2019 Annual Report Every day, small andmedium-size businesspeople do incrediblethings. They’re innovators with the vision to break down barriers and create new possibilities with passion, ingenuity and hard work.And TriNet gets it. 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, 2019
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)
One Park Place, Suite 600
Dublin, CA
(Address of principal executive offices)
95-3359658
(I.R.S. Employer
Identification No.)
94568
(Zip Code)
Registrant’s telephone number, including area code: (510) 352-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock par value $0.000025 per share
TNET
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
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
No
No
No
No
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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, 2019, was $3.0 billion.
The number of shares of Registrant’s Common Stock outstanding as of February 6, 2020 was 68,750,437.
Portions of the Registrant’s Definitive Proxy Statement to be issued in connection with its Annual Meeting of Stockholders, scheduled to be held
on June 4, 2020, are incorporated by reference into Part III of this Form 10-K.
No
No
TRINET GROUP, INC.
Form 10-K - Annual Report
For the Year Ended December 31, 2019
TABLE OF CONTENTS
TABLE OF CONTENTS
Glossary
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
Form 10-K
Cross Reference
Page
Part I, Item 1.
Part I, Item 1A.
Part I, Item 1B.
Part I, Item 2.
Part I, Item 3.
Part I, Item 4.
Part II, Item 5.
Part II, Item 6.
Part II, Item 7.
Part II, Item 7A.
Part II, Item 8.
Part II, Item 9.
Part II, Item 9A.
Part II, Item 9B.
Part III, Item 10.
Part III, Item 11.
Part III, Item 12.
Part III, Item 13.
Part III, Item 14.
Part IV, Item 15.
Part IV, Item 16.
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92
GLOSSARY
Glossary of Acronyms and Abbreviations
Acronyms and abbreviations are used throughout this report, particularly in Part I, Item 1. Business; Part 1, Item 1A.
Risk Factors; Part II, Item 7. MD&A; Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk
and Part II, Item 8. Financial Statements and Supplementary Data.
AB5
ACA
ACH
AFS
ASC
ASU
Assembly Bill 5
The Patient Protection and Affordable Care Act
Automated Clearinghouse Transaction
Available-for-sale
Accounting standards codification
Accounting standards update
CCPA
California Consumer Privacy Act of 2018
COBRA
Consolidated Omnibus Budget Reconciliation Act
COPS
COSO
D&A
DOL
Cost of providing services
Committee of Sponsoring Organizations of Treadway Commission
Depreciation and amortization expenses
U.S. Department of Labor
EBITDA
Earnings before interest expense, taxes, depreciation and amortization of intangible assets
EPLI
EPS
Employment Practices Liability Insurance
Earnings Per Share
ERISA
Employee Retirement Income Security Act of 1974
ESAC
ESPP
ETR
FASB
FLSA
G&A
GAAP
HIPAA
Employer Services Assurance Corporation
Employee stock purchase plan
Effective tax rate
Financial Accounting Standards Board
Fair Labor Standards Act
General and administrative
Generally Accepted Accounting Principles in the United States
Health Insurance Portability and Accountability Act of 1996
HITECH Act Health Information Technology for Economic and Clinical Health Act of 2009
HR
IBNP
IBNR
IGP
IRS
ISR
LDF
LIBOR
MCT
MD&A
NIM
NISR
NSR
OE
Human Resources
Incurred but not yet paid
Incurred but not yet reported
Indemnity Guarantee Payment
Internal Revenue Service
Insurance service revenues
Loss development factor
London Inter-bank Offered Rate
Medical cost trend
Management's Discussion and Analysis of Financial Condition and Results of Operations
Net Insurance Margin
Net Insurance Service Revenues
Net service revenues
Operating expenses
1
GLOSSARY
PCAOB
Public Company Accounting Oversight Board
PEO
PFC
PHI
PSR
ROU
RSA
RSU
SBC
S&M
Professional Employer Organization
Payroll funds collected
Protected Health Information
Professional service revenues
Right-of-use
Restricted Stock Award
Restricted Stock Unit
Stock Based Compensation
Sales and marketing
S&P 500
Standard and Poor's 500 Stock Index
SD&P
SEC
SMB
TCJA
U.S.
WSE
Systems development and programming
Securities and Exchange Commission
Small to midsize business
Tax Cuts and Jobs Act of 2017
United States
Worksite employee
2
BUSINESS
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 subsidiaries. This Annual Report on Form 10-K (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, “ability,” “anticipate,” “believe,” “can,” “continue,” “could,” “design,” “estimate,” “expect,” “forecast,”
“hope,” “impact,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “strategy,” “target,”
“value,” “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 impact of our vertical
approach, our ability to leverage our scale and industry HR experience to deliver vertical product and service offerings;
the growth of our customer base; planned improvements to our technology platform; our ability to drive operating
efficiencies and improve the customer experience; the impact of our customer service initiatives; the volume and
severity of insurance claims; metrics that may be indicators of future financial performance; the relative value of our
benefit offerings versus those SMBs can independently obtain; the principal competitive drivers in our market; our
plans to retain clients and manage client attrition; our investment strategy and its impact on our ability to generate
future interest income, net income, and Adjusted EBITDA; seasonal trends and their impact on our business; fluctuations
in the period-to-period timing of when we incur certain operating expenses; the estimates and assumptions we use to
prepare our financial statements; and other expectations, outlooks and forecasts on our future business, operational
and financial performance.
Important factors that could cause actual results, level of activity, performance or achievements to differ materially from
those expressed or implied by these forward-looking statements are discussed above and throughout this Form 10-
K, including under Part I, Item 1A. Risk Factors, and Part II, Item 7. MD&A, and in the other periodic filings we make
with the SEC, and including risk factors associated with: our ability to mitigate the business risks we face as a co-
employer; our ability to manage unexpected changes in workers’ compensation and health insurance claims and costs
by worksite employees; the effects of volatility in the financial and economic environment on the businesses that make
up our client base; the impact of the concentration of our clients in certain geographies and industries; the impact of
failures or limitations in the business systems we rely upon; adverse changes in our insurance coverage or our
relationships with key insurance carriers; our ability to manage our client attrition; our ability to improve our technology
to satisfy regulatory requirements and meet the expectations of our clients; our ability to effectively integrate businesses
we have acquired or may acquire in the future; our ability to effectively manage and improve our operational processes;
our ability to attract and retain qualified personnel; the effects of increased competition and our ability to compete
effectively; the impact on our business of cyber-attacks and security breaches; our ability to secure our information
technology infrastructure and our confidential, sensitive and personal information from cyber-attacks and security
breaches; our ability to comply with constantly evolving data privacy and security laws; our ability to manage changes
in, uncertainty regarding, or adverse application of the complex laws and regulations that govern our business; changing
laws and regulations governing health insurance and employee benefits; our ability to be recognized as an employer
of worksite employees under federal and state regulations; changes in the laws and regulations that govern what it
means to be an employer, employee or independent contractor; our ability to comply with the laws and regulations that
govern PEOs and other similar industries; the outcome of existing and future legal and tax proceedings; fluctuation in
our results of operation and stock price due to factors outside of our control, such as the volume and severity of our
workers’ compensation and health insurance claims and the amount and timing of our insurance costs, operating
expenses and capital expenditure requirements; our ability to comply with the restrictions of our credit facility and meet
our debt obligations; and the impact of concentrated ownership in our stock. Any of these factors could cause our
actual results to differ materially from our anticipated results.
Forward-looking statements are not guarantees of future performance, but are based on management’s expectations
as of the date of this Form 10-K 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. Given these risks and uncertainties, readers are
cautioned not to place undue reliance on such forward-looking statements.
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BUSINESS
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 of this Form 10-K. We undertake
no obligation to revise or update any of the information provided in this Form 10-K, except as required by law.
Part II, Item 6. Selected Financial Data and Part II, Item 7. MD&A of this Form 10-K include references to our performance
measures presented in conformity with GAAP and other non-GAAP financial measures that we use to manage our
business, to make planning decisions, to allocate resources and to use as performance measures in our executive
compensation plans. Refer to the Non-GAAP Financial Measures in Part II, Item 6. Selected Financial Data for definitions
and reconciliations from GAAP measures.
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BUSINESS
Item 1. Business
PART I
TriNet is a leading provider of HR expertise, payroll services, employee benefits and employment risk mitigation services
for SMBs. Since our founding in 1988, TriNet has served, and continues to serve, thousands of SMBs. For the year
ended December 31, 2019, we processed $41.7 billion in payroll and payroll taxes for our clients and ended 2019 with
approximately 18,900 clients and 340,000 WSEs, primarily in the U.S.
Our Products and Services
We deliver a comprehensive suite of products and services, that facilitates the administration and management of
various HR-related functions for our clients, including compensation and benefits, payroll processing, employee data,
health insurance and workers' compensation programs, and other transactional HR needs using our technology platform
and HR, benefits and compliance expertise.
We also leverage our scale and industry HR experience to deliver product and service offerings for SMBs in specific
industries. We believe our approach, which we call our vertical approach, is a key differentiator for us and creates
additional value for our clients by allowing our product and service offerings to address HR needs in different client
industries. We offer six industry-tailored vertical products, TriNet Financial Services, TriNet Life Sciences, TriNet Main
Street, TriNet Nonprofit, TriNet Professional Services, and TriNet Technology.
Our comprehensive HR products and solutions include the following capabilities:
HR CONSULTING
EXPERTISE
BENEFIT
OPTIONS
PAYROLL
SERVICES
RISK MITIGATION
TECHNOLOGY
PLATFORM
HR Consulting Expertise
We use the collective knowledge and experience of our teams of HR, benefits, risk management and compliance
professionals to help clients manage many of the administrative, regulatory and practical requirements associated with
being employers. Our HR professionals and services help clients address a variety of HR issues, including consulting
on talent management, retention and terminations, benefits enrollment, immigration and visas, payroll tax credits, labor
law and regulatory developments and many other industry-specific and general HR topics. Depending on their needs,
our clients and WSEs have access to varying levels of service and support from our HR professionals ranging from
call center support for basic questions, to pooled HR resources, to onsite consulting and services. Our HR professionals
also provide additional specialized HR consulting and services upon request.
Benefit Options
We utilize our scale to provide our clients and WSEs access to a broad range of cost-effective, TriNet-sponsored
employee benefit and insurance programs at a cost that we believe most of our clients would be unable to obtain on
their own. We believe that our TriNet-sponsored programs help clients compete for talent against larger businesses.
Our benefit and insurance programs are designed to comply with federal, state and local regulations, and our benefit
and insurance service offerings include plan selection and administration, enrollment management, leave management,
plan document distribution and WSE and client communications.
Under our benefit and insurance programs, we pay third-party insurance carriers for WSE insurance benefits and
reimburse insurance carriers or third-party administrators for claims payments within our insurance deductible layer,
where applicable.
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BUSINESS
We sponsor and administer several fully insured employee benefit plans through a broad range of carriers, including
group health, dental, vision, short- and long-term disability, and life insurance as an employer plan sponsor under
Section 3(5) of ERISA. We also offer other benefit programs to WSEs, including flexible spending accounts, health
savings accounts, retirement benefits, COBRA benefits, supplemental insurance, commuter benefits, home insurance,
critical illness insurance, accident insurance, hospital indemnity, 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. Financial Statements and Supplementary Data, of this Form 10-K.
Payroll Services
We help clients manage all aspects of their employee compensation by providing multi-state payroll processing, tax
administration services and other payroll-related services, such as time and attendance management, time off and
overtime tracking, and expense management solutions. Our clients and WSEs can access payroll and tax information
using our online and mobile tools. Our tax administration services include calculating, withholding, remitting and
reporting certain federal, state and local payroll and unemployment taxes on behalf of clients and WSEs.
Risk Mitigation
We monitor employment-related legal and regulatory developments at the federal, state, and levels to help our clients
comply with employment laws and mitigate many of the risks associated with being an employer. We provide guidance
on employment laws and regulations, including those relating to minimum wage, unemployment insurance, family and
medical leave and anti-discrimination. We also ensure that our TriNet-sponsored benefit plans comply with applicable
laws and regulations, like the ACA, reducing this compliance burden to our clients.
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. 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, and by
monitoring claims data and the performance of our carriers and third-party claims management service providers. In
addition, we advise clients on workers’ compensation best practices, including by performing workplace assessment
consultations and assisting with client efforts to identify conditions or practices that might lead to employee injuries.
We also provide EPLI coverage for our clients through insurance policies that we obtain from a third-party EPLI 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, with a per-claim retention amount. The retention amount
is split between the client and TriNet. Our HR professionals assist our clients in implementing HR best practices to
help avoid and reduce the cost of employment-related liabilities. Litigation defense is conducted by our preferred outside
employment law firms.
Technology Platform
Our technology platform includes online and mobile tools that allow our clients and WSEs to store, view, and manage
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 online tools also incorporate workforce analytics, allowing clients to generate HR data, payroll,
total compensation and other custom reports.
In 2019, we continued to make significant investments in our technology platform on projects intended to provide our
users with improved functionality, HR management options, and security. We intend to continue to invest in our
technology platform to improve its functionality, ease of use, security and the overall user experience for our clients
and WSEs. We believe the continued investment in and improvement of our technology platform will drive operating
efficiencies and improve the client experience.
We invested approximately $74 million, $81 million and $74 million, during 2019, 2018 and 2017, respectively,
developing our technology platform.
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BUSINESS
Our Co-Employment Model
We operate using a co-employment model, under which employment-related responsibilities are allocated by contract
between us and our clients. This model allows WSEs to receive the full benefit of our services, including access to
TriNet-sponsored 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. WSEs also separately acknowledge
the co-employment relationship and the allocation of employment-related responsibilities between TriNet and our
clients. The division of responsibilities under our client service agreements is typically as follows:
TriNet Responsibilities
We generally assume responsibility for, and manage certain risks associated with:
•
•
•
•
•
•
•
payments of salaries, wages and certain other compensation to WSEs from our own bank accounts (based on
client reports and payments), including the processing of garnishment and wage deduction orders,
reporting of wages, withholding and deposit of associated payroll taxes as the employer of record,
provision and maintenance of workers' compensation insurance and workers' compensation claims processing,
access to, and administration of, group health, welfare, and retirement benefits to WSEs under TriNet-sponsored
benefit plans,
compliance with applicable law for certain employee benefits offered to WSEs,
administration of unemployment claims, and
provision of various HR policies and agreements, including employee handbooks and worksite employee
agreements describing the co-employment relationship.
Client Responsibilities
Our clients are responsible for employment-related responsibilities that we do not specifically assume, generally
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 other compensation, and work locations,
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,
provision and administration of any employee benefits not provided by TriNet such as 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 salary, wages and other relevant compensation 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 services provided by the
client company to its own customers.
As a result of our co-employment relationships, 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 ACH.
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BUSINESS
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 statutory employer for federal employment tax purposes, since our clients transfer legal control over
these payroll functions to us. The laws that govern the payment of salaries, wages and related payroll taxes for our
WSEs are complex and the various federal, state and local laws that govern such payments can vary significantly.
Based on applicable law in any jurisdiction, we or our client may be held ultimately liable for those obligations if we fail
to remit taxes.
Sales and Marketing
Our Sales Organization
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. Our
sales representatives are supported by marketing, lead generation efforts, and referral sources and networks.
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 as accounting firms, venture capital firms, incubators, insurance brokers,
and 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.
Our Marketing Organization
Our marketing organization is charged with driving overall brand awareness, managing lead generation, creating and
managing our website and other online properties, creating content for our outbound and inbound marketing efforts,
media relations, and managing our sponsorships, major marketing events, and client communications. In 2019 our
marketing team focused on strategic marketing, communications and branding initiatives, in part by augmenting our
comprehensive company re-branding campaign, Incredible Starts Here, with our marketing campaign, People Matter,
that included social media and advertising across digital, television, radio and out-of-home media.
Legal and Regulatory
Our business operates in a complex legal and regulatory environment due to a myriad of federal, state and local laws
and regulations that impact our business. Below is a summary of what we believe are the most important legal and
regulatory issues for our business. For additional information on the impact of these and other laws and regulations
on our business and results of operations, refer to Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading
- Legal and Compliance Risks.
Employer Status
We sponsor our employee benefit plan offerings as the employer of our WSEs under the Internal Revenue Code of
1986, as amended (the Code), ERISA and applicable state law. 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 laws, but this status could be subject to challenge by various regulators. For additional information on our employer
status and its impact on our business and results of operations, refer to Part I, Item 1A. Risk Factors, of this Form 10-
K, under the heading - If we are not recognized as an employer of worksite employees under federal and state
regulations, we and our clients could be adversely impacted.
8
BUSINESS
Health Insurance and Health Care Reform
Our sponsored employee health plan offerings are an important component of the products and services that we
provide. The future of health care reform continues to evolve in the U.S. For example, the passage of the ACA in 2010
implemented sweeping health care reforms with staggered effective dates from 2010 through 2022, and many provisions
in the ACA still require the issuance of additional guidance from the DOL, the IRS, the U.S. Department of Health and
Human Services and various U.S. states. Passage of the TCJA in 2017 eliminated the individual mandate tax penalty
under the ACA beginning in 2019, while retaining employer ACA obligations. States have developed, and will continue
to develop, varying approaches to state-based health exchanges. Further significant changes to health care statutes,
regulations and policy at the federal, state and local levels could occur in 2020 and beyond, including the potential
further modification, amendment or repeal of the ACA, and we may need to adapt the manner in which we conduct
our business as a result of any such changes. For additional information on the ACA and its impact on our business
and results of operations, refer to Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading - Changing laws
and regulations governing health insurance and other traditional employee benefits at the federal, state and local level
could negatively affect our business.
Data Privacy and Security Regulations
We collect , store, use, retain, disclose, transfer and otherwise process a significant amount of confidential, sensitive
and personal information from and about our actual and potential clients, WSEs and corporate employees, and we
are subject to a variety of federal, state and foreign laws, rules, and regulations in connection with such activities. As
a sponsor of employee benefit plans, we also have access to certain protected health information (PHI) of our WSEs
and corporate employees. Management of PHI is subject to several regulations at the federal level, including HIPAA
and the HITECH Act. HIPAA contains restrictions and health data privacy, security and breach notification requirements
with respect to the use and disclosure of PHI. Further, there are penalties and fines for HIPAA violations. Because
TriNet sponsored health plans are covered entities under HIPAA, we are required to comply with HIPAA's portability,
privacy, and security requirements. We are also subject, among other applicable federal laws, rules and regulations,
to the rules and regulations promulgated under the authority of the Federal Trade Commission. The U.S. Congress
has considered, but not yet passed, several comprehensive federal data privacy bills over the past few years, such as
the CONSENT Act, which was intended to be similar to the landmark 2018 European Union General Data Protection
Regulations. We expect federal data privacy laws to continue to evolve.
At the state and local level, there is increased focus on regulating the collection, storage, use, retention, security,
disclosure, transfer and other processing of confidential, sensitive and personal information. In recent years, we have
seen significant changes to data privacy regulations across the U.S., including the enactment of the California Consumer
Privacy Act of 2018 (CCPA), which went into effect in January 2020. The CCPA increases privacy rights for California
residents and imposes obligations on companies that process their personal information, including an obligation to
provide certain new disclosures to such residents. The CCPA provides for civil penalties for violations, as well as a
private right of action for certain data breaches that result in the loss of personal information. This private right of action
may increase the likelihood of, and risks associated with, data breach litigation. The CCPA was amended in September
2018 and October 2019, and further amendments may be enacted.
New legislation proposed or enacted in Illinois, Massachusetts, New Jersey, New York, Rhode Island, Washington and
other states, including a proposed right to privacy amendment to the Vermont Constitution, impose, or has the potential
to impose, additional obligations on companies that collect , store, use, retain, disclose, transfer and otherwise process
confidential, sensitive and personal information, and will continue to shape the data privacy environment nationally. In
addition, all 50 U.S. states, the District of Columbia and Canada have enacted data breach notification laws that may
require us to notify WSEs, clients, employees, third parties or regulators in the event of unauthorized access to or
disclosure of personal or confidential information. Complying with existing and new data privacy and security regulations
could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our
business. Any failure to comply with existing and new data privacy and security regulations could result in significant
penalties, damage our reputation and otherwise have a material adverse effect on our business. For additional
information on the privacy and security of the confidential, sensitive and personal information and PHI we possess
and the potential impact to our business if we fail to protect such information, refer to each of the risk factors included
in Part I, Item 1A. Risk Factors, of this Form 10-K, under the heading - Data Privacy and Security Risks.
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BUSINESS
PEO Licensing Laws
Nearly all states have adopted laws and regulations for licensing, registration, certification or recognition of PEOs and
the IRS has implemented a federal licensing program for PEOs. We expect states without such laws and regulations
to adopt them in the future. While these laws and regulations can vary widely, most regulators monitor the financial
health and other relevant business information of PEOs on an annual or quarterly basis. In some cases, these laws
and regulations codify and clarify the co-employment relationship for certain payroll, unemployment, workers'
compensation and other employment-related purposes or require specific client contractual terms and/or WSE
disclosures. We believe we comply in all material respects with the applicable PEO laws and regulations in each state
and jurisdiction in which we operate. For additional information, refer to Part I, Item 1A. Risk Factors, of this Form 10-
K, under the heading - If we fail to qualify as a co-employer of WSEs under applicable federal and state licensing rules,
or if we are deemed to be operating in certain insurance-related industries, we and our clients could be adversely
impacted.
Payroll and Unemployment Taxes
We must also comply with the federal and state payroll tax and unemployment tax requirements that apply where our
clients are located. Tax reform efforts, and other payroll tax changes, at the federal, state and local level can impact
our payroll tax reporting obligations for our clients and the products and services we can provide. State unemployment
tax rates vary by state based, in part, on prior years’ compensation and unemployment claims experience and may
also vary based on the overall claims experience of a PEO. As a result, depending on where clients are located, the
fees we charge for unemployment taxes can be higher or lower than a client could obtain alone. In some cases, the
unemployment taxes we pay can also be retroactively increased to cover deficiencies in the unemployment tax funds.
Other Employment Regulations
We must also comply with labor and employment laws, which can change frequently at the federal, state and local
level. In particular, regulatory focus on the classification of employers, employees and independent contractors has
the potential to significantly change how we and other PEOs operate and the products and services that we and other
PEOs can provide to our clients and WSEs. For example, in September 2019 California passed AB5, a law that could
potentially reclassify client independent contractors as employees. Similarly, in January 2020, the DOL issued a new
rule broadening the definition of joint employer used under the Fair Labor Standards Act (FLSA). We do not believe
that we are a joint employer under the new DOL rule, but the impact of new regulations like these could lead to increased
legal claims against us or our clients, increase our compliance costs, or require changes to how we operate our business
and the products and services we provide to our clients and WSEs. For additional information, refer to Part I, Item 1A.
Risk Factors, of this Form 10-K, under the heading - The definition of employers, employees and independent contractors
is evolving. Changes to the laws and regulations that govern what it means to be an employer or an employee may
require us to make significant changes in our operations and may negatively affect our business.
Acquisitions
Historically, we have pursued acquisitions to both expand our product capabilities and supplement our growth across
geographies and certain industry verticals. Our acquisition targets have included PEOs and other HR solution providers
as well as technology companies or technology product offerings to supplement or enhance our existing HR solutions.
We intend to continue to pursue acquisitions, where appropriate, 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 attractive
products and services.
Client Industries and Geographies
Our clients are distributed across a variety of industries, including technology, professional services, financial services,
life sciences, not-for-profit, 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 days'
notice to us and we may cancel these contracts with thirty days' notice.
Nearly all of our revenues are generated within the United States and its territories and substantially all our long-lived
assets are located in the United States.
10
BUSINESS
Seasonality
Our business is affected by seasonality in client business activity and WSE product selection, health claims costs and
payroll taxes:
• Clients generally change their payroll service providers at the beginning of the payroll tax year; as a result, we
have historically experienced our highest volumes of new and exiting clients in the month of January.
• WSEs select our benefit products during their respective open enrollment periods, which occur throughout the
year. We have historically experienced the largest proportion of WSE benefit changes in the first and fourth quarters.
• Health claims cost tend to increase throughout the year as the utilization of medical services above each WSE's
deductible causes our insurance costs to increase. In addition, the overall use of medical services by WSEs,
including elective procedures, tends to increase later in the calendar year.
• Certain payroll tax related billings are based on the WSE's annual taxable wage base up to a set cap. WSEs
frequently meet these wage base caps in the first two quarters of the year, depending on the WSE's compensation
level, resulting in lower related billing contributions to PSR in the latter half of the year.
Competition
We face competition from:
• PEOs that compete directly with us,
• HR and information systems departments and personnel of companies that administer employee benefits, payroll
and HR for their companies in-house,
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providers of certain endpoint HR services, including payroll, employee benefits, business process outsourcers with
high-volume transaction and administrative capabilities, 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,
alternative and non-traditional benefit providers, and
insurance brokers who allow third-party HR systems to integrate with their technology platform.
Our competitors include large PEOs such as the TotalSource unit of Automatic Data Processing, Inc., the PEO operations
of Paychex, Inc. and Insperity, Inc., as well as specialized and smaller PEOs and similar HR service providers with
PEO operations. 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.
We believe that our services are attractive to many SMBs in part because of our ability to provide access to a broad
range of TriNet-sponsored workers' compensation, health insurance and other benefits programs on a cost-effective
basis. We compete with insurance brokers and other providers of insurance and benefits coverage, and our offerings
must be priced competitively with those provided by these competitors in order for us to attract and retain our clients.
We believe that we compete based upon the breadth and depth of our benefit plans, vertical market expertise, total
cost of service, brand awareness and reputation, ability to innovate and respond to client needs rapidly, access to
online and mobile solutions, and subject matter expertise. We believe that we are competitive across these factors.
For additional information about our competition, please refer to Part I, Item 1A. Risk Factors, of this Form 10-K, under
the heading - To succeed, we must work to improve our products and services to meet the expectations of our clients
and applicable regulations. If we fail to meet those expectations and regulations, we may lose clients and harm our
business.
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. We also own registered trademarks
in the United States, Canada and the European Union covering our name and other trademarks and logos that we
believe are materially important to our operations.
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BUSINESS
Corporate Employees
We refer to our employees that are not co-employed with our clients as our corporate employees. We had approximately
2,900 corporate employees as of December 31, 2019. Our corporate employees are not covered by a collective
bargaining agreement.
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 office is located at One Park Place, Suite 600, Dublin, CA 94568 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.
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments
to those reports are available free of charge at investor.trinet.com as soon as reasonably practicable after we file such
material with, or furnish it to, the SEC. Alternatively, the public may access these reports at the SEC's website at
www.sec.gov. The contents of these websites are not incorporated into this report and are not part of this report.
12
RISK FACTORS
Item 1A. Risk Factors
Below is a discussion of the risks that we believe are significant to our business. These risks are not the only ones we
face. We may face additional risks that we do not currently consider to be significant or of which we are not currently
aware, and any of these risks could cause our actual results to differ materially from historical or anticipated results.
You should carefully consider these risks along with the other information provided in this Annual Report, including the
information in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our
accompanying consolidated financial statements, as well as the information under the heading "Cautionary Note
Regarding Forward-Looking Statements" before investing in any of our securities. We may amend, supplement or add
to the risk factors described below from time to time in future reports filed with the SEC.
Operational Risks
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 risks and obligations of
an employer. For instance, we face the risk of providing access to health benefits to our WSEs even if the cost of
providing benefits exceeds the fees received from our clients. The extent of our responsibility for other aspects of our
co-employer relationship with our WSEs remains subject to regulatory uncertainty at the federal, state and local levels.
For example, under certain circumstances, we may be found to be responsible for paying salaries, wages and related
payroll taxes of our WSEs, even if our clients have not timely remitted payments to us.
Our WSEs work in our clients' workplaces. Our ability to control the workplace environment of our clients is limited. As
a co-employer of WSEs, we may be subject to liability for violations of labor and employment laws, workers'
compensation laws, industry-specific laws that apply to the businesses our clients operate, and other laws that apply
to our clients or to employers generally. We may also be liable for acts and omissions by our clients or WSEs, even if
we do not violate such laws or participate in such acts or omissions. Federal and state positions regarding co-
employment relationships can change, and have frequently changed in the past, with varying degrees of impact on
our operations. We cannot predict when changes will occur or forecast whether any particular future changes will be
favorable or unfavorable to our operations. Any such changes could reduce or eliminate the attractiveness of using a
PEO and/or significantly increase our compliance costs and the cost to provide our products or services, which could
result in a material adverse effect on our financial condition and results of operations.
We seek to mitigate these risks through agreements and insurance coverage and by requiring certain clients to pre-
fund certain obligations. Our agreements with our clients divide responsibilities between us and our clients and provide
that our clients 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 obligations. In addition, we maintain insurance coverage, including
workers’ compensation and EPLI coverage, to limit our and our clients' exposure to various WSE-related claims, but
subject to split by contract, 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. 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 or our corporate employees as a result of the actions
of our customers and WSEs, or others associated with them, whether or not justified, may tarnish our reputation and
reduce the value of our 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.
Unexpected changes in workers' compensation and health insurance costs and claims by worksite employees could
harm our business.
Our insurance costs, which make up a significant portion of our overall costs, are significantly affected by our WSEs’
health and workers' compensation insurance claims experience. Our fully insured insurance plans are provided by
third-party insurance carriers under risk-based or under guaranteed-cost insurance policies. Refer to Note 1 in Part II,
Item 8. Financial Statements and Supplementary Data, of this Form 10-K for further discussion of these policies.
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RISK FACTORS
Under our risk-based health insurance policies, we assume the risk of variability in future health claims costs for our
enrollees. We have experienced variability, and may experience variability in the future, in the amounts that we are
required to pay for group health insurance expenses incurred by WSEs within our deductible layer under these risk-
based policies, based on changing trends in the volume and severity of medical and pharmaceutical claims. This
variability arises from changes to the components of medical cost trend (MCT), defined as changes in participant use
of services, the introduction of new treatment options, changes in treatment guidelines and mandates, and changes
in the mix and unit cost of services provided to plan participants. These trends change, and other seasonal trends and
variability may develop, which makes it difficult for us to predict this aspect of our business and which may have a
material adverse effect on our business.
Under our fully insured workers' compensation insurance policies, we assume the risk for losses up to $1 million per
claim occurrence (deductible layer). Refer to Note 1 in Part II, Item 8. Financial Statements and Supplementary Data,
of this Form 10-K for further discussion of these policies. The ultimate cost of the workers’ compensation services
provided will not be known until all the claims are settled. If we do not accurately predict the risks that we assume, we
may not charge adequate fees to cover our costs, which could reduce our net income and result in a material adverse
effect on our business. Our ability to predict these costs is limited by unexpected increases in frequency or severity of
claims, which can vary due to changes in the cost of treatments or claim settlements.
We accrue for the estimated future costs of reimbursing our workers' compensation and health insurance carriers under
our insurance policies, using external actuaries and our own experience to develop the estimates, but the volume and
severity of claims activity is inherently unpredictable. Estimating these accrued costs requires us to consider a number
of factors and requires significant judgment.
In addition, we accrue for estimated future costs of reimbursing our workers' compensation and health insurance
carriers under our insurance policies, using external actuaries and our own experience to develop the estimates.
Estimating these accrued costs requires us to consider a number of factors and requires significant judgment.
If we subsequently receive updated information indicating that the volume and severity of insurance claims were higher
or lower than previously estimated and reported, our insurance costs could be higher or lower, respectively, in that
period or subsequent periods as we adjust our accrued costs accordingly, which could have a material adverse effect
on our business. We have experienced both favorable and unfavorable insurance cost variability due to claims activity
in the past and could have similar or worse experiences in the future. Refer to Critical Accounting Judgments and
Estimates in Part II, Item 7. MD&A, of this Form 10-K for further discussion of these estimates.
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 susceptible to changes in the level of overall
economic activity in the markets in which we operate. These businesses are often exposed to credit and cash liquidity
risks that larger businesses may be able to avoid and during periods of weak economic conditions, small business
failures tend to increase and employment levels tend to decrease. During these periods, our clients have in the past
and may in the future reduce employee headcount, compensation and/or benefits levels, which could negatively affect
our revenues and margins if we are unable to reduce our operating expenses sufficiently or quickly enough.
Weak economic forecasts or conditions have in the past and may in the future also 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. During such periods, we are also likely to see an increase in unemployment and related COBRA
claims and employment-related costs from our clients and WSEs and we may be legally or practically unable to recover
these costs or increase the fees we charge our customers in these situations.
In addition, most of our clients are concentrated in certain geographic regions and operate in a relatively small number
of industries, including the technology, life sciences, not-for-profit, professional services and financial services
industries. As a result, if any of those geographic regions or specific industries suffers a downturn, even if the economy
at the national level remains strong, 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.
14
RISK FACTORS
Any failure in our business systems, or in any third-party business systems or service provider that we rely upon, could
reduce the quality of our business services, harm our reputation and expose us to liability.
Our business is highly dependent on in-house and third-party data processing centers and systems that rely on the
complex integration of numerous hardware and software subsystems to manage, on a daily basis, a large volume of
client and WSE transactions, including the processing of employee, payroll and benefits data. In addition, we rely on
third-party systems to provide services for our clients and WSEs, including insurance carrier networks and databases
that manage the benefits provided to, and claims made by, our clients and WSEs and electronic banking systems and
payroll tax systems that transmit payments and data to clients, WSEs and taxing agencies. These centers and systems
have been, and could 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. We have also experienced office closures on the East Coast on multiple
occasions over the past few years due to hurricane threats, and in California due to increased wildfire threats in the
state. Our offices and data processing centers in these and other locations will continue to face the risk of closure or
damage in the future due to climate change.
Any delay or failure in our business continuity response to these events, or in the response of our third-party service
providers, even if only for a short period of time, can have a significant impact on our clients and WSEs. This could
cause clients to leave us, result in reduced revenues, increase our liability to our clients and WSEs, any of which could
result in a materially adverse effect on our reputation and business.
We also rely on enterprise software applications licensed from third parties that are updated from time to time. Any
failure of these systems for any reason could delay or prevent us from providing services to our clients, which would
have a material adverse effect on our business and results of operations.
Adverse changes in our insurance coverage, or in our relationships with key insurance carriers, could harm our business.
Our success depends in part on our ability to maintain competitive health and workers' compensation coverage options
and insurance rates through well-known insurance carriers. If we are unable to maintain competitive insurance rates
or obtain popular and desirable coverage plans through well-known insurance carriers, it could affect our ability to
attract and retain clients, which could have a material adverse effect on our business. Where we sponsor insurance
coverage and we are not responsible for any deductibles, our carriers set the fixed cost of the plan, which may lead
to uncompetitive fees. Even where we sponsor insurance under which we are responsible for deductibles, we may not
be able to control our costs in a way that would make our fees competitive.
In addition, broad adoption of our services in certain geographic regions 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 region or industry. The loss of any one or more of our key insurance vendors in these areas, 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.
Clients may terminate our services based on a variety of factors, many of which are difficult for us to control, which
can negatively impact our business.
We regularly experience client attrition due to a variety of factors that are difficult for us to control or predict, including
cost pressures, client merger and acquisition activity, reactions to any proposed increases in administrative and
insurance service fees by us, client business failure, effects of competition, and client decisions to bring their HR
administration in-house. Our standard client service agreement can generally be canceled by us or by the client without
penalty with 30 days’ prior written notice. 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.
To succeed, we must work to improve our products and services to meet the expectations of our clients and applicable
regulations. If we fail to meet those expectations and regulations, we may lose clients and harm our business.
In order to attract and retain clients, we believe that we must compete in our industry effectively on the basis of the
value proposition that we deliver to our clients including customer experience and satisfaction, relevance and price of
our benefit plans, vertical market expertise, total price of service, brand awareness and reputation, ability to innovate
and respond to customer needs rapidly, access to online and mobile solutions, and subject matter expertise. The
expectations of our clients and prospective clients in these areas change over time as a result of many factors outside
of our control, such as competition, regulatory and technical changes, and changing trends in the demands employees
place on SMB employers. If we are unable to satisfy the evolving product and service delivery expectations of our
clients and WSEs, then we could experience lower client satisfaction, lower rates for on-boarding new clients and
higher client attrition, which could have a material adverse effect on our business.
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RISK FACTORS
To satisfy the product and service delivery expectations of our clients and regulators, we must also timely and effectively
identify, develop, or license the technologies we need, and implement those technologies into the solutions that we
provide. New products or upgrades may not be released according to schedule, or may contain defects when released.
Difficulties with the performance of our 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 materially harm our business. Even if we
are capable of satisfying client expectations in these areas, we may not be able to do so on a cost-effective basis,
which could have a material adverse effect on our financial condition and our results of operations. In addition, we
could lose market share if our competitors develop superior products and services or satisfy client or regulatory demands
before we are able to do so.
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 pursue future acquisitions. Acquisitions involve numerous other risks, some of which we have experienced in the
past and which we may experience in the future, including:
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over-valuing and over-paying for businesses and technologies,
increased operating costs and unanticipated costs to successfully integrate the clients, WSEs, operations, systems,
technologies, services and personnel of the acquired business,
establishing or maintaining required internal controls, procedures and policies for the acquired business,
diversion of management’s attention from other business concerns,
litigation resulting from the activities of the acquired business,
insufficient revenues, insurance or seller indemnification to offset increased expenses associated with the
acquisitions and unanticipated liabilities of the acquired businesses,
entering markets in which we have no prior experience and may not succeed,
potential loss of key employees or key clients of the acquired business as a result of the acquisition or integration
of the acquired business.
We have experienced increased operating costs to resolve the challenges of prior acquisitions. If we fail to appropriately
integrate any acquired business, we may fail to achieve our growth, service enhancement or operational efficiency
objectives, and our business, results of operations and financial condition could be harmed.
Our business and operations have undergone and will continue to undergo significant change as we seek to improve
our operational effectiveness. If we are unable to effectively manage this change, our business and results of operations
may suffer.
We have changed our operations and internal processes in recent periods in order to improve our operational
effectiveness, and to provide improved client support and services. Managing these changes will continue to require
further refinement to our operational, financial and management controls and reporting systems and procedures while
we simultaneously seek to effectively recruit, integrate, train and motivate new corporate employees, retain our existing
corporate employees, maintain the beneficial aspects of our corporate culture, effectively execute our business plan,
satisfy the requirements of our existing clients, acquire new clients, and enhance the quality and scope of our services.
These activities will require significant operating and capital expenditures and allocation of valuable management and
employee resources, which we expect will continue to place significant demands on our management and on our
operational and financial infrastructure. If we fail to manage these changes effectively, our costs and expenses may
increase more than we expect and our business, financial condition and results of operations may be harmed.
16
RISK FACTORS
If we are unable to attract, maintain and manage qualified personnel, including our sales force, our business may be
harmed.
Our ability to provide the products and services that our clients need, satisfy our strategic objectives and grow depends
in part on our ability to attract and retain highly motivated and qualified personnel. Competition for skilled employees
is intense and, if we are unable to attract and retain such personnel, our business may suffer. In addition, we have
invested significant time and resources into developing a corporate culture that we believe will help us provide improved
products and services and increase client satisfaction with our services. If we are unable to attract and retain the
personnel needed to support and further develop our corporate culture, 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. For example,
we have experienced in the past, and may in the future experience, elevated sales force attrition as a result of our
change in industry focus, compensation structure changes, third-party competition for sales talent and other factors.
Newly hired sales personnel are typically not productive for some period of time following their hiring, which results in
increased near-term costs to us relative to their actual sales contributions during this period. If we are unable to
effectively train and maintain an adequately seasoned sales force, 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.
Similarly, we rely on qualified personnel to properly manage and maintain our internal control processes, including
internal control over financial reporting. Our internal control environment involves a significant number of manual
procedures. If we are unable to effectively train and maintain qualified personnel to manage and operate these
procedures, it is possible that our internal controls may not remain effective, which could negatively affect the market
price and trading liquidity of our common stock, 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.
Our industry is 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 other PEOs, as well as other existing, and potential,
companies and industries that service, or may in the future service, client HR needs. Refer to the heading “Competition”
under Part I, Item 1. Business, above for more details. Our competitors, regardless of industry, 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.
Moreover, 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
either by themselves or by using the services of our competitors. If we cannot compete effectively against other PEOs
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.
Data Privacy and Security Risks
Cyber-attacks or other security-related incidents could result in reduced revenue, increased costs, liability claims,
regulatory penalties, and damage to our reputation.
We collect, store, use, retain, disclose, transfer and otherwise process a significant amount of confidential, sensitive
and personal information from and about our actual and potential clients, WSEs and corporate employees, including
bank account and social security numbers, tax information, certain medical information, certain health claim information,
PHI, retirement account information and payroll data. Maintaining the security of our infrastructure and the confidentiality
of the confidential, sensitive and personal information of our clients, WSEs and corporate employees is critical as the
clients, WSEs and corporate employees using our technology platform and services rely on our security infrastructure
to protect their confidential, sensitive and personal information. In providing our services, we also rely on third-party
service providers, such as insurance carriers and banks, who also have access to confidential, sensitive and personal
information about our clients, WSEs and corporate employees. Some of those service providers in turn subcontract
with other service providers.
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RISK FACTORS
Due to the size and complexity of our technology platform and services, the amount of confidential, sensitive and
personal information that we store and the number of clients, WSEs, corporate employees and service providers with
access to confidential, sensitive and personal information, we and our service providers are potentially vulnerable to
a variety of intentional and inadvertent cyber-attacks and other security-related incidents and threats, which could
result in a disclosure of information and a material adverse effect on our business. The occurrence of any actual or
attempted cyber-attack or other security-related incident, the reporting of such an incident, whether accurate or not,
or our failure to make adequate or timely disclosures to the public or law enforcement agencies following any such
event, whether due to delayed discovery or a failure to follow existing protocols, could result in significant fines, penalties,
orders, sanctions and proceedings or actions against us or our service providers by governmental bodies and other
regulatory authorities, clients or third parties, which could in turn result in a material adverse effect on our financial
condition and results of operations. Any such fines, penalties, order, sanctions, proceedings or actions, and any related
indemnification obligation, could damage our reputation, force us to incur significant expenses in defense of these
proceedings or to pay fines and penalties, distract our management, increase our costs of doing business or result in
the imposition of financial liability.
Threats to our information technology systems and data 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 or those
of our service providers. Other malicious actors may direct social engineering, phishing, credential stuffing, ransomware,
denial or degradation of service attacks and similar types of attacks against any or all of us, our clients and our service
providers. Other threats include inadvertent security breaches or theft, misuse or unauthorized access or other improper
actions by our employees, clients, WSEs, service providers and other business partners. Cyber-attacks and other
security-related incidents are increasing in frequency and evolving in nature. Given the unpredictability of the timing,
nature and scope of cyber-attacks and other security-related incidents, there can be no assurance that any security
procedures and controls that we or our service providers have implemented will be sufficient to prevent such incidents
from occurring. Furthermore, because the methods of attack and deception change frequently, are increasingly complex
and sophisticated, and can originate from a wide variety of sources, including third parties such as service providers
and even nation-state actors, it is possible that we may not be able to anticipate, detect, appropriately react and respond
to, or implement effective preventative measures against, all cyber-attacks and other security-related incidents. As a
result, disclosure of confidential, sensitive and personal information could occur due to the occurrence of such attacks
of incidents, which could materially and adversely affect our financial condition or results of operations.
We, our clients and our service providers have been the victims of these types of threats, attacks and security breaches
in the past. No security measures, procedures, technology or amount of preparation can provide guaranteed protection
from these threats, and we, our clients and our service providers expect to be victims again in the future. Cyber-attacks
have disrupted, or resulted in unauthorized access to, our networks, applications, bank accounts, and confidential,
sensitive and personal information, or those of our clients or WSEs or service providers, in the past and successful
attacks may occur again in the future. We, our service providers and our clients have experienced security incidents
in the past that led to disclosure of the confidential, sensitive or personal information we possess and we and they
could experience such incidents in the future. In addition, we have in the past been, and may in the future be, required
to report data breaches to regulators, affected individuals, clients and other third parties. While we do not believe that
any such past events resulted in material expenditures or a material loss of confidential, sensitive or personal
information, we cannot guarantee that any future events will not have a material impact on our operations.
Any cyber-attack, unauthorized intrusion, insider theft, malicious software infiltration, network disruption, denial of
service or other data security incident could result in disruption to our clients' or service providers' systems and services,
product development delays, compliance breaches, and the disclosure or misuse of confidential, sensitive and personal
information. This could have a material adverse effect on our business operations, result in liability, fines and penalties
or other regulatory sanctions, a loss of confidence in our ability to provide our services, and/or harm our reputation
and relationships with current or potential clients. We may be required to expend significant capital and other resources
to protect against, respond to, and recover from any potential, attempted, or existing cyber-attacks or other security-
related incidents and their consequences. The costs of identifying and remediating any threat, attack, breach, or
disclosure, and the costs associated with responding to litigation or regulatory investigations, could have a material
adverse effect on our business and reduce our operating margins. Although we maintain insurance coverage, the
amount of our insurance may not cover the costs associated with any security incident, and we cannot be certain that
cyber insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will
not deny coverage as to any future claim. Any publicized security incident, or even public rumors about a security
incident, affecting our businesses and/or those of our service providers may also have a similarly material adverse
effect on our business or reputation. Moreover, there could be public announcements regarding any security-related
incidents and any steps we take to respond to or remediate such incidents, if securities analysts or investors perceive
these announcements to be negative, could have a material adverse effect on the price of our common stock.
18
RISK FACTORS
Our efforts to protect against and to remediate cyber-attacks, other security-related incidents, and data breaches may
not succeed and any such event, whether intentional or inadvertent and whether attributable to us or our service
providers, could have a material adverse effect on our business, reputation and the price of our common stock.
We have implemented policy, procedural, technical, physical, and administrative controls with the aim of protecting
our networks, applications, bank accounts, and the confidential, sensitive and personal information entrusted to us,
including bank account and social security numbers, tax information, certain medical information, certain health claim
information, PHI, retirement account information and payroll data, from cyber-attacks and other security-related
incidents. While we, and our service providers, have security measures and programs in place to prevent, detect, and
respond to cyber-attacks, security-related incidents, data breaches and other similar threats, these security measures
and programs and our collective efforts may not always succeed. Despite our efforts and those of our service providers,
we cannot fully eliminate the possibility of such cyber-attacks, security-related incidents and other threats, whether
intentional or inadvertent and whether internal or external and we, our clients or our service providers may not discover
a security incident for a significant period of time after the incident occurs.
In some cases, we perform risk assessments of our service providers or require them to undertake security measures
through contract provisions. However, we do not control our service providers and our ability to monitor their data
security is limited, so we cannot ensure the security measures they take will be sufficient to protect our confidential,
sensitive and personal information. Due to applicable laws and regulations or contractual obligations, we may be held
responsible for any cyber-attack or other security-related incident attributed to our service providers regarding the
information we share with them and any contractual protections we may have from our service providers may not be
sufficient to adequately protect us from any such liabilities and losses.
We have invested, and plan to continue investing, in resources to protect our information security ecosystem against
cyber-attacks, other security-related incidents, and data breaches and to investigate and remediate any information
security vulnerabilities. However, the security protections and strategies that we implement, and the investigation and
remediation efforts we undertake, may not be successful. Any security breach, whether intentional or inadvertent, could
result in the access, public disclosure, loss or theft of our clients', WSEs' and corporate employees’ confidential, sensitive
and personal information, which could negatively affect our ability to attract new clients, cause existing clients to
terminate their agreements with us, result in significant reputational damage and subject us to significant lawsuits,
regulatory fines, or other actions or liabilities, any of which could materially and adversely affect our business and
operating results.
We must comply with constantly evolving, data privacy and security laws and regulations, which may require substantial
costs or changes to our business, and any actual or perceived compliance failure could result in reduced revenue,
increased costs, liability claims, regulatory penalties, and damage to our reputation.
We are subject to various federal, state and local laws, rules, and regulations, as well as contractual obligations, relating
to the collection, storage, use, retention, security, disclosure, transfer and other processing of confidential, sensitive
and personal information. Existing laws and regulations are constantly evolving, and new laws and regulations that
apply to our business are being introduced at every level of government inside and outside of the United States. For
example, all 50 U.S. states, the District of Columbia and Canada have enacted breach notification laws that may require
us to notify WSEs, clients, corporate employees, or other third parties regulators in the event of unauthorized access
to or disclosure of confidential, sensitive or personal information experienced by us or our service providers.
In addition to breach notification laws, we have seen increased focus at every level of government inside and outside
of the United States on regulating the collection, store, use, retention, security, disclosure, transfer and other processing
of confidential, sensitive and personal information. For example, in recent years, many states have proposed or enacted
new laws or amended existing laws. Certain state laws, including the CCPA, may be more stringent or broader in
scope, or offer greater individual rights, with respect to confidential, sensitive and personal information than federal,
international or other state laws, and such laws may differ from each other, which may complicate compliance efforts,
requiring attention to changing regulatory requirements. We believe that we currently comply with the requirements of
the CCPA, but additional provisions of the CCPA will become effective in 2021. While we are working to comply with
these provisions, we cannot guarantee that we will not incur significant costs or that our efforts will be successful. As
a sponsor of employee benefit plans with access to certain PHI, we are subject to regulation at the federal level,
including under the HIPAA and the HITECH Act. HIPAA contains restrictions and health data privacy, security and
breach notification requirements with respect to the use and disclosure of PHI and there are penalties and fines for
HIPAA violations.
19
RISK FACTORS
For details regarding these data privacy and security laws and regulations discussed above and that apply to our
operations, refer to Part I, Item 1. Business, of this Form 10-K, under the heading Legal and Regulatory: Data Privacy
and Security Regulations. Complying with these and any other data privacy and security laws, rules and regulations,
and with any new laws or regulations or changes to existing laws, could cause us to incur substantial costs or require
us to change our business practices in a manner adverse to our business, divert resources from other initiatives and
projects, and restrict the way products and services involving data are offered, all of which may have a material adverse
effect on our business. For example, we have incurred and expect to continue to incur additional costs to comply with
the CCPA and other similar regulations. Despite our efforts, in the future we may be unable to make required changes
and modifications to our business practices in a commercially reasonable manner, or at all. Given the rapid development
of cybersecurity and data privacy laws, we expect to encounter inconsistent interpretation and enforcement of these
laws and regulations, as well as frequent changes to these laws and regulation. As a result, we may be required to
incur significant, unexpected compliance costs and we may be exposed to significant penalties or liability for non-
compliance, the possibility of fines, lawsuits (including class action privacy litigation), regulatory investigations, criminal
or civil sanctions, audits, adverse media coverage, public censure, other claims, significant costs for remediation and
damage to our reputation, all of which could have a material adverse effect on our business and operations. Any
inability, or the perception of any inability, to adequately address data privacy or security-related concerns, even if
unfounded, or to comply with applicable laws, regulations, standards and other obligations relating to data privacy and
security, could result in additional cost and liability to us, damage our relationships with clients and have a material
adverse effect on our business.
Legal and Compliance Risks
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 subject to numerous complex federal, state and local laws
and regulations, including those described in Part I, Item 1. Business, of this Form 10-K. These laws and regulations
cover a diverse range of topics, including employer, employee and independent contractor classifications, employee
benefit, health and retirement plan laws, workers' compensation laws, employment and payroll tax laws, worksite safety
laws, insurance and banking laws, wage and hour laws, anti-discrimination laws, and many laws specific to the industries
of our clients. Many of these laws do not specifically address PEOs or co-employment relationships, and regulators
are often unfamiliar with the PEO industry and co-employment relationships, which can lead to unpredictable application,
interpretation and enforcement of these laws and regulations at the federal, state and local levels in relation to our
business.
Any new laws, changes in existing laws, or any adverse application, interpretation or enforcement of new or existing
laws, including those described in Part I, Item 1. Business, of this Form 10-K, whether they apply to employers generally
or specifically to PEOs or to our co-employment relationships could:
•
•
•
•
•
•
•
reduce or eliminate the value and benefits that customers realize by using our products and services,
change or eliminate the types of products and services we provide,
require us to make significant changes to how we do business and provide products and services,
affect the extent and type of employee benefits that employers and co-employers can or must provide
employees,
alter the amount, timing and type of taxes employers, co-employers and employees are required to pay and that
we are able to manage for our clients
increase the cost and complexity of the licensing requirements for our business operations,
create or increase our liability and responsibilities to our clients and WSEs, and/or
• mandate new compliance requirements, disclosures or services.
Any of these changes could have a material adverse effect on our financial condition and results of operations.
20
RISK FACTORS
The laws that apply in our industry and to employers and co-employers have in the past, and could in the future, be
changed, replaced or interpreted in a manner adverse to our operations and we are not able to predict the occurrence,
direction or ultimate impact of these events. Any such new laws, change in laws or adverse application or interpretation
of laws could reduce or eliminate the attractiveness of our products and services, provide customers with new and
attractive alternatives to our products and services, significantly increase our compliance costs and the cost to provide
our products and services, or require us to make substantial changes to the way in which we operate, any one of which
could result in a material adverse effect on our financial condition and results of operations.
Changing laws and regulations governing health insurance and other traditional employee benefits at the federal, state
and local level could negatively affect our business.
Changes to and continued uncertainty regarding the implementation and future of health care reform in the United
States, at the federal, state and local level, 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 how we provide our sponsored health benefits to our WSEs, and our ability to attract and retain our clients. In
addition, changes at the federal, state and local level to the laws and regulations regarding other traditional employee
benefits, such as retirement and workers’ compensation benefits, also have the potential to substantially change the
types of benefit programs that are available to SMBs and that we and other PEOs may be required to offer. Our ability
to comply with, and adapt our product offerings to take advantage of, any such changes could require significant
additional costs, prove cost prohibitive and/or otherwise divert management attention, which could result in a material
adverse effect on our financial condition and results of operations.
If we are not recognized as an employer of worksite employees under federal and state regulations, we and our clients
could be adversely impacted.
In order to sponsor our employee benefit plan offerings for WSEs, we must qualify as an employer of 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 in evaluating this issue have included
the employer’s degree of behavioral control (for example the extent of instructions, training and evaluation of the work),
financial control and the economic aspects of the work relationship, the type of relationship, as evidenced by the specific
contract, if any, whether employee benefits are provided, whether the work is indefinite in duration or project-based,
and whether it is a regular part of the employer’s business. 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 the ability to control and supervise an individual are less important, while the DOL 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 WSEs under ERISA and the DOL has not provided guidance otherwise,
we are not able to predict the outcome of any 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 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 these
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 WSEs under the
Code, we cannot assure you that the IRS will not challenge our 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 WSEs. Such changes could have a material adverse effect on our business
and results of operations.
21
RISK FACTORS
The definition of employers, employees and independent contractors is evolving. Changes to the laws and regulations
that govern what it means to be an employer or an employee may require us to make significant changes in our
operations and may negatively affect our business.
National views on employers, employees and independent contractors are changing at a rapid rate, as evidenced by
recent federal and state rule changes. In September 2019 California passed AB5, a law that could potentially reclassify
client independent contractors as employees. AB5 and similar changes in rules defining when a worker is an employee
or independent contractor can increase or decrease the pool of WSEs that we are allowed to include in our TriNet
sponsored benefit plans, which may negatively impact client demand for the products and services we provide, require
us to modify or change how we operate our business and have a material adverse effect on our business and results
of operations.
In addition, in January 2020, the DOL issued a new rule broadening the definition of joint employer that has been used
under the Fair Labor Standards Act (FLSA) for more than sixty years. Joint employment is not the same as co-
employment, and we do not believe that we are a joint employer under the new DOL rule or that this rule change
impacts our status as a co-employer. However, these changes could potentially result in increased FLSA joint
employment claims, which could divert management attention and cause us to incur additional and potentially material
costs to defend.
The examples above highlight the impact to our business when regulations regarding the definitions or classification
of employers, employees, independent contractors and other groups of workers change. Any such regulatory changes
could affect the way in which we provide TriNet-sponsored benefits to our WSEs, the way in which we report and remit
payroll taxes to tax authorities, and our legal liability for the actions and inactions of our clients. Any of such regulatory
changes could also require us to change the manner in which we operate our business, or provide our products and
services, and could have an adverse effect on our business and results of operations.
If we fail to qualify as a co-employer of WSEs under applicable federal and state licensing rules, or if we are deemed
to be operating in certain industries, we and our clients could be adversely impacted.
We must qualify as co-employers of WSEs and comply with licensing, certification and registration requirements for
the regulation of PEOs at the federal level and in nearly every state. We expect states without these regulations to
adopt similar requirements in the future and states without these regulations today often still have laws and regulations
applicable to PEOs. While we believe that we satisfy applicable state regulations, these requirements vary from state
to state, they have changed frequently in the past, and could change again in the future, with potentially material impact
on our operations. If we are not able to satisfy existing or future licensing requirements or other applicable regulations
in any state, we may be prohibited from doing business in that state, including having any clients within that state.
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. Other state
regulatory authorities impose licensing requirements on companies involved in the transmission of cash, such as banks,
and other money transmitters. We do not believe that our current activities require any such licenses, but we and others
in our industry have received inquiries from regulatory authorities in the past and could receive them in the future. If
regulatory authorities in any state determine that we are acting as an insurance agent, third-party administrator, money
transmitter, or as any other regulated industry other than a PEO, we may need to hire additional personnel to manage
regulatory compliance and pay annual regulatory fees, which could have a material adverse effect on our financial
condition and results of operations.
We are subject to legal and tax 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 10 in Part II, Item 8. Financial Statements and Supplementary Data, 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.
In addition, the tax authorities in the U.S. regularly examine our income and other tax returns. Refer to Note 13 in Part
II, Item 8. Financial Statements and Supplementary Data, 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.
22
RISK FACTORS
Financial and Stock Ownership Risks
Our results of operations and stock price may fluctuate as a result of numerous factors, many of which are outside of
our control.
Our future operating results and stock price are subject to fluctuations and quarterly variations based upon a variety
of factors, many of which are not within our control, including, without limitation:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the volume and severity of health and workers' compensation insurance claims made 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 insurance premiums and other insurance costs, operating expenses and capital
expenditures,
the number of our new clients and the number of WSEs employed by each new client,
the retention or loss of existing clients, for any reason, including third-party acquisition,
a reduction in the number of WSEs employed by existing clients,
the timing of client payments and payment defaults by clients,
the costs associated with our acquisitions of companies, assets and technologies,
any payments or draw downs on our credit facility,
any unanticipated expenses, such as litigation or other dispute-related settlement payments and compliance
expenses arising from changes in regulations or regulatory enforcement,
any expenses we incur for geographic and service expansion and product and service enhancements,
any changes in laws or adverse interpretation or enforcement of laws, which may require us to change the manner
in which we operate and/or increase our regulatory compliance costs,
any changes in our effective tax rate,
the issuance of common stock or debt to pay for future acquisitions, which could dilute our stockholders or subject
us to significant debt service obligations,
amortization expense, or the impairment of intangible assets and goodwill, associated with past or future
acquisitions, and
•
the impact of new accounting pronouncements.
In addition, the trading price of our common stock is subject to fluctuation in response to a variety of factors, including
the factors above and below, many of which are not within our control, including, without limitation:
•
•
•
•
•
the overall performance of the equity markets,
any trading activity, or a market expectation regarding such activity, by our directors, executive officers and
significant stockholders,
the economy as a whole, and its impact on SMBs and our clients,
the performance and market perception of companies that investors believe are similar to us, and
any significant changes in the liquidity of our common stock.
Many of the above factors are discussed in more detail elsewhere in this Risk Factors section and in Part II, Item 7.
MD&A, of this Form 10-K. Many of these factors are outside our control, and the variability and unpredictability of these
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, 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, and our 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.
23
RISK FACTORS
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 prepay debt or incur or assume liens,
pay dividends or distributions or redeem or repurchase capital stock,
• make loans, investments or acquisitions,
•
•
•
•
enter into sale-leaseback transactions,
enter into new lines of business,
complete a significant corporate transaction, such as a merger or sale of our company or its assets, and
enter into agreements that prohibit the incurrence of liens or the payment by our subsidiaries of dividends and
distributions.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced plans to phase out the use of
LIBOR by the end of 2021. Our credit facility includes a LIBOR-indexed component and our lenders are not obligated
to accept any LIBOR alternative that we may propose. However, we do not believe that the phase out of LIBOR will
have a material effect on our operational or borrowing costs under our credit facility or any of our other business
arrangements.
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 ownership of capital stock,
and thus the voting control, of our Company 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
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 January 31, 2020, Atairos beneficially owned approximately
28% of our outstanding common stock, and all of our directors, executive officers and their affiliates, including Atairos,
beneficially own, in the aggregate, approximately 37% of our outstanding common stock. As a result Atairos, particularly
when acting with our executive officers, directors and their affiliates, is 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.
24
PROPERTIES, LEGAL PROCEEDINGS AND MINE SAFETY DISCLOSURES
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease space for 54 offices in various U.S. states, including the following:
Corporate:
• Dublin, California
Principal Client Service Centers:
• Bradenton, Florida
• Reno, Nevada
• Indian Land, South Carolina
All of these leases expire at various times up through 2028. 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 10 in Part II, Item 8. Financial Statements and Supplementary
Data, of this Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
25
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 is traded on the New York Stock Exchange under the symbol “TNET”.
As of February 6, 2020, we had 39 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 a trust by other entities.
For information regarding our equity-based incentive plans, please refer to Part III, Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters, of this Form 10-K.
Dividend Policy
We did not declare or pay cash dividends in 2019 or 2018. 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 9 in Part II, Item 8. Financial Statements and
Supplementary Data, of this Form 10-K), capital requirements, business prospects and other factors our board of
directors may deem relevant.
Performance Graph
The graph on the following page compares the cumulative return on our common stock since December 31, 2014 with
the cumulative return on the S&P 500 Index and a Peer Group Index. The cumulative return is based on the assumption
that $100 had been invested in TriNet Group, Inc. common stock, the Standard & Poor's 500 Stock Index (S&P 500)
and common stock of members of a Peer Group Index, all on December 31, 2014 and that all quarterly dividends were
reinvested. The cumulative dollar returns shown on the graph represent the value that such investments would have
had at each year end.
26
STOCK ACTIVITIES
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
Among TriNet Group, Inc., the S&P 500 Index, and a Peer Group(1)
(1) The Peer Group Index used in the chart above consists of the following companies:
Automatic Data Processing, Inc.
Insperity, Inc.
Paychex, Inc.
Barrett Business Services, Inc.
Intuit, Inc.
Issuer Purchases of Equity Securities
Our ongoing stock repurchase program was originally approved by our board of directors in 2014 and has been
subsequently amended. As of December 31, 2019, our board of directors had authorized us to repurchase up to an
aggregate $615 million under this program of which approximately $236 million remained available as of December 31,
2019 for repurchases under all authorizations approved by the board of directors. We repurchased approximately $140
million of our common stock in 2019 using existing cash and cash equivalents through our Rule 10b5-1 plan. Under the
program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans
complying with Rule 10b5-1 under the Securities Exchange Act of 1934. This repurchase authorization has no expiration.
We plan to use current cash and cash generated from ongoing operating activities to fund this share repurchase program.
We use this program to return value to our stockholders and to offset dilution from the issuance of stock under our
equity-based incentive plans and employee purchase plan.
27
STOCK ACTIVITIES
The following table provides information about our purchases of TriNet common stock during the fourth quarter of 2019:
Period
October 1- October 31, 2019
November 1 - November 30, 2019
December 1 - December 31, 2019
Total
Total Number of
Shares
Purchased (1)
Weighted Average
Price
Paid Per Share
156,425 $
554,910 $
513,349 $
1,224,684
55.89
53.79
55.55
Total Number of
Shares
Purchased
as Part of Publicly
Announced Plans (2)
Approximate Dollar
Value
of Shares that May
Yet Be Purchased
Under the Plans
(in millions) (2)
156,285 $
488,765 $
382,671 $
1,027,721
283
257
236
(1) Includes shares surrendered by employees to us to satisfy tax withholding obligations that arose upon vesting of restricted stock units granted
pursuant to approved plans.
(2) We repurchased a total of approximately $56 million of our outstanding stock during the three months ended December 31, 2019.
In February 2020, our board of directors authorized a $300 million incremental increase to our ongoing stock repurchase
program initiated in May 2014. We use this program to return value to our stockholders and to offset dilution from the
issuance of stock under our equity-based incentive plan and employee purchase plan.
Our stock repurchases are subject to certain restrictions under the terms of our credit facility. For more information about
our stock repurchases and the restrictions imposed by our credit facility, refer to Note 12 in Part II, Item 8. Financial
Statements and Supplementary Data, of this Form 10-K.
28
SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
The following selected consolidated financial and other data should be read in conjunction with Part II, Item 7. MD&A,
as well as our audited consolidated financial statements and related notes included in Part II, Item 8. Financial
Statements and Supplementary Data, of this Form 10-K.
(in millions, except per share data)
Income Statement Data:
Total revenues
Net income
Diluted net income per share of common stock
Non-GAAP measures (1):
Net Service Revenues
Net Insurance Service Revenues
Adjusted EBITDA
Adjusted Net Income
Balance Sheet Data:
Working capital
Total assets
Long-term debt
Total stockholders’ equity
Cash Flow Data:
Net cash (used in) investing activities
Net cash (used in) financing activities
Non-GAAP measures (1):
Corporate operating cash flows
Year Ended December 31,
2019
2018
2017
2016
2015
$
3,856 $
3,503 $
3,275 $
3,060 $
2,659
212
2.99
929
399
378
236
228
2,748
391
475
192
2.65
893
406
347
218
221
2,435
413
375
178
2.49
809
351
285
142
234
2,593
423
206
61
0.85
646
199
185
87
156
2,095
459
35
32
0.44
547
146
151
71
112
2,092
494
8
(281)
(38)
(81)
(188)
(176)
(200)
(85)
(24)
(77)
(27)
(104)
233
234
299
189
169
Net cash (used in) provided by operating activities
$
471 $
(104) $
606 $
192 $
(1)
Refer to Non-GAAP Financial Measures section on the following pages for definitions and reconciliations from GAAP measures.
29
SELECTED FINANCIAL DATA
Non-GAAP Financial Measures
In addition to financial measures presented in accordance with GAAP, we monitor other non-GAAP financial measures
that we use to manage our business, to make planning decisions, to allocate resources and to use 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 information that we use to maintain and grow our business.
The presentation of these non-GAAP financial measures is used 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.
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, and
- stock based compensation expense.
30
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.
functions and evaluates
• Provides a measure, among others, used in
the determination of incentive compensation
for management.
• Is a component of Net Service Revenues.
• 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.
• We also sometimes refer to Net Insurance
Margin (NIM), which is the ratio of Net
Insurance Revenue to Insurance Service
Revenue.
• 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, and stock
based compensation recognized based on
the estimated fair values. We believe these
charges are either not directly resulting from
our core operations or not indicative of our
ongoing operations.
• Enhances comparisons to prior periods and,
accordingly, facilitates the development of
future projections and earnings growth
prospects.
• Provides a measure, among others, used in
the determination of incentive compensation
for management.
• We also sometimes refer to Adjusted EBITDA
margin, which is the ratio of Adjusted EBITDA
to Net Service Revenue.
SELECTED FINANCIAL DATA
Adjusted Net Income
• Net income, excluding the effects of:
Corporate Operating Cash Flows
- effective income tax rate (1),
- stock based compensation,
- amortization of intangible assets,
- non-cash interest expense (2), and
- the income tax effect (at our effective tax
rate (1)) of these pre-tax adjustments.
• Net cash (used in) provided by operating
activities, excluding the effects of:
- Assets associated with WSEs (accounts
revenue, prepaid
receivable, unbilled
expenses and other current assets) and
- Liabilities associated with WSEs (client
deposits, accrued wages, payroll
tax
liabilities and other payroll withholdings,
accrued health benefit costs, accrued
workers' compensation costs, insurance
premiums and other payables, and other
current liabilities).
• 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.
• Provides information that our stockholders
and management can use to evaluate our
cash flows from operations independent of
the current assets and liabilities associated
with our WSEs.
• Enhances comparisons to prior periods and,
accordingly, used as a liquidity measure to
manage liquidity between corporate and
WSE related activities, and to help determine
and plan our cash flow and capital strategies.
(1) We have adjusted our non-GAAP effective tax rate to 25.5%, 26%, 41%, 43% and 42% for 2019, 2018, 2017, 2016 and 2015, respectively.
The change in 2018 is due primarily to a decrease in the statutory tax rate from 35% to 21%. The changes in 2017, 2016 and 2015 are a
result of changes in state income taxes from an increase in excludable income for state income tax purposes or state legislative changes.
These non-GAAP effective tax rates exclude the income tax impact from stock based compensation, changes in uncertain tax positions and
nonrecurring benefits or expenses from federal legislative changes.
(2)
Non-cash interest expense represents amortization and write-off of our debt issuance costs.
Reconciliation of GAAP to Non-GAAP Measures
The table below presents a reconciliation of Total revenues to Net Service Revenues:
(in millions)
Total revenues
Less: Insurance costs
Net Service Revenues
Year Ended December 31,
2019
2018
2017
2016
2015
$
$
3,856 $
3,503 $
3,275 $
3,060 $
2,927
2,610
2,466
2,414
929 $
893 $
809 $
646 $
2,659
2,112
547
The table below presents a reconciliation of Insurance service revenues to Net Insurance Service Revenues:
(in millions)
Insurance service revenues
Less: Insurance costs
Net Insurance Service Revenues
NIM
Year Ended December 31,
2019
2018
2017
2016
2015
$
$
3,326
2,927
399
$
$
3,016
2,610
406
$
$
2,817
2,466
351
$
$
2,613
2,414
199
$
$
2,258
2,112
146
12%
13%
12%
8%
6%
The table below presents a reconciliation of Net income to Adjusted EBITDA:
(in millions)
Net income
Provision for income taxes
Stock based compensation
Interest expense and bank fees
Depreciation and amortization of intangible assets
Year Ended December 31,
2019
2018
2017
2016
2015
$
212
$
192
$
178
$
58
41
21
46
49
44
22
40
22
32
20
33
$
61
43
26
20
35
32
28
18
19
54
Adjusted EBITDA
Adjusted EBITDA Margin
$
378
$
347
$
285
$
185
$
151
41%
39%
35%
29%
28%
31
SELECTED FINANCIAL DATA
The table below presents a reconciliation of Net income to Adjusted Net Income:
(in millions)
Net income
Effective income tax rate adjustment
Stock based compensation
Amortization of intangible assets
Non-cash interest expense
Income tax impact of pre-tax adjustments
Adjusted Net Income
$
Year Ended December 31,
2019
2018
2017
2016
2015
$
212 $
192 $
178 $
(11)
41
5
1
(12)
236 $
(13)
44
5
4
(14)
218 $
(59)
32
5
2
(16)
142 $
61 $
(1)
26
16
4
(19)
87 $
32
3
18
39
4
(25)
71
The table below presents a reconciliation of net cash (used in) provided by operating activities to corporate
operating cash flows:
(in millions)
Net cash (used in) provided by operating activities
Change in WSE related other current assets
Change in WSE related liabilities
Corporate Operating Cash Flows
2019
2018
2017
2016
2015
$
$
471 $
(104) $
606 $
192 $
(281)
(15)
(223)
33
305
35
(342)
(96)
93
233 $
234 $
299 $
189 $
188
262
169
Year Ended December 31,
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Operational Highlights
Our consolidated results for 2019 reflect our continued progress in attracting new customers to our industry-oriented
(vertical) products, serving our existing customers and improving our brand awareness through marketing.
Our customers are our focus, and we are investing in our processes to ensure a stronger customer experience. We
expect this investment will further enhance our value to our customers, support retention and provide further efficiency
and scale for our operations. We started this work in 2018 and expect this to continue in the near-term.
During 2019 we:
•
•
•
•
•
•
experienced an improvement in retention as a result of our customer service initiatives,
benefited from our clients growing their WSEs,
saw an increase in new sales, which delivered additional revenue growth,
continued to experience our WSEs increasing their participation, or enrollment, in our insurance offerings,
experienced increased severity of health costs per enrollee overall, but particularly within a national carrier, and
delivered profitable growth.
Our efforts to build a successful and enduring company include building and leveraging a strong national brand presence.
Our branding strategy, Incredible Starts Here, is being augmented with our current campaign: People Matter. We place
our customers at the center of what we do, including placing our customers at the center of our marketing.
Performance Highlights
These operational achievements drove the financial performance improvements noted below in 2019 when compared
to 2018:
$3.9B
Total revenues
10% increase
$212M
Net income
10% increase
* Non-GAAP measure
$268M
Operating income
7% increase
$2.99
Diluted EPS
13% increase
$929M
Net Service Revenue *
4% increase
$236M
Adjusted Net income *
8% increase
Our results for WSEs and payroll and payroll tax payments in 2019 when compared to the prior year were:
324,927
Average WSE
2% increase
340,017
Total WSE
4% increase
$41.7B
Payroll and payroll tax payments
11% increase
During 2019, our average WSEs and total WSEs grew primarily as a result of new clients, continued hiring in the
installed base and lower client attrition. In addition, our WSE growth and increased participation in our health services
resulted in a 10% increase in total revenues. We also experienced higher insurance costs, due to an increase in medical
cost trend, that resulted in reduced NSR growth of 4%. Net income increased 10% and adjusted net income increased
8%.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
The following table summarizes our results of operations for the three years ended December 31, 2019, 2018 and
2017. 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 MD&A.
Year Ended December 31,
% Change
(in millions, except operating metrics data)
2019
2018
2017
Income Statement Data:
Professional service revenues
Insurance service revenues
Total revenues
Insurance costs
Operating expenses
Total costs and operating expenses
Operating income
Other income (expense):
Interest expense, bank fees and other
Interest income
Income before provision for income taxes
Income taxes
Net income
Non-GAAP measures (1):
Net Service Revenues
Net Insurance Service Revenues
Adjusted EBITDA
Adjusted Net income
Operating Metrics:
Average WSEs
Total WSEs
$
530 $
487 $
3,326
3,856
2,927
661
3,588
268
(21)
23
270
58
3,016
3,503
2,610
642
3,252
251
(22)
12
241
49
$
$
212 $
192 $
929 $
893 $
399
378
236
406
347
218
458
2,817
3,275
2,466
592
3,058
217
(20)
3
200
22
178
809
351
285
142
324,927
340,017
317,104
325,616
324,679
325,370
2019 vs.
2018
2018 vs.
2017
9%
6 %
10
10
12
3
10
7
(5)
92
12
18
10%
4%
(2)
9
8
2%
4
7
7
6
8
6
15
10
300
21
128
8 %
10 %
16
22
53
(2)%
—
Total WSEs payroll and payroll taxes processed (in
millions)
$
41,682 $
37,666 $
37,115
11
1
(1)
Refer to Non-GAAP measures definitions and reconciliations from GAAP measures in Part II, Item 6. Selected Financial Data.
A discussion regarding our financial condition and results of operations for 2018 compared to 2017 can be found under
Part II, Item 7. Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December
31, 2018, filed with the SEC on February 14, 2019.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating Metrics
Worksite Employees (WSE)
Average WSE growth is a volume measure we use to monitor the performance of our business. Average WSEs
increased 2% in 2019. Throughout 2019, we experienced reduced attrition resulting from our customer service initiatives,
continued hiring in our installed based, primarily in our Professional Services and Technology verticals, and stronger
new sales performance.
Total WSEs can be used to estimate our beginning WSEs for the next period and, as a result, can be used as an
indicator of our potential future success in growing our business and retaining clients.
Anticipated revenues for future periods can diverge from the revenue expectation derived from Average WSEs or Total
WSEs due to pricing differences across our HR solutions and services and the degree to which clients and WSEs elect
to participate in our solutions during future periods. In addition to focusing on growing our Average WSE and Total
WSE counts, we also focus on pricing strategies, product participation and product differentiation to expand our revenue
opportunities. We report the impact of client and WSE participation differences as a change in mix.
We are focused on growing our WSE base, including by pursuing acquisitions where appropriate, while we improve
our customer service experience and continue to manage attrition.
Payroll and payroll taxes processed
Payroll and payroll taxes processed, which includes recurring payrolls and non-recurring bonus payrolls, benefits, and
associated payroll taxes may also be used as an indicator of our PSR growth.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS
Total Revenues
Our revenues consist of professional service revenues (PSR) and insurance service revenues (ISR). PSR represents
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. ISR consists 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.
Monthly total revenues per Average WSE is a measure we use to monitor the success of our product and service
pricing strategies. This measure increased 8% during 2019 compared to 2018.
We also use the following measures to further analyze changes in total revenue:
• Volume - the percentage change in period over period Average WSEs,
• Rate - the combined weighted average percentage changes in service fees for each vertical product and
changes in service fees associated with each insurance service offering, and
• Mix - the change in composition of Average WSEs within our verticals combined with the composition of our
enrolled WSEs within our insurance service offerings.
The volume increase in 2019 was primarily driven by WSE growth, especially in our Professional Services and
Technology verticals. The changes in rate and mix during 2019, were primarily driven by increases in insurance service
fees and increased health plan enrollment in our insurance service offerings.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating Income
Our operating income consists of total revenues less insurance costs and OE. Our 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 accrued costs related to contractual obligations with our workers'
compensation and health benefit carriers. Our OE consists primarily of our corporate employees' compensation related
expenses, which includes payroll, payroll taxes, SBC, bonuses, commissions and other payroll-and benefits-related
costs.
The table below provides a view of the changes in components of operating income on a year-over-year basis.
(in millions)
$251
2018 Operating Income
+353
-317
-19
Higher total revenues are a result of increases in insurance service fees and health plan
enrollment in our insurance service offerings combined with growth in PSR.
Higher insurance costs primarily as a result of an increase in medical cost trend and health plan
participation, or enrollment.
Higher OE primarily as a result of growth in our corporate employee compensation costs to
support initiatives to improve customer experience, enhance product offerings, and improve
processes.
$268
2019 Operating Income
Professional Service Revenues
Our clients are billed either based on a fee per WSE per month per transaction or on a percentage of the WSEs’ payroll.
For those clients that are billed on a percentage of WSEs' payroll, as our clients' payrolls increase, our fees also
increase.
Our vertical approach provides us the flexibility to offer our clients in different industries with varied services at different
prices, which we believe potentially reduces the value of solely using Average WSE and Total WSE counts as indicators
of future potential revenue performance.
We also analyze changes in PSR with the following measures:
• Volume - the percentage change in period over period Average WSEs,
• Rate - the weighted average percentage change in fees for each vertical, and
• Mix - the change in composition of Average WSEs across our verticals.
The increase in PSR during 2019 reflects the result of our vertical pricing strategy and ongoing change in the mix of
our WSEs. We continued to experience WSE growth, especially in our Professional Services and Technology verticals,
while our Main Street vertical continued to shrink, but at a reduced rate when compared to 2018.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS
Insurance Service Revenues
ISR consists of insurance services-related billings and administrative fees collected from clients and withheld from
WSE payroll for health benefits and workers' compensation insurance provided by third-party insurance carriers.
We use the following measures to analyze changes in ISR:
• Volume - the percentage change in period over period Average WSEs,
• Rate - the weighted average percentage change in fees associated with each of our insurance service offerings,
and
• Mix - all other changes including the composition of our enrolled WSEs within our insurance service offerings
(health plan enrollment).
The growth in ISR during 2019 primarily resulted from changes in rate, due to higher insurance service fees per plan
participant and changes in mix, due to higher health plan enrollment.
Insurance Costs
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 accrued costs related to contractual
obligations with our workers' compensation and health benefit carriers.
We use the following measures to analyze changes in insurance costs:
• Volume - the percentage change in period over period Average WSEs,
• Rate - the weighted average percentage change in cost trend associated with each of our insurance service
offerings, and
• Mix - all other changes including the composition of our enrolled WSEs within our insurance service offerings
(health plan enrollment).
38
MANAGEMENT'S DISCUSSION AND ANALYSIS
The increase in insurance cost rates during 2019 was primarily driven by:
•
Increased severity of health costs per enrollee (medical cost trend) of 10.5% - 11.5% in 2019, particularly within
one national carrier, arising from a shift in pharmaceutical utilization from brand name drugs to higher cost specialty
drugs, combined with elevated health costs in a portion of this business, partially offset by lower health administrative
costs.
• Partially offset by an $11 million decrease in workers' compensation claim costs.
We continued to experience favorable prior year development on our accrued workers' compensation costs of $31
million during 2019, primarily due to lower than expected claim severity.
Net Service Revenues
NSR provides us with a comparable basis of revenues on a net basis, acts as the basis to allocate resources to different
functions and helps us evaluate the effectiveness of our business strategies by each business function.
The primary drivers to the changes in our NSR are presented below.
NIM was 12% for 2019 representing a decrease of 1% from 2018, due to insurance costs rate increases exceeding
the ISR rate increases achieved, as discussed previously.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating Expenses
OE includes cost of providing services (COPS), sales and marketing (S&M), general and administrative (G&A), systems
development and programming (SD&P), and depreciation and amortization expenses (D&A).
We manage our operating expenses and allocate resources across different business functions based on a percentage
of NSR, which has decreased to 71% in 2019 from 72% in 2018.
We had approximately 2,900 corporate employees as of December 31, 2019 in 54 offices across the U.S. Our corporate
employees' compensation-related expenses represent a majority of our operating expenses. Compensation costs for
our corporate employees include payroll, payroll taxes, SBC, bonuses, commissions and other payroll- and benefits-
related costs. Compensation-related expense represented 63% of our OE in 2019 and 61% in 2018.
During the year ended December 31, 2019, we experienced operating expense growth of 3% when compared to the
same period in 2018. We expect our OE to increase in the foreseeable future due to our continued efforts to improve
our customer service experience and our systems and processes. During the year ended December 31, 2019, the
percent of OE to total revenues was 17%, compared to 18% in 2018.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS
We analyze and present our OE based upon the business functions COPS, S&M, G&A and SD&P and depreciation
and amortization. The charts below provide a view of the expenses of the business functions. Dollars are presented
in millions and percentages represent year-over-year change.
(in millions)
$642
2018 Operating Expense
+16
COPS increased in 2019, driven by increases in compensation related expenses to support initiatives
to improve our customer experience, our systems and processes, and to enhance our product
offerings. We also experienced an increase in the volume of EPLI claim expenses.
+8
-5
-6
+6
S&M increased in 2019, driven by an increase in headcount and amortization of deferred commissions
expense related to our growth in new sales.
G&A decreased in 2019, driven by a decrease in compensation related expenses and professional
fees.
SD&P decreased in 2019, primarily due to a decrease in compensation related expenses and
professional fees.
D&A increased in 2019, primarily as a result of our investments in technology to support our customer
service initiatives.
$661
2019 Operating Expenses
41
MANAGEMENT'S DISCUSSION AND ANALYSIS
We break out the expenses that make up our OE in the chart below:
Other Income (Expense)
Other income (expense) consists primarily of interest and dividend income from investments and interest expense
under our credit facility.
Interest income increased to $23 million in 2019 due to a change in our investment strategy initiated in the second
quarter of 2018 to improve our interest income. Our investment strategy has improved our interest income, net income,
Adjusted Net Income and Adjusted EBITDA, year-over-year. Interest expense, bank fees and other, remained consistent
year-over-year.
Provision for Income Taxes
Our effective tax rate (ETR) was 21% and 20% for the years ended December 31, 2019 and 2018, respectively. The
change in ETR was driven by a 3% increase primarily from one-time expenses associated with SBC, partially offset
by a 2% decrease from a one-time benefit associated with prior year tax expense and changes in the valuation allowance.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
Liquidity
Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash
requirements of our business operations. We believe that we have sufficient liquidity and capital resources to satisfy
future requirements and meet our obligations to our clients, creditors and debt holders.
Included in our balance sheets are 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. Although we are not subject to regulatory restrictions, we distinguish
and manage our corporate assets and liabilities separately from those current assets and liabilities held by us to satisfy
our employer obligations associated with our WSEs as follows:
(in millions)
Current assets:
Cash and cash equivalents
Investments
Restricted cash, cash equivalents and investments
Other current assets
Total current assets
Total current liabilities
Working capital
December 31,
Corporate
2019
WSE
Total
Corporate
2018
WSE
Total
$
213 $
— $
213 $
228 $
— $
68
15
45
—
1,165
365
68
1,180
410
54
15
36
—
927
386
$
$
$
341 $
1,530 $
1,871 $
333 $
1,313 $
113 $
1,530 $
1,643 $
112 $
1,313 $
228 $
— $
228 $
221 $
— $
228
54
942
422
1,646
1,425
221
To meet various U.S. state licensing requirements and maintain accreditation by the ESAC, we are subject to various
minimum working capital and net worth requirements. As of December 31, 2019, 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.
Working capital for WSEs activities
We designate funds to ensure that we have adequate current assets to satisfy our current obligations associated with
WSEs. We manage our WSE payroll and benefits obligations through collections of payments from our clients which
generally occurs two to three days in advance of client payroll dates. We regularly review our short-term obligations
associated with our WSEs (such as payroll and related taxes, insurance premium and claim payments) and designate
funds required to fulfill these short-term obligations, which we refer to as PFC. PFC is included in current assets as
restricted cash, cash equivalents and investments.
We manage our sponsored benefit and workers' compensation insurance obligations by maintaining collateral funds
in restricted cash, cash equivalents and investments. These collateral amounts are generally determined at the
beginning of each plan year and we may be required by our insurance carriers to adjust our collateral balances when
facts and circumstances change. We regularly review our collateral balances with our insurance carriers and anticipate
funding further collateral in the future based upon our capital requirements. We classify our restricted cash, cash
equivalents and investments as current and noncurrent assets to match against the anticipated timing of payment of
claims.
Working capital for corporate purposes
We use our available cash and cash equivalents to satisfy our operational and regulatory requirements and to fund
capital expenditures. 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 corporate operating activities, our
borrowing capacity under our revolving credit facility and the potential issuance of debt or equity securities.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS
Cash Flows
The following table presents our cash flow activities for the stated periods:
(in millions)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents, unrestricted
and restricted
Cash and cash equivalents, unrestricted and restricted:
Beginning of period
End of period
$
$
$
Year Ended December 31,
2019
2018
Corporate WSE
Total
Corporate WSE
Total
$
233 $ 238 $ 471 $
234 $ (338) $ (104)
(191)
3
(188)
(200)
— (200)
(176)
(134) $ 241 $ 107 $
— (176)
(85)
(85)
—
(51) $ (338) $ (389)
425 $ 924 $ 1,349 $
476 $ 1,262 $1,738
291 $1,165 $ 1,456 $
425 $ 924 $1,349
Net increase (decrease) in cash and cash equivalents:
Unrestricted
Restricted
Operating Activities
$
(15) $ — $
(15) $
(108) $ — $ (108)
(119)
241
122
57
(338)
(281)
Components of net cash (used in) provided by operating activities are as follows:
(in millions)
Net income
Depreciation and amortization
Noncash lease expense
Stock based compensation expense
Payment of interest
Income tax payments, net
Changes in deferred taxes
Changes in other operating assets
Changes in other operating liabilities
Net cash provided by operating activities - Corporate
Collateral (paid to) refunded from insurance carriers, net
Changes in other operating assets
Changes in other operating liabilities
Net cash (used in) provided by operating activities - WSE
Net cash (used in) provided by operating activities
Year Ended December 31,
2019
2018
$
212 $
192
57
16
41
(19)
(62)
(7)
(36)
31
233 $
6
15
217
238 $
471 $
46
—
44
(17)
(49)
1
(44)
61
234
26
(27)
(337)
(338)
(104)
$
$
$
Year-over-year change in net cash used in operating activities for WSE purposes was primarily driven by timing of
client payments, payments of payroll and payroll taxes, and collateral funding and insurance claim activities. We expect
the changes in restricted cash and cash equivalents to correspond to WSE cash provided by (or used in) operations
as we manage our obligations associated with WSEs through restricted cash.
Corporate operating cash flows in 2019 remained consistent to 2018.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS
Investing Activities
Cash used in investing activities for the periods presented below primarily consisted of purchases of investments and
capital expenditures, partially offset by proceeds from the sale and maturity of investments.
(in millions)
Investments:
Purchases of investments
Proceeds from sale and maturity of investments
Cash used in investments
Capital expenditures:
Software and hardware
Office furniture, equipment and leasehold improvements
Cash used in capital expenditures
Cash used in investing activities
Investments
Year Ended December 31,
2019
2018
$
$
$
$
$
(302) $
159
(143) $
(34) $
(11)
(45) $
(188) $
(258)
101
(157)
(30)
(13)
(43)
(200)
We invest a portion of available cash in investment-grade securities with effective maturities less than five years that
are classified on our balance sheets as investments. As of December 31, 2019, we had approximately $193 million in
investments.
We also invest funds held as collateral to satisfy our long-term obligation towards workers' compensation liabilities.
These investments are classified on our balance sheets as restricted cash, cash equivalents and investments. We
review the amount and the anticipated holding period of these investments regularly in conjunction with our estimated
long-term workers' compensation liabilities and anticipated claims payment trend.
As of December 31, 2019, we held approximately $1.8 billion in cash, cash equivalents and investments, of which
$213 million is unrestricted. Refer to Note 2 in Part II, Item 8. Financial Statements and Supplemental Data, in this
Form 10-K for a summary of these funds.
Capital Expenditures
During 2019, we continued to make investments in software and hardware and we enhanced our existing products
and technology platform. We also incurred expenses related to the build out of our corporate headquarters and our
technology and client service centers. We expect capital investments in our software and hardware to continue in the
future.
Financing Activities
Net cash used in financing activities in the years ended December 31, 2019 and 2018 consisted of our debt and equity-
related activities.
(in millions)
Financing activities
Repurchase of common stock, net of issuance
Repayment of borrowings
Net proceeds from issuance of debt
Cash used in financing activities
Year Ended December 31,
2019
2018
$
$
(154) $
(22)
—
(176) $
(69)
(22)
6
(85)
In June 2018 we entered into a $425 million term loan A (our 2018 Term Loan) under our new credit agreement (2018
Credit Agreement). The proceeds of the 2018 Term Loan were used to repay our previously outstanding term loans.
Refer to Note 9 in Part II, Item 8. Financial Statements and Supplemental Data, in this Form 10-K for more details.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS
We repurchase shares to return value to our stockholders and to offset dilution from the issuance of stock under our
equity-based incentive plan and employee purchase plan. Refer to Note 12 in Part II, Item 8. Financial Statements
and Supplemental Data, in this Form 10-K for more details.
In February 2020, our board of directors authorized a $300 million incremental increase to our ongoing stock repurchase
program initiated in May 2014. We use this program to return value to our stockholders and to offset dilution from the
issuance of stock under our equity-based incentive plan and employee purchase plan.
Capital Resources
As of December 31, 2019, $392 million was outstanding under our 2018 Term Loan. Our 2018 Credit Agreement
includes a $250 million revolving credit facility (our 2018 Revolver), which will be used solely for working capital and
other general corporate purposes. The 2018 Revolver includes capacity for a $20 million swingline facility. Letters of
credit issued pursuant to the revolving credit facility reduce the amount available for borrowing under the 2018 Revolver.
At December 31, 2019, we had $16 million of letters of credit outstanding and remaining capacity of $234 million under
the 2018 Revolver.
Each of our 2018 Term Loan and our 2018 Revolver mature in June 2023 and bear interest, at our option, either at a
LIBOR rate, or the prime lending rate, plus an applicable margin subject to change in the future based on our leverage
ratio, as set forth in our 2018 Credit Agreement.
Our 2018 Credit Agreement contains customary affirmative and restrictive financial covenants and representations
and warranties that are customary for facilities of this type, including restrictions on indebtedness, liens, investments,
mergers, dispositions, prepayment of indebtedness (other than our 2018 Term Loan and our 2018 Revolver), dividends,
distributions and transactions with affiliates, as well as minimum interest coverage and maximum total leverage ratio
requirements. We were in compliance with the covenants and restrictions under our 2018 Credit Agreement at
December 31, 2019.
Contractual Obligations
The following table summarizes our significant contractual obligations as of December 31, 2019:
(in millions)
Debt obligations (1)
Workers' compensation obligations (2)
Operating lease obligations (3)
Purchase obligations (4)
Uncertain tax positions (5)
Payments Due by Period
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
$
392 $
217
74
60
7
22 $
44 $
326 $
66
19
34
1
49
21
22
6
34
15
4
—
—
68
19
—
—
87
Total
$
750 $
142 $
142 $
379 $
(1) Includes principal and the projected interest payments of our term loans, see Note 9 in Part II, Item 8. Financial Statements and
Supplementary Data 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 other liabilities.
(3) Includes various facilities and equipment leases under various operating lease agreements.
(4) Our purchase obligations primarily consist of software licenses, consulting and maintenance agreements, and sales and marketing events
pertaining to various contractual agreements.
(5) Our uncertain tax positions primarily pertain to tax credits and other related reserves, including interest and penalties.
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, 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.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS
Off-Balance Sheet Arrangements
As of December 31, 2019, 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 within the meaning of Item 303(a)(4) of Regulation S-K.
Critical Accounting Judgments and Estimates
Our consolidated financial statements are prepared in accordance with 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 Part II, Item 8. Financial Statements and Supplementary Data, of this Form 10-K.
The following items require significant estimation or judgment:
Insurance Costs
We purchase 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
accrued insurance costs including both known claims filed and estimates for incurred but not reported claims.
We use external actuaries to evaluate, review and recommend estimates of our accrued workers' compensation and
health insurance costs. The accrued costs studies performed by these qualified external actuaries analyze historical
claims data to develop a range of our potential ultimate costs using loss development, expected loss ratio and frequency/
severity methods in accordance with Actuarial Standards of Practice. These methods are applied to classes of the
claims data organized by policy year and risk class.
Key judgments and evaluations in arriving at loss estimates by class and the accrued costs selection overall include:
•
•
•
•
the selection of method used and the relative weights given to selecting the method used for each policy year,
the underlying assumptions of LDF used in these models,
the effect of any changes to the insurers' claims handling and payment processes,
evaluation of 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 accrued
costs. Where adjustments are necessary these are recorded in the period in which the adjustments are identified.
These accrued costs may vary in subsequent quarters from the amount estimated. Certain assumptions used in
estimating these accrued costs are highly judgmental. Our accrued costs, results of operations and financial condition
can be materially impacted if actual experience differs from the assumptions used in establishing these accrued costs.
Accrued Workers' Compensation Costs
Under our policies, we are responsible for reimbursing the insurance carriers for workers' compensation losses up to
$1 million per claim occurrence (Deductible Layer). As workers' compensation costs for a particular period are not
known for many years after the losses have occurred, these costs represent our best estimate of unpaid claim losses
and loss adjustment expenses within the deductible layer in accordance with our insurance policies. We use external
actuaries to evaluate, review and recommend accrued workers' compensation costs on a quarterly basis. The data is
segmented by class and state and analyzed by policy year, and states where we have small exposure are aggregated
into a single grouping.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS
We use a combination of loss development, expected loss ratio and frequency/severity methods which include the
following inputs, assumptions and analytical techniques:
• Historical volume and severity of workers' compensation cost experience, exposure data and industry loss
experience related to TriNet’s insurance policies,
inputs of WSEs’ job responsibilities and location,
estimates of future cost trends,
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
•
•
•
•
LDFs to project the reported losses for each accident year to an ultimate basis.
Final cost settlements may vary materially from the present estimates, particularly when payments do 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.
We believe that our estimate of accrued workers' compensation costs is most sensitive to LDFs given the long reporting
and paid development patterns for our workers' compensation loss costs. Our methods of estimating accrued workers'
compensation costs rely on these LDFs and an estimate of future cost trend.
The following table illustrates the sensitivity of changes in the LDFs on our year end estimate of insurance costs (in
millions of dollars):
Change in loss development factor
Change in insurance costs
-5.0%
-2.5%
+2.5%
+5.0%
Accrued Health Insurance Costs
($33)
($18)
$19
$38
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 83% of
our group health insurance costs relate to risk-based plans in which we agree to reimburse our carriers for any claims
paid within an agreed-upon 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 insurance costs
and accrued health insurance costs include estimates of reported losses and claims incurred but not yet paid (IBNP).
Data is grouped and analyzed by insurance carrier.
To estimate accrued health benefits costs we use a number of inputs, assumptions and analytical techniques:
•
•
•
historical loss claims payment patterns and medical cost trend rates related to TriNet’s insurance policies,
current period claims costs and claims reporting patterns (completion factors), and
plan enrollment.
Medical cost trend rates are a significant factor we use in developing our accrued health insurance costs. Medical cost
trends are developed through an analysis of claims incurred in prior months, provider pricing and indicators of health
care utilization, including pharmacy utilization trends, and outpatient and inpatient utilization. Many factors may cause
medical cost trend to vary from our estimates.
48
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table illustrates the sensitivity of changes in the medical cost trend on our year end estimate of insurance
costs (in millions of dollars):
Change in medical cost trend
Change in insurance costs
+3.0%
+2.0%
+1.0%
-1.0%
-2.0%
-3.0%
$18
$12
$6
$(6)
$(12)
$(18)
Completion factors are an actuarial estimate based on historical experience and analysis of current trends, of paid
costs to carriers as a percentage of the expected ultimate costs to carriers. Many factors may cause actual claims
submissions rates from our carriers to vary from our estimated completion factors, including carrier claims processing
patterns, the mix of providers and the mix of electronic versus manual claims submitted to our carriers.
The following table illustrates the sensitivity of changes in completion factors on our year end estimate of insurance
costs (in millions of dollars):
Change in completion factors
Change in insurance costs
-0.75%
-0.50%
-0.25%
+0.25%
+0.50%
+0.75%
$14
$9
$5
$(5)
$(9)
$(14)
Recent Accounting Pronouncements
Refer to Note 1 in Part II, Item 8, Financial Statements and Supplementary Data, of this Form 10-K for additional
information related to recent accounting pronouncements.
49
QUANTITATIVE AND QUALITATIVE DISCLOSURES
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to changes in interest rates relates primarily to our investment portfolio and outstanding floating rate
debt. Changes in U.S. interest rates affect the interest earned on the Company’s cash, cash equivalents and investments
and the fair value of the investments, as well as interest costs associated with our debt.
In June 2019, we entered into an interest rate collar derivative transaction with no upfront premium. We use this
derivative to hedge against interest rate risk on a portion of our outstanding floating rate debt under our 2018 Credit
Agreement. We have designated this derivative as a cash flow hedge. Our primary objective in purchasing and holding
this derivative is to reduce our volatility of net earnings and cash flows associated with changes in the benchmark
interest rate in our interest rate payments. We do not enter into any derivatives for trading or other speculative purposes.
We performed a sensitivity analysis to determine the impact a change in interest rates would have on the cash flows
of the collar assuming a 100 basis point parallel shift in the current LIBOR rate. Based on the terms and remaining
settlements as of December 31, 2019, a hypothetical 100 basis point decrease in one-month LIBOR across all maturities
would not result in any cash payments by the Company while a hypothetical 100 basis point increase in one-month
LIBOR across all maturities would result in cash receipts of $2 million.
Our cash equivalents consist primarily of money market mutual funds, which are not significantly exposed to interest
rate risk. Our AFS marketable securities are subject to interest rate risk because these securities generally include a
fixed interest rate. As a result, the market values of these securities are affected by changes in prevailing interest rates.
We attempt to limit our exposure to interest rate risk and credit risk by investing our investment portfolio in instruments
that meet the minimum credit quality, liquidity, diversification and other requirements of our investment policy. Our AFS
marketable securities consist of liquid, investment-grade securities. The average effective duration of our AFS
marketable securities was 1.49 years at December 31, 2019. The risk of rate changes on investment balances was
not significant at December 31, 2019.
At December 31, 2019, we had total outstanding long-term debt of $391 million. A 100 basis point increase or decrease
in market interest rates would cause interest expense on our debt as of December 31, 2019 to increase by $11 million
or to decrease by $13 million over the remaining term of the loan, respectively.
50
FINANCIAL STATEMENTS
Item 8. Financial Statements and Supplementary Data
TRINET GROUP, INC.
Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Income and Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Stockholders’ Equity
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. Investments
Note 4. Financial Instruments and Fair Value Measurements
Note 5. Property, Equipment and Software, Net
Note 6. Goodwill and Other Intangible Assets
Note 7. Accrued Workers' Compensation Costs
Note 8. Leases
Note 9. Long-term Debt
Note 10. Commitments and Contingencies
Note 11. Stock Based Compensation
Note 12. Stockholders' Equity
Note 13. Income Taxes
Note 14. Earnings Per Share
Note 15. 401(k) Plan
Note 16. Related Party Transactions
Note 17. Selected Quarterly Financial Data (Unaudited)
52
55
56
57
58
59
59
68
69
70
73
73
74
75
75
76
77
80
81
84
84
84
85
51
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of TriNet Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TriNet Group, Inc. and subsidiaries (the "Company")
as of December 31, 2019 and 2018, and the related consolidated statements of income and comprehensive income,
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related
notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in
all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated February 13, 2020, expressed an unqualified opinion on the
Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements
that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accrued Workers’ Compensation and Health Insurance Costs - Refer to Note 1 to the financial statements
Critical Audit Matter Description
The Company offers its clients and worksite employees (WSEs) workers’ compensation insurance and health insurance
coverage through fully-insured insurance policies provided by third-party insurance carriers. The Company is obligated
to reimburse the insurance carriers for losses up to defined deductible limits, in accordance with the insurance policies.
Accrued workers’ compensation and health insurance costs are established to provide for the estimated unpaid costs
of reimbursing the carriers.
The accrued workers’ compensation costs include estimates of unpaid claim losses and loss adjustment expenses.
The estimate is based on the Company’s historical and industry loss experience, exposure data, an estimate of future
cost trends, expected loss ratios, and loss development factors. Accrued workers' compensation costs, net as of
December 31, 2019, were $205 million.
52
FINANCIAL STATEMENTS
The accrued health insurance costs include estimates for reported losses, plus estimates for claims incurred but not
paid. The estimate is based on the Company’s historical claim payment patterns and medical cost trends, current
period claim costs and claim reporting patterns, and plan enrollment. Accrued health insurance costs, net as of
December 31, 2019, were $167 million.
Both the accrued workers’ compensation and health insurance costs are established using actuarial methods followed
in the insurance industry and the Company uses third-party actuaries to develop these estimates.
Given the subjectivity of estimating the value of the accrued workers’ compensation and health insurance costs,
performing audit procedures to evaluate whether accrued workers’ compensation and health insurance costs recorded
for the year ended December 31, 2019, required a high degree of auditor judgment and an increased extent of effort,
including the need to involve our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the accrued workers’ compensation and health insurance costs included the following,
among others:
• We tested the effectiveness of controls related to accrued workers’ compensation and health insurance costs.
• We tested the underlying data that served as inputs into the actuarial analyses, including testing historical claims
and enrollment data and recreating the claim loss triangles.
• With the assistance of our actuarial specialists, we evaluated the methods and assumptions used by management
to estimate the accrued workers’ compensation and health insurance costs:
Compared management’s prior-year assumptions of expected development and ultimate loss to actuals
incurred during the current year to identify and evaluate potential bias in the determination of the accrued
workers’ compensation and health insurance costs.
Developed an independent range of estimates of the accrued costs, utilizing loss development factors and
future cost trends for accrued workers’ compensation costs and claim payment patterns and medical trend
rates for accrued health insurance costs. We compared our estimated ranges to management’s estimates.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 13, 2020
We have served as the Company's auditor since 2016.
53
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of TriNet Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of TriNet Group, Inc. and subsidiaries (the "Company”)
as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based
on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the
Company and our report dated February 13, 2020, expressed an unqualified opinion on those financial statements
and financial statement schedule.
Basis for Opinion
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 are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 the assessed 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
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 the policies or procedures may
deteriorate.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 13, 2020,
54
FINANCIAL STATEMENTS
TRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended December 31,
2018
2017
2019
$
530 $
487 $
3,326
3,856
2,927
245
190
137
43
46
3,588
268
(21)
23
270
58
212 $
212 $
3,016
3,503
2,610
229
182
142
49
40
3,252
251
(22)
12
241
49
192 $
192 $
3.04 $
2.99 $
2.72 $
2.65 $
70
71
70
72
$
$
$
$
458
2,817
3,275
2,466
213
187
114
45
33
3,058
217
(20)
3
200
22
178
178
2.57
2.49
69
71
(in millions except per share data)
Professional service revenues
Insurance service revenues
Total revenues
Insurance costs
Cost of providing services
Sales and marketing
General and administrative
Systems development and programming
Depreciation and amortization of intangible assets
Total costs and operating expenses
Operating income
Other income (expense):
Interest expense, bank fees and other
Interest income
Income before provision for income taxes
Income taxes
Net income
Comprehensive income
Net income per share:
Basic
Diluted
Weighted average shares:
Basic
Diluted
See accompanying notes.
55
FINANCIAL STATEMENTS
TRINET GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Investments
Restricted cash, cash equivalents and investments
Accounts receivable, net
Unbilled revenue, net
Prepaid expenses, net
Other current assets
Total current assets
Restricted cash, cash equivalents and investments, noncurrent
Investments, noncurrent
Property, equipment and software, net
Operating lease right-of-use asset
Goodwill
Other intangible assets, net
Other assets
Total assets
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and other current liabilities
Long-term debt
Client deposits
Accrued wages
Accrued health insurance costs, net
Accrued workers' compensation costs, net
Payroll tax liabilities and other payroll withholdings
Operating lease liabilities
Insurance premiums and other payables
Total current liabilities
Long-term debt, noncurrent
Accrued workers' compensation costs, noncurrent, net
Deferred taxes
Operating lease liabilities, noncurrent
Other non-current liabilities
Total liabilities
Commitments and contingencies (see Note 10)
Stockholders' equity:
Preferred stock
($0.000025 par value per share; 20,000,000 shares authorized; no shares issued or outstanding at
December 31, 2019 and 2018)
Common stock and additional paid-in capital
($0.000025 par value per share; 750,000,000 shares authorized; 69,065,491 and 70,596,559
shares issued and outstanding at December 31, 2019 and 2018, respectively)
Accumulated deficit
Total stockholders' equity
Total liabilities & stockholders' equity
See accompanying notes.
56
December 31, December 31,
2019
2018
$
213
$
68
1,180
9
285
52
64
228
54
942
11
304
48
59
1,871
1,646
$
$
212
125
85
55
289
15
96
187
135
79
—
289
21
78
2,748
$
2,435
$
31
22
44
391
167
61
901
17
9
45
22
56
352
135
67
729
—
19
1,643
1,425
369
144
61
48
8
391
158
68
—
18
2,273
2,060
—
694
(219)
475
$
2,748
$
—
641
(266)
375
2,435
Year Ended December 31,
2018
2017
2019
$
375 $
206 $
641
2
9
42
694
(266)
212
—
(140)
(25)
(219)
475 $
583
7
7
44
641
(377)
192
2
(61)
(22)
(266)
375 $
35
535
11
5
32
583
(500)
178
—
(44)
(11)
(377)
206
FINANCIAL STATEMENTS
TRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
Total Stockholders' Equity, beginning balance
Common Stock and Additional Paid-In Capital:
Beginning balance
Issuance of common stock from exercise of stock options
Issuance of common stock for employee stock purchase plan
Stock based compensation expense
Ending balance
Accumulated Deficit:
Beginning balance
Net income
Cumulative effect of accounting change
Repurchase of common stock
Awards effectively repurchased for required employee withholding taxes
Ending balance
Total Stockholders' Equity, ending balance
$
See accompanying notes.
57
FINANCIAL STATEMENTS
TRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Operating activities
Year Ended December 31,
2018
2017
2019
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
$
212 $
192
178
Depreciation and amortization
Noncash lease expense
Stock based compensation
Deferred income taxes
Amortization of (premium) discount of investments
Changes in operating assets and liabilities:
Accounts receivable, net
Unbilled revenue, net
Prepaid expenses, net
Accounts payable and other current liabilities
Client deposits
Accrued wages
Accrued health insurance costs, net
Accrued workers' compensation costs, net
Payroll taxes payable and other payroll withholdings
Operating lease liabilities
Other assets
Other liabilities
Net cash (used in) provided by operating activities
Investing activities
Purchases of marketable securities
Proceeds from sale and maturity of marketable securities
Acquisitions of property and equipment
Net cash used in investing activities
Financing activities
Repurchase of common stock
Proceeds from issuance of common stock
Awards effectively repurchased for required employee withholding taxes
Proceeds from issuance of notes payable, net
Payments for extinguishment of debt
Repayment of debt
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents, unrestricted and
restricted
Cash and cash equivalents, unrestricted and restricted:
Beginning of period
End of period
Supplemental disclosures of cash flow information
Interest paid
Income taxes paid, net
Supplemental schedule of noncash investing and financing activities
Payable for purchase of property and equipment
See accompanying notes.
58
57
16
41
(7)
(1)
5
19
(5)
(15)
(12)
40
32
(20)
172
(17)
(34)
(12)
471
(302)
159
(45)
(188)
(140)
11
(25)
—
—
(22)
(176)
107
46
—
44
1
—
10
(14)
(9)
(8)
4
23
(16)
(7)
(305)
—
(64)
(1)
(104)
(258)
101
(43)
(200)
(61)
14
(22)
210
(204)
(22)
(85)
(389)
35
—
32
(25)
—
(14)
(4)
28
23
(4)
26
22
9
294
—
(11)
17
606
—
14
(38)
(24)
(44)
16
(11)
—
—
(38)
(77)
505
1,349
1,456 $
1,738
1,349 $
1,233
1,738
19 $
62
2 $
17
49
3
16
2
2
$
$
$
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 the Company, we, our and us), a professional employer organization, provides
comprehensive human resources solutions for small to midsize businesses under a co-employment model. These HR
solutions include 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 HR-related services. Through the co-employment relationship, we are the employer of
record for certain employment-related administrative and regulatory purposes for the worksite employees (WSEs),
including:
•
•
•
•
compensation through wages and salaries,
employer payroll-related tax payments,
employee payroll-related tax withholdings and payments,
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 WSEs.
We operate in one reportable segment. All of our service revenues are generated from external clients. Less than 1%
of our revenue is generated outside of the United States.
Basis of Presentation
Our consolidated financial statements are prepared in conformity with generally accepted accounting principles in the
United States of America (GAAP). 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.
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.
Revenue Recognition
On January 1, 2018, we adopted Accounting Standards Codification Topic 606 (ASC Topic 606) using the modified
retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting
periods beginning after January 1, 2018 are presented under ASC Topic 606, while the comparative prior period amounts
are not restated and continue to be reported in accordance with statements previously accounted for under Accounting
Standards Codification Topic 605.
Upon adoption of ASC Topic 606, we recorded a $2 million cumulative effect adjustment to opening retained earnings
as of January 1, 2018. Impacts from adoption of the new standard on our revenue recognition include:
• Our annual service contracts with our clients that are cancellable with 30 days' notice are considered 30-day
contracts under the new standard;
• Professional service revenues are recognized on an output basis which results in recognition at the time payroll
is processed;
59
FINANCIAL STATEMENTS
• Our non-refundable set up fees are no longer deferred but accounted for as part of our transaction price and are
allocated among professional service revenues and insurance services revenues; and
• The majority of sales commissions related to onboarding new clients that were previously expensed are capitalized
as contract assets and amortized over the estimated client life.
Revenues are recognized when the promised services are transferred to our clients, in an amount that reflects the
consideration that we expect to receive in exchange for services. We generate all of our revenue from contracts with
clients. We disaggregate revenues into professional services revenues and insurance services revenues as reported
on the consolidated statements of income and comprehensive income. Generally, both the client and the Company
may terminate the contract without penalty by providing a 30-day notice.
Performance Obligations
At contract inception, we assess the services promised in our contracts with clients and identify a performance obligation
for each distinct promise to transfer to the client a service or bundle of services. We determined that the following
distinct services represent separate performance obligations:
• Payroll and payroll tax processing,
• Health benefits services, and
• Workers’ compensation services.
Payroll and payroll tax processing performance obligations include services to process payroll and payroll tax-related
transactions on behalf of our clients. Revenues associated with this performance obligation are reported as professional
service revenues and recognized using an output method in which the promised services are transferred when a client's
payroll is processed by us and WSEs are paid. Professional service revenues are stated net of the gross payroll and
payroll tax amounts funded by our clients. Although we assume the responsibilities to process and remit the payroll
and payroll related obligations, we do not assume employment-related responsibilities such as determining the amount
of the payroll and related payroll obligations. As a result, we are the agent in this arrangement for revenue recognition
purposes.
Health benefits and workers' compensation services include performance obligations to provide TriNet-sponsored
health benefits and workers' compensation insurance coverage through insurance policies provided by third-party
insurance carriers and settle high deductible amounts on those policies. Revenues associated with these performance
obligations are reported as insurance services revenues and are recognized using the output method over the period
of time that the client and WSEs are covered under TriNet-sponsored insurance policies.
We control the selection of health benefits and workers' compensation coverage made available. As a result, we are
the principal in this arrangement for revenue recognition purposes and insurance services revenues are reported gross.
We generally charge new customers a nominal upfront non-refundable fee to recover our costs to set them up on our
TriNet platform for payroll processing and other administrative services, such as benefit enrollments. These fees are
accounted for as part of our transaction price and are allocated among the performance obligations based on their
relative standalone selling prices.
Variable Consideration and Pricing Allocation
Our contracts with customers generally do not include any variable consideration. However, from time to time, we may
offer incentive credits to our clients considered to be variable consideration including incentive credits issued related
to contract renewals. Incentive credits are recorded as a reduction to revenue as part of the transaction price at contract
inception when there is a basis to reasonably estimate the amount of the incentive credit and we reduce the full amount
of the credit only to the extent that it is probable that a significant reversal of any incremental revenue will not occur.
These incentive credits are allocated among the performance obligations based on their relative standalone selling
prices.
60
FINANCIAL STATEMENTS
We allocate the total transaction price to each performance obligation based on the estimated relative standalone
selling prices of the promised services underlying each performance obligation. The transaction price for the payroll
and payroll tax processing performance obligations is determined upon establishment of the contract that contains the
final terms of the arrangement, including the description and price of each service purchased. The estimated service
fee is calculated based on observable inputs and include the following key assumptions: target profit margin, pricing
strategies including the mix of services purchased and competitive factors, and client and industry specifics.
The transaction price for health benefits insurance and workers' compensation insurance performance obligations is
determined during the new client on-boarding and enrollment processes based on the types of benefits coverage the
clients and WSEs have elected and the applicable risk profile of the client. We estimate our service fees based on
actuarial forecasts of our expected insurance premiums and loss sensitive premium costs, and amounts to cover our
costs to administer these programs.
We require our clients to prefund payroll and related taxes and other withholding liabilities before payroll is processed
or due for payment. Under the provision of our contracts with clients, we generally will process the payment of a client’s
payroll only when the client successfully funds the amount required. As a result, there is no financing arrangement for
the contracts, however, certain contracts to provide payroll and payroll tax processing services permit the client to pay
certain payroll tax components ratably over a 12-month period rather than as payroll tax is determined on wages paid,
which may be considered a significant financing arrangement under ASC Topic 606. However, as the period between
our performing the service under the contract and when the client pays for the service is less than one year, we have
elected, as a practical expedient, not to adjust the transaction price.
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 where we assume, under state
regulations, the obligation for the payment of wages and the corresponding payroll tax liabilities associated with the
work performed prior to period-end. These estimated payroll and payroll tax liabilities are recorded in accrued wages.
The associated receivables, including estimated revenues, offset by advance collections from clients, are recorded as
unbilled revenue. As of December 31, 2019 and 2018, advance collections included in unbilled revenue were $95
million and $23 million respectively.
Contract Costs
We recognize as deferred commission expense the incremental cost to obtain a contract with a client for certain
components under our commission plans for sales representatives and channel partners that are directly related to
new customers onboarded as we expect to recover these costs through future service fees. Such assets are amortized
over the estimated average client tenure. These commissions are earned on the basis of the revenue generated from
payroll and payroll tax processing performance obligations. When the commission on a renewal contract is not
commensurate with the commission on the initial contract, any incremental commission will be capitalized and amortized
over the estimated average client tenure. If the commission for both the initial contract and renewal contracts are
commensurate, such commissions are expensed in the contract period. The below table summarizes the amounts
capitalized and amortized during the years ended December 31, 2019 and 2018:
Year Ended December 31,
2019
2018
(in millions)
Deferred commission expense
Capitalized Amortized Capitalized Amortized
$
45 $
10 $
33 $
2
Certain commission plans pay a commission on estimated professional service revenues over the first 12 months of
the contract with clients. The portion of commission paid in excess of the actual commission earned in that period is
recorded as prepaid commission. When the prepaid commission is considered earned, it is classified as a deferred
commission expense and subject to amortization. We do not have material contract liabilities as of December 31, 2019
and 2018.
61
FINANCIAL STATEMENTS
Insurance Costs
Our fully insured insurance plans are provided by third-party insurance carriers under risk-based or guaranteed-cost
insurance policies. Under risk-based policies, we agree to reimburse our carriers for any claims paid within an agreed-
upon 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. Under guaranteed-cost policies, our carriers establish the premiums and
we are not responsible for any deductible.
Insurance costs include insurance premiums for coverage provided by insurance carriers, reimbursement of claims
payments made by insurance carriers or third-party administrators below a predefined deductible limit, and changes
in accrued costs related to our workers' compensation and health benefit insurance.
At policy inception, annual workers' compensation premiums are estimated by the insurance carriers based on projected
wages over the duration of the policy period and the risk categories of the WSEs. We initially pay premiums based on
these estimates. As actual wages are realized, premium expense recorded may differ from estimated premium expense,
creating an asset or liability throughout the policy year. Such asset or liability is reported on our consolidated balance
sheets as prepaid expenses or insurance premiums and other payables, respectively.
Accrued Workers' Compensation Costs
We have secured fully insured workers' compensation insurance policies with insurance carriers to administer and pay
claims for our clients and WSEs. We are responsible for reimbursing the insurance carriers for losses up to $1 million
per claim occurrence (deductible layer). Insurance carriers are responsible for administering and paying claims. We
are responsible for reimbursing each carrier up to a deductible limit per occurrence. Accrued workers' compensation
costs represent our liability to reimburse insurance carriers for our share of their losses and loss adjustment expenses.
These accrued costs are established to provide for the estimated ultimate costs of paying claims within the deductible
layer in accordance with workers' compensation insurance policies. These accrued costs include estimates for reported
and incurred but not reported (IBNR) losses, accrued costs on reported claims, and expenses associated with
processing and settling the claims. In establishing these accrued costs, we use an external actuary to provide an
estimate of undiscounted future cash payments that would be made to settle the claims based upon:
•
•
•
•
•
historical loss experience, exposure data, and industry loss experience related to TriNet’s insurance policies,
inputs including WSE job responsibilities and location,
historical volume and severity of workers' compensation claims,
an estimate of future cost trends,
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 accrued workers' compensation costs 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 accrued workers' compensation costs. Adjustments to previously established accrued costs
estimates 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 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 accrued workers' compensation costs. Costs expected to be paid within one year are recorded as
accrued workers' compensation costs. Costs expected to be paid beyond one year are included in accrued workers'
compensation costs, less current portion.
62
FINANCIAL STATEMENTS
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 requirements are
established at the policy year and are re-assessed by each carrier annually. Based on the results of each assessment,
additional collateral may be required for or paid to the carrier or collateral funds may be released or returned to the
Company. In instances where we pay collateral to carriers and the agreement permits net settlement of obligations
against collateral held, we record our accrued costs net of that collateral (Carrier Collateral Offset). We offset carrier
Collateral Offset against our obligation due within the next 12 months before applying against long-term obligations.
Collateral balances in excess of accrued costs are recorded in other assets.
Accrued Health Insurance Costs
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 ERISA. In 2019, a majority of our group health
insurance costs related to risk-based plans. Our remaining group health insurance costs were for guaranteed-cost
policies.
Accrued health insurance costs are established to provide for the estimated unpaid costs of reimbursing the carriers
for paying claims within the deductible layer in accordance with risk-based health insurance policies. These accrued
costs include estimates for reported losses, plus estimates for claims incurred but not paid. We assess accrued health
insurance costs regularly based upon external actuarial studies that include other relevant factors such as current and
historical claims payment patterns, plan enrollment and medical trend rates.
In certain carrier contracts we are required to prepay the expected claims activity for subsequent periods. These prepaid
balances by agreement permit net settlement of obligations and offset the accrued health insurance costs. As of
December 31, 2019 and 2018, prepayments offsetting accrued health insurance costs were $39 million and $33 million,
respectively. When the prepaid amount is in excess of our recorded liability the net asset position is included in prepaid
expenses. As of December 31, 2019 and 2018, accrued health insurance costs offsetting prepaid expenses were $52
million and $50 million, respectively.
Derivative Instruments
In June 2019, we entered into an interest rate collar derivative transaction with no upfront premium to mitigate the risk
of changes in interest rates on our floating rate debt. This derivative, for which we have elected and qualify for cash
flow hedge accounting, is recorded on the balance sheet at its fair value. Changes in the derivative’s fair value are
recorded each period in other comprehensive income until the underlying monthly interest payment and the
corresponding portion of the derivative are settled, at which point changes in fair value are recorded in net income.
We evaluate this derivative each quarter to determine that it remains effective by comparing the remaining expected
cash flows of the derivative against the related expected interest payments of our floating rate debt. We do not enter
into any derivatives for trading or other speculative purposes.
Leases
We adopted ASU 2016-02 - Leases (ASC 842) effective January 1, 2019 using the optional transition method, under
which we recognized the cumulative effects of initially applying the standard as an adjustment to the opening balance
of retained earnings on January 1, 2019 with unchanged comparative periods. As part of this adoption, we elected the
following practical expedients:
•
•
not to reassess 1) whether any contracts that existed prior to adoption have or contain leases, 2) the classification
of our existing leases or 3) initial direct costs for existing leases,
to use the practical expedient of using hindsight to determine the lease terms and evaluate any impairments in
right-of-use assets upon transition, and
•
not separately record non-lease and lease components for all leases in which we act as a lessee.
63
FINANCIAL STATEMENTS
We determine if a new contractual arrangement is a lease at contract inception. If a contract contains a lease, we
evaluate whether it should be classified as an operating or a finance lease. If applicable as a lease, we record our
lease liabilities and ROU assets based on the future minimum lease payments over the lease term and only include
options to renew a lease in the future minimum lease payments if it is reasonably certain that we will exercise that
option. For certain leases with original terms of twelve months or less we recognize the lease expense as incurred
and we do not recognize lease liabilities and ROU assets.
We measure our lease liabilities based on the future minimum lease payments discounted over the lease term. We
determine our discount rate at lease inception using our incremental borrowing rate, which is based on our outstanding
term debts that are collateralized by certain corporate assets. As of December 31, 2019, the weighted-average rate
used in discounting the lease liability was 4.4%.
We measure our ROU assets based on the associated lease liabilities adjusted for any lease incentives such as tenant
improvement allowances and classify operating ROU assets in other assets in our consolidated balance sheet. For
operating leases, we recognize expense for lease payments on a straight-line basis over the lease term.
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.
Restricted Cash, Cash Equivalents and Investments
Restricted cash, cash equivalents and investments presented on our consolidated balance sheets include:
•
•
•
cash and cash equivalents in trust accounts functioning as security deposits for our insurance carriers,
payroll funds collected representing cash collected in advance from clients which we designate as restricted for
the purpose of funding WSE payroll and payroll taxes and other payroll related liabilities, and
amounts held in trust for current and future premium and claim obligations with our insurance carriers, which
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
Our investments are primarily 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, net of deferred
income taxes. The amortized cost of debt investments is adjusted for amortization of premiums and accretion of
discounts from the date of purchase to the earliest call date for premiums or the maturity date for discounts. 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 realized gains and losses on the sale of available-
for-sale securities. Realized gains and losses are included in interest income in the accompanying consolidated
statements of income and comprehensive 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.
We have investments within our unrestricted and our restricted accounts. Unrestricted investments are recorded on
the balance sheet as current or noncurrent based upon the remaining time to maturity, and investments subject to
restrictions are classified as current or noncurrent based on the expected payout of the related liability.
64
FINANCIAL STATEMENTS
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 cash equivalents, 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 liabilities 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 1—observable inputs for identical assets or liabilities, such as quoted prices in active markets,
Level 2—inputs other than the quoted prices in active markets that are observable either directly or indirectly,
Level 3—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, investments and long-term debt in the fair value
hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.
Accounts Receivable
Our accounts receivable represents outstanding gross billings to clients, net of an allowance for doubtful accounts.
We require our clients to prefund payroll and related liabilities before payroll is processed or due for payment. If a client
fails to fund payroll or misses the funding cut-off, at our sole discretion, we may pay the payroll and the resulting
amounts due to us are recognized as accounts receivable. When client payment is received in advance of our
performance under the contract, such amount is recorded as client deposits. 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. The allowance was immaterial at December 31, 2019 and $1 million at December 31, 2018.
Property, Equipment and Software
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 years to five years for software and office
equipment, five years 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 software configuration, coding, and installation.
Capitalized costs are amortized on a straight-line basis over the estimated useful life, typically ranging from three years
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.
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.
65
FINANCIAL STATEMENTS
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.
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. All goodwill is associated with one reporting
unit within our one 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 its 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, 2019, 2018 and 2017.
Intangible assets with finite useful lives are amortized over their respective estimated useful lives ranging from two
years 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, 2019, 2018 and 2017.
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 $18 million, $17 million, and $8 million for the years ended December 31, 2019, 2018 and 2017,
respectively.
Stock Based Compensation
Our stock based awards to employees include time based and performance based restricted stock units and restricted
stock awards, stock options and an employee stock purchase plan. Compensation expense associated with restricted
stock units and restricted stock awards 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, with adjustments to expense
recognized in the period in which forfeitures occur.
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 the 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.
66
FINANCIAL STATEMENTS
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 non-current liabilities on the consolidated balance
sheet.
Concentrations of Credit Risk
Financial instruments subject to concentrations of credit risk include cash, cash equivalents and investments
(unrestricted and restricted), accounts receivable, and amounts due from insurance carriers. We maintain these financial
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.
No client accounted for more than 10% of total revenues in the years ended December 31, 2019, 2018 and 2017. Bad
debt expense, net of recoveries was $1 million, for each of the years ended December 31, 2019, 2018 and 2017.
Recent Accounting Pronouncements
Recently adopted accounting guidance
Leases - In February 2016, the FASB issued ASC 842, which replaced existing lease guidance under GAAP. Under
this guidance, we recognize on our balance sheet lease liabilities representing the present value of future lease
payments and an associated right-of-use asset representing our right to use or control the use of specified assets
for the lease term for any operating lease with a term greater than one year.
67
FINANCIAL STATEMENTS
The impact of our adoption of ASC 842 did not have a material impact on our income statement or cash flow statement.
The impact on our balance sheets is as follows:
(in millions)
Balance sheet
Assets
December 31, 2019
Balance Using
Previous
Standard
Increase
(Decrease)
As reported
Operating lease right-of-use assets
$
Liabilities
Operating lease liabilities
Operating lease liabilities, noncurrent
Equity
Accumulated deficit
$
55
17
48
$
—
—
10
(219)
(219)
55
17
38
—
Recently issued accounting pronouncements
Credit Losses - In June 2016, the FASB issued ASU 2016-13 - Financial Instruments - Credit Losses (ASC Topic 326)
which requires financial assets to be presented at the net amount expected to be collected. We will be required to use
forward-looking information when evaluating an allowance for our accounts receivable, unbilled revenue and other
financial assets measured at amortized cost. ASC Topic 326 also modifies the impairment guidance for available-for-
sale debt securities to require an allowance for credit losses. We will adopt ASC Topic 326 effective January 1, 2020
using a modified retrospective approach through a cumulative-effect adjustment to retained earnings. We do not expect
the adoption of ASC Topic 326 to have a material impact on our 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 and noncurrent portions of these trust accounts 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 restricted cash, cash equivalents and investments as payroll
funds collected, which is designated to pay pending payrolls, payroll tax liabilities and other payroll withholdings.
We also invest available corporate funds, primarily in fixed income securities which meet the requirements of our
corporate investment policy and are classified as available for sale (AFS).
68
FINANCIAL STATEMENTS
Our total cash, cash equivalents and investments are summarized below:
(in millions)
December 31, 2019
December 31, 2018
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
— $
68
— $
—
213 $
228 $
68
—
— $
54
— $
—
Cash and cash equivalents
$
213 $
Investments
Restricted cash, cash equivalents and
investments
Payroll funds collected
Collateral for health benefits claims
Collateral for workers' compensation claims
Collateral to secure standby letter of credit
Other security deposits
Total restricted cash, cash equivalents and
investments
Investments, noncurrent
Restricted cash, cash equivalents and
investments, noncurrent
—
1,018
98
62
—
2
1,180
—
—
—
—
—
—
—
125
Collateral for workers' compensation claims
63
148
—
—
—
—
—
—
—
1
1,018
98
62
—
2
1,180
125
783
75
66
—
15
939
—
—
—
1
—
—
1
135
212
182
5
—
—
—
2
—
2
—
—
Total
$
1,456 $
341 $
1 $
1,798 $
1,349 $
195 $
2 $
1,546
NOTE 3. INVESTMENTS
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of our AFS investments as of
December 31, 2019 and 2018 are presented below:
(in millions)
December 31, 2019
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Amortized
Cost
December 31, 2018
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Asset-backed securities
$
30 $
— $
— $
30 $
33 $
— $
— $
Corporate bonds
U.S. government agencies and government-
sponsored agencies
U.S. treasuries
Exchange traded fund
Certificates of deposit
Other debt securities
Total
123
14
163
—
1
10
1
—
—
—
—
—
—
—
—
—
—
—
124
14
163
—
1
10
99
7
46
1
—
9
—
—
—
—
—
—
—
—
—
—
—
—
$
341 $
1 $
— $
342 $
195 $
— $
— $
195
Gross unrealized losses as of December 31, 2019 and 2018 were not material.
Unrealized losses on fixed income securities are principally caused by changes in interest rates and the financial
condition of the issuer. In analyzing an issuer's financial condition, we consider whether the securities are issued by
the federal government or its agencies, whether downgrades by credit rating agencies have occurred, and industry
analysts' reports. As we have the ability to hold these investments until maturity, or for the foreseeable future, no decline
was deemed to be other-than-temporary. Actual maturities may differ from contractual maturities because borrowers
may have the right to prepay obligations with or without prepayment penalties.
69
228
54
783
75
67
2
15
942
135
187
33
99
7
46
1
—
9
FINANCIAL STATEMENTS
The fair value of debt investments by contractual maturity are shown below:
(in millions)
One year or less
Over one year through five years
Over five years through ten years
Over ten years
Total fair value
December 31,
2019
December 31,
2018
$
$
80
$
237
8
17
342
$
59
120
3
12
194
The gross proceeds from sales and maturities of AFS securities for the years ended December 31, 2019, 2018, and
2017 are shown below. We had immaterial realized gains and losses from sales of investments for the years ended
December 31, 2019, 2018, and 2017.
(in millions)
Gross proceeds from sales
Gross proceeds from maturities
Total
Year Ended December 31,
2019
2018
2017
$
$
76 $
83
159 $
54 $
47
101 $
—
14
14
NOTE 4. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
We use an independent pricing source to determine the fair value of our securities. The independent pricing source
utilizes various pricing models for each asset class; including the market approach. The inputs and assumptions for
the pricing models are market observable inputs including trades of comparable securities, dealer quotes, credit
spreads, yield curves and other market-related data.
We have not adjusted the prices obtained from the independent pricing service and we believe the prices received
from the independent pricing service are representative of the prices that would be received to sell the assets at the
measurement date (exit price).
The carrying value of the Company's cash equivalents and restricted cash equivalents approximate their fair values
due to their short-term maturities.
We did not have any Level 3 financial instruments recognized in our balance sheet as of December 31, 2019 and 2018.
There were no transfers between levels as of December 31, 2019 and 2018.
70
FINANCIAL STATEMENTS
Fair Value Measurements on a Recurring Basis
The following tables summarize our financial instruments by significant categories and fair value measurement on a
recurring basis as of December 31, 2019 and 2018:
(in millions)
December 31, 2019
Cash equivalents:
Level 1
Level 2
Total
Money market mutual funds
$
89 $
— $
194
194
89
3
92
30
96
5
53
10
42
12
2
14
70
28
9
110
1
148
504
U.S. treasuries
Total cash equivalents
Investments:
Asset-backed securities
Corporate bonds
U.S. government agencies and government-sponsored
agencies
U.S. treasuries
Other debt securities
Total investments
Restricted cash equivalents:
Money market mutual funds
U.S. treasuries
Certificate of deposit
Commercial paper
Total restricted cash equivalents
Restricted investments:
Corporate bonds
U.S. government agencies and government-sponsored
agencies
U.S. treasuries
Certificate of deposit
Total restricted investments
—
89
—
—
—
—
—
—
42
—
—
14
56
—
—
—
—
—
3
3
30
96
5
53
10
—
12
2
—
14
28
9
110
1
148
Total investments and restricted cash equivalents and
investments
$
145 $
359 $
71
FINANCIAL STATEMENTS
(in millions)
December 31, 2018
Cash equivalents:
Level 1
Level 2
Total
Money market mutual funds
$
4 $
— $
U.S. treasuries
Total cash equivalents
Investments:
Asset-backed securities
Corporate bonds
U.S. government agencies and government-sponsored
agencies
U.S. treasuries
Other debt securities
Total investments
Restricted cash equivalents:
Money market mutual funds
Commercial paper
Total restricted cash equivalents
Restricted investments:
U.S. treasuries
Exchange traded fund
Certificate of deposit
Total restricted investments
—
4
—
—
—
—
—
—
48
20
68
—
1
—
1
1
1
33
99
7
41
9
4
1
5
33
99
7
41
9
189
189
—
—
—
5
—
2
7
48
20
68
—
5
1
2
8
Total investments and restricted cash equivalents and
investments
$
73 $
197 $
270
Fair Value of Financial Instruments Disclosure
Long-Term Debt
Our long-term debt is a floating rate debt and the fair value of our floating rate debt approximates its carrying value
(exclusive of issuance costs) at December 31, 2019 and 2018. The fair value of our floating rate debt is estimated
based on a discounted cash flow, which incorporates credit spreads and market interest rates to estimate the fair value
and is considered Level 3 in the hierarchy for fair value measurement.
Derivative Instruments
In June 2019, we entered into an interest rate collar derivative transaction with no upfront premium to mitigate the risk
of changes in interest rates on the interest payments on a portion of our floating rate debt. If short-term interest rates
increase, we will incur higher interest expense on any future outstanding balances of floating rate debt. We use this
derivative as part of our interest rate risk management strategy and designated it as a cash flow hedge. If interest rates
rise above the cap strike rate on the contract, we will receive variable-rate amounts and if interest rates fall below the
floor strike rate on the contract, we will pay variable-rate amounts.
The following table summarizes the fair value of our derivative instrument at December 31, 2019:
(in millions)
Derivatives designated as hedging instruments
December 31, 2019
Fair Market Value
Hedge type
Final
settlement
date
Notional
amount
Other current
assets
Accounts payable
and other current
liabilities
Collar - LIBOR
Cash flow
May 2022 $
213 $
— $
—
72
FINANCIAL STATEMENTS
The pre-tax effect of derivative instrument for year ended December 31, 2019 is insignificant and we estimate that an
insignificant amount of net derivative gains or losses included in other comprehensive income will be reclassified into
earnings within the following 12 months. There were no cash flows associated with the derivative for year ended
December 31, 2019.
As of December 31, 2019, we do not hold, nor have we posted, any collateral related to the above derivative instrument.
The interest rate collar derivative is classified as Level 2 in the fair value hierarchy as its value is determined using
observable inputs such as forward LIBOR curves.
NOTE 5. PROPERTY, EQUIPMENT AND SOFTWARE, NET
Property, equipment and software, net, consists of the following:
(in millions)
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, 2019
December 31, 2018
$
$
174 $
27
24
17
3
245
(160)
85 $
144
27
21
15
2
209
(130)
79
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.
The following table summarizes our depreciation expense and capitalized internally developed software costs and
related depreciation expense.
(in millions)
Depreciation expense
Capitalized internally developed software costs
Depreciation expense for capitalized internally developed software costs
Year Ended December 31,
2019
2018
2017
$
41 $
31
29
35 $
33
24
28
29
17
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
The following summarizes goodwill and other intangible assets:
(in millions)
Goodwill
Amortizable intangibles:
Customer contracts
Developed technology
Total
December 31, 2019
December 31, 2018
Weighted
Average
Amortization
Period
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
289 $
— $
289 $
289 $
— $
289
10 years
5 years
90
5
95 $
$
(76)
(4)
(80) $
14
1
15 $
90
5
95 $
(71)
(3)
(74) $
19
2
21
Amortization of intangible assets during the years ended December 31, 2019, 2018 and 2017 was $5 million for each
period. 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.
73
FINANCIAL STATEMENTS
Expense related to intangibles amortization in future periods as of December 31, 2019 is expected to be as follows:
Year ending December 31:
2020
2021
2022
2023
Total
Amount
(in millions)
$
$
5
4
4
2
15
NOTE 7. ACCRUED WORKERS' COMPENSATION COSTS
The following table summarizes the accrued workers’ compensation cost activity for the years ended December 31,
2019, 2018 and 2017:
(in millions)
Year Ended December 31,
2019
2018
2017
Total accrued costs, beginning of year
$
238 $
255 $
255
Incurred
Current year
Prior years
Total incurred
Paid
Current year
Prior years
Total paid
72
(31)
41
(14)
(51)
(65)
80
(28)
52
(12)
(57)
(69)
Total accrued costs, end of year
$
214 $
238 $
The following table summarizes workers' compensation liabilities on the consolidated balance sheets:
98
(6)
92
(14)
(78)
(92)
255
(in millions)
Total accrued costs, end of year
Collateral paid to carriers and offset against accrued costs
Total accrued costs, net of carrier collateral offset
Payable in less than 1 year
(net of collateral paid to carriers of $3 as of December 31, 2019 and
2018)
Payable in more than 1 year
(net of collateral paid to carriers of $6 and $10 as of December 31,
2019 and 2018, respectively)
Total accrued costs, net of carrier collateral offset
December 31,
2019
December 31,
2018
$
$
$
$
214 $
(9)
205 $
61 $
144
205 $
238
(13)
225
67
158
225
Incurred claims related to prior years represent changes in estimates for ultimate losses on workers' compensation
claims. For the years ended December 31, 2019 and December 31, 2018, the favorable development was primarily
due to lower than expected severity development on claims that had previously been reported, as well as a lower than
expected reported claim frequency. For the year ended December 31, 2017, the favorable development was primarily
due to lower than expected severity of reported claims associated with office worker WSEs in recent accident years.
As of December 31, 2019 and 2018, we had $46 million and $57 million, respectively, of collateral held by insurance
carriers of which $9 million and $13 million, respectively, was offset against accrued workers' compensation costs as
the agreements permit and are net settled of insurance obligations against collateral held.
74
FINANCIAL STATEMENTS
NOTE 8. LEASES
Our leasing activities predominantly consist of leasing office space that we occupy, which we have classified as operating
leases. Our leases are comprised of fixed payments with remaining lease terms of 1 to 9 years, some of which include
options to extend for up to 15 years. As of December 31, 2019, we have not included any options to extend or cancel
in the calculation of our lease liability or ROU asset. We do not have any significant residual value guarantees or
restrictive covenants in our leases.
During the year ended December 31, 2019, we recognized operating lease expense of $19 million.
During the year ended December 31, 2019, we paid $17 million to reduce operating lease liabilities and recognized
$17 million in new operating lease liabilities in exchange for ROU assets.
As of December 31, 2019, the weighted average remaining lease term on our operating leases was 6.1 years. Future
minimum lease payments as of December 31, 2019 and December 31, 2018 were as follows:
(in millions)
2019
2020
2021
2022
2023
2024
2025 and thereafter
Total future minimum lease payments
Less: imputed interest
Total operating lease liabilities
Current portion
Non-current portion
(1) Presented in accordance with ASC 842.
(2) Presented in accordance with ASC 840.
(3) N/A - Not Applicable under ASC 840.
NOTE 9. LONG-TERM DEBT
December 31, 2019 (1) December 31, 2018 (2)
$
$
$
— $
19
11
10
9
6
19
74 $
(9)
65
17
48
18
17
11
9
8
5
20
88
N/A(3)
N/A(3)
N/A(3)
N/A(3)
As of December 31, 2019 and 2018, long-term debt consisted of the following:
(in millions)
2018 Term Loan A
Total term loans
Deferred loan costs
Less: current portion
Long-term debt, noncurrent
Annual contractual interest rate
Effective interest rate
December 31,
2019
December 31,
2018
392
392
(1)
(22)
$
369
$
3.42%
3.52%
414
414
(1)
(22)
391
4.15%
4.25%
In June 2018 we entered into a $425 million term loan A (our 2018 Term Loan) under our new credit agreement (2018
Credit Agreement). The proceeds of the 2018 Term Loan were used to repay our previously outstanding term loans.
75
FINANCIAL STATEMENTS
The 2018 Credit Agreement includes a $250 million revolving credit facility (our 2018 Revolver), which will be used
solely for working capital and other general corporate purposes. The 2018 Revolver includes capacity for a $20 million
swingline facility. Letters of credit issued pursuant to the revolving credit facility reduce the amount available for
borrowing under the 2018 Revolver. At December 31, 2019, we had $16 million of letters of credit outstanding and
remaining capacity of $234 million under the 2018 Revolver.
Interest on our 2018 Term Loan is payable quarterly and is variable based on LIBOR plus 1.625% or the prime rate
plus 0.625%, at our option, subject to certain rate adjustments based upon our total leverage ratio. At December 31,
2019, the interest rate was based on LIBOR plus 1.625%. We are required to pay a quarterly commitment fee on the
daily unused amount of the commitments under our 2018 Revolver, as well as fronting fees and other customary fees
for letters of credit issued under our 2018 Revolver, which is subject to adjustments based on our total leverage ratio.
Borrowings under our 2018 Term Loan and 2018 Revolver are secured by substantially all of our assets, other than
excluded assets as defined in our 2018 Credit Agreement, which includes certain customary assets, assets held in
trusts as collateral and WSE related assets.
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).
The 2018 Credit Agreement contains certain financial covenants and restrictive covenants customary for facilities of
this type, including restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of indebtedness
(other than our 2018 Term Loan and our 2018 Revolver), dividends, distributions and transactions with affiliates, as
well as minimum interest coverage and maximum total leverage ratio requirements. We were in compliance with all
financial covenants under the credit facilities at December 31, 2019.
The remaining balance of our 2018 Term Loan will be repaid in quarterly installments in aggregate annual amounts as
follows:
(in millions)
2020
Year ending December 31,
2022
2023
2021
2024
Thereafter
Term loan repayments
$
22 $
22 $
22 $
326 $
— $
—
NOTE 10. COMMITMENTS AND CONTINGENCIES
Contingencies
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 our 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 will have a materially 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.
76
FINANCIAL STATEMENTS
NOTE 11. STOCK BASED COMPENSATION
Equity Based Incentive Plans
Our 2019 Equity Incentive Plan (the 2019 Plan), approved in May 2019, provides for the grant of stock awards, including
stock options, RSUs, RSAs, and other stock awards. Shares available for grant as of December 31, 2019 was
approximately 3 million.
The 2009 Equity Incentive Plan (the 2009 Plan), was terminated, replaced and superseded by the 2019 Plan, except
that any outstanding awards granted under the 2009 Plan remain in effect pursuant to their terms.
Stock Options
Stock options are granted to employees at exercise prices equal to the fair market value of our common stock on the
dates of grant. Stock options generally have a maximum contractual term of 10 years. Stock options generally vest
over 4 years, and are generally forfeited if the employee terminates service prior to vesting.
The following table summarizes stock option activity under our equity-based plan for the year ended December 31,
2019:
Balance at December 31, 2018
Exercised
Expired
Balance at December 31, 2019
Exercisable at December 31, 2019
Vested and expected to vest at December 31, 2019
Number
of Shares
Weighted
Average
Exercise
Price
655,515 $
(187,504)
(6,000)
462,011 $
462,011 $
462,011 $
12.90
10.80
0.50
13.90
13.90
13.90
4.91 $
4.02 $
4.02 $
4.02 $
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
(in millions)
Additional Disclosures for Stock Options (in millions)
2019
2018
2017
Total fair value of options vested
Total intrinsic value of options exercised
Cash received from options exercised
$
1 $
9
2
4 $
24
7
Year Ended December 31,
Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs)
Time-based RSUs and RSAs generally vest over a four-year term. Performance-based RSUs and RSAs are subject
to vesting requirements based on certain financial performance metrics as defined in the grant notice. Actual number
of shares earned may range from 0% to 200% of the target award. Awards granted in 2019 and 2018 are based on a
single-year performance period subject to subsequent multi-year vesting with 50% of the shares earned vesting in one
year after the performance period and the remaining shares in the year after. RSUs and RSAs are generally forfeited
if the participant terminates service prior to vesting.
77
19
20
20
20
7
36
11
FINANCIAL STATEMENTS
The following tables summarize RSU and RSA activity under our equity-based plans for the year ended December 31,
2019:
Time-based RSUs and RSAs
Total Number
of RSUs
Total Number
of RSAs
Total Number
of Shares
Nonvested at December 31, 2018
1,560,685
98,445
1,659,130 $
Granted
Vested
Forfeited
616,224
(891,633)
(180,547)
—
(37,309)
—
616,224
(928,942)
(180,547)
Nonvested at December 31, 2019
1,104,729
61,136
1,165,865 $
Nonvested at December 31, 2018
Granted
Vested
Cancelled
Forfeited
Nonvested at December 31, 2019
Performance-based RSUs and RSAs
Total Number
of RSUs
Total Number
of RSAs
Total Number
Shares
176,869
83,110
248,347
425,216 $
—
83,110
(155,589)
(122,387)
(277,976)
(61,400)
(27,238)
15,752
—
(11,103)
114,857
(61,400)
(38,341)
130,609 $
Time-based RSUs and RSAs
Year Ended December 31,
Additional Disclosures for equity-based plans
2019
2018
2017
Weighted-
Average
Grant Date
Fair Value
33.88
60.99
32.53
38.89
48.47
Weighted-
Average
Grant Date
Fair Value
42.02
59.83
39.45
61.75
41.52
49.70
37
21
Total grant date fair value of shares granted (in millions) $
Total grant date fair value of shares vested (in millions) $
Shares withheld to settle payroll tax liabilities related to
vesting of shares held by employees
38 $
30 $
38 $
28 $
315,762
348,010
332,857
Performance-based RSUs and RSAs
Year Ended December 31,
Additional Disclosures for equity-based plans
2019
2018
2017
Total grant date fair value of shares granted (in millions) $
Total grant date fair value of shares vested (in millions) $
Shares withheld to settle payroll tax liabilities related to
vesting of shares held by employees
4 $
11 $
14 $
7 $
135,877
110,222
10
—
2,244
Employee Stock Purchase Plan
Our 2014 Employee Stock Purchase plan (ESPP) offers eligible employees an option to purchase shares of our common
stock through payroll deductions. 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. The plan is considered to be a compensatory plan. As of December 31, 2019, approximately 3 million shares
were reserved for future issuances under the ESPP.
78
FINANCIAL STATEMENTS
In applying the Black Scholes option valuation model for the ESPP options, we use the following assumptions:
(in millions)
Expected Term (in Years)
Expected Volatility
Risk-Free Interest Rate
Expected Dividend Yield
Shares Issued under ESPP
Stock Based Compensation
Year Ended December 31,
2019
2018
2017
0.5
0.5
0.5
27-42%
27-37%
28-37%
1.6-2.5%
1.42-2.5%
0.62-1.42%
0%
0%
0%
207,324
175,966
224,928
Stock based compensation expense is measured based on the fair value of the stock award on the grant date and
recognized over the requisite service period for each separately vesting portion of the stock award. Stock based
compensation expense and other disclosures for stock based awards made to our employees pursuant to the equity
plans was as follows:
(in millions)
Cost of providing services
Sales and marketing
General and administrative
Systems development and programming costs
Total stock based compensation expense
Total stock based compensation capitalized
Income tax benefit related to stock based compensation expense
Tax benefit realized from stock options exercised and similar awards
Year Ended December 31,
2019
2018
2017
8 $
10 $
3
28
2
41 $
1 $
11 $
18 $
8
22
4
44 $
— $
11 $
23 $
8
6
14
4
32
—
7
28
$
$
$
$
$
The table below summarizes unrecognized compensation expense for the year ended December 31, 2019 associated
with the following:
Nonvested stock options
Nonvested RSUs
Nonvested RSAs
Amount
(in millions)
Weighted-Average
Period (in Years)
$
—
51
2
0
2.27
0.49
79
FINANCIAL STATEMENTS
NOTE 12. STOCKHOLDERS' EQUITY
Common Stock
The following table shows the beginning and ending balances of our issued and outstanding common stock for the
year ended December 31, 2019, 2018, and 2017:
Shares issued and outstanding, beginning balance
Issuance of common stock from vested restricted stock units
Issuance of common stock from exercise of stock options
Issuance of common stock for employee stock purchase plan
Repurchase of common stock
Awards effectively repurchased for required employee withholding taxes
Shares issued and outstanding, ending balance
Stock Repurchases
Year Ended
December 31,
2018
69,818,392
1,634,271
617,157
175,966
(1,190,995)
(458,232)
70,596,559
2019
70,596,559
1,036,119
187,504
207,324
(2,510,376)
(451,639)
69,065,491
2017
69,015,690
1,020,352
1,441,957
224,928
(1,549,434)
(335,101)
69,818,392
On February 6, 2019, our board of directors authorized a $300 million incremental increase to our ongoing stock
repurchase program. This repurchase authorization has no expiration. We retire shares in the period they are acquired
and account for the payment as a reduction to stockholders' equity.
The following table summarizes the share repurchases under this program for the years ended December 31, 2019,
2018 and 2017:
(in millions, except per share data)
Total cost
Total shares
Average price per share
Year Ended
December 31,
2018
2017
2019
$
$
140 $
61 $
44
2,510,376
1,190,995
1,549,434
55.64 $
51.22 $
34.46
As of December 31, 2019, $236 million remains available for repurchase under all authorizations approved by the
board of directors.
80
FINANCIAL STATEMENTS
NOTE 13. INCOME TAXES
Provision for Income Taxes
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, 2015. The
provision for income taxes consists of the following:
(in millions)
Current:
Federal
State
Total Current
Deferred:
Federal
State
Revaluation due to legislative changes
Total Deferred
Total
Year Ended December 31,
2019
2018
2017
$
53 $
12
65
(2)
(5)
—
(7)
41 $
7
48
(3)
4
—
1
$
58 $
49 $
46
1
47
12
3
(40)
(25)
22
Certain prior year amounts have been reclassified to conform to current period presentation. The U.S. federal statutory
income tax rate reconciled to our effective tax rate is as follows:
(in millions, except percent)
Year Ended December 31,
2019
Tax
Expense/
(Benefit)
Percent
of Pre-
Tax
Income
(Loss)
Pre-Tax
Income
$
270
Pre-Tax
Income
$
241
2018
Tax
Expense
/(Benefit)
Percent
of Pre-
Tax
Income
(Loss)
Pre-Tax
Income
$
200
2017
Tax
Expense/
(Benefit)
Percent
of Pre-
Tax
Income
(Loss)
U.S. federal statutory tax rate
$
State income taxes, net of federal benefit
Tax rate change
Nondeductible meals, entertainment and
penalties
Stock based compensation
Uncertain tax positions
Tax credits
State and tax return to provision
adjustments
Sec 199 benefits
Other
Total
57
20
—
1
(1)
—
(7)
(8)
(1)
(3)
21%
$
7
—
—
—
—
(3)
(3)
—
(1)
$
58
21%
$
51
18
—
1
(9)
1
(5)
(7)
—
(1)
49
21%
$
8
—
—
(4)
—
(2)
(3)
—
—
70
10
(40)
1
(15)
4
(4)
(5)
(3)
4
35%
5
(20)
—
(7)
2
(2)
(3)
(1)
2
20%
$
22
11%
Our effective income tax rate increased by 1% to 21% in 2019 from 20% in 2018. The increase was primarily attributable
to one-time expenses associated with stock based compensation and a reduction from excess tax benefits related to
stock-based compensation. These increases were partially offset by a one-time benefit associated with prior year tax
expense and changes in valuation allowance.
The revaluation of deferred taxes from changes in the statutory tax rates resulted in a discrete tax benefit representing
an immaterial amount in 2019 and 2018, and 20% for the year ended December 31, 2017.
81
FINANCIAL STATEMENTS
Deferred Income Taxes
Significant components of our deferred tax assets and liabilities are as follows:
(in millions)
Deferred tax assets:
Net operating losses (federal and state)
Accrued expenses
Accrued workers' compensation costs
Stock based compensation
Tax benefits relating to uncertain positions
Tax credits (federal and state)
Total
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Depreciation and amortization
Deferred service revenues
Prepaid health plan expenses
Prepaid commission expenses
Total deferred tax liabilities
Net deferred tax liabilities
Year Ended December 31,
2019
2018
$
3 $
10
9
3
1
7
33
(5)
28
(27)
(41)
(1)
(19)
(88)
$
(60) $
3
8
9
8
—
7
35
(7)
28
(24)
(62)
—
(9)
(95)
(67)
As of December 31, 2019 and 2018, we have various state net operating loss carryforwards of $53 million and $61
million, respectively, which, if unused, will expire in years 2020 through 2039 with the exception of an immaterial amount
that will be carried forward indefinitely. As of December 31, 2019 and 2018, we have state tax credit carryforwards (net
of federal benefit) of $6 million and $7 million, respectively available that will begin expiring in 2021, which are offset
by a valuation allowance of $4 million and $6 million as of December 31, 2019 and 2018, respectively.
The provision for income taxes for the year ended December 31, 2019 included $8 million of excess tax benefits
resulting from equity incentive plan activities.
We previously paid Notices of Proposed Assessments disallowing employment tax credits totaling $11 million, plus
interest of $4 million in connection with the IRS examination of Gevity HR, Inc. and its subsidiaries, which was acquired
by TriNet in June 2009. TriNet filed suit in June 2016 to recover the disallowed credits, and the issue is being resolved
through the litigation process. TriNet and the U.S. filed cross motions for summary judgment in federal district court.
On September 17, 2018, the district court granted our motion for summary judgment and denied the U.S.'s motion.
On January 18, 2019, the district court entered judgment in favor of TriNet in the amount of $15 million, plus interest. The
U.S. filed a notice of appeal of the federal district court's decision on March 18, 2019. The U.S. filed its opening brief
in the court of appeals on June 10, 2019 and we filed our answering brief on July 24, 2019 to which the government
filed its reply brief on September 6, 2019. We will continue to vigorously defend our position through the litigation
process. Given the uncertainty of the outcome of any appeal, it remains possible that our recovery of the refund will
be less than the total amount in dispute.
82
FINANCIAL STATEMENTS
Valuation Allowance
We have recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized.
A reconciliation of the beginning and ending amount of the valuation allowance is presented in the table below:
(in millions)
Valuation allowance at January 1
Credited/ charged to net income
Valuation allowance at December 31
Uncertain Tax Positions
Year Ended December 31,
2019
2018
2017
$
7 $
(2)
5
7 $
—
7
6
1
7
As of December 31, 2019 and 2018, the total unrecognized tax benefits related to uncertain income tax positions,
which would affect the effective tax rate if recognized, were $7 million and $6 million, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is
presented in the table below:
(in millions)
Unrecognized tax benefits at January 1
Additions for tax positions of prior periods
Additions for tax positions of current period
Reductions for tax positions of prior period:
Lapse of applicable statute of limitations
Unrecognized tax benefits at December 31
Year Ended December 31,
2019
2018
2017
$
$
6 $
1
1
(1)
7 $
6 $
1
—
(1)
6 $
1
4
1
—
6
As of December 31, 2019 and 2018, the total amount of gross interest and penalties accrued were immaterial. The
unrecognized tax benefit, including accrued interest and penalties, is included in other liabilities on the consolidated
balance sheet.
It is reasonably possible the amount of the unrecognized benefit could increase or decrease within the next twelve
months, which would have an impact on net income.
83
FINANCIAL STATEMENTS
NOTE 14. EARNINGS PER SHARE
Basic EPS is computed based on the weighted average shares of common stock 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.
The following table presents the computation of our basic and diluted EPS attributable to our common stock:
(in millions, except per share data)
Net income
Weighted average shares of common stock outstanding
Basic EPS
Net income
Weighted average shares of common stock outstanding
Dilutive effect of stock options and restricted stock units
Weighted average shares of common stock outstanding
Diluted EPS
Common stock equivalents excluded from income per
diluted share because of their anti-dilutive effect
NOTE 15. 401(k) PLAN
$
$
$
$
Year Ended December 31,
2019
2018
2017
212 $
70
3.04 $
212 $
70
1
71
192 $
70
2.72 $
192 $
70
2
72
178
69
2.57
178
69
2
71
2.99 $
2.65 $
2.49
1
1
2
The Company maintains a defined contribution 401(k) plan for the benefit of corporate employees. Under our 401(k)
plan, eligible employees may elect to contribute based on their eligible compensation. The Company matches a portion
of employee contributions, which amounted to $14 million, $11 million, and $6 million for the years ended December 31,
2019, 2018, and 2017, respectively.
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.
NOTE 16. 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 $25 million, $20 million, and
$22 million in total revenues from such related parties during the years ended December 31, 2019, 2018 and 2017,
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 $10 million, $5 million, and $6 million during the
years ended December 31, 2019, 2018 and 2017, for services we received, respectively.
84
FINANCIAL STATEMENTS
NOTE 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in millions, except per share data)
March 31
June 30
September 30
December 31
Quarter ended
2019
Total revenues
Insurance costs
Operating income
Net income
Basic net income per share
Diluted net income per share
2018
Total revenues
Insurance costs
Operating income
Net income
Basic net income per share
Diluted net income per share
$
$
$
$
$
$
934 $
935 $
969 $
683
82
63
0.91 $
0.89 $
704
55
46
0.65 $
0.64 $
748
68
55
0.80 $
0.78 $
861 $
850 $
875 $
641
71
54
0.77 $
0.75 $
630
76
58
0.82 $
0.80 $
647
62
51
0.73 $
0.71 $
1,018
792
63
48
0.69
0.68
917
692
42
29
0.41
0.40
85
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, 2019, as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act.
Based on the evaluation of our disclosure controls and procedures as of December 31, 2019, our Chief Executive
Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective
as of December 31, 2019 in ensuring that
i.
information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is
accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required disclosure and
ii. such information is recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commission's rules and forms.
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 to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the 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 have performed an assessment of the effectiveness of our internal control over financial reporting as of December
31, 2019 based upon criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Based on this assessment, we determined that our internal control over financial reporting was effective as of December
31, 2019.
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, 2019. This audit report appears in Part II, Item 8.
Financial Statements and Supplementary Data, of this Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended
December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
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 2020 Annual
Meeting of Shareholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2019.
Item 11. Executive Compensation.
Information required by this item is incorporated by reference to TriNet Group Inc.’s Proxy Statement for its 2020 Annual
Meeting of Shareholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2019.
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 2020 Annual
Meeting of Shareholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2019.
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 2020 Annual
Meeting of Shareholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2019.
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 2020 Annual
Meeting of Shareholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2019.
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. Financial Statements and Supplementary Data.
(2) Financial statement schedules have been omitted, since the required information is not applicable or is not present
in amounts sufficient to require submission of the schedule, or because the information required is included in the
consolidated financial statements and accompanying notes included in this Form 10-K.
Item 16. Form 10-K Summary.
None.
88
EXHIBITS
Exhibit
No.
Description of Exhibit
Form
File No.
Exhibit
Filing
Filed
Herewith
EXHIBIT INDEX
Incorporated by Reference
3.1
3.2
3.3
4.1
4.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
Amended and Restated Certificate of
Incorporation of TriNet Group, Inc.
Certificate of Correction of Amended and
Restated Certificate of Incorporation of TriNet
Group, Inc.
8-K
001-36373
3.1
4/1/2014
10-Q
001-36373
3.1
11/2/2017
Amended and Restated Bylaws of TriNet
Group, Inc.
S-1/A 333-192465
Registration Rights Agreement, by and
between TriNet Group, Inc. and AGI-T, L.P.,
dated as of February 1, 2017.
8-K
001-36373
3.4
4.1
3/4/2014
2/2/2017
X
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
10-Q
001-36373
10.1
4/30/2018
10-Q
001-36373
10.2
4/30/2018
10-Q
001-36373
10.3
4/30/2018
10-Q
001-36373
10.4
4/30/2018
10-Q
001-36373
10.2
4/29/2019
Description of the Registrant’s Securities
Registered Pursuant to Section 12 of the
Securities Exchange Act of 1934.
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.
Form of Restricted Stock Unit Award
Agreement and Restricted Stock Unit Grant
Notice under the 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 Restricted Stock Award Agreement
and Restricted Stock Grant Notice under the
Amended and Restated 2009 Equity
Incentive Plan.
Form of Performance-Based Restricted
Stock Award Agreement and Performance-
Based Restricted Stock Grant Notice under
the 2009 Equity Incentive Plan, as amended
through February 20, 2014.
Form of Restricted Stock Unit Award
Agreement and Restricted Stock Unit Grant
Notice under the Amended and Restated
2009 Equity Incentive Plan.
89
EXHIBITS
Exhibit
No.
10.10*
10.11*
10.12*
Description of Exhibit
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.
TriNet Group, Inc. 2019 Equity Incentive
Plan.
Form of Notice of Restricted Stock Unit
Award and Restricted Stock Unit Award
Agreement under the TriNet Group, Inc. 2019
Equity Incentive Plan.
Incorporated by Reference
Form
10-Q
File No.
001-36373
Exhibit
10.3
Filing
4/29/2019
Filed
Herewith
10-Q
001-36373
10.1
7/25/2019
10-Q
001-36373
10.2
7/25/2019
10.13*
2014 Employee Stock Purchase Plan.
S-1/A 333-192465
10.7
3/14/2014
10.14*
2015 Executive Bonus Plan.
8-K
001-36373
N/A
3/11/2015
10.15*
Amended and Restated Non-Employee
Director Compensation Policy.
10-K
001-36373
10.7
2/27/2018
10.16*
TriNet Group, Inc. Severance Benefit Plan.
10-K
001-36373
10.10
4/1/2016
10.17*
10.18*
10.19
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
TriNet Group, Inc. Amended and Restated
Executive Severance Benefit Plan
TriNet Group Inc. Amended and Restated
Executive Severance Benefit Plan
Form of Indemnification Agreement made by
and between TriNet Group, Inc. and each of
its directors and executive officers.
Employment Agreement, dated November 9,
2009, between Burton M. Goldfield and
TriNet Group, Inc.
Employment Agreement, dated March 31,
2017, between Richard Beckert and TriNet
Group, Inc.
Second Amended and Restated Employment
Agreement, dated December 31, 2016,
between Edward Griese and TriNet Group,
Inc.
Employment Agreement, dated October 16,
2017, between Barrett Boston and TriNet
Group, Inc., as amended on February 26,
2018.
Employment Agreement, dated November
19, 2018, between Samantha Wellington and
TriNet Group, Inc.
First Amended and Restated Employment
Agreement, dated April 9, 2018, between
TriNet Group, Inc. and Olivier Kohler.
Stockholder Agreement, by and between
TriNet Group, Inc. and AGI-T, L.P., dated as
of December 21, 2016
8-K
001-36373
10.1
5/23/2017
10-Q
001-36373
10.5
4/30/2018
S-1/A 333-192465
10.8
3/4/2014
S-1/A 333-192465
10.9
2/13/2014
10-Q
001-36373
10.1
8/1/2017
10-Q
001-36373
10.2
8/1/2017
10-K
001-36373
10.15
2/27/2018
10-K
001-36373
10.22
2/14/2019
10-Q
001-36373
10.1
4/29/2019
8-K
001-36373
10.1
12/22/2016
90
EXHIBITS
Exhibit
No.
10.27*
21.1
23.1
24.1
31.1
31.2
32.1**
101.INS
Description of Exhibit
Credit Agreement, dated as of June 22,
2018, among TriNet Group, Inc., TriNet USA,
Inc., as borrower, the lenders party thereto,
and Bank of America, N.A., as administrative
agent.
List of Subsidiaries.
Consent of Deloitte & Touche LLP,
independent registered public accounting
firm.
Power of Attorney (included on the signature
page of this report).
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.
Inline XBRL Instance Document - the
instance document does not appear in the
Interactive Data File because its XBRL tags
are embedded within the Inline XBRL
document.
101.SCH Inline XBRL Taxonomy Extension Schema
Document.
101.SCH
CAL
Inline XBRL Taxonomy Extension
SchemaCalculation Linkbase Document.
101.CAL
DEF
Inline XBRL Taxonomy Extension
CalculationDefinition Linkbase Document.
101.DEF
LAB
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DefinitionLabel Linkbase Document.
101.LAB
PRE
Inline XBRL Taxonomy Extension
LabelPresentation Linkbase Document.
101.PRE
104
XBRL Taxonomy Extension Presentation
Linkbase Document.Cover Page Interactive
Data File (embedded with the Inline XBRL
document).
Incorporated by Reference
Form
8-K
File No.
001-36373
Exhibit
10.1
Filing
6/22/2018
Filed
Herewith
X
X
X
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.
91
SIGNATURES
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 Dublin, State
of California, on the day of 13th February, 2020.
Date: February 13, 2020
Date: February 13, 2020
TRINET GROUP, INC.
By:
/s/ Burton M. Goldfield
Burton M. Goldfield
Chief Executive Officer
By:
/s/ Richard Beckert
Richard Beckert
Chief Financial Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Burton M. Goldfield, Richard Beckert and Samantha Wellington, and each of them, as his or her true and
lawful attorneys-in-fact and agents, each with the full power of substitution, for him or her and in his or her 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 or her substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
92
SIGNATURES
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/ Richard Beckert
Richard Beckert
/s/ Michael P. Murphy
Michael P. Murphy
/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/ Shawn Guertin
Shawn Guertin
/s/ David C. Hodgson
David C. Hodgson
/s/ Dr. Jacqueline Kosecoff
Dr. Jacqueline Kosecoff
/s/ Wayne B. Lowell
Wayne B. Lowell
Chief Executive Officer (principal
executive officer)
February 13, 2020
Chief Financial Officer (principal financial
officer)
February 13, 2020
Chief Accounting Officer (principal
accounting officer)
February 13, 2020
February 13, 2020
February 13, 2020
February 13, 2020
February 13, 2020
February 13, 2020
February 13, 2020
February 13, 2020
February 13, 2020
February 13, 2020
February 13, 2020
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
93
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Paul ChamberlainAudit Committee MemberBurton M. GoldfieldPresident and Chief Executive OfficerKenneth GoldmanAudit Committee MemberShawn GuertinAudit Committee MemberJacqueline KosecoffCompensation Committee MemberWayne LowellAudit Committee ChairBOARD OF DIRECTORSDavid C. HodgsonChair of the Board of Directors andNominating and Corporate GovernanceCommittee MemberMichael J. AngelakisCompensation Committee Member andNominating and Corporate GovernanceCommittee MemberKatherine August-deWildeCompensation Committee ChairMartin BabinecH. Raymond BinghamNominating and Corporate GovernanceCommittee Chair and CompensationCommittee MemberCORPORATE INFORMATIONCorporate HeadquartersOne Park Place, Suite 600Dublin, CA 94568T: 510.352.5000F: 510.352.6480TriNet.comInvestor Relationsinvestorrelations@trinet.com510.875.7201Transfer AgentComputershareP.O. Box 505000Louisville, KY 40233800.736.3001 (US, Canada, Puerto Rico)781.575.3100 (non-US)computershare.com/investorStock ExchangeNew York Stock ExchangeNYSE Trading Symbol: TNET #YourPeopleMatterTriNet.com