thousands)
December 31, 2016
December 31, 2015
Cash and
cash
equivalents
Available
for sale
marketable
securities
Certificate
of
deposits
Cash and
cash
equivalents
Available
for sale
marketable
securities
Certificate
of
deposits
Total
Total
Cash and cash equivalents
$
184,004 $
— $
— $
184,004 $
166,178 $
— $
— $
166,178
Restricted cash and cash equivalents
14,569
14,569
14,557
14,557
Restricted cash, cash equivalents and
investments, noncurrent
Collateral for workers' compensation claims
78,672
51,829
—
130,501
38,711
63,095
—
101,806
Worksite employee related assets
Restricted cash, cash equivalents and
investments, current
Collateral for health benefits claims
Collateral for workers' compensation
claims
Investments
Total WSE related restricted cash, cash
equivalents and investments, current
Payroll funds collected
Total
65,022
64,773
—
129,795
825,958
—
—
—
—
—
65,022
46,980
2,320
2,320
—
64,773
2,320
45,937
—
132,115
825,958
92,917
859,322
—
1,500
—
1,500
—
—
46,980
2,319
2,319
—
47,437
2,319
96,736
859,322
$ 1,232,998 $
51,829 $
2,320 $ 1,287,147 $ 1,171,685 $
64,595 $
2,319 $ 1,238,599
65
FINANCIAL STATEMENTS
NOTE 3. WORKSITE EMPLOYEE RELATED ASSETS AND LIABILITIES
WSE related assets and WSE related liabilities are intended to be reviewed together when considering the position of
the company. The client directs the price and service specifications for payroll and payroll taxes and as a result, we
are not the primary obligor for payroll and payroll tax payments and therefore, record these amounts net in our statements
of income. However, we record without offset, accrued wages and payroll tax liabilities for WSEs in WSE related
liabilities with the related payroll funds collected and unbilled revenues in WSE related assets. We have classified
these assets and liabilities and other service related amounts, collectively as WSE related, to present a clearer picture
of the inter-relationship of the balances and distinguish these from our other corporate assets and liabilities.
In addition to unbilled revenues, accrued wages and payroll tax liabilities, other significant balances included in the
WSE related assets and liabilities include:
• Payroll funds collected represents cash collected from clients in advance to fund payroll and payroll taxes, and
other payroll related liabilities;
• Other payroll assets primarily include payroll tax receivables. As of December 31, 2015, there was a receivable
of $181 million from one client related to an end of year payroll tax liability for which funding was received in January
2016.
• Client deposits represent IGP payments received from clients and collections from clients in excess of payroll and
other payroll related liabilities;
• Other payroll withholdings primarily include withholdings under 401(k) plans and flexible benefit plans.
(In thousands)
Worksite employee related assets:
Restricted cash, cash equivalents and investments
Payroll funds collected
Unbilled revenues
(net of advance collections of $8,602 and $11,875 at December 31, 2016 and
2015, respectively)
Accounts receivable
(net of allowance for doubtful accounts of $292 and $1,158 at December 31, 2016
and 2015, respectively)
Prepaid insurance premiums
Workers' compensation collateral receivable
Other payroll assets
Total worksite employee related assets
Worksite employee related liabilities:
Accrued wages
Client deposits
Payroll tax liabilities
Unpaid losses and loss adjustment expenses (less than 1 year):
Health benefits loss reserves
Workers' compensation loss reserves
(net of collateral paid of $9,234 and $11,761 at December 31, 2016 and 2015,
respectively)
Insurance premiums and other payables
Other payroll withholdings
Total worksite employee related liabilities
December 31,
2016
December 31,
2015
$
$
$
132,115 $
825,958
96,736
859,322
293,192
213,837
4,854
12,805
2,136
10,411
1,281,471 $
5,060
8,832
2,428
187,171
1,373,386
272,966 $
56,182
692,460
202,396
57,758
883,608
129,430
112,658
63,702
14,223
47,032
57,731
23,813
31,533
$
1,275,995 $
1,369,497
Included in the payroll tax liabilities and insurance premiums and other payables were amounts relating to approximately
2,600 and 2,500 of our corporate employees at December 31, 2016 and 2015, respectively.
66
FINANCIAL STATEMENTS
NOTE 4. WORKERS' COMPENSATION LOSS RESERVES
The following summarizes the activities in the consolidated balance sheets for unpaid claims and claims adjustment
expenses within workers' compensation assets and liabilities:
(in thousands)
Year Ended December 31,
2016
2015
2014
Total loss reserves, beginning of year
$
190,102 $
148,034 $
120,739
Incurred
Current year
Prior years
Total incurred
Paid
Current year
Prior years
Total paid
112,967
28,243
141,210
(14,411)
(62,287)
(76,698)
89,137
26,391
115,528
(16,376)
(57,084)
(73,460)
63,377
15,401
78,778
(13,086)
(38,397)
(51,483)
Total loss reserves, end of year
Collateral paid to carriers and offset against loss reserves
Total loss reserves, net of carrier collateral offset
$
$
254,614 $
190,102 $
148,034
(31,611)
(26,890)
223,003 $
163,212 $
(55,492)
92,542
Payable in less than 1 year (1)
(net of collateral paid to carriers of $9,234, $11,761 and $10,275 as of
December 31, 2016, 2015 and 2014, respectively)
Payable in more than 1 year
63,702
57,731
17,094
(net of collateral paid to carriers of $22,377, $15,129 and $45,217 as of
December 31, 2016, 2015 and 2014, respectively)
159,301
105,481
Workers' Compensation Loss Reserves
$
223,003 $
163,212 $
75,448
92,542
(1) Included under WSE related liabilities within Note 3 to these consolidated financial statements.
Incurred claims related to prior years represent changes in estimates for ultimate losses on workers' compensation
claims. For the year ended December 31, 2016, the adverse development was primarily due to higher than expected
severity of reported claims associated with our non-office WSEs in recent accident years. For the years ended
December 31, 2015 and 2014, the adverse development resulted from changes in estimates for ultimate losses
associated with non-office WSEs.
As of December 31, 2016, 2015 and 2014, we had $65.6 million, $58.5 million and $95.4 million, respectively, collateral
held by insurance carriers of which $31.6 million, $26.9 million and $55.5 million was offset against workers'
compensation loss reserves as the agreements permit and are net settled of insurance obligations against collateral
held. Collateral paid to each carrier for a policy year in excess of our loss reserves are recorded as workers' compensation
collateral receivable.
67
FINANCIAL STATEMENTS
NOTE 5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following:
(In thousands)
Software
Office equipment, including data processing equipment
Leasehold improvements
Furniture, fixtures, and equipment
Projects in progress
Total
Less: Accumulated depreciation
Property and equipment, net
December 31, 2016 December 31, 2015
$
88,161 $
20,974
11,785
11,421
10,714
143,055
(84,433)
$
58,622 $
64,727
20,044
9,874
7,911
7,407
109,963
(72,119)
37,844
Projects in progress consist primarily of development costs for internally developed software, which we capitalize and
amortize on a straight-line basis over the estimated useful life. We recognized depreciation expense for capitalized
internally developed software of $10.2 million, $5.4 million, and $5.2 million for the years ended December 31, 2016,
2015 and 2014, respectively.
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
The following summarizes goodwill and other intangible assets:
December 31, 2016
December 31, 2015
Weighted
Average
Amortization
Period
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
289,207 $
— $
289,207 $
289,207 $
— $
289,207
(In thousands)
Goodwill
Amortizable intangibles:
Customer contracts
10 years
209,850
(182,168)
27,682
209,850
(167,968)
41,882
Trademark
Developed technology
Noncompete agreements
3 years
5 years
3 years
16,900
(16,900)
—
16,900
(16,467)
5,700
1,940
(2,308)
(1,940)
3,392
—
5,400
1,940
(1,173)
(1,710)
433
4,227
230
Total
$
234,390 $
(203,316) $
31,074 $
234,090 $
(187,318) $
46,772
We evaluate the remaining useful life of intangible assets annually to determine whether events and circumstances
warrant a revision to the estimated remaining useful life. On October 1, 2016, we adjusted the estimated useful lives
of customer contracts acquired from Ambrose, from a previously estimated useful life of 5 years to 10 years.
Expense related to intangibles amortization in future periods as of December 31, 2016 is expected to be as follows:
Year ending December 31:
2017
2018
2019
2020
2021 and thereafter
Total
Amount
(in thousands)
5,265
5,199
5,199
4,759
10,652
31,074
$
$
68
FINANCIAL STATEMENTS
NOTE 7. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Cash, Cash equivalents and Restricted Investments
We classify our cash, cash equivalents and restricted investments in marketable securities within Level I in the fair
value hierarchy because we use quoted market prices to determine the fair value. We classify our certificates of deposit
within Level II in the fair value hierarchy as we use a market approach that compares fair values on certificates with
similar maturities. We have no available for sale securities included in Level III as of December 31, 2016 and 2015.
There was no transfer of any assets and liabilities between Levels during years ended December 31, 2016 and 2015.
The following table summarizes our investments by significant categories and fair value measurement on a recurring
basis as of December 31, 2016 and 2015:
(In thousands)
December 31, 2016
Level 1:
Investments:
U.S. treasuries
Mutual funds
Total investments
Level 2:
Certificates of deposit
Total
December 31, 2015
Level 1:
Investments
U.S. treasuries
Mutual funds
Total investments
Level 2:
Certificates of deposit
Total
Maturity
(in years)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
< 3
N/A
< 1
< 4
N/A
< 1
$
$
$
$
$
$
51,376 $
500
51,876 $
25 $
5
30 $
(77) $
51,324
—
505
(77) $
51,829
2,320 $
— $
—
$
2,320
54,149
64,226 $
500
64,726 $
9 $
4
13 $
(144) $
64,091
—
504
(144) $
64,595
2,319 $
— $
— $
$
2,319
66,914
There were de minimis realized gains or losses for the years ended December 31, 2016 and 2015. We had $0.1 million
gross unrealized losses in our U.S. Treasury securities as of December 31, 2016 and 2015. The fair value of these
securities in an unrealized loss position represented 58% and 81% of the total fair value of all U.S. Treasury securities
as of December 31, 2016 and 2015, respectively.
Unrealized losses are principally caused by changes in interest rates. In analyzing an issuer's financial condition, we
consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond
rating agencies have occurred, and industry analysts' reports. As we have the ability to hold these available for sale
marketable securities until maturity, or for the foreseeable future, no decline was deemed to be other-than-temporary.
Notes Payable
The carrying value of our notes payable at December 31, 2016 and 2015 was $462.9 million and $499.6 million,
respectively, which approximated fair value. These valuations are considered Level II in the hierarchy for fair value
measurement. At December 31, 2016, the valuation was based on readily available quoted market prices. The
discounted cash flow method of valuation was used as of December 31, 2015.
69
FINANCIAL STATEMENTS
NOTE 8. NOTES AND CAPITAL LEASES PAYABLE
As of December 31, 2016, notes and capital leases payable consisted of the following:
(In thousands)
Term loan A
Term loan B
Term loan A-2
Total term loans
Deferred loan costs
Capital leases
Less: current portion
Annual
Contractual
Interest Rate
3.250% (1)
3.220% (2)
3.125% (3)
Effective
Interest Rate
Maturity
Date
3.46%
July 2019
N/A
July 2017
3.29%
July 2019
December 31,
2016
December 31,
2015
$
330,469 $
351,563
—
148,000
132,469
462,938
(4,018)
134
—
499,563
(5,781)
153
(36,559)
(32,970)
Non-current term portion
$
422,495 $
460,965
(1) Bears interest at LIBOR plus 2.25% or the prime rate plus 1.25% at our option, subject to certain rate adjustments based upon our total
leverage ratio.
(2) Contractual interest rate in place at June 30, 2016, prior to the refinancing in July 2016.
(3) Bears interest at LIBOR plus 2.125% or the prime rate plus 1.125% at our option, subject to certain rate adjustments based upon our total
leverage ratio.
In July 2016, we refinanced our Amended and Restated First Lien Credit Agreement (Credit Agreement). We replaced
$135.0 million of outstanding tranche B term loans maturing July 2017 with substantially the same amount of new
tranche A-2 term loans maturing July 2019. The $342.0 million of existing tranche A term loans and the $75.0 million
revolving credit facility were not refinanced. As part of the $135.0 million refinancing transaction, $57.6 million was
recorded as an extinguishment, and $77.0 million was rolled over into the new tranche A-2 term loans and was treated
as a debt modification.
The proceeds of the tranche A-2 term loans were used to: (i) refinance the remaining tranche B term loans outstanding
under the Credit Agreement and (ii) pay related fees and expenses. As a result of this refinancing, approximately $1.4
million in fees and costs were incurred, of which $0.8 million were recorded as deferred loan cost with the remainder
expensed.
Interest on term loans is payable quarterly. We are required to pay a quarterly commitment fee of 0.50% which may
decrease to 0.375% based on our total leverage ratio, on the daily unused amount of the commitments under the
revolving credit facility, as well as fronting fees and other customary fees for letters of credit issued under the revolving
credit facility.
The $75.0 million revolving credit facility includes capacity for a $40.0 million letter of credit facility and a $10.0 million
swingline facility. Letters of credit issued pursuant to the revolving credit facility reduce the amount available for
borrowing under the revolving credit facility. The total unused portion of the revolving credit facility was $59.5 million
as of December 31, 2016.
We are permitted to make voluntary prepayments at any time without payment of a premium. We are required to make
mandatory prepayments of term loans (without payment of a premium) with (i) net cash proceeds from issuances of
debt (other than certain permitted debt), and (ii) net cash proceeds from certain non-ordinary course asset sales and
casualty and condemnation proceeds (subject to reinvestment rights and other exceptions).
70
FINANCIAL STATEMENTS
The tranche A and A-2 term loans will be repaid in quarterly installments in aggregate annual amounts as follows (in
thousands):
Year ending December 31,
2018
2019
2017
Total
Term loan repayments
$
38,250 $
41,438 $
383,250 $
462,938
The Credit Agreement contains customary representations and warranties, and customary affirmative and negative
covenants applicable to us, including, among other things, restrictions on indebtedness, liens, investments, mergers,
and other dispositions. The Credit Agreement also defines certain restricted payments including prepayment of other
indebtedness, dividends and stock repurchases within a dollar limit. This limit is subject to adjustments based on our
total leverage ratio and continued compliance with the financial covenants set forth in the Credit Agreement.
The financial covenants under the Credit Agreement require us to maintain a minimum consolidated interest coverage
ratio of at least 3.50 to 1.00 and a maximum total leverage ratio of 4.25 to 1.00 at December 31, 2016 and 2015. We
were in compliance with these financial covenants under the credit facilities at December 31, 2016 and 2015.
The credit facility is secured by substantially all of our assets, other than excluded assets as defined in the Credit
Agreement, which includes certain customary assets, assets held in trusts as collateral and WSE related assets.
NOTE 9. STOCKHOLDERS’ EQUITY
Common Stock
Upon closing of our IPO in March 2014, we issued 15,000,000 shares of common stock at a public offering price
$16 per share, for an aggregate offering price of $240.0 million, resulting in net proceeds to us of $216.8 million,
after deducting underwriting discounts and commissions of approximately $16.8 million and offering expenses of
approximately $5.6 million.
Equity-Based Incentive Plans
In December 2009, the board of directors approved the 2009 Equity Incentive Plan (the 2009 Plan) which provides for
the grant of various equity awards to eligible employees, directors, and consultants including stock options, restricted
stock unit (time-based and performance-based) and other stock awards. Shares available for grant as of December 31,
2016 were 6.7 million.
Stock Options
Stock options are granted to employees under the 2009 Plan at exercise prices equal to the fair market value of our
common stock on the dates of grant. Options generally have a maximum contractual term of 10 years. Options are
generally vested over four years, based on continued service. Stock options are forfeited if the employee ceases to
be employed by us prior to vesting.
71
FINANCIAL STATEMENTS
The following table summarizes stock option activity under our equity-based plans for the year ended December 31,
2016:
Balance at December 31, 2015
Granted
Exercised
Forfeited
Expired
Balance at December 31, 2016
Exercisable at December 31, 2016
Vested and expected to vest at December 31, 2016
Additional Disclosures for Stock Options
Weighted-average grant date fair value of stock options
Total fair value of options vested (in millions)
Total intrinsic value of options exercised (in millions)
Cash received from options exercised (in millions)
Restricted Stock Units
Number
of Shares
4,446,149 $
—
(1,297,812)
(261,029)
(72,084)
2,815,224 $
2,014,443 $
2,775,326 $
Weighted
Average
Exercise
Price
8.96
—
4.06
17.53
27.01
9.96
8.00
9.83
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
(in thousands)
7.56 $
52,108
6.66 $
6.42 $
6.65 $
46,231
36,459
45,865
Year Ended December 31,
2016
2015
2014
$
$
$
N/A $
6.8 $
20.5 $
5.3 $
12.73 $
12.2 $
53.3 $
7.3 $
7.18
7.5
35.1
2.2
Restricted stock units are subject to time-based or performance-based vesting conditions:
• The time-based restricted stock units (RSUs) granted to non-employee directors generally fully vest on the first
anniversary of the grant date;
• The RSU granted to employees are generally subject to vesting ratably on a quarterly basis over four years;
• The performance-based restricted stock units (PSUs) are subject to vesting based on our achievement of the
financial performance metrics and other goals that are established at the grant date. The financial performance
metric established represents cumulative annual growth rate in our Net Service Revenues as defined in the incentive
plan over three-year performance periods. Depending on the results achieved, the actual number of shares to be
granted may range from 0% to 200% of the target shares. Compensation expense is recognized ratably over the
vesting period based on the probability of the number of awards expected to vest at each reporting date.
Unvested restricted stock units are forfeited if the employee ceases to be employed by us prior to vesting.
72
FINANCIAL STATEMENTS
The following table summarizes RSU and PSU activity under our equity-based plans for the year ended December 31,
2016:
Nonvested at December 31, 2015
Granted
Vested
Forfeited
Nonvested at December 31, 2016
RSUs
PSUs
Number of
Units
956,687 $
2,281,998
(695,253)
(220,381)
2,323,051 $
Weighted-
Average
Grant Date
Fair Value
Number of
Units
Weighted-
Average
Grant Date
Fair Value
28.03
18.25
23.52
22.29
20.32
173,286 $
33.51
—
—
(23,874)
149,412 $
—
—
33.51
33.51
Additional Disclosures for RSUs
Total grant date fair value of RSUs granted (in millions)
Total grant date fair value of RSUs vested (in millions)
Shares withheld to settle payroll tax liabilities related to vesting of RSUs
held by employees
Year Ended December 31,
2016
2015
2014
$
$
41.7 $
16.4 $
31.2
3.5 $
N/A
0.1
217,769
35,379
80,599
Employee Stock Purchase Plan
Our 2014 Employee Stock Purchase plan (ESPP) offers eligible employees an option to purchase shares of our common
stock through a payroll deduction. The purchase price is equal to the lesser of 85% of the fair market value of our
common stock on the offering date or 85% of the fair market value of our common stock on the applicable purchase
date. Offering periods are approximately six months in duration and will end on or about May 15 and November 15 of
each year. Employees may contribute a minimum of 1% and a maximum of 15% of their earnings. The plan is considered
to be a compensatory plan. We issued 283,644, 272,836, and 249,494 shares under the ESPP during 2016, 2015 and
2014, respectively. As of December 31, 2016, 1.7 million shares were reserved for future issuances under the ESPP.
Stock-Based Compensation
The fair value of our RSUs and PSUs is equal to the fair value of our common stock on the grant date. The fair value
of stock options and the ESPP is estimated on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
Year Ended December 31,
Expected
Term (in
Years)
Expected
Volatility
Risk-Free
Interest
Rate
Expected
Dividend
Yield
Expected
Term (in
Years)
Expected
Volatility
Risk-Free
Interest
Rate
Expected
Dividend
Yield
Stock Option Assumptions
ESPP Assumptions
2016
2015
2014
N/A
6.08
6.05
N/A
39%
58%
N/A
1.73%
1.80%
N/A
0%
0%
0.50
0.50
0.50
32-76% 0.33-0.62%
34-76% 0.07-0.33%
33-58% 0.06-0.07%
0%
0%
0%
Compensation expense is measured based on the fair value of the stock option on the grant date and recognized over
the requisite service period for each separately vesting portion of the stock option award. Stock-based compensation
expense and other disclosures for stock-based awards made to our employees pursuant to the equity plans was as
follows:
73
FINANCIAL STATEMENTS
(In thousands)
Cost of providing services
Sales and marketing
General and administrative
Systems development and programming costs
Total stock-based compensation expense
Income tax benefit related to stock-based compensation expense
Actual tax benefit realized from stock options exercise
Year Ended December 31,
2016
2015
2014
6,607 $
4,244 $
6,573
10,831
2,486
26,497 $
9,142 $
7,076 $
4,490
7,501
1,688
17,923 $
5,678 $
19,609 $
2,658
2,755
4,517
1,030
10,960
2,040
13,514
$
$
$
$
The table below summarizes unrecognized compensation expense, net of forfeitures for the year ended December 31,
2016 associated with the following:
Nonvested stock options
Nonvested RSUs
Nonvested PSUs
Stock Repurchases
Amount
(in thousands)
Weighted-Average
Period (in Years)
$
$
$
5,739
42,198
374
1.41
2.70
1.00
During 2016, 2015, and 2014, the board of directors authorized $100 million, $50 million and $45 million, respectively
of outstanding common stock to be repurchased with no expiration from the date of authorization. As of December 31,
2016, approximately $60.0 million remained available for repurchase pursuant to our stock repurchase program. During
2016, 2015 and 2014, we repurchased 3,414,675 shares, 1,895,625 shares and 490,419 shares, respectively.
NOTE 10. EARNINGS PER SHARE (EPS)
Basic EPS is computed based on the weighted average number of common stocks outstanding during the period.
Diluted EPS is computed based on those shares used in the basic EPS computation, plus potentially dilutive shares
issuable under our equity-based compensation plans using the treasury stock method. Shares that are potentially anti-
dilutive are excluded.
In 2014, we had convertible preferred stock which were participating securities. Basic EPS was computed using the
two-class method that earnings were allocated between common stock and participating preferred stock. Diluted EPS
is computed using the more dilutive of the if-converted method and two-class method. The convertible preferred stock
was converted into common stock as a result of our IPO.
74
FINANCIAL STATEMENTS
The following table presents the computation of our basic and diluted EPS attributable to our common stock:
(In thousands, except per share data)
Numerator (basic)
Net income
Less net income allocated to participating securities
Net income attributable to common stock
Denominator (basic)
Weighted average shares of common stock outstanding
Basic EPS
Numerator (diluted)
Net income
Less net income allocated to participating securities
Net income attributable to common stock
Denominator (diluted)
Weighted average shares of common stock
Dilutive effect of stock options and restricted stock units
Weighted average shares of common stock outstanding
Year Ended December 31,
2016
2015
2014
$
$
$
$
$
61,406 $
31,695 $
—
—
61,406 $
31,695 $
70,160
70,228
0.88 $
0.45 $
61,406 $
31,695 $
—
—
61,406 $
31,695 $
70,160
1,812
71,972
70,228
2,390
72,618
15,497
(2,224)
13,273
56,161
0.24
15,497
(2,114)
13,383
56,161
3,406
59,567
0.22
Diluted EPS
$
0.85 $
0.44 $
Common stock equivalents excluded from income per diluted share
because of their anti-dilutive effect
871
1,004
526
NOTE 11. 401(k) PLAN
Under our 401(k) plan, corporate participants may direct the investment of contributions to their accounts among certain
investments. We match individual employee 401(k) plan contributions at the rate of $0.50 for every dollar contributed
by employees subject to a cap. We recorded matching contributions to the 401(k) plan of $5.1 million, $4.6 million,
and $3.5 million during the years ended December 31, 2016, 2015, and 2014, respectively, which are reflected in
various operating expense lines within the accompanying consolidated statements of income.
We also maintain multiple employer defined contribution plans, which cover WSEs for client companies electing to
participate in the plan and for their internal staff employees. We contribute, on behalf of each participating client, varying
amounts based on the clients’ policies and serviced employee elections.
75
FINANCIAL STATEMENTS
NOTE 12. INCOME TAXES
Provision for Income Taxes
The provision for income taxes consists of the following:
(In thousands)
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Revaluation due to state legislative changes
Year Ended December 31,
2016
2015
2014
$
1,488 $
9,189 $
(31,111)
(364)
150
1,274
38,028
4,278
(6)
(528)
41,772
3,794
378
13,361
11,528
320
(24)
3,130
14,954
4,618
230
(26,263)
38,297
2,951
—
2,594
43,842
17,579
Total
$
43,046 $
28,315 $
The U.S. federal statutory income tax rate reconciled to our effective tax rate is as follows:
(In thousands, except percent)
Year Ended December 31,
2016
Tax
Expense/
(Benefit)
Percent
of Pre-
Tax
Income
(Loss)
Pre-Tax
Income
$104,452
Pre-Tax
Income
$ 60,010
2015
Tax
Expense
/(Benefit)
Percent
of Pre-
Tax
Income
(Loss)
Pre-Tax
Income
$ 33,076
2014
Tax
Expense
/(Benefit)
Percent
of Pre-
Tax
Income
(Loss)
U.S. federal statutory tax rate
$ 36,558
35.0%
$ 21,004
35.0%
$ 11,577
35.0%
State income taxes, net of federal benefit
Tax rate change
Nondeductible transaction costs
Nondeductible meals, entertainment and
penalties
Stock-based compensation
Uncertain tax positions
Tax credits
Net Operating Loss adjustment
State tax return to provision adjustment
Other
Total
4,484
(528)
—
4,129
634
23
4.2
(0.5)
—
4.0
0.6
—
(1,228)
(1.2)
—
(1,267)
241
—
(1.2)
0.3
3,961
3,130
—
1,970
816
98
(1,340)
(932)
—
6.6
5.2
—
3.3
1.3
0.2
(2.2)
(1.5)
—
1,257
2,594
305
1,412
1,478
268
3.8
7.8
0.9
4.3
4.5
0.8
(1,202)
(3.6)
—
—
—
—
(392)
(0.7)
(110)
(0.3)
$ 43,046
41.2%
$ 28,315
47.2%
$ 17,579
53.2%
Our effective income tax rate decreased by 6.0% from 47.2% in 2015 to 41.2% in 2016. The change was primarily
attributed to a decrease in state income taxes from income that is excluded for state income tax purposes and dilution
of the negative rate impact from permanent items due to an increase in pre-tax earnings.
In 2015, the revaluation of deferred taxes from state legislative changes resulted in a charge to income tax of $3.1
million compared to the state tax benefit from such revaluation of $0.5 million in 2016. Further, a discrete benefit of
$1.3 million resulting in a tax rate benefit of 1.2% was recorded in 2016 associated with reduced state income tax
expense in prior years arising from state return to provision paid for workers' compensation insurance. The revaluation
76
FINANCIAL STATEMENTS
of deferred taxes resulted in discrete tax (benefit)/expense representing (0.5)%, 5.2% and 7.8% of the effective tax
rate for the years ended December 31, 2016, 2015 and 2014, respectively.
Deferred Income Taxes
Significant components of our deferred tax assets and liabilities are as follows:
(In thousands)
Deferred tax assets:
Year Ended December 31,
2016
2015
Net operating losses (federal and state)
$
4,397 $
Accrued expenses
Accrued workers' compensation costs
Stock-based compensation
Tax benefits relating to uncertain positions
Tax credits (federal and state)
Other
Total
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Depreciation and amortization
Deferred service revenues
Prepaid health plan expenses
Total deferred tax liabilities
10,239
13,266
5,350
37
6,344
(47)
39,586
(5,689)
33,897
(8,055)
(114,646)
(3,569)
(126,270)
Net non-current deferred tax liabilities
$
(92,373) $
2,508
9,908
18,823
4,643
29
6,272
113
42,296
(5,276)
37,020
(3,277)
(85,263)
(3,121)
(91,661)
(54,641)
We recorded an additional $0.4 million of valuation allowance from $5.3 million in 2015 to $5.7 million in 2016, related
to certain state net operating loss carryforwards generated in current year that may not be utilized prior to expiration.
We have de minimis federal net operating loss carryforwards and $95.5 million multiple state net operating loss
carryforwards as of December 31, 2016. The federal net operating loss carryforward will begin expiring in 2031 and
the state net operating loss carryforward will begin expiring in 2017.
We have excluded excess windfall tax benefits resulting from stock option exercises as components of our gross state
deferred tax assets, as tax attributes related to such windfall tax benefits should not be recognized until they result in
a reduction of state taxes payable. The gross amount of unrealized state net operating loss carryforwards resulting
from stock option exercises was $13.1 million at December 31, 2016. When realized, excess windfall tax benefits are
credited to additional paid-in capital. The provision for income taxes for the year ended December 31, 2016 included
$4.7 million of excess tax benefits resulting from stock option exercises and net operating loss carryforward utilization.
We follow the tax law ordering method to determine when such net operating loss carryforwards have been realized.
We have $6.5 million (net of federal benefit) state tax credit carryforwards available that will begin expiring in 2021,
which are partially offset by a valuation allowance of $4.7 million as of December 31, 2016 and 2015.
We are subject to tax in U.S. federal and various state and local jurisdictions, as well as Canada. We are not subject
to any material income tax examinations in federal or state jurisdictions for tax years prior to January 1, 2011. We paid
Notices of Proposed Assessments disallowing employment tax credits totaling $10.5 million, plus interest and penalties
of $4.0 million in connection with the IRS examination of Gevity HR, Inc. and its subsidiaries, which was acquired by
TriNet in June 2009. This issue is being resolved through litigation. With regard to these employment tax credits, we
believe it is more likely than not that we will prevail and realize our receivable included in other noncurrent assets
without a charge to our statement of income. Therefore, no reserve has been recognized related to this matter.
We have not provided for U.S. federal income and foreign withholding taxes on our Canadian subsidiary’s undistributed
earnings of $2.7 million as of December 31, 2016, because we intend to reinvest such earnings indefinitely. Upon
77
FINANCIAL STATEMENTS
distribution of those earnings in the form of dividends or otherwise, we would be subject to U.S. income taxes (subject
to an adjustment for foreign tax credits). Determining the unrecognized deferred tax liability related to our investment
in our Canadian subsidiary that are indefinitely reinvested is not practicable.
Uncertain Tax Positions
As of December 31, 2016 and 2015, the total unrecognized tax benefits related to uncertain income tax positions,
which would affect the effective tax rate if recognized, were $0.6 million and $3.3 million, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is
as follows:
(In thousands)
Year Ended December 31,
2016
2015
2014
Unrecognized tax benefits at January 1
$
2,618 $
2,471 $
2,300
Additions for tax positions of prior periods
Additions for tax positions of current period
Reductions for tax positions of prior period:
Settlements with taxing authorities
Lapse of applicable statute of limitations
Adjustments to tax positions
—
132
(1,855)
(130)
(15)
—
167
—
—
(20)
25
182
—
—
(36)
Unrecognized tax benefits at December 31
$
750 $
2,618 $
2,471
As of December 31, 2016 and 2015, the total amount of gross interest and penalties accrued was $0.8 million. Accrued
interest and penalties are included in other liabilities on the consolidated balance sheet.
78
FINANCIAL STATEMENTS
NOTE 13. COMMITMENTS AND CONTINGENCIES
Lease Commitments
We lease office facilities, including our headquarters and other facilities under non-cancelable operating leases. The
schedule of minimum future rental payments under non-cancelable operating leases having initial terms in excess of
one year at December 31, 2016, is as follows:
(In thousands)
Year ending December 31:
2017
2018
2019
2020
2021
Thereafter
Minimum lease payments
Operating Leases
$
$
15,274
13,809
11,840
11,334
5,505
6,882
64,644
The lease agreements generally provide for rental payments on a graduated basis and for options to renew, which
could increase future minimum lease payments if exercised. We recognize rent expense on a straight-line basis over
the lease period and accrue for rent expense incurred but not paid. Rent expense for the years ended December 31,
2016, 2015 and 2014 was $16.7 million, $12.9 million and $11.9 million, respectively.
Standby Letters of Credit
We have two standby letters of credit up to an aggregate of $17.8 million provided as collateral for our workers’
compensation obligations. At December 31, 2016, the facilities were not drawn down.
Contingencies
In August 2015, Howard Welgus, a purported stockholder filed a putative securities class action lawsuit, Welgus v.
TriNet Group, Inc. et. al., under the Securities Exchange Act of 1934 in the United States District Court (the Court) for
the Northern District of California. The complaint was later amended in April 2016. The amended complaint generally
alleges that TriNet and the other defendants caused damage to purchasers of our stock by misrepresenting and/or
failing to disclose facts generally pertaining to alleged trends affecting health insurance and workers' compensation
claims. The other defendants include certain of our officers and directors, General Atlantic, LLC, a former significant
shareholder, and the underwriters of our IPO. In November 2016, the parties appeared at a hearing before the Court
on our motion to dismiss the amended complaint in its entirety. In January 2017, the Court issued an order granting
TriNet’s and the other defendants’ motions to dismiss. The Court dismissed the plaintiff’s claims in part with prejudice
and in part without. As a result, the Court has given the plaintiff until March 3, 2017 to file a second amended complaint
with respect to claims not dismissed with prejudice. If the plaintiff chooses not to file a second amended complaint,
the case will be dismissed with prejudice and a final judgment will be entered. We are unable to reasonably estimate
the possible loss or range of losses, if any, arising from this litigation.
We are and, from time to time, have been and may in the future become involved in various litigation matters, legal
proceedings and claims arising in the ordinary course of its business, including disputes with our clients or various
class action, collective action, representative action and other proceedings arising from the nature of our co-employment
relationship with our clients and WSEs in which we are named as a defendant. In addition, due to the nature of our
co-employment relationship with our clients and WSEs, we could be subject to liability for federal and state law violations,
even if we do not participate in such violations. While our agreements with our clients contain indemnification provisions
related to the conduct of our clients, we may not be able to avail ourselves of such provisions in every instance. We
have accrued our current best estimates of probable losses with respect to these matters which are individually and
in aggregate immaterial to our consolidated financial statements.
While the outcome of the matters described above cannot be predicted with certainty, management currently does not
believe that any such claims or proceedings or the above mentioned securities class action will have a materially
79
FINANCIAL STATEMENTS
adverse effect on our consolidated financial position, results of operations or cash flows. However, the unfavorable
resolution of any particular matter or our reassessment of our exposure for any of the above matters based on additional
information obtained in the future could have a material impact on our consolidated financial position, results of
operations or cash flows.
NOTE 14. RELATED PARTY TRANSACTIONS
We have service agreements with certain stockholders that we process their employees' payrolls and payroll taxes.
From time to time, we also enter into sales and purchases agreements with various companies that have a relationship
with our executive officers or members of our board of directors. The relationships are typically an equity investment
by the executive officer or board member in the customer / vendor company or our executive officer or board member
is a member of the customer / vendor company's board of directors. We have received $10.2 million, $6.1 million, and
$3.9 million in total revenues from such related parties during the years ended December 31, 2016, 2015 and 2014,
respectively.
We have also entered into various software license agreements with software service providers who have board
members in common with us. We paid the software service providers $7.1 million, $4.1 million, and $5.9 million during
the years ended December 31, 2016, 2015 and 2014, for services we received, respectively.
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
March 31
June 30
September 30
December 31
Quarter ended
2016
Total revenues
Insurance costs
Operating income
Net income
Basic net income per share
Diluted net income per share
2015
Total revenues
Insurance costs
Operating income
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
$
$
$
$
$
$
732,939 $
745,846 $
770,457 $
569,689
25,902
11,577
0.16 $
0.16 $
596,673
26,367
12,282
0.17 $
0.17 $
609,422
28,972
14,581
0.21 $
0.20 $
625,578 $
640,007 $
668,008 $
483,203
31,041
15,811
0.23 $
0.22 $
517,994
5,985
(1,308)
(0.02) $
(0.02) $
534,481
11,682
3,097
0.04 $
0.04 $
811,071
637,968
42,717
22,966
0.34
0.32
725,695
576,698
29,609
14,095
0.20
0.20
80
DISCLOSURE CONTROLS AND PROCEDURES
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have, with the participation of our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), evaluated
the effectiveness of our disclosure controls and procedures as of December 31, 2016. The term “disclosure controls
and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our
disclosure controls and procedures as of December 31, 2016, our Chief Executive Officer and Chief Financial Officer
concluded that, as of such date, our disclosure controls and procedures were not effective as a result of the material
weaknesses in our internal control over financial reporting, as further described below. A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected
on a timely basis.
Notwithstanding the material weaknesses in our internal control over financial reporting, we have concluded that the
consolidated financial statements included in this Annual Report on Form 10-K fairly present, in all material respects,
our financial position, results of operations and cash flows for the periods presented in conformity with accounting
principles generally accepted in the United States of America. Additionally, the material weaknesses did not result in
any restatements of our consolidated financial statements or disclosures for any prior period.
Management’s Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process, designed by, or under the supervision
of the our principal executive and principal financial officers and effected by our board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP.
Due to inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that
a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions or that the degree of compliance with policies or procedures may deteriorate.
We, with the participation of the CEO and CFO, conducted an evaluation of the effectiveness of our internal control
over financial reporting as of December 31, 2016 based on the framework and criteria established in Internal Control
- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
This evaluation included review of the documentation of controls, testing of the operating effectiveness of controls and
a conclusion on this evaluation.
Based on the foregoing, we concluded that our internal controls over financial reporting as of December 31, 2016 were
not effective as a result of the material weaknesses described below.
Deloitte & Touche LLP, our independent registered public accounting firm, has issued an audit report on the effectiveness
of our internal control over financial reporting as of December 31, 2016. This audit report appears below.
81
DISCLOSURE CONTROLS AND PROCEDURES
Information Technology General Controls (ITGC)
In the course of completing our assessment of internal control over financial reporting as of December 31, 2015, we
identified a number of deficiencies related to the design and operating effectiveness of information technology (IT)
general controls for information systems that comprised part of our system of internal control over financial reporting
and are relevant to the preparation of our consolidated financial statements (such information technology systems are
referred to as the “affected IT systems”).
These deficiencies in the design and operating effectiveness of the controls involved logical access, program change
management and computer operations controls that are intended to ensure that access to financial applications and
data is adequately restricted to appropriate personnel, and that changes affecting the financial applications and
underlying account records are identified, authorized, tested and implemented appropriately.
We have concluded that deficiencies in ITGC logical access, including controls intended to ensure that access rights
are compatible with job duties (segregation of duties) existed at December 31, 2016 and therefore represent a material
weakness as of December 31, 2016.
As a result of the deficiencies identified, the following business process controls that are dependent on the affected IT
systems or resulting electronic data and financial reports were adversely affected: controls over revenues and insurance
costs; insurance liabilities, payroll related costs, payroll tax and WSE related assets and liabilities. Accordingly, the
business process controls that are dependent on affected IT systems or resulting electronic data were also deemed
to be deficient and have material weaknesses.
Revenue and Payroll Operations
We have determined that we have several control deficiencies aggregating to a material weakness related to the design
and operating effectiveness of controls over our revenue platforms as of December 31, 2016. This was primarily
caused by controls over the review and approval of adjustments to revenue, including revenue pricing and SOI benefit
elections could not be attested as operating effectively due to control deficiencies. The deficiencies noted above could
impact revenues, insurance costs, insurance liabilities, payroll related costs, payroll tax and WSE related assets and
liabilities.
Payroll Tax Liabilities
We have determined that we have several control deficiencies aggregating to a material weakness in the design and
operating effectiveness of our controls to validate the accuracy and completeness of withholding tax rates updated
into our payroll systems as of December 31, 2016. We receive payroll tax rate updates from an outside vendor which
we rely upon. We do not, however, receive a report of service organization controls to ensure that we timely receive
all tax rate updates. Additionally, our controls over the identification and resolution of reconciling items for our payroll
tax liabilities to our general ledger were not operating with a sufficient level of precision to be effective. Our internal
review processes to verify the tax rate updates received from the vendor are not at a sufficient level of precision to
conclude all that tax rate updates have been accurately and timely identified. These deficiencies impact our WSE
related liabilities.
Insurance Costs and Insurance Liabilities
We have determined that we have several control deficiencies aggregating to a material weakness exist related to the
design and operating effectiveness of controls over health and worker’s compensation expenses and liabilities as of
December 31,2016. Controls over the review and reconciliation of input data, spreadsheets and system generated
reports were not designed with an appropriate level of precision to provide reasonable assurance that they will prevent
or detect a material error in the financial statements. These deficiencies impact insurance costs, workers’ compensation
collateral receivable, workers’ compensation liabilities, and worksite employee related assets and liabilities.
Entity Level Controls - Control Activities and Monitoring
We determined that we have several control deficiencies aggregating to a material weakness related to our entity level
controls over our identification of certain control activities and the monitoring of our control performance as of December
31, 2016.
82
DISCLOSURE CONTROLS AND PROCEDURES
The control deficiencies included ineffective controls over the evaluation and timely review of controls operating at
service organizations and the integration of these controls with our 'user' controls. Additionally, we had inadequate
processes to monitor control performance and remediation activities and failed to implement compensating controls
for deficiencies in ITGC's.
Changes in Internal Control over Financial Reporting
Significant changes in internal control over financial reporting included, but were not limited to
•
•
Improved the design, operating effectiveness, and documentation of certain review controls used to verify the
accuracy of data used in financial reporting. These activities included the development of new review controls,
training and education for process owners on audit requirements, and the creation of review templates to properly
document evidence of management review.
Implementation of a new procure-to-pay system that interfaces with internal systems and designed to ensure only
authorized individuals can access the system and execute purchases. Detailed processes and automated controls
are maintained in the system in an effort to ensure all approvers and defined dollar limits conform with our expense
and authorization policy. Other control enhancements include vendor contract review and approval prior to purchase
requisition set-up and payment.
• We have been actively engaged in the implementation of a remediation plan designed to ensure that controls
contributing to remediation of our ITGC material weakness are designed appropriately and will operate effectively.
We also engaged external IT specialist consultants to advise us on these remediation activities. The remediation
actions we have taken to date to address the material weakness and to improve and strengthen our internal controls
include the following:
• Enhancing IT governance policies and procedures,
• Designing and implementing control activities and procedures around user and administrator access, program
change management and monitoring of batch processing, and
• Hiring qualified IT resources, and providing sufficient training to the relevant control owners.
• We retired the Ambrose and Accord payroll platforms and implemented a number of controls to improve the
effectiveness of revenue processing and to control the manual inputs and data changes to address the material
weaknesses identified in 2015.
• We improved the design, operation, and monitoring of control activities and procedures to address internal controls
and financial reporting requirements. These activities included the hiring of senior financial management,
improvements to financial reporting processes and control activities, and the significant expansion of the internal
audit department as well as hiring outside consultants to facilitate the timely completion of the evaluation of the
design and operating effectiveness of internal control over financial reporting.
• We improved reconciliation controls of the payroll taxes payable account, but have not sufficiently addressed
controls over the completeness and accuracy of the payroll tax rates input into our Passport platform.
As of December 31, 2016, testing of both the design and operating effectiveness of the new and improved controls
was completed, and management concluded that the material weaknesses in internal controls over financial reporting
related to ITGC computer operations and change management control, control environment and risk assessment,
management review controls, and procurement processes have been fully remediated.
Except for the changes described above there were no changes in our internal control over financial reporting identified
in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the fourth quarter
ended December 31, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Planned Remediation Activities
We will continue the consolidation of IT platforms, plan to complete the implementation of appropriate access rights
and monitor the operation of new controls so management can conclude that they are designed and operating effectively,
and the material weakness is remediated. We plan to implement additional compensating controls over areas of known
ITGC access issues while the relevant controls are in remediation, require self-certification as part of an improved
83
DISCLOSURE CONTROLS AND PROCEDURES
system of control monitoring and improve the process of integrating and testing service organization controls that we
rely upon.
In addition, as we continue to evaluate and work to improve our internal control over financial reporting, we may take
additional measures to address control deficiencies or determine to modify the remediation plan described above. We
will continue to test and evaluate the implementation of these new processes and internal controls during 2017 to
ascertain whether they are designed and operating effectively to provide reasonable assurance that they will prevent
or detect a material error in our financial statements.
To further strengthen controls around the accuracy and completeness of revenue and payroll processing, we will
continue to consolidate platforms in 2017 and retire the SOI platform which will reduce a significant number of manual
business process controls. We intend to improve transaction logging capabilities in an effort to ensure manual
adjustments are properly evidenced as authorized and reviewed. We will develop an additional compensating controls
in an effort to ensure the output of payroll processing and recorded revenue is complete and accurate.
We will be implementing a number of control improvements in order to further improve the design and operating
effectiveness of controls over health and worker’s compensation liabilities and expenses in 2017. The design of key
controls will be addressed to better ensure the completeness and accuracy of information used in a control (key reports)
and review controls will be refined to better address both the accuracy and precision of management’s review.
We will implement compensating controls over the tax rates provided by the outside vendor in an effort to ensure all
tax rate updates are complete, accurate, and timely.
While we intend to resolve all of the material control deficiencies, we cannot provide any assurance that these
remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of
these efforts by any particular date.
84
DISCLOSURE CONTROLS AND PROCEDURES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of TriNet Group, Inc.
We have audited the internal control over financial reporting of TriNet Group, Inc. and subsidiaries (the "Company”)
as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on that risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have
a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements
will not be prevented or detected on a timely basis. The following material weaknesses have been identified and
included in management's assessment:
•
•
•
•
•
Ineffective controls to ensure identification of control activities and monitoring
Ineffective information technology (IT) general controls over user access
Ineffective controls over revenue and payroll operations
Ineffective controls over payroll tax liabilities
Ineffective controls over insurance costs and insurance liabilities
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our
audit of the consolidated financial statements and financial statement schedule as of and for the year ended
December 31, 2016, of the Company and this report does not affect our report on such financial statements.
85
DISCLOSURE CONTROLS AND PROCEDURES
In our opinion, because of the effect of the material weaknesses identified above on the achievement of the objectives
of the control criteria, the Company has not maintained effective internal control over financial reporting as of
December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements and financial statement schedule as of and for the year ended
December 31, 2016, of the Company and our report dated February 28, 2017 expressed an unqualified opinion on
those financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 28, 2017
Item 9B. Other Information.
Not applicable.
86
MANAGEMENT AND CERTAIN SECURITY HOLDERS
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information required by this item is incorporated by reference to TriNet Group Inc.’s Proxy Statement for its 2017 Annual
Meeting of Shareholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2016.
Item 11. Executive Compensation.
Information required by this item is incorporated by reference to TriNet Group Inc.’s Proxy Statement for its 2017 Annual
Meeting of Shareholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2016.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
Information required by this item is incorporated by reference to TriNet Group Inc.’s Proxy Statement for its 2017 Annual
Meeting of Shareholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2016.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required by this item is incorporated by reference to TriNet Group Inc.’s Proxy Statement for its 2017 Annual
Meeting of Shareholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2016.
Item 14. Principal Accounting Fees and Services.
Information required by this item is incorporated by reference to TriNet Group Inc.’s Proxy Statement for its 2017 Annual
Meeting of Shareholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2016.
87
FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as a part of the report:
PART IV
(1) The financial statements filed as part of this report are listed in the “Index to Financial Statements” under Part II,
Item 8 of this report.
(2) Financial statement schedules.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Allowances for Doubtful Accounts and Authorized
Credits
Year ended December 31, 2016
Year ended December 31, 2015
Year ended December 31, 2014
Tax Valuation Allowance
Year ended December 31, 2016
Year ended December 31, 2015
Year ended December 31, 2014
Balance at
Beginning of
Period
Credited/
Charged to
Net Income
Charges
Utilized/
Write-Offs
Balance at
End of
Period
$
$
$
$
$
$
1,158
388
865
5,276
6,945
5,194
1,418
2,085
947
413
—
1,751
(2,284) $
(1,315) $
(1,424) $
— $
(1,669) $
— $
292
1,158
388
5,689
5,276
6,945
88
FINANCIAL STATEMENT SCHEDULES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Leandro,
State of California, on the 28th day of February, 2017.
Date: February 28, 2017
TRINET GROUP, INC.
By:
/s/ Burton M. Goldfield
Burton M. Goldfield
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Burton M. Goldfield, William Porter and Brady Mickelsen, and each of them, as his true and lawful attorneys-
in-fact and agents, each with the full power of substitution, for him and in his name, place or stead, in any and all
capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that any of
said attorneys-in-fact and agents, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
89
FINANCIAL STATEMENT SCHEDULES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Burton M. Goldfield
Burton M. Goldfield
/s/ William Porter
William Porter
/s/ Michael J. Angelakis
Michael J. Angelakis
/s/ Katherine August-deWilde
Katherine August-deWilde
/s/ Martin Babinec
Martin Babinec
/s/ H. Raymond Bingham
H. Raymond Bingham
/s/ Paul Chamberlain
Paul Chamberlain
/s/ Kenneth Goldman
Kenneth Goldman
/s/ David C. Hodgson
David C. Hodgson
/s/ John H. Kispert
John H. Kispert
/s/ Wayne B. Lowell
Wayne B. Lowell
Chief Executive Officer (principal
executive officer)
February 28, 2017
Chief Financial Officer (principal financial
and accounting officer)
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
Director
Director
Director
Director
Director
Director
Director
Director
Director
90
EXHIBITS
Exhibit
No.
2.1
2.2
3.1
3.2
4.1
4.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
EXHIBIT INDEX
Description of Exhibit
Form
File No.
Exhibit
Filing
Filed
Herewith
Incorporated by Reference
Equity Purchase Agreement by and among
TriNet Group, Inc., Ambrose Employer Group,
LLC and Gregory Slamowitz, John Iorillo and
Marc Dwek, dated July 1, 2013.
Agreement and Plan of Merger by and among
TriNet Group,
Inc., Champ Acquisition
Corporation, SOI Holdings, Inc. and SOI
Stockholder Representative, LLC, dated
August 24, 2012.
Amended and Restated Certificate of
Incorporation of TriNet Group, Inc.
Amended and Restated Bylaws of TriNet
Group, Inc.
Amended and Restated Registration Rights
Agreement, by and among TriNet Group, Inc.,
GA TriNet LLC and HR Acquisitions, LLC,
dated June 1, 2009.
Registration Rights Agreement, by and
between TriNet Group, Inc. and AGI-T, L.P.,
dated as of February 1, 2017.
Amended and Restated 2000 Equity Incentive
Plan.
Forms of Option Agreement and Option Grant
Notice under the Amended and Restated 2000
Equity Incentive Plan.
Amended and Restated 2009 Equity Incentive
Plan.
Form of Performance-Based Restricted Stock
Unit Award Agreement and Performance-
Based Restricted Stock Unit Grant Notice
under the Amended and Restated 2009 Equity
Incentive Plan.
Form of Option Agreement and Option Grant
Notice under the Amended and Restated 2009
Equity Incentive Plan.
Form of Restricted Stock Unit Agreement and
Restricted Stock Unit Award Notice under the
Amended and Restated 2009 Equity Incentive
Plan.
S-1
333-192465
2.1
11/21/2013
S-1
333-192465
2.2
11/21/2013
8-K
001-36373
3.1
4/1/2014
S-1/A 333-192465
3.4
3/4/2014
S-1
333-192465
4.2
11/21/2013
8-K
001-36373
4.1
2/2/2017
S-1
333-192465
10.1
11/21/2013
S-1
333-192465
10.2
11/21/2013
S-1/A 333-192465
10.3
3/14/2014
10-Q
001-36373
10.1
5/8/2015
S-1/A 333-192465
10.4
3/4/2014
S-1/A 333-192465
10.6
3/4/2014
2014 Employee Stock Purchase Plan.
S-1/A 333-192465
10.7
3/14/2014
2015 Executive Bonus Plan.
8-K
001-36373
Amended and Restated Non-Employee
Director Compensation Policy.
DEF
14A
001-36373
N/A
N/A
3/11/2015
4/2/2015
10.10*
Severance Benefit Plan.
10-K
001-36373
10.10
4/1/2016
10.11*
Form of Indemnification Agreement made by
and between TriNet Group, Inc. and each of its
directors and executive officers.
S-1/A 333-192465
10.8
3/4/2014
91
EXHIBITS
Exhibit
No.
10.12*
10.13*
10.14*
10.15*
10.16*
10.17
10.18
10.19
10.20
16.1
21.1
23.1
23.2
24.1
Description of Exhibit
Employment Agreement, dated November 9,
2009, between Burton M. Goldfield and TriNet
Group, Inc.
Employment Agreement, dated August 23,
2010, between William Porter and TriNet
Group, Inc.
Employment Agreement, dated March 5, 2012,
between John Turner and TriNet Group, Inc.
Employment Agreement, dated May 8, 2015,
between Brady Mickelsen and TriNet Group,
Inc.
Letter Agreement, dated June 22, 2015,
between Gregory Hammond and TriNet
Group, Inc.
Transition Agreement by and among TriNet G
roup, Inc. and William Porter , dated as of Se
ptember 30, 2016
Stockholder Agreement, by and between
TriNet Group, Inc. and AGI-T, L.P., dated as of
December 21, 2016
Amended and Restated First Lien Credit Agr
eement, dated as of August 20, 2013, as am
ended and restated as of July 29, 2016, amo
ng TriNetHR Corporation, as borrower, TriNet
Group, Inc., the lenders from time to time par
ty thereto and JPMorgan Chase Bank, N.A.,
as administrative agent.
Incremental Facility Amendment, dated as of
July 29, 2016, to the Amended and Restated
First Lien Credit Agreement dated as of August
20, 2013, as amended and restated as of July
9, 2014, among TriNet HR Corporation, as
borrower, TriNet Group, Inc., the lenders party
thereto and JPMorgan Chase Bank, N.A., as
administrative agent.
Creekside Plaza Office Lease between
Creekside Associates, LLC and TriNet Group,
Inc., dated April 24, 2001.
First Amendment to Creekside Plaza Office
Lease between Creekside Associates, LLC
and TriNet Group, Inc., dated June 21, 2012.
Letter from Ernst & Young LLP, dated May 10,
2016
List of Subsidiaries.
Consent of Ernst & Young LLP, independent
registered public accounting firm.
Consent of Deloitte & Touche LLP, independent
registered public accounting firm.
Power of Attorney (included on the signature
page of this report).
92
Incorporated by Reference
Form
S-1/A 333-192465
File No.
Exhibit
10.9
Filing
Filed
Herewith
2/13/2014
S-1/A 333-192465
10.11
2/13/2014
S-1/A 333-192465
10.12
2/13/2014
10-Q
001-36373
10.2
8/6/2015
10-Q
001-36373
10.1
8/6/2015
8-K
001-36373
10.1
10/3/2016
8-K
001-36373
10.1
12/22/2016
8-K
001-36373
10.1
7/10/2014
8-K
001-36373
10.1
8/1/2016
S-1
333-192465
10.15
11/21/2013
S-1
333-192465
10.16
11/21/2013
8-K
001-36373
16.1
5/10/2016
X
X
X
EXHIBITS
Exhibit
No.
31.1
31.2
32.1**
Description of Exhibit
Certification of Principal Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Certification of Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Certification of Principal Executive Officer and
Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document.
101.SC
H
XBRL Taxonomy Extension Schema
Document.
101.CAL XBRL Taxonomy Extension Calculation
Linkbase Document.
101.DE
F
XBRL Taxonomy Extension Definition
Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase
Document.
101.PR
E
XBRL Taxonomy Extension Presentation
Linkbase Document.
Incorporated by Reference
Form
File No.
Exhibit
Filing
Filed
Herewith
X
X
X
X
X
X
X
X
X
*
**
Constitutes a management contract or compensatory plan or arrangement.
Document has been furnished, is deemed not filed and is not to be incorporated by reference into any of the Company’s filings
under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general
incorporation language contained in any such filing.
93
Exhibit 21.1
SUBSIDIARIES OF TRINET GROUP, INC.
Company Name
DBA/AKA
210 Park Avenue Holding, Inc.
Accord Human Resources, Inc.
Accord
Incorporation
Jurisdiction
Oklahoma
Oklahoma
Accord Human Resources 2, Inc.
Accord Human Resources of Florida II, Inc.
Florida
Accord Human Resources 8, Inc.
Accord Human Resources of Georgia, Inc.
Oklahoma
Accord Human Resources 10, Inc.
Florida
Accord Human Resources 11, Inc.
Accord Human Resources of California, Inc.
California
Accord Human Resources 12, Inc.
Accord Human Resources of Florida, Inc.
Florida
Accord Human Resources 13, Inc.
Accord Human Resources of New York II, Inc.
New York
Accord Human Resources 14, Inc.
Accord Human Resources of New York, Inc.
New York
Accord Human Resources 15, Inc.
Accord Human Resources of California II, Inc.
California
Accord Human Resources 16, Inc.
Accord Human Resources of Texas, Inc.
Texas
Accord Human Resources 17, Inc.
Accord Human Resources of Colorado, Inc.
Colorado
Accord Human Resources 18, Inc.
Accord Human Resources of New York III, Inc.
New York
Accord Human Resources 19, Inc.
Accord Personnel Services, Inc.
Accord Human Resources 20, Inc.
CEO, Inc.
Accord Technology, LLC
Affiliated Risk Management, Inc.
ALSUB-36, Inc.
Ambrose Advisory Services, LLC
Ambrose Employer Group, LLC
Ambrose
ExpenseCloud
Amlease Corporation
Amlease of PA, Inc.
App7, Inc.
Archimedes Risk Solutions, Ltd.
ASOI, Inc.
AZSUB-51, Inc.
Gevity Insurance Agency, Inc.
HR Complete, Inc.
Mayberry HR Outsourcing, Inc.
Mosaic By Accord, LLC
NYSUB-54, Inc.
NYSUB-55, Inc.
Florida
Indiana
Oklahoma
North Carolina
Alabama
New York
New York
Delaware
Pennsylvania
Delaware
Bermuda
Delaware
Arizona
Delaware
Delaware
North Carolina
Oklahoma
New York
New York
DBA/AKA
Incorporation
Jurisdiction
Company Name
Real Solutions, Inc.
Rocky Top HR Outsourcing, Inc.
Route 66 HR Outsourcing, Inc.
SOI Holdings, Inc.
SOI, Inc.
SOI-17 of TN, Inc.
SOI-23 of FL, Inc.
SOI-27 of CA, Inc.
SOI-28 of TX, Inc.
SOI-29 of AR, Inc.
SOI-31 of AR, Inc.
SOI-59 of TX, Inc.
Star Outsourcing, Inc.
Strategic Outsourced HR, Inc.
Strategic Outsourcing, Inc.
SOI
Summit Services of Georgia, Inc.
Summit Services, Inc.
TNET HR, Inc.
TNET HR2, Inc.
TNET HR3, Inc.
TNET HR4, Inc.
TNET HR5, Inc.
TriNet Employee Benefit Insurance Trust
TriNet Employer Group Canada, Inc.
TriNet Group, Inc.
TriNet HR Corporation
TriNet HR II, Inc.
TriNet HR V, Inc.
TriNet Insurance Services, Inc.
TriNet USA, Inc.
TXSUB-64, Inc.
TriNet
TriNet
TriNet
TriNet
TriNet
Arizona
Tennessee
California
Delaware
Delaware
Tennessee
Florida
California
Texas
Arkansas
Arkansas
Texas
Arizona
Indiana
Delaware
Georgia
New Jersey
Delaware
Delaware
Delaware
Delaware
Delaware
a Grantor Trust
Ontario
Delaware
California
Delaware
Delaware
California
Delaware
Texas
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-210558, 333-203134
and 333-194880), pertaining to the TriNet Group, Inc. 2000 Equity Incentive Plan, TriNet Group, Inc. 2009 Equity
Incentive Plan and TriNet Group, Inc. 2014 Employee Stock Purchase Plan of our report dated March 31, 2016 with
respect to the consolidated financial statements and schedule of TriNet Group, Inc., included in this Annual Report
(Form 10-K) for the year ended December 31, 2016.
Exhibit 23.1
/s/ Ernst & Young LLP
San Francisco, California
February 27, 2017
Consent of Independent Registered Public Accounting Firm
Exhibit 23.2
We consent to the incorporation by reference in Registration Statement Nos. 333-194880, 333-203134 and 333-210558
on Form S-8 of our report dated February 28, 2017, relating to the consolidated financial statements and financial
statement schedule of TriNet Group, Inc. (the “Company”), and of our report dated February 28, 2017 related to internal
control over financial reporting (which report expresses an adverse opinion on the effectiveness of the Company's
internal control over financial reporting because of material weaknesses), appearing in this Annual Report on Form
10-K of TriNet Group, Inc. for the year ended December 31, 2016.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 28, 2017
Exhibit 31.1
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Burton M. Goldfield, certify that:
1. I have reviewed this Annual Report on Form 10-K of TriNet Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 28, 2017
/s/ Burton M. Goldfield
Burton M. Goldfield
President and Chief Executive
Officer
Exhibit 31.2
CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William Porter, certify that:
1. I have reviewed this Annual Report on Form 10-K of TriNet Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 28, 2017
/s/ William Porter
William Porter
Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of TriNet Group, Inc., a Delaware corporation (the “Company”), on Form 10-K
for the year ending December 31, 2016 as filed with the U.S. Securities and Exchange Commission on the date hereof
(the “Report”), each of the undersigned officers of the Company does hereby certify, pursuant to 18 U.S.C. § 1350
(section 906 of the Sarbanes-Oxley Act of 2002), that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
The foregoing certification (i) is given to such officers’ knowledge, based upon such officers’ investigation as such
officers reasonably deem appropriate; and (ii) is being furnished solely pursuant to 18 U.S.C. § 1350 (section 906 of
the Sarbanes-Oxley Act of 2002) and is not being filed as part of the Report or as a separate disclosure document
and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective
of any general incorporation language contained in such filing.
Date: February 28, 2017
Date: February 28, 2017
/s/ Burton M. Goldfield
Burton M. Goldfield
Chief Executive Officer
/s/ William Porter
William Porter
Chief Financial Officer