NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 and medium-size 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,
•certain 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 U.S.
Basis of Presentation
These unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Rules and Regulations of the Securities and Exchange Commission. Certain information and note disclosures included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, that are normal and recurring in nature, necessary for fair financial statement presentation. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the operating results anticipated for the full year. These financial statements should be read in conjunction with the audited Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Data of our Annual Report on Form 10-K for the year ended December 31, 2020 (2020 Form 10-K).
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
Performance Obligations
In April 2020, we created our Recovery Credit program to assist in the economic recovery of our existing SMB clients and enhance our ability to retain these clients. Under this one-time program eligible clients will receive reductions against fees for future services, accounted for as a discount, over the following 12 months. This option to renew future services at a discount represents a material right and is accounted for as a performance obligation (Recovery Credit). This performance obligation will be satisfied when the clients have successfully renewed the services contracts and the future services are transferred.
The consideration we receive that is allocated to this performance obligation is deferred as an unsatisfied performance obligation and is included in client deposits and other client liabilities on the balance sheet. The amount of consideration we defer each period is dependent on the timing of when eligible clients will receive the Recovery Credit, which is subject to a limit on the total amount of $145 million.
The change in the balance of the Recovery Credit unsatisfied performance obligation was as follows:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in millions)
|
2021
|
|
|
|
|
Balance at beginning of period
|
$
|
92
|
|
|
(+) Accruals
|
12
|
|
|
(-) Distributions to clients
|
(27)
|
|
|
Balance at end of period
|
$
|
77
|
|
|
Variable Consideration and Pricing Allocation
Our contracts with clients generally do not include any variable consideration. However, from time to time, we may offer credits to our clients considered to be variable consideration. Incentive credits related to contract renewals are recorded as a reduction to revenue as part of the transaction price at contract inception and are allocated among the performance obligations based on their relative standalone selling prices. Credits based on the performance of our insurance costs are recorded as a reduction to insurance services revenues and included in client deposits and other client liabilities on the balance sheet. In the three months ended March 31, 2021, we accrued $25 million under our 2021 Credit Program, payable within 12 months to eligible clients as of March 31, 2021, related to the expected performance of our health insurance costs for the year.
Accrued Health Insurance Costs
We sponsor and administer a number of employee benefit plans, including group health, dental, and vision as an employer plan sponsor under section 3(5) of the ERISA. In the three months ended March 31, 2021, 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 March 31, 2021 and December 31, 2020, prepayments and miscellaneous receivables offsetting accrued health insurance costs were $52 million and $49 million, respectively. When the prepaid amount is in excess of our recorded liability the net asset position is included in prepaid expenses. As of March 31, 2021 and December 31, 2020, accrued health insurance costs offsetting prepaid expenses were $70 million and $58 million, respectively.
NOTE 2. CASH, CASH EQUIVALENTS AND INVESTMENTS - UNRESTRICTED AND RESTRICTED
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).
Our total cash, cash equivalents and investments are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
(in millions)
|
Cash and cash equivalents
|
Available-for-sale marketable securities
|
|
Total
|
|
Cash and cash equivalents
|
Available-for-sale marketable securities
|
|
Total
|
Cash and cash equivalents
|
$
|
500
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
301
|
|
$
|
—
|
|
|
$
|
301
|
|
Investments
|
—
|
|
71
|
|
|
71
|
|
|
—
|
|
57
|
|
|
57
|
|
Restricted cash, cash equivalents and investments:
|
|
|
|
|
|
|
|
|
|
Payroll funds collected
|
906
|
|
—
|
|
|
906
|
|
|
1,228
|
|
—
|
|
|
1,228
|
|
Collateral for health benefits claims
|
22
|
|
90
|
|
|
112
|
|
|
16
|
|
82
|
|
|
98
|
|
Collateral for workers' compensation claims
|
61
|
|
—
|
|
|
61
|
|
|
60
|
|
—
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
Other security deposits
|
2
|
|
—
|
|
|
2
|
|
|
2
|
|
—
|
|
|
2
|
|
Total restricted cash, cash equivalents and investments
|
991
|
|
90
|
|
|
1,081
|
|
|
1,306
|
|
82
|
|
|
1,388
|
|
Investments, noncurrent
|
—
|
|
130
|
|
|
130
|
|
|
—
|
|
138
|
|
|
138
|
|
Restricted cash, cash equivalents and investments, noncurrent
|
|
|
|
|
|
|
|
|
|
Collateral for workers' compensation claims
|
30
|
|
154
|
|
|
184
|
|
|
36
|
|
174
|
|
|
210
|
|
Total
|
$
|
1,521
|
|
$
|
445
|
|
|
$
|
1,966
|
|
|
$
|
1,643
|
|
$
|
451
|
|
|
$
|
2,094
|
|
NOTE 3. INVESTMENTS
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of our AFS investments as of March 31, 2021 and December 31, 2020 are presented below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
(in millions)
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
Asset-backed securities
|
$
|
25
|
|
$
|
—
|
|
$
|
—
|
|
$
|
25
|
|
|
$
|
24
|
|
$
|
—
|
|
$
|
—
|
|
$
|
24
|
|
Corporate bonds
|
121
|
|
2
|
|
—
|
|
123
|
|
|
126
|
|
2
|
|
—
|
|
128
|
|
U.S. government agencies and government-
sponsored agencies
|
23
|
|
—
|
|
—
|
|
23
|
|
|
27
|
|
1
|
|
—
|
|
28
|
|
U.S. treasuries
|
256
|
|
3
|
|
—
|
|
259
|
|
|
261
|
|
4
|
|
—
|
|
265
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposit
|
9
|
|
—
|
|
—
|
|
9
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Other debt securities
|
6
|
|
—
|
|
—
|
|
6
|
|
|
6
|
|
—
|
|
—
|
|
6
|
|
Total
|
$
|
440
|
|
$
|
5
|
|
$
|
—
|
|
$
|
445
|
|
|
$
|
444
|
|
$
|
7
|
|
$
|
—
|
|
$
|
451
|
|
Gross unrealized losses were immaterial at March 31, 2021 and December 31, 2020.
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.
The fair value of debt investments by contractual maturity are shown below:
|
|
|
|
|
|
|
|
(in millions)
|
|
March 31, 2021
|
|
One year or less
|
|
$
|
135
|
|
|
Over one year through five years
|
|
281
|
|
|
Over five years through ten years
|
|
5
|
|
|
Over ten years
|
|
24
|
|
|
Total fair value
|
|
$
|
445
|
|
|
The gross proceeds from sales and maturities of AFS securities for the three months ended March 31, 2021 and March 31, 2020 are presented below. We had immaterial gross realized gains and losses from sales of investments for the three months ended March 31, 2021 and 2020.
|
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
(in millions)
|
2021
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross proceeds from sales
|
$
|
41
|
|
$
|
40
|
|
|
|
|
Gross proceeds from maturities
|
43
|
|
27
|
|
|
|
|
Total
|
$
|
84
|
|
$
|
67
|
|
|
|
|
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 March 31, 2021 and December 31, 2020. There were no transfers between levels as of March 31, 2021 and December 31, 2020.
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 March 31, 2021 and December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Level 1
|
Level 2
|
Total
|
March 31, 2021
|
|
|
|
Cash equivalents:
|
|
|
|
Money market mutual funds
|
$
|
127
|
|
$
|
—
|
|
127
|
|
|
|
|
|
Total cash equivalents
|
127
|
|
—
|
|
127
|
|
Investments:
|
|
|
|
Asset-backed securities
|
—
|
|
25
|
|
25
|
|
Corporate bonds
|
—
|
|
89
|
|
89
|
|
U.S. government agencies and government-sponsored agencies
|
—
|
|
5
|
|
5
|
|
U.S. treasuries
|
—
|
|
77
|
|
77
|
|
Other debt securities
|
—
|
|
6
|
|
6
|
|
Total investments
|
—
|
|
202
|
|
202
|
|
Restricted cash equivalents:
|
|
|
|
Money market mutual funds
|
95
|
|
—
|
|
95
|
|
Certificate of deposit
|
—
|
|
1
|
|
1
|
|
Commercial paper
|
—
|
|
—
|
|
—
|
|
Total restricted cash equivalents
|
95
|
|
1
|
|
96
|
|
Restricted investments:
|
|
|
|
Corporate bonds
|
—
|
|
34
|
|
34
|
|
U.S. government agencies and government-sponsored agencies
|
—
|
|
18
|
|
18
|
|
|
|
|
|
U.S. treasuries
|
—
|
|
182
|
|
182
|
|
Certificate of deposit
|
—
|
|
9
|
|
9
|
|
Total restricted investments
|
—
|
|
243
|
|
243
|
|
Total cash equivalents and investments and restricted cash equivalents and investments
|
$
|
222
|
|
$
|
446
|
|
$
|
668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Level 1
|
Level 2
|
Total
|
December 31, 2020
|
|
|
|
Cash equivalents
|
|
|
|
Money market mutual funds
|
$
|
2
|
|
$
|
—
|
|
$
|
2
|
|
U.S. treasuries
|
—
|
|
11
|
|
11
|
|
Total cash equivalents
|
2
|
|
11
|
|
13
|
|
Investments
|
|
|
|
Asset-backed securities
|
—
|
|
24
|
|
24
|
|
Corporate bonds
|
—
|
|
93
|
|
93
|
|
U.S. government agencies and government-sponsored agencies
|
—
|
|
5
|
|
5
|
|
U.S. treasuries
|
—
|
|
67
|
|
67
|
|
Other debt securities
|
—
|
|
6
|
|
6
|
|
Total investments
|
—
|
|
195
|
|
195
|
|
Restricted cash equivalents:
|
|
|
|
Money market mutual funds
|
99
|
|
—
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted cash equivalents
|
99
|
|
—
|
|
99
|
|
Restricted investments:
|
|
|
|
Corporate bonds
|
—
|
|
35
|
|
35
|
|
U.S. government agencies and government-sponsored agencies
|
—
|
|
23
|
|
23
|
|
U.S. treasuries
|
—
|
|
198
|
|
198
|
|
|
|
|
|
Total restricted investments
|
—
|
|
256
|
|
256
|
|
Total investments and restricted cash equivalents and investments
|
$
|
101
|
|
$
|
462
|
|
$
|
563
|
|
Fair Value of Financial Instruments Disclosure
Long-Term Debt
As of December 31, 2020, our long-term debt was floating rate debt and the fair value approximated its carrying value (exclusive of issuance costs). The fair value of our floating rate debt was estimated based on a discounted cash flow, which incorporated credit spreads and market interest rates to estimate the fair value and was considered Level 3 in the hierarchy for fair value measurement.
The fair value of our 2029 Notes was obtained from a third-party pricing service and is based on observable market inputs. As such, the fair value of the senior notes is considered Level 2 in the hierarchy for fair value measurement. As of March 31, 2021, our 2029 Notes were carried at their cost, net of issuance costs, and had a fair value of $491 million.
Derivative Instruments
As of December 31, 2020, the fair value of the interest rate collar derivative, included in accounts payable and other current liabilities, was $1 million and was classified as Level 2 in the fair value hierarchy. In conjunction with the repayment and termination of our 2018 Term Loan, the interest rate collar derivative was terminated and settled and a realized loss of $1 million was recognized in net income for the three months ended March 31, 2021.
NOTE 5. ACCRUED WORKERS' COMPENSATION COSTS
The following table summarizes the accrued workers’ compensation cost activity for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(in millions)
|
|
|
|
2021
|
2020
|
Total accrued costs, beginning of period
|
|
|
|
$
|
205
|
|
$
|
214
|
|
Incurred
|
|
|
|
|
|
Current year
|
|
|
|
16
|
|
20
|
|
Prior years
|
|
|
|
(4)
|
|
(3)
|
|
Total incurred
|
|
|
|
12
|
|
17
|
|
Paid
|
|
|
|
|
|
Current year
|
|
|
|
(1)
|
|
(1)
|
|
Prior years
|
|
|
|
(11)
|
|
(13)
|
|
Total paid
|
|
|
|
(12)
|
|
(14)
|
|
Total accrued costs, end of period
|
|
|
|
$
|
205
|
|
$
|
217
|
|
The following summarizes workers' compensation liabilities on the condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
(in millions)
|
March 31, 2021
|
December 31, 2020
|
Total accrued costs, end of period
|
$
|
205
|
|
$
|
205
|
|
Collateral paid to carriers and offset against accrued costs
|
(8)
|
|
(8)
|
|
Total accrued costs, net of carrier collateral offset
|
$
|
197
|
|
$
|
197
|
|
|
|
|
Payable in less than 1 year
(net of collateral paid to carriers of $2 and $3 at March 31, 2021 and December 31, 2020, respectively)
|
$
|
59
|
|
$
|
59
|
|
Payable in more than 1 year
(net of collateral paid to carriers of $6 and $5 at March 31, 2021 and December 31, 2020, respectively)
|
138
|
|
138
|
|
Total accrued costs, net of carrier collateral offset
|
$
|
197
|
|
$
|
197
|
|
|
|
|
Incurred claims related to prior years represent changes in estimates for ultimate losses on workers' compensation claims.
As of March 31, 2021 and December 31, 2020, we had $44 million and $45 million, respectively, of collateral held by insurance carriers of which $8 million for both periods was offset against accrued workers' compensation costs as
the agreements permit and are net settled of insurance obligations against collateral held.
NOTE 6. LONG-TERM DEBT AND REVOLVING CREDIT AGREEMENTS
As of March 31, 2021 and December 31, 2020, our long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
(in millions)
|
March 31, 2021
|
December 31, 2020
|
2018 Term Loan A
|
$
|
—
|
|
$
|
370
|
|
2029 Notes
|
500
|
|
—
|
|
Principal amount
|
500
|
|
370
|
|
Deferred issuance costs
|
(6)
|
|
—
|
|
Less: current portion
|
—
|
|
(22)
|
|
Long-term debt, noncurrent
|
$
|
494
|
|
$
|
348
|
|
|
|
|
Annual contractual interest rate
|
3.50
|
%
|
1.77
|
%
|
Effective interest rate
|
3.67
|
%
|
1.87
|
%
|
In June 2018 we entered into a $425 million term loan A (our 2018 Term Loan) under our 2018 credit agreement (our 2018 Credit Agreement). The 2018 Credit Agreement included a $250 million revolving credit facility (our 2018 Revolver). The 2018 Credit Agreement was terminated in February 2021.
In February 2021, we issued $500 million aggregate principal of 3.50% senior unsecured notes maturing in March 2029 (our 2029 Notes). The 2029 Notes are a senior unsecured obligation of TriNet Group, Inc. and rank equally with all of its existing and future senior unsecured indebtedness. Interest payments on the 2029 Notes are due semi-annually in arrears on March 1 and September 1, beginning on September 1, 2021. The net proceeds were used to repay and terminate our 2018 Term Loan and for general corporate purposes.
We may voluntarily redeem the 2029 Notes, in whole or in part, 1) at any time prior to March 1, 2024 at (a) 100% of their principal amount, plus a “make whole” premium or (b) with the net cash proceeds received from an equity offering at a redemption price equal to 103.50% of the principal amount, provided the aggregate principal amount of all such redemptions does not exceed 40% of the original aggregate principal amount of the 2029 Notes; 2) at any time on or after March 1, 2024 at a prepayment price equal to 101.75% of the principal amount; 3) at any time on or after March 1, 2025 at a prepayment price equal to 100.875%of the principal amount; and 4) at any time on or after March 1, 2026 at a prepayment price equal to 100% of the principal amount; in each case, plus accrued and unpaid interest, if any, to but excluding, the date of redemption.
In February 2021, concurrently with the closing of the 2029 Notes offering, we entered into a new $500 million revolving facility (our 2021 Revolver) under a new credit agreement (our 2021 Credit Agreement) and the 2018 Credit Agreement was terminated. Letters of credit issued pursuant to the revolving facility reduce the amount available for borrowing under the 2021 Revolver. As of March 31, 2021, we had remaining capacity of $491 million under our 2021 Revolver.
The annual interest rate for borrowings under our 2021 Revolver is calculated based on an applicable London Interbank Offered Rate (LIBOR) tenor of our choosing, plus a margin of 1.25% to 2.00%, or, at our option, the alternative base rate (ABR), plus a margin of 0.25% to 1.00%. The applicable LIBOR or ABR margin is based on our Total Leverage Ratio, as defined in the 2021 Credit Agreement. The ABR is the highest of (a) the applicable Federal Reserve Bank of New York rate, as defined in our 2021 Credit Agreement plus 0.50% (b) the prime rate, and (c) one month LIBOR adjusted daily plus 1.00%.
In the event TriNet Group, Inc. receives a Corporate Issuer Credit Rating that is one level below investment grade rating or higher from at least two Nationally Recognized Statistical Rating Organizations, then rating based pricing applies and, for so long as rating based pricing applies, irrespective of the Total Leverage Ratio, the LIBOR margin will be 1.125% and the ABR margin will be 0.125%.
The indenture governing our 2029 Notes includes restrictive covenants limiting our ability to: (i) create liens on certain assets to secure debt; (ii) grant a subsidiary guarantee of certain debt without also providing a guarantee of the 2029 Notes; and (iii) consolidate or merge with or into, or sell or otherwise dispose of all or substantially all of our assets to, another person, subject, in each case, to certain customary exceptions.
The 2021 Credit Agreement includes negative covenants that limit our ability to incur indebtedness and liens, sell assets and make restricted payments, including dividends and investments, subject to certain exceptions. In addition, the 2021 Credit Agreement also contains other customary affirmative and negative covenants and customary events of default. The 2021 Credit Agreement also contains a financial covenant that requires the Company to maintain certain maximum total net leverage ratios. We were in compliance with all financial covenants under the 2021 Credit Agreement at March 31, 2021.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Contingencies
On September 29, 2020, a class action was filed in the United States District Court for the Middle District of Florida against the directors of certain TriNet subsidiaries and other TriNet employees on behalf of participants in two retirement plans available to TriNet’s eligible worksite employees, the TriNet 401(k) Plan and the TriNet Select 401(k) Plan. The complaint is similar to claims recently brought against a number of employers including PEOs and generally alleges that the defendants violated certain fiduciary obligations to Plan participants under the Employee Retirement Income Security Act of 1974 with respect to overseeing plan investment and recordkeeping fees. These claims are in the early stages, and we are unable to reasonably estimate any possible loss, or range of loss, with respect to this matter. We believe the claims are without merit.
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.
NOTE 8. STOCK BASED COMPENSATION
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 and are earned, in part, 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. Performance-based awards granted in 2021 and 2020 are earned based on a single-year performance period subject to subsequent multi-year time-based 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.
The following tables summarize RSU and RSA activity for the three months ended March 31, 2021:
Time-based RSUs and RSAs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
of RSUs
|
Total Number
of RSAs
|
Total Number
of Shares
|
Weighted-Average
Grant Date
Fair Value
|
Nonvested at December 31, 2020
|
1,230,071
|
|
30,026
|
|
1,260,097
|
|
$
|
54.04
|
|
Granted
|
456,421
|
|
—
|
|
456,421
|
|
83.11
|
|
Vested
|
(212,948)
|
|
(7,055)
|
|
(220,003)
|
|
45.14
|
|
Forfeited
|
(47,908)
|
|
—
|
|
(47,908)
|
|
56.14
|
|
Nonvested at March 31, 2021
|
1,425,636
|
|
22,971
|
|
1,448,607
|
|
$
|
64.48
|
|
Performance-based RSUs and RSAs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
of RSUs
|
Total Number
of RSAs
|
Total Number of Shares
|
Weighted-Average
Grant Date
Fair Value
|
Nonvested at December 31, 2020
|
167,127
|
|
16,052
|
|
183,179
|
|
$
|
52.89
|
|
Granted
|
232,815
|
|
—
|
|
232,815
|
|
68.27
|
|
Vested
|
(3,010)
|
|
(16,052)
|
|
(19,062)
|
|
47.61
|
|
|
|
|
|
|
Forfeited
|
(9,459)
|
|
—
|
|
(9,459)
|
|
52.86
|
|
Nonvested at March 31, 2021
|
387,473
|
|
—
|
|
387,473
|
|
$
|
62.39
|
|
Stock Based Compensation
Stock based compensation expense for stock based awards made to our employees pursuant to our equity plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in millions)
|
|
|
|
2021
|
2020
|
Cost of providing services
|
|
|
|
$
|
3
|
|
$
|
2
|
|
Sales and marketing
|
|
|
|
1
|
|
2
|
|
General and administrative
|
|
|
|
6
|
|
5
|
|
Systems development and programming costs
|
|
|
|
1
|
|
—
|
|
Total stock based compensation expense
|
|
|
|
$
|
11
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9. STOCKHOLDERS’ EQUITY
Common Stock
The following table shows the beginning and ending balances of our issued and outstanding common stock for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
2020
|
Shares issued and outstanding, beginning balance
|
|
|
|
66,456,663
|
|
69,065,491
|
|
Issuance of common stock from vested restricted stock units
|
|
|
|
215,958
|
|
173,629
|
|
Issuance of common stock from exercise of stock options
|
|
|
|
20,841
|
|
29,473
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
(744,001)
|
|
(747,417)
|
|
Awards effectively repurchased for required employee withholding taxes
|
|
|
|
(68,228)
|
|
(51,126)
|
|
Shares issued and outstanding, ending balance
|
|
|
|
65,881,233
|
|
68,470,050
|
|
Stock Repurchases
During the three months ended March 31, 2021, we repurchased 744,001 shares of common stock for approximately $60 million. We retire shares in the period they are acquired and account for the payment as a reduction to stockholders' equity. As of March 31, 2021, approximately $298 million remained available for further repurchases of our common stock under all authorizations from our board of directors under this program. This repurchase authorization has no expiration.
NOTE 10. INCOME TAXES
Our ETR was 25% for the three months ended March 31, 2021 and 2020.
During the three months ended March 31, 2021, there was a de minimis change in our unrecognized tax benefits. The total amount of gross interest and penalties accrued was immaterial. It is reasonably possible the amount of the unrecognized benefit could increase or decrease within the next twelve months for which an estimate of the impact on net income cannot be made.
We are subject to tax in U.S. federal and various state and local jurisdictions, as well as Canada. We are open to federal and significant state income tax examinations for tax years 2016 and subsequent years.
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. Oral arguments occurred on March 11, 2020. On November 5, 2020, the court of appeals affirmed the district court’s judgement in favor of TriNet. The April 5, 2021 deadline for the IRS to petition the Supreme Court for review passed without a petition. TriNet will pursue recovery of the judgment.
NOTE 11. EARNINGS PER SHARE (EPS)
The following table presents the computation of our basic and diluted EPS attributable to our common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
(in millions, except per share data)
|
2021
|
2020
|
|
|
|
Net income
|
$
|
101
|
|
$
|
91
|
|
|
|
|
Weighted average shares of common stock outstanding
|
66
|
|
68
|
|
|
|
|
Basic EPS
|
$
|
1.53
|
|
$
|
1.32
|
|
|
|
|
Net income
|
$
|
101
|
|
$
|
91
|
|
|
|
|
Weighted average shares of common stock outstanding
|
66
|
|
68
|
|
|
|
|
Dilutive effect of stock options and restricted stock units
|
1
|
|
1
|
|
|
|
|
Weighted average shares of common stock outstanding
|
67
|
|
69
|
|
|
|
|
Diluted EPS
|
$
|
1.51
|
|
$
|
1.31
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents excluded from income per diluted share because of their anti-dilutive effect
|
1
|
|
1
|
|
|
|
|
Legal Proceedings
For the information required in this section, refer to Note 7 in the condensed consolidated financial statements and related notes included in this Form 10-Q.
Risk Factors
There have been no material changes in our risk factors disclosed in Part 1, Item 1A, of our 2020 Form 10-K.
Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities
Not applicable.
(b) Use of Proceeds from Sales of Unregistered Securities
Not applicable.
(c) Issuer Purchases of Equity Securities
The following table provides information about our purchases of TriNet common stock during the quarter ended March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
Total Number of
Shares
Purchased (1)
|
|
Weighted Average Price
Paid Per Share
|
|
Total Number of
Shares
Purchased as Part of Publicly
Announced Plans (2)
|
|
|
|
Approximate Dollar Value ($ millions)
of Shares that May Yet be Purchased
Under the Plans (3)
|
January 1- January 31, 2021
|
349,764
|
|
|
$
|
80.78
|
|
|
335,791
|
|
|
|
|
$
|
331
|
|
February 1 - February 28, 2021
|
390,545
|
|
|
$
|
80.97
|
|
|
338,735
|
|
|
|
|
$
|
303
|
|
March 1 - March 31, 2021
|
71,920
|
|
|
$
|
81.59
|
|
|
69,475
|
|
|
|
|
$
|
298
|
|
Total
|
812,229
|
|
|
|
|
744,001
|
|
|
|
|
|
(1) In May 2014, our board of directors approved a stock repurchase program pursuant to which we are authorized to repurchase our common stock in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934. From time to time, our board of directors authorizes increases to our stock repurchase program and approved an aggregate total of $951 million as of March 31, 2021. The total remaining authorization for future stock repurchases under our stock repurchase program was $298 million as of March 31, 2021. The program does not have an expiration date.
(2) 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.
(3) We repurchased a total of approximately $60 million of our outstanding stock during the three months ended March 31, 2021.
We use our stock repurchase 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. We plan to use current cash and cash generated from ongoing operating activities to fund our stock repurchase program.
Defaults Upon Senior Securities
Not applicable.
Mine Safety Disclosures
Not applicable.
Other Information
Not applicable.
Exhibits
Incorporated herein by reference is a list of the exhibits contained in the Exhibit Index below.