UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-36373

 

TriNet Group, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

95-3359658

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1100 San Leandro Blvd., Suite 400

San Leandro, CA 94577

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (510) 352-5000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

¨

Accelerated filer

¨

 

Non-accelerated filer

x (do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of April 30, 2014, the registrant had 69,046,149 shares of common stock outstanding.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Unaudited Consolidated Financial Statements

3

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations

4

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

32

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3.

Defaults Upon Senior Securities

48

Item 4.

Mine Safety Disclosures

48

Item 5.

Other Information

48

Item 6.

Exhibits

48

Signatures

49

Exhibit Index

50

 

 

 

 


PART I — FINANCIAL INFORMATION

 

Item  1.

Financial Statements

TriNet Group, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

 

March 31,

 

 

December 31,

 

 

2014

 

 

2013

 

Assets

(unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

122,601

 

 

$

94,356

 

Restricted cash

 

15,269

 

 

 

15,267

 

Prepaid income taxes

 

8,873

 

 

 

3,331

 

Deferred income taxes

 

68

 

 

 

68

 

Prepaid expenses

 

7,153

 

 

 

7,849

 

Deferred loan costs and other current assets

 

5,190

 

 

 

5,238

 

Worksite employee related assets

 

663,800

 

 

 

772,437

 

Total current assets

 

822,954

 

 

 

898,546

 

Workers compensation receivable

 

22,356

 

 

 

25,381

 

Restricted cash and investments

 

41,927

 

 

 

36,968

 

Property and equipment, net

 

26,648

 

 

 

25,690

 

Goodwill

 

288,857

 

 

 

288,857

 

Other intangible assets, net

 

120,471

 

 

 

134,020

 

Deferred income taxes

 

1,000

 

 

 

1,000

 

Deferred loan costs and other assets

 

16,214

 

 

 

24,276

 

Total assets

$

1,340,427

 

 

$

1,434,738

 

Liabilities and stockholders’ deficit

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

8,505

 

 

$

7,315

 

Accrued corporate wages

 

19,524

 

 

 

26,264

 

Deferred income taxes

 

20,439

 

 

 

16,535

 

Current portion of notes payable and borrowings under capital leases

 

6,589

 

 

 

6,669

 

Other current liabilities

 

16,569

 

 

 

9,078

 

Worksite employee related liabilities

 

657,567

 

 

 

767,624

 

Total current liabilities

 

729,193

 

 

 

833,485

 

Notes payable and borrowings under capital leases, less current portion

 

595,647

 

 

 

812,208

 

Workers compensation liabilities

 

49,712

 

 

 

45,309

 

Deferred income taxes

 

6,401

 

 

 

8,888

 

Other liabilities

 

5,598

 

 

 

5,210

 

Total liabilities

 

1,386,551

 

 

 

1,705,100

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

Series G convertible preferred stock, $.0001 per share stated value

   (aggregate liquidation preference of $59,306); no shares authorized, issued and outstanding

   at March 31, 2014; 5,391,441 shares authorized, issued and outstanding at December 31, 2013

 

 

 

 

59,059

 

Series H convertible preferred stock, $.0001 per share stated value

   (aggregate liquidation preference of $60,000); no shares authorized, issued and outstanding

   at March 31, 2014; 4,124,986 shares authorized, issued and outstanding at December 31, 2013

 

 

 

 

63,819

 

Stockholders’ deficit:

 

 

 

 

 

 

 

Preferred stock, $.000025 per share stated value; 20,000,000 shares authorized;

   no shares issued and outstanding at March 31, 2014 and December 31, 2013

 

 

 

 

 

Common stock, $.000025 per share stated value; 750,000,000 shares authorized;

   68,966,451 and 15,259,540 shares issued and outstanding at March 31, 2014

   and December 31, 2013

 

420,212

 

 

 

74,160

 

Accumulated deficit

 

(466,120

)

 

 

(467,209

)

Accumulated other comprehensive loss

 

(216

)

 

 

(191

)

Total stockholders’ deficit

 

(46,124

)

 

 

(393,240

)

Total liabilities and stockholders’ deficit

$

1,340,427

 

 

$

1,434,738

 

See accompanying notes.

 

3


TriNet Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

 

2014

 

 

 

2013

 

Professional service revenues

 

$

82,875

 

 

$

59,231

 

Insurance service revenues

 

 

426,037

 

 

 

291,839

 

Total revenues

 

 

508,912

 

 

 

351,070

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

Insurance costs

 

 

381,157

 

 

 

253,912

 

Cost of providing services (exclusive of depreciation and

   amortization of intangible assets)

 

 

33,643

 

 

 

22,815

 

Sales and marketing

 

 

31,837

 

 

 

22,631

 

General and administrative

 

 

14,337

 

 

 

12,487

 

Systems development and programming costs

 

 

5,894

 

 

 

4,510

 

Amortization of intangible assets

 

 

13,549

 

 

 

10,306

 

Depreciation

 

 

3,218

 

 

 

2,826

 

Total costs and operating expenses

 

 

483,635

 

 

 

329,487

 

Operating income

 

 

25,277

 

 

 

21,583

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense and bank fees

 

 

(21,852

)

 

 

(5,152

)

Other, net

 

 

103

 

 

 

73

 

Income before provision for income taxes

 

 

3,528

 

 

 

16,504

 

Provision for income taxes

 

 

1,988

 

 

 

5,967

 

Net income

 

$

1,540

 

 

$

10,537

 

Net income per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

 

$

0.22

 

Diluted

 

$

0.03

 

 

$

0.20

 

Weighted average shares:

 

 

 

 

 

 

 

 

Basic

 

 

16,775,513

 

 

 

10,769,530

 

Diluted

 

 

19,397,777

 

 

 

14,445,039

 

See accompanying notes.

 

 

 

4


TriNet Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2014

 

 

2013

 

Net income

 

$

1,540

 

 

$

10,537

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

Unrealized gains on investments

 

 

16

 

 

 

5

 

Unrealized losses on interest rate cap

 

 

 

 

 

(13

)

Foreign currency translation adjustments

 

 

(42

)

 

 

(11

)

Total other comprehensive loss, net of tax

 

 

(26

)

 

 

(19

)

Comprehensive income

 

$

1,514

 

 

$

10,518

 

See accompanying notes.

 

 

 

5


TriNet Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

 

2014

 

 

 

2013

 

Operating activities

 

 

 

Net income

 

$

1,540

 

 

$

10,537

 

Adjustments to reconcile net income to net cash provided by  operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

22,028

 

 

 

13,178

 

Deferred income taxes

 

 

1,412

 

 

 

2,414

 

Stock-based compensation

 

 

2,147

 

 

 

1,360

 

Excess tax benefit from equity incentive plan activity

 

 

(1,753

)

 

 

(107

)

Accretion of workers compensation and leases fair value adjustment

 

 

(347

)

 

 

(384

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Restricted cash

 

 

(3,961

)

 

 

(645

)

Prepaid expenses and other current assets

 

 

(1,411

)

 

 

877

 

Workers compensation receivables

 

 

3,379

 

 

 

717

 

Other assets

 

 

4,033

 

 

 

742

 

Accounts payable

 

 

2,078

 

 

 

(586

)

Income tax payable/receivable

 

 

(3,789

)

 

 

3,613

 

Other current liabilities

 

 

1,532

 

 

 

739

 

Other liabilities

 

 

4,869

 

 

 

(3,211

)

Worksite employee related assets

 

 

108,637

 

 

 

(56,969

)

Worksite employee related liabilities

 

 

(110,057

)

 

 

63,440

 

Net cash provided by operating activities

 

 

30,337

 

 

 

35,715

 

Investing activities

 

 

 

 

 

 

 

 

Proceeds from sale and maturity of debt securities

 

 

 

 

 

500

 

Purchase of debt securities

 

 

(1,000

)

 

 

(6,752

)

Purchase of property and equipment

 

 

(5,064

)

 

 

(2,224

)

Net cash used in investing activities

 

 

(6,064

)

 

 

(8,476

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

218,859

 

 

 

 

Proceeds from issuance of common stock on exercised options

 

 

494

 

 

 

283

 

Excess tax benefit from equity incentive plan activity

 

 

1,753

 

 

 

107

 

Repayment of notes payable

 

 

(216,575

)

 

 

(2,333

)

Payments of special dividend

 

 

 

 

 

(28

)

Borrowings under capital leases

 

 

47

 

 

 

 

Repayments under capital leases

 

 

(113

)

 

 

(206

)

Repurchase of common stock

 

 

(451

)

 

 

(2,689

)

Net cash provided by (used in) financing activities

 

 

4,014

 

 

 

(4,866

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(42

)

 

 

(11

)

Net increase in cash and cash equivalents

 

 

28,245

 

 

 

22,362

 

Cash and cash equivalents at beginning of year

 

 

94,356

 

 

 

63,749

 

Cash and cash equivalents at end of year

 

$

122,601

 

 

$

86,111

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

9,093

 

 

$

4,312

 

Cash paid for income taxes, net of refunds

 

 

4,352

 

 

 

(199

)

Supplemental schedule of noncash investing and financing activities

 

 

 

 

 

 

 

 

Special dividend payable on unvested restricted stock units

 

$

35

 

 

$

70

 

Payable for purchase of property and equipment

 

 

632

 

 

 

46

 

See accompanying notes.

 

 

 

6


TriNet Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business

TriNet Group, Inc. (the Company or TriNet), a Delaware corporation incorporated in January 2000, provides a comprehensive human resources solution for small to medium-sized businesses. The Company’s solution includes payroll processing, human capital consulting, employment law compliance and employee benefits, including health insurance, retirement plans and workers compensation insurance.

The Company provides its services through co-employment relationships with its customers, under which the Company and its customers each take responsibility for certain portions of the employer-employee relationship for worksite employees (WSEs). The Company is the employer of record for most administrative and regulatory purposes, including the following: (i) compensation through wages and salaries; (ii) employer payroll-related taxes payment; (iii) employee payroll-related taxes withholding and payment; (iv) employee benefit programs including health and life insurance, and others; and (v) workers compensation coverage.

Initial Public Offering

In March 2014, the Company completed its initial public offering (IPO) in which the Company issued and sold 15,000,000 shares of common stock at a public offering price of $16.00 per share. In addition, another 2,250,000 shares were sold by certain selling stockholders pursuant to the underwriters’ option to purchase additional shares.  The Company received net proceeds of approximately $218.0 million, after deducting underwriting discounts and commissions of $16.8 million and offering expenses of $5.3 million. The Company did not receive any proceeds from the sale by the selling stockholders.  Upon the closing of the IPO, all shares of the Company’s then-outstanding preferred stock were converted into an aggregate of 38,065,708 shares of common stock.

Segment Information

The Company operates in one reportable segment in accordance with ASC 280. All of the Company’s service revenues are generated from external customers. Less than 1% of revenues are generated outside of the United States of America (U.S.). Substantially all of the Company’s long-lived assets are located in the U.S.

Basis of Presentation

The accompanying unaudited consolidated financial statements and footnotes thereto of the Company and its wholly owned subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933 with the SEC on March 27, 2014. There have been no changes to the Company’s significant accounting policies described in the prospectus that have had a material impact on our consolidated financial statements and related notes. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated balance sheets present the current assets and current liabilities directly related to the processing of human resources transactions as WSE-related assets and WSE-related liabilities, respectively. WSE-related assets comprise cash and investments restricted for current workers compensation claim payments, payroll funds collected, accounts receivable, unbilled service revenues, and refundable or prepaid amounts related to the Company-sponsored workers compensation and health plan programs. WSE-related liabilities comprise customer prepayments, wages and payroll taxes accrued and payable, and liabilities related to the Company-sponsored workers compensation and health plan programs resulting from workers compensation case reserves, premium amounts due to providers for enrolled employees, and workers compensation and health reserves that are expected to be disbursed within the next 12 months.

The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation. The results of the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014.

 

7


Seasonality

Historically, the Company has experienced its highest monthly addition of WSEs, as well as its highest monthly levels of client attrition, in the month of January, primarily because clients that change their payroll service providers tend to do so at the beginning of a calendar year. In addition, the Company experiences higher levels of client attrition in connection with renewals of the health insurance it provides for its WSEs, in the event that such renewals result in increased premiums that it passes on to its clients. The Company has also historically experienced higher insurance claim volumes in the second and third quarters of a fiscal year than in the first and fourth quarters of a fiscal year, as WSEs typically access their health care providers more often in the second and third quarters of a fiscal year, which has negatively impacted the Company’s insurance costs in these quarters. These historical trends may change, and other seasonal trends may develop that make it more difficult for the Company to manage its business.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. These estimates include, but are not limited to, allowances for accounts receivable, workers compensation related assets and liabilities, health plan assets and liabilities, recoverability of goodwill and other intangible assets, income taxes, stock-based compensation and other contingent liabilities. Such estimates are based on historical experience and on various other assumptions that Company management believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (FASB) issued ASU 2013-11—Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which requires that an unrecognized tax benefit, or portion of an unrecognized tax benefit, be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If an applicable deferred tax asset is not available or a company does not expect to use the applicable deferred tax asset, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined with an unrelated deferred tax asset. ASU 2013-11 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date, however retrospective application is permitted. The Company adopted this guidance in 2014. The adoption of ASU 2013-11 did not have a material impact on the Company’s consolidated financial statements.

 

8


NOTE 2. WORKSITE EMPLOYEE-RELATED ASSETS AND LIABILITIES

The following schedule presents the components of the Company’s WSE-related assets and WSE-related liabilities (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2014

 

 

2013

 

Worksite employee-related assets:

 

 

 

 

 

 

 

Restricted cash

$

44,765

 

 

$

19,154

 

Restricted investment

 

2,317

 

 

 

2,317

 

Payroll funds collected

 

314,551

 

 

 

490,058

 

Unbilled revenue, net of advance collection of $33,634 and $54,159 at March 31, 2014

     and December 31, 2013, respectively

 

255,209

 

 

 

200,641

 

Accounts receivable, net of allowance for doubtful accounts of $406 and $865 at

     March 31, 2014 and December 31,2013, respectively

 

9,704

 

 

 

10,450

 

Prepaid health plan expenses

 

4,240

 

 

 

7,584

 

Refundable health plan premiums

 

667

 

 

 

17,601

 

Refundable workers compensation premiums

 

28,995

 

 

 

20,834

 

Prepaid workers compensation expenses

 

1,622

 

 

 

1,414

 

Other payroll assets

 

1,730

 

 

 

2,384

 

Total worksite employee-related assets

$

663,800

 

 

$

772,437

 

 

 

 

 

 

 

 

 

Worksite employee-related liabilities:

 

 

 

 

 

 

 

Unbilled wages accrual

$

279,186

 

 

$

243,640

 

Payroll taxes payable

 

209,966

 

 

 

358,285

 

Health benefits payable

 

77,036

 

 

 

67,132

 

Customer prepayments

 

44,603

 

 

 

51,902

 

Workers compensation payable

 

26,543

 

 

 

23,453

 

Other payroll deductions

 

20,233

 

 

 

23,212

 

Total worksite employee-related liabilities

$

657,567

 

 

$

767,624

 

 

 

 

NOTE 3. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS

The Company’s noncurrent restricted cash and investments include $37.4 million of available-for-sale marketable securities, $4.0 million of cash collateral, and $0.5 million of certificates of deposit at March 31, 2014. The available-for-sale marketable securities as of March 31, 2014 and December 31, 2013 consist of the following (in thousands):

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Estimated Fair Value

 

March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

$

36,838

 

 

$

54

 

 

$

(12

)

 

$

36,880

 

Mutual funds

 

500

 

 

 

8

 

 

 

-

 

 

 

508

 

Total investments

$

37,338

 

 

$

62

 

 

$

(12

)

 

$

37,388

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

$

35,900

 

 

$

38

 

 

$

(20

)

 

$

35,918

 

Mutual funds

 

500

 

 

 

8

 

 

 

 

 

508

 

Total investments

$

36,400

 

 

$

46

 

 

$

(20

)

 

$

36,426

 

 

There were no realized gains or losses for the three months ended March 31, 2014 and 2013. As of March 31, 2014 and December 31, 2013, the contractual maturities of the U.S. treasuries were two to three years.

As of March 31, 2014, certain of the Company’s U.S. treasuries were in unrealized loss position principally due to changes in interest rates and credit spreads. No U.S. treasuries were in an unrealized loss position for more than 12 months as of either March 31, 2014 or December 31, 2013. In analyzing an issuer’s financial condition, the Company considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. The fair value of these securities in an unrealized loss position represented 18% of the total fair value of all securities available for sale and their unrealized loss was $0.01 million as of March 31, 2014. As the Company has the ability to hold debt securities until maturity, or for the foreseeable future as classified as available for sale, no decline was deemed to be other-than-temporary.

9


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. 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.

As a basis for considering such assumptions, the Company uses a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

·

Level I—observable inputs such as quoted prices in active markets

·

Level II—inputs other than the quoted prices in active markets that are observable either directly or indirectly

·

Level III—unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions

This hierarchy requires the Company to use observable market data when available and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures its financial assets at fair value.

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis (in thousands):

 

 

Total

Fair Value

 

 

Level I

 

 

Level II

 

 

Level III

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificate of deposit

$

2,859

 

 

$

2,859

 

 

 

 

$

-

 

U.S. treasuries

 

36,880

 

 

 

36,880

 

 

 

 

 

Mutual funds

 

508

 

 

 

508

 

 

 

 

 

Interest rate cap

 

25

 

 

 

 

25

 

 

 

Total

$

40,272

 

 

$

40,247

 

 

$

25

 

 

$

-

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificate of deposit

$

2,858

 

 

$

2,858

 

 

$

-

 

 

$

-

 

U.S. treasuries

 

35,918

 

 

 

35,918

 

 

 

 

 

Mutual funds

508

 

 

508

 

 

 

 

 

Interest rate cap

47

 

 

 

 

47

 

 

 

Total

$

39,331

 

 

$

39,284

 

 

$

47

 

 

$

0

 

 

There were no transfers between Level I and Level II assets for the three months ended March 31, 2014 or the year ended December 31, 2013.

As of March 31, 2014 and December 31, 2013, certificate of deposit consisted of certificates of deposit held by domestic financial institutions, of which $2.3 million are presented as restricted investments within WSE-related assets and $0.5 million are presented as noncurrent restricted investments in the accompanying consolidated balance sheets.

The book value of the Company’s financial instruments not measured at fair value, including cash, restricted cash, WSE-related assets and liabilities, line of credit and accrued corporate wages, approximates fair value due to the relatively short maturity, cash repayments or market interest rates of such instruments. The fair value of such financial instruments, other than cash and restricted cash, is determined using the income approach based on the present value of estimated future cash flows. The fair value of all of these instruments would be categorized as Level II of the fair value hierarchy, with the exception of cash and cash equivalents, which would be categorized as Level I.

At March 31, 2014 and December 31, 2013, the carrying value of our notes payable of $601.9 million and $818.4 million, respectively, approximated fair value. The estimate fair values of our notes payable are considered a Level II valuation in the hierarchy for fair value measurement and are based on a cash flow model discounted at market interest rates that considers the underlying risks of unsecured debt.

 

 

10


NOTE 4. NOTES PAYABLE AND BORROWINGS UNDER CAPITAL LEASES

The following schedule summarizes the components of the Company’s notes payable and borrowings under capital leases balances (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2014

 

 

2013

 

Notes payable under credit facility

$

601,850

 

 

$

818,425

 

Capital leases

 

386

 

 

 

452

 

Less current portion

 

(6,589

)

 

 

(6,669

)

 

$

595,647

 

 

$

812,208

 

In August 2013, the Company, as guarantor, its subsidiary TriNet HR Corporation, as borrower, and certain of its other subsidiaries as subsidiary guarantors entered into two senior secured credit facilities:

·

a $705.0 million first lien credit facility with JPMorgan Chase Bank, N.A., as administrative agent; and

·

a $190.0 million second lien credit facility with Wilmington Trust, National Association, as administrative agent.

The credit facilities are secured by substantially all of the Company’s assets and the assets of the borrower and of the subsidiary guarantors, other than specifically excluded assets.

The first lien credit facility provides for a five-year revolving credit facility of $75.0 million, three-year first lien tranche B-1 term loan of $175.0 million and seven-year first lien tranche B-2 term loan of $455.0 million. A second lien credit facility provides for seven-year-and-six-month term loan of $190.0 million. All first lien and second lien term loans were fully drawn in August 2013. The $75.0 million revolving credit facility includes capacity for a $30.0 million letter of credit facility and a $10.0 million swingline facility. The total unused portion of the revolving credit facility was $52.2 million as of March 31, 2014, since $22.8 million of the facility was used to backstop letters of credit outstanding in a previous credit facility. The proceeds of the first and second lien credit facilities were used to repay approximately $448.3 million of indebtedness outstanding under the Company’s previous credit facility, declare a special dividend, provide cash collateral to guarantee a letter of credit and pay transaction costs. In connection with the credit facilities, the Company incurred $23.1 million of debt issuance costs, which were deferred and are being amortized over the term of the credit facilities.

In March 2014, the proceeds from the IPO were used to fully repay the $190.0 million second lien credit facility, which resulted in a prepayment premium of $3.8 million, and to repay $25.0 million of the first lien tranche B-1 term loan. Additionally, the remaining balance of the loan fees associated with the second lien credit facility and a portion of the loan fees associated with the first lien credit facility were fully amortized in March 2014 for a charge of $5.0 million.

The credit facilities contain customary representations and warranties and customary affirmative and negative covenants applicable to us and our subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, and dividends and other distributions. Under the revolving credit facility, so long as there are any outstanding revolving loans and/or outstanding letters of credit in excess of $15.0 million other than letters of credit that have been cash collateralized, we are required to comply with a financial covenant that requires us and our subsidiaries to maintain a maximum first lien leverage ratio at 5.50 to 1.00 on a consolidated basis as of March 31, 2014. The Company was in compliance with the restrictive covenants under the credit facilities at March 31, 2014.

 

NOTE 5. CONVERTIBLE PREFERRED STOCK

On June 7, 2005, the Company issued 5,391,441 shares of Series G convertible preferred stock (Series G) at $11.00 per share for an aggregate cash purchase price of $59.3 million. The Company recorded the issuance of Series G at $59.1 million, net of issuance costs of $0.2 million. On June 1, 2009, the Company issued 4,124,986 shares of Series H convertible preferred stock (Series H) at $16.69 per share for an aggregate cash purchase price of $68.8 million. The Company recorded the issuance of Series H at $63.8 million, net of issuance costs of $5.0 million. Upon the issuance of Series H, certain terms related to Series G were amended. In March 2014, upon completion of the Company’s IPO, all of the outstanding shares of Series H and Series G were converted into 38,065,708 shares of common stock.

 

NOTE 6: STOCKHOLDERS’ EQUITY

Equity-Based Incentive Plans

In 2000, the Company established the 2000 Equity Incentive Plan (the 2000 Plan), which provided for granting incentive stock options, nonstatutory stock options, bonus awards and restricted stock awards to eligible employees, directors, and consultants of the Company. In December 2009, the Board of Directors approved the 2009 Equity Incentive Plan (the 2009 Plan) as the successor to and

11


continuation of the 2000 Plan. As of the 2009 Plan effective date, remaining shares available for issuance under the 2000 Plan were cancelled and became available for issuance under the 2009 Plan. No additional stock awards will be granted under the 2000 Plan. The 2009 Plan provides for the grant of the following awards to eligible employees, directors, and consultants: incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other stock awards. Incentive stock options may only be granted to employees. Nonemployee directors are eligible to receive nonstatutory stock options automatically at designated intervals over their period of continuous service on the Board. In February 2014, the Board approved an amendment to the 2009 Plan authorizing an additional 3,000,000 shares available for grant. The amended 2009 Plan also provides that the number of shares reserved for issuance under the 2009 Plan will increase on January 1 of each year for a period of up to five years by 4.5% of the total number of shares of capital stock outstanding on December 31 of the preceding calendar year, which will begin on January 1, 2015 and continue through January 1, 2019.

The exercise price per share of all incentive stock options granted under the 2000 Plan and the 2009 Plan must be at least equal to the fair market value of the shares at the date of grant as determined by the Board of Directors. Options issued to recipients other than nonemployee directors generally vest over four years with a one year cliff and monthly thereafter, and have a maximum contractual term of 10 years. Options issued to members of the Board of Directors are issued with varying vesting schedules. Incentive stock options granted at 110% of the fair market value to stockholders who have greater than 10% ownership have a maximum term of five years.

The Company also has granted restricted stock units to members of the Board of Directors and certain executives. These restricted stock units represent rights to receive shares of the Company’s common stock on satisfaction of applicable vesting conditions. The fair value of restricted stock units is equal to the fair value of the Company’s common stock on the date of grant. The restricted stock units vest at a rate of 25% at the end of the first year and then pro rata monthly thereafter over the remaining vesting term of three or two years, as applicable.

Stock option plan activity under the 2000 Plan and the 2009 Plan is summarized as follows:

 

 

Shares Available for Grant

 

Balance at December 31, 2013

 

2,004,464

 

Authorized

 

3,000,000

 

Granted

 

(2,448,500

)

Forfeited

 

66,052

 

Expired

 

6,580

 

Balance at March 31, 2014

 

2,628,596

 

 

The following table summarizes stock option activity under the Company’s equity-based plans for the three months ended March 31, 2014:

 

 

Number

of Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Term

(Years)

 

Aggregate

Intrinsic

Value

(in thousands)

 

Balance at December 31, 2013

 

6,281,148

 

 

$

1.74

 

 

8.55

 

$

53,373

 

Granted

 

2,448,500

 

 

 

11.20

 

 

 

 

 

 

 

Exercised

 

(590,482

)

 

0.84

 

 

 

 

 

 

 

Forfeited

 

(66,052

)

 

 

2.54

 

 

 

 

 

 

 

Expired

 

(6,580

)

 

 

0.50

 

 

 

 

 

 

 

Balance at March 31, 2014

 

8,066,534

 

 

$

4.67

 

 

8.81

 

$

134,227

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2014

 

1,408,826

 

 

$

0.79

 

 

7.63

 

$

28,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest at March 31, 2014

 

7,322,533

 

 

$

3.88

 

 

8.76

 

$

127,667

 

 

The weighted-average grant-date fair value of stock options granted in each of the three months ended March 31, 2014 and March 31, 2013 was $6.18 and $3.72 per share, respectively. The total fair value of options vested for the three months ended March 31, 2014 and March 31, 2013 was $3.4 million and $1.7 million, respectively.

The total intrinsic value of options exercised for the three months ended March 31, 2014 and March 31, 2013 was $6.2 million and $0.8 million, respectively. Cash received from options exercised during the three months ended March 31, 2014 and March 31,

12


2013 was $0.5 million and $0.3 million, respectively. The exercise price of all options granted was equal to the fair value of the common stock on the date of grant.

As of March 31, 2014, unrecognized compensation expense, net of forfeitures, associated with nonvested options outstanding was $27.7 million and is expected to be recognized over a weighted-average period of 3.21 years.

For the three months ended March 31, 2014, there were no grants, vesting, or forfeitures of restricted stock units.  The total grant date fair value of restricted stock units vested in the three months ended March 31, 2014 and 2013 was $0.0 million and $0.1 million, respectively. As of March 31, 2014, unrecognized compensation expense, net of forfeitures, associated with the nonvested restricted stock units outstanding was $0.5 million, and is expected to be recognized over a weighted-average period of 3.25 years.

Stock Split

On March 7, 2014, the Company’s board of directors and stockholders approved and effected an amendment to the amended and restated certificate of incorporation providing for a 2-for-1 stock split of the outstanding common stock. All of the share numbers, share prices, and exercise prices have been adjusted within these financial statements, on a retroactive basis, to reflect this 2-for-1stock split.

Employee Stock Purchase Plan

The Company adopted the 2014 Employee Stock Purchase Plan (ESPP) in February 2014, which became effective on March 26, 2014. The ESPP was approved with a reserve of 1.1 million shares of common stock for future issuance under various terms provided for in the ESPP, which will automatically increase on January 1 of each year from 2015 through 2024 by the lesser of 1% of the total number of shares outstanding on December 31 of the preceding calendar year or 1,800,000 shares. We commenced our first purchase period under the ESPP on March 26, 2014 with the purchase price at the lesser of 85% of the fair market value of the common stock on the offering date and 85% of the fair market value of the common stock on the applicable purchase date.  Offering periods will be six months in duration and will end on or about May 15 and November 15 of each year, with the exception of the initial offering period which commenced on March 26, 2014 and that ends on November 14, 2014. Employees may contribute a minimum of 1% and a maximum of 15% of their earnings.

Stock-Based Compensation

Stock-based compensation expense of $2.1 million and $1.4 million was recognized for the three months ended March 31, 2014 and 2013, respectively. An income tax benefit of $0.6 million and $0.2 million was recognized relating to stock-based compensation expense for the three months ended March 31, 2014 and 2013, respectively. The actual tax benefit realized from stock options exercised was $2.4 million and $0.3 million for the three months ended March 31, 2014 and 2013, respectively.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

 

Three Months Ended March 31,

 

 

2014

 

 

2013

 

Expected term (in years)

6.05

 

 

6.03

 

Expected volatility

 

58.3

%

 

 

49

%

Risk-free interest rate

 

1.80

%

 

 

1.13

%

Expected dividend yield

 

0

%

 

 

0

%

 

 

13


NOTE 7: EARNINGS PER SHARE

Basic net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period and participating convertible preferred stock that were outstanding prior to the IPO. Diluted net income per share is computed by giving effect to all potential shares of common stock, including shares issuable upon the conversion of our convertible preferred stock that were outstanding prior to the IPO, shares issuable upon the exercise of outstanding stock options, and stock related to unvested restricted stock unit awards to the extent dilutive.

The following table sets forth the computation of the Company’s basic and diluted net income per share attributable to common stock (in thousands, except per share data):

 

 

Three months ended March 31,

 

 

2014

 

 

2013

 

Numerator (basic)

 

 

 

 

 

 

 

Net income

$

1,540

 

 

$

10,537

 

Less net income allocated to participating securities

 

(1,065

)

 

 

(8,213

)

Net income attributable to common stock

$

475

 

 

$

2,324

 

Denominator (basic)

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

16,776

 

 

 

10,770

 

Basic EPS

$

0.03

 

 

$

0.22

 

 

 

 

 

 

 

 

 

Numerator (diluted)

 

 

 

 

 

 

 

Net income

$

1,540

 

 

$

10,537

 

Less net income allocated to participating securities

 

(1,016

)

 

 

(7,638

)

Net income attributable to common stock

$

524

 

 

$

2,899

 

Denominator (diluted)

 

 

 

 

 

 

 

Weighted average shares of common stock

 

16,776

 

 

 

10,770

 

Dilutive effect of stock options and restricted stock units

 

2,622

 

 

 

3,676

 

Weighted average shares of common stock outstanding

 

19,398

 

 

 

14,445

 

Diluted EPS

$

0.03

 

 

$

0.20

 

 

 

 

 

 

 

 

 

Common stock equivalents excluded from income per diluted share because of

   their anti-dilutive effect

 

1,511

 

 

 

653

 

 

 

NOTE 8. INCOME TAXES

The Company is subject to taxation in the United States and Canada. However, business is conducted primarily in the United States. The effective tax rate differs from the statutory rate primarily due to state taxes, tax credits and changes in uncertain tax positions. The Company makes estimates and judgments about its future taxable income that are based on assumptions that are consistent with the Company’s plans and estimates. Should the actual amounts differ from these estimates, the amount of the valuation allowance could be materially affected.

Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Changes in valuation allowances are reflected as a component of provision for income taxes.

The effective tax rate (ETR) was 56.4% and 36.2% for the three months ended March 31, 2014 and 2013, respectively. The increase is primarily due to non-deductible stock-based compensation related to February 2014 stock option grants and to a discrete tax charge of $0.5 million, or 14.4% of the ETR, for the revaluation of deferred taxes, based on a regulatory state tax change enacted during the three months ended March 31, 2014. The remainder of the increase is primarily due to the expiration of the federal research and development tax credit in 2014, as well as a release of uncertain tax positions recognized for the three months ended March 31, 2013.

The Company has not been subject to U.S. federal, state and local income tax examinations by tax authorities in material jurisdictions for tax years beginning prior to January 1, 2009.  However, there are outstanding Notices of Proposed Assessment disallowing employment tax credits totaling $10.5 million in connection with the Internal Revenue Service (IRS) examination of

14


Gevity HR, Inc. and Subsidiaries, which was acquired by TriNet on June 1, 2009.  While Appeals has denied the credits, and the Company plans to exhaust all administrative efforts to resolve this issue, it is likely that the matter will ultimately be resolved through litigation.  With regard to these FICA tip tax credits, the Company believes it is more likely than not that the Company will prevail.  Therefore, no reserve has been recognized related to this matter.  TriNet was notified by the IRS during the quarter ended March 31, 2014 that the Company has been selected for examination for the 2012 tax year.

 

 

NOTE 9. COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases office facilities, including its headquarters and other facilities, and equipment under non-cancelable operating leases. The Company also leases certain software and furniture, fixtures, and equipment under capital leases. The lease agreements generally provide for rental payments on a graduated basis and for options to renew, which could increase future minimum lease payments if exercised. The Company recognizes rent expense on a straight-line basis over the lease period and accrues for rent expense incurred but not paid. Rent expense for the three months ended March 31, 2014 and 2013 was $2.8 million and $2.2 million, respectively.

Operating Covenants

To meet various states’ licensing requirements and maintain accreditation by Employer Services Assurance Corporation, the Company is subject to various minimum working capital and net worth requirements. As of March 31, 2014, the Company believes it has 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, the Company has maintained positive working capital throughout the period covered by the financial statements.

Contingencies

The Company may from time to time become involved in various litigation matters arising in the ordinary course of business, including suits by its clients. The unfavorable resolution of any such matter could have a material effect on the Company’s consolidated financial position and results of operations.

Due to the nature of the Company’s relationship with its WSEs, the Company could be subject to liability for federal and state law violations even if the Company does not participate in such violations. While the Company’s agreements with its clients contain indemnification provisions related to the conduct of its clients, the Company historically has not encountered situations requiring enforcement of these indemnification provisions.

The Company has been named as a defendant in various class action lawsuits arising from the nature of the Company’s relationship with its WSEs. At this stage of the lawsuits, management believes an unfavorable outcome to the Company is not probable. There are significant uncertainties involved in any class action litigation. Management is unable to estimate a possible loss or range of loss for these class action lawsuits.

 

 

 

 

15


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our Prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission on March 27, 2014.

Special Note Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are not guarantees of future performance, but are based on management’s expectations as of the date of this report and assumptions that are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements. Important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below. All information provided in this report is as of the date of this report and the company undertakes no duty to update this information except as required by law.

Overview

TriNet is a leading provider of a comprehensive human resources solution for small to medium-sized businesses, or SMBs. We enhance business productivity by enabling our clients to outsource their HR function to one strategic partner and allowing them to focus on operating and growing their core businesses. Our HR solution includes services such as payroll processing, human capital consulting, employment law compliance and employee benefits, including health insurance, retirement plans and workers compensation insurance. Our services are delivered by our expert team of HR professionals and enabled by our proprietary, cloud-based technology platform, which allows our clients and their employees to efficiently conduct their HR transactions anytime and anywhere. We believe we are a leader in the industry due to our size, our presence in the United States and Canada and the number of clients and employees that we serve.

We utilize a co-employment model pursuant to which both we and our clients become employers of our clients’ employees, which we refer to as worksite employees, or WSEs. This model affords us a close and embedded relationship with our clients and their employees. Under the co-employment model, employment-related liabilities are contractually allocated between us and our clients. We assume responsibility for, and manage the risks associated with, each clients’ employee payroll obligations, including the liability for payment of salaries and wages to each client employee, the payment of payroll taxes and, at the client’s option, responsibility for providing group health, welfare, workers compensation and retirement benefits to such individuals. Unlike a payroll service provider, we issue each WSE a payroll check drawn on our bank accounts and contract with insurance carriers to provide health and workers compensation insurance to WSEs under TriNet’s name.

We serve thousands of clients in specific industry vertical markets, including technology, life sciences, property management, professional services, banking and financial services, retail, manufacturing and hospitality services, as well as non-profit entities. As of March 31, 2014, we served over 9,000 clients in 50 states, the District of Columbia and Canada and co-employed approximately 241,000 WSEs. In 2013, we processed over $17 billion in payroll and payroll tax payments for our clients.

Our total revenues consist of professional service revenues and insurance service revenues. For the three months ended March 31, 2014 and 2013, 16% and 17% of our total revenues, respectively, consisted of professional service revenues, and 84% and 83% of our total revenues, respectively, consisted of insurance service revenues. We earn professional service revenues by processing HR transactions, such as payroll and employment tax withholding, and providing labor and benefit law compliance services, on behalf of our clients. We earn insurance service revenues by providing risk-based, third-party plans to our clients, primarily employee health benefit plans and workers compensation insurance.

For professional service revenues, we recognize as revenues the fees we earn for processing HR transactions, which fees do not include the payroll that is paid to us by the client and paid out to WSEs or remitted as taxes. We recognize as insurance service revenues all insurance-related billings and administrative fees collected from clients and withheld from WSEs for risk-based insurance plans provided through third-party insurance carriers, primarily employee health insurance and workers compensation insurance. We in turn pay premiums to third-party insurance carriers for these insurance benefits, as well as reimburse them for claim payments within our insurance deductible layer. These premiums and reimbursements are classified as insurance costs on our statements of operations. To augment our financial information prepared in accordance with U.S. generally accepted accounting principles, or GAAP, we use internally a non-GAAP financial measure, Net Insurance Service Revenues, which consists of insurance service revenues less insurance costs. We also use a measure of total non-GAAP revenue, or Net Service Revenues, which is the sum of

16


professional service revenues and Net Insurance Service Revenues. For the three months ended March 31, 2014 and 2013, 65% and 61% of our Net Service Revenues, respectively, consisted of professional service revenues and 35% and 39% of our Net Service Revenues, respectively, consisted of Net Insurance Service Revenues.

We sell our services primarily through our direct sales force, which consists of sales representatives who focus on serving clients in specific industry vertical markets. For the three months ended March 31, 2014 and 2013, our sales and marketing expenses were $31.8 million and $22.6 million, respectively, or 6% and 6% of our total revenues and 25% and 23% of our Net Service Revenues, respectively.

We have made significant investments in our proprietary, cloud-based technology platform, including implementing client information and management software to provide our clients with enhanced features and functionality with which to conduct their HR transactions, manage their employees and analyze employee benefits data. For the three months ended March 31, 2014 and 2013, our systems development and programming costs were $5.9 million and $4.5 million, or 1% and 1% of our total revenues and 5% and 5% of our Net Service Revenues, respectively.

Strategic Acquisitions

We operate in a highly fragmented industry and have completed numerous strategic acquisitions over the course of the past decade. We intend to continue to pursue strategic acquisitions that will enable us to add new clients and employees to our existing business and offer our clients and their employees more comprehensive and attractive services. Our operations could be adversely impacted if our strategic acquisitions are not integrated effectively. Because many of the companies we have acquired to date were focused on specific industries, our acquisitions have allowed us to expand our vertical service offerings into areas such as financial services, property management and food services, hospitality and manufacturing in which we did not previously have a significant presence. In addition, we have acquired sales representatives with experience in these vertical markets. Our acquisitions have provided us with additional clients and WSEs to allow us to continue to leverage our operations over a larger client base. These acquisitions have resulted in increased revenues and costs, as described below in our results of operations. We expect to continue to pursue strategic acquisitions.

Key Operating Metrics

We regularly review certain key operating metrics to evaluate growth trends, measure our performance and make strategic decisions. Our key operating metrics as of and for the three months ended March 31, 2014 and 2013 were as follows:

 

 

 

Three Months Ended

March 31,

 

 

 

2014

 

 

2013

 

Key Operating Metrics:

 

 

 

Total WSEs

 

 

241,944

 

 

 

185,894

 

Total Sales Representatives

 

 

336

 

 

 

234

 

Net Insurance Service Revenues (in thousands)

 

$

44,880

 

 

$

37,927

 

Net Service Revenues (in thousands)

 

$

127,755

 

 

$

97,158

 

Total WSEs

We define Total WSEs at the end of a given fiscal period as the total number of WSEs paid in the last calendar month of the fiscal period. We believe that comparing our Total WSEs at the end of a fiscal period to that of prior periods is an indicator of our success in growing our business, both organically and through the integration of acquired businesses, and retaining clients, and that our Total WSEs paid in the last calendar month of the fiscal period is a leading indicator of our anticipated revenues for future fiscal periods.

Total Sales Representatives

Our direct sales force consists of sales representatives who focus on serving clients in specific industry vertical markets. We define Total Sales Representatives at the end of a given fiscal period as the total number of our direct sales force employees at that date. We believe that comparing our Total Sales Representatives at the end of a fiscal period to our Total Sales Representatives at the end of a prior fiscal period is an indicator of our success in growing our business, and that our Total Sales Representatives at the end of recent fiscal periods is a key indicator of our ability to increase our revenues in the following fiscal periods.

17


Net Insurance Service Revenues and Net Service Revenues

We define Net Insurance Service Revenues as insurance service revenues less insurance costs. We define Net Service Revenues as the sum of professional service revenues and Net Insurance Service Revenues. Our total revenues on a GAAP basis represent the total amount invoiced by us to our clients, net of direct pass-through costs such as payroll and payroll tax payments, for the services we provide to our clients. Our insurance costs include the premiums we pay to insurance carriers for the health and workers compensation insurance coverage provided to our clients and WSEs and the reimbursements we pay to the insurance carriers for claim payments within our insurance deductible layer. We act principally as the service provider to add value in the execution and procurement of these services to our clients. Net Insurance Service Revenues is the primary indicator of our ability to source, add value and offer benefit services to WSEs through third-party insurance carriers, and is considered by management to be a key performance measure. We believe that Net Service Revenues is also a key performance measure as it provides a useful measure of total revenues for the two main components of our revenues calculated on a consistent basis. In addition, management believes measuring operating costs as a function of Net Service Revenues provides a useful metric, as we believe it enables better evaluation of the performance of our business.

Non-GAAP Financial Results

We use Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income to provide an additional view of our operational performance. Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income are financial measures that are not prepared in accordance with GAAP. We define Net Insurance Service Revenues as insurance service revenues less insurance costs, which include the premiums we pay to insurance carriers for the health and workers compensation insurance coverage provided to our clients and WSEs and the reimbursements we pay to the insurance carriers for claim payments within our insurance deductible layer. We define Net Service Revenues as the sum of professional service revenues and Net Insurance Service Revenues. We define Adjusted EBITDA as net income, excluding the effects of our income tax provision, interest expense, depreciation, amortization of intangible assets and stock-based compensation expense. We define Adjusted Net Income as net income, excluding the effects of stock-based compensation, amortization of intangible assets, non-cash interest expense and the income tax effect of these pre-tax adjustments at our effective tax rate. In the first quarter of 2014, the effective tax rate is adjusted to exclude income tax on non-deductible stock-based compensation and discrete items including the cumulative effect of state law changes. Non-cash interest expense represents amortization and write-off of our debt issuance costs and, in the three months ended March 31, 2014, a debt prepayment premium.

We believe that the use of Net Insurance Service Revenues provides useful information as it presents a measure of revenues from our provision of insurance services to our clients that eliminates the cost of insurance. We believe that Net Service Revenues provides a useful measure of total revenues for the two main components of our revenues calculated on a consistent basis. We believe that the use of Adjusted EBITDA and Adjusted Net Income provides additional period-to-period comparisons and analysis of trends in our business, as they exclude certain one-time and non-cash expenses. We believe that Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income are useful for our stockholders and board of directors by helping them to identify trends in our business and understand how our management evaluates our business. We use Net Insurance Service Revenues, Net Service Revenues and Adjusted EBITDA to monitor and evaluate our operating results and trends on an ongoing basis and internally for operating, budgeting and financial planning purposes, in addition to allocating our resources to enhance the financial performance of our business and evaluating the effectiveness of our business strategies. We also use Net Service Revenues and Adjusted EBITDA in determining the incentive compensation for management.

Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income are not prepared in accordance with, and should not be considered in isolation of, or as an alternative to, measurements required by GAAP. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. As non-GAAP measures, Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. In particular:

·

Net Insurance Service Revenues and Net Service Revenues are reduced by the insurance costs that we pay to the insurance carriers;

·

Adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

·

Adjusted EBITDA does not reflect the amounts we paid in taxes or other components of our tax provision;

·

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

·

Adjusted EBITDA and Adjusted Net Income do not reflect changes in, or cash requirements for, our working capital needs;

·

Adjusted EBITDA and Adjusted Net Income do not reflect the non-cash component of employee compensation;

 

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·

Although depreciation and amortization of intangible assets are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and

·

Other companies in our industry may calculate these measures or similar measures differently than we do, limiting their usefulness as a comparative measure.

Because of these limitations, you should consider Net Insurance Service Revenues, Net Service Revenues, Adjusted EBITDA and Adjusted Net Income alongside other financial performance measures, including total revenues, net income and our financial results presented in accordance with GAAP.

The table below sets forth a reconciliation of GAAP insurance service revenues to Net Insurance Service Revenues:

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2014

 

 

2013

 

 

 

(in thousands)

 

Insurance service revenues

 

$

426,037

 

 

$

291,839

 

Less:  Insurance costs

 

 

381,157

 

 

 

253,912

 

Net Insurance Service Revenues

 

$

44,880

 

 

$

37,927

 

The table below sets forth a reconciliation of GAAP total revenues to Net Service Revenues:

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2014

 

 

2013

 

 

 

(in thousands)

 

Total revenues

 

$

508,912

 

 

$

351,070

 

Less:  Insurance costs

 

 

381,157

 

 

 

253,912

 

Net Services Revenues

 

$

127,755

 

 

$

97,158

 

The table below sets forth a reconciliation of GAAP net income to Adjusted EBITDA:

 

 

 

Three months ended

 

 

 

March 31,