NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
TriNet Group Inc. (TriNet, or the Company, we, our and us), a professional employer organization (PEO), provides comprehensive human resources (HR) solutions for small to midsize businesses (SMBs) under a co-employment model. These HR solutions include bundled services, such as multi-state payroll processing and tax administration, employee benefits programs, including health insurance and retirement plans, workers' compensation insurance and claims management, employment and benefit law compliance, and other services. Through the co-employment relationship, we are the employer of record for most administrative and regulatory purposes, including:
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•
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compensation through wages and salaries,
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•
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employer payroll-related tax payments,
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•
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employee payroll-related tax withholdings and payments,
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•
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employee benefit programs including health and life insurance, and others, and
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•
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workers' compensation coverage.
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Our clients are responsible for the day-to-day job responsibilities of the worksite employees (WSEs).
We operate in
one
reportable segment. All of our service revenues are generated from external clients. Less than
1%
of revenue is generated outside of the U.S.
Basis of Presentation
Our consolidated financial statements are prepared in conformity with generally accepted accounting principles in the United States of America (GAAP). All intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications and Impact of Recently Adopted Accounting Guidance
Certain prior year amounts have been reclassified to conform to current period presentation.
Balance sheet reclassifications are summarized in the tables below:
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December 31, 2017
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As previously
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Reclassification
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As
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(in millions)
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Reported
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Amounts
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Revised
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Assets
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Restricted cash, cash equivalents, and investments
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$
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15
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$
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1,265
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$
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1,280
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Accounts receivable, net
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—
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21
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21
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Unbilled revenue, net
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—
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|
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297
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297
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Prepaid income taxes
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5
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(5
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)
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—
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Prepaid expenses
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8
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|
30
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38
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Other current assets
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2
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17
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19
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Worksite employee related assets
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1,625
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(1,625
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)
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—
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Workers' compensation collateral receivable
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39
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(39
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)
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—
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Deferred and other long term income taxes
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2
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(2
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)
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—
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Other assets
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14
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41
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55
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December 31, 2017
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As previously
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Reclassification
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As
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(in millions)
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Reported
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Amounts
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Revised
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Liabilities and stockholders' equity
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Accounts payable & other current liabilities
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$
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45
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$
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14
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$
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59
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Accrued wages
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40
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289
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329
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Client deposits
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—
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52
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52
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Accrued health insurance costs, net
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—
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151
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151
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Accrued workers' compensation costs, net
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—
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67
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67
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Payroll tax liabilities and other payroll withholdings
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—
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1,034
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1,034
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Insurance premiums and other payables
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—
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25
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25
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Other current liabilities
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14
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(14
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)
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—
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Worksite employee related liabilities
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1,618
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(1,618
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)
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—
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Effects on the cash flow statement due to adoption of ASU 2016-18 and effects due to reclassifications are summarized below:
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Year ended December 31,
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2017
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2016
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(in millions)
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As previously reported
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Effect of ASU adoption
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Reclassified amounts
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As revised
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As previously reported
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Effect of ASU adoption
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Reclassified amounts
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As revised
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Operating activities
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Changes in operating assets and liabilities:
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Accounts receivable
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$
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—
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$
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—
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$
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(14
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)
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$
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(14
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)
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$
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—
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$
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—
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$
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—
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$
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—
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Restricted cash, cash equivalents, and investments
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(46
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)
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46
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—
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—
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(42
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)
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42
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—
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—
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Unbilled revenue
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—
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—
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(4
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)
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(4
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)
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—
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—
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(79
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)
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(79
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)
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Prepaid income taxes
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37
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—
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(37
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)
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—
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(38
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)
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—
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38
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—
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Prepaid expenses
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1
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—
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27
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28
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(2
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)
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—
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(43
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)
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(45
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)
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Workers' compensation collateral receivable
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(7
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)
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—
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7
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—
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(3
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)
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—
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3
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—
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Accounts payable
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22
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—
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1
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23
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9
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—
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2
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11
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Client deposits
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—
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—
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(4
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)
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(4
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)
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—
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—
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(2
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)
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(2
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)
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Accrued wages
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11
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—
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15
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26
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4
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—
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69
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73
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Accrued health insurance costs
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—
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—
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22
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22
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—
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—
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16
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16
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Accrued workers' compensation costs
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12
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—
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(3
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)
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9
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55
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—
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5
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60
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Payroll taxes payable and other payroll withholdings
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—
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—
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294
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294
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—
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—
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(175
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)
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(175
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)
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Worksite employee related assets
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(343
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)
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307
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36
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—
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92
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1
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(93
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)
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—
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Worksite employee related liabilities
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342
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—
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(342
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)
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—
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(94
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)
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—
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94
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—
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Other assets
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4
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—
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(15
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)
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(11
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)
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—
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—
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174
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174
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Other liabilities
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—
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—
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17
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17
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—
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—
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(9
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)
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(9
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)
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Net cash provided by operating activities
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253
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353
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—
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606
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149
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43
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—
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192
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Financing activities
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Proceeds from issuance of common stock on exercised options
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11
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—
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(11
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)
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—
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5
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—
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(5
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)
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—
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Proceeds from issuance of common stock on employee stock purchase plan
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5
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—
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(5
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)
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—
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4
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—
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(4
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)
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—
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Proceeds from issuance of common stock
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—
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—
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16
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16
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—
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—
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9
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9
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Net increase in cash and cash equivalents
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$
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152
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$
|
353
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$
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—
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$
|
505
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$
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18
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$
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43
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$
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—
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$
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61
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Interest income previously classified in other income (expense), net is now presented in a new line item. Depreciation expense and amortization of intangible assets previously reported separately, are now presented together as depreciation and amortization of intangible assets.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect certain reported amounts and related disclosures. Significant estimates include:
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liability for unpaid losses and loss adjustment expenses (accrued workers' compensation costs) related to workers' compensation and workers' compensation collateral receivable,
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accrued health insurance costs,
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•
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liability for insurance premiums payable,
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impairments of goodwill and other intangible assets,
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•
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income tax assets and liabilities, and
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•
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liability for legal contingencies.
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These estimates are based on historical experience and on various other assumptions that we believe to be reasonable from the facts available to us. Some of the assumptions are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial statements could be materially affected.
Revenue Recognition
On January 1, 2018, we adopted Accounting Standards Codification Topic 606 (ASC Topic 606) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while the comparative prior period amounts are not restated and continue to be reported in accordance with statements previously accounted for under Accounting Standards Codification Topic 605.
Upon adoption of ASC Topic 606, we recorded a
$2 million
cumulative effect adjustment to opening retained earnings as of January 1, 2018. Impacts from adoption of the new standard on our revenue recognition include:
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Our annual service contracts with our clients that are cancellable with 30 days' notice are initially considered 30-day contracts under the new standard;
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Professional service revenues are recognized on an output basis which results in recognition at the time payroll is processed;
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Our non-refundable set up fees are no longer deferred but accounted for as part of our transaction price and are allocated among professional service revenues and insurance services revenues; and
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The majority of sales commissions related to onboarding new clients that were previously expensed are capitalized as contract assets and amortized over the estimated client life.
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Revenues are recognized when control of the promised services are transferred to our clients, in an amount that reflects the consideration that we expect to receive in exchange for services. We generate all of our revenue from contracts with clients. We disaggregate revenues into professional services revenues and insurance services revenues as reported on the consolidated statements of income and comprehensive income. Generally, both the client and the Company may terminate the contract without penalty by providing a 30-day notice.
Performance Obligations
At contract inception, we assess the services promised in our contracts with clients and identify a performance obligation for each distinct promise to transfer to the client a service or bundle of services. We determined that the following distinct services represent separate performance obligations:
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Payroll and payroll tax processing,
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Health benefits services, and
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Workers’ compensation services.
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Payroll and payroll tax processing performance obligations include services to process payroll and payroll tax-related transactions on behalf of our clients. Revenues associated with this performance obligation are reported as professional service revenues and recognized using an output method in which the control of the promised services is considered transferred when a client's payroll is processed by us and WSEs are paid. Professional service revenues are stated net of the gross payroll and payroll tax amounts funded by our clients. Although we assume the responsibilities to process and remit the payroll and payroll related obligations, we do not assume employment-related responsibilities such as determining the amount of the payroll and related payroll obligations. As a result, we are the agent in this arrangement for revenue recognition purposes.
Health benefits and workers' compensation services include performance obligations to provide TriNet-sponsored health benefits and workers' compensation insurance coverage through insurance policies provided by third-party insurance carriers and settle high deductible amounts on those policies. Revenues associated with these performance obligations are reported as insurance services revenues and are recognized using the output method over the period of time that the client and WSEs are covered under TriNet-sponsored insurance policies.
We control the selection of health benefits and workers' compensation coverage made available. As a result, we are the principal in this arrangement for revenue recognition purposes and insurance services revenues are reported gross.
We generally charge new customers a nominal upfront non-refundable fee to recover our costs to set them up on our TriNet platform for payroll processing and other administrative services, such as benefit enrollments. These fees are accounted for as part of our transaction price and are allocated among the performance obligations based on their relative standalone selling prices.
Variable Consideration and Pricing Allocation
Our contracts with customers generally do not include any variable consideration. However, from time to time, we may offer incentive credits to our clients considered to be variable consideration including incentive credits issued related to contract renewals. Incentive credits are recorded as a reduction to revenue as part of the transaction price at contract inception when there is a basis to reasonably estimate the amount of the incentive credit and we reduce the full amount of the credit only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. These incentive credits are allocated among the performance obligations based on their relative standalone selling prices.
We allocate the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised services underlying each performance obligation. The transaction price for the payroll and payroll tax processing performance obligations is determined upon establishment of the contract that contains the final terms of the arrangement, including the description and price of each service purchased. The estimated service fee is calculated based on observable inputs and include the following key assumptions: target profit margin, pricing strategies including the mix of services purchased and competitive factors, and client and industry specifics.
The transaction price for health benefits insurance and worker’s compensation insurance performance obligations is determined during the new client on-boarding and enrollment processes based on the types of benefits coverage the clients and WSEs have elected and the applicable risk profile of the client. We estimate our service fees based on actuarial forecasts of our expected insurance premiums and claim costs, and amounts to cover our costs to administer these programs.
We require our clients to prefund payroll and related taxes and other withholding liabilities before payroll is processed or due for payment. Under the provision of our contracts with clients, we generally will process the payment of a client’s payroll only when the client successfully funds the amount required. As a result, there is no financing arrangement for the contracts, however, certain contracts to provide payroll and payroll tax processing services permit the client to pay certain payroll tax components ratably over a 12-month period rather than as payroll tax is determined on wages paid, which may be considered a significant financing arrangement under ASC Topic 606. However, as the period between our performing the service under the contract and when the client pays for the service is less than one year, we have elected, as a practical expedient, not to adjust the transaction price.
Contract Costs
We recognize as deferred commission expense the incremental cost to obtain a contract with a client for certain components under our commission plans for sales representatives and channel partners that are directly related to new customers onboarded as we expect to recover these costs through future service fees. Such assets will be amortized over the estimated average client tenure. These commissions are earned on the basis of the revenue generated from payroll and payroll tax processing performance obligations. When the commission on a renewal contract is not commensurate with the commission on the initial contract, such incremental commission will be capitalized and amortized over the estimated average client tenure. If the commission for both initial contract and renewal contracts are commensurate, such commissions are expensed in the contract period. When the amortization period is less than one year, we apply practical expedient to expense sales commissions in sales and marketing expenses in the period incurred. The below table summarizes the amounts capitalized and amortized during the
year ended
December 31, 2018
:
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Year Ended December 31, 2018
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(in millions)
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Capitalized
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Amortized
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Deferred commission costs
|
$
|
33
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|
$
|
2
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Certain commission plans will pay a commission on estimated professional service revenues over the first 12 months of the contract with clients. The portion of commission paid in excess of the actual commission earned in that period is recorded as prepaid commission. When the prepaid commission is considered earned, it is classified as a deferred commission expense and subject to amortization. We do not have material contract liabilities as of
December 31, 2018
.
Insurance Costs
Our fully insured insurance plans are provided by third-party insurance carriers under risk-based or guaranteed-cost insurance policies. Under risk-based policies, we agree to reimburse our carriers for any claims paid within an agreed-upon per-person deductible layer up to a maximum aggregate exposure limit per policy. These deductible dollar limits and maximum limits vary by carrier and year. Under guaranteed-cost policies, our carriers establish the premiums and we are not responsible for any deductible.
Insurance costs include insurance premiums for coverage provided by insurance carriers, reimbursement of claims payments made by insurance carriers or third-party administrators, and changes in accrued costs related to our workers' compensation and health benefit insurance.
At policy inception, annual workers' compensation premiums are estimated by the insurance carriers based on projected wages over the duration of the policy period and the risk categories of the WSEs. As actual wages are realized, premium expense recorded may differ from estimated premium expense, creating an asset or liability throughout the policy year. Such asset or liability is reported on our consolidated balance sheets as prepaid expenses or insurance premiums and other payables, respectively.
Accrued Workers' Compensation Costs
We have secured fully insured workers' compensation insurance policies with insurance carriers to administer and pay claims for our clients and WSEs. We are responsible for reimbursing the insurance carriers for losses up to
$1 million
per claim occurrence (deductible layer). Insurance carriers are responsible for administering and paying claims. We are responsible for reimbursing each carrier up to a deductible limit per occurrence. Accrued workers' compensation costs represent our liability for unpaid losses and loss adjustment expenses. These accrued costs are established to provide for the estimated ultimate costs of paying claims within the deductible layer in accordance with worker's compensation insurance policies. These accrued costs include estimates for reported and incurred but not reported (IBNR) losses, accrued costs on reported claims, and expenses associated with processing and settling the claims. In establishing these accrued costs, we use an independent actuary to provide an estimate of undiscounted future cash payments that would be made to settle the claims based upon:
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TriNet's historical loss experience, exposure data, and industry loss experience,
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•
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inputs including WSE job responsibilities and location,
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•
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historical frequency and severity of workers' compensation claims,
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•
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an estimate of future cost trends to establish expected loss ratios for subsequent accident years,
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•
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expected loss ratios for the latest accident year or prior accident years, adjusted for the loss trend, the effect of rate changes and other quantifiable factors, and
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•
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loss development factors to project the reported losses for each accident year to an ultimate basis.
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We assess the accrued workers' compensation costs on a quarterly basis. For each reporting period, changes in the actuarial methods and assumptions resulting from changes in actual claims experience and other trends are incorporated into the accrued workers' compensation costs. Adjustments to previously established accrued costs estimate are reflected in the results of operations for the period in which the adjustment is identified. Such adjustments could be significant, reflecting any variety of new adverse or favorable trends. Accordingly, final claim settlements may vary materially from the present estimates, particularly when those payments may not occur until well into the future. In our experience, plan years related to workers' compensation programs may take
ten
years or more to be settled.
We do not discount accrued workers' compensation costs. Claim costs expected to be paid within one year are recorded as accrued workers' compensation costs. Claim costs expected to be paid beyond one year are included in accrued workers' compensation costs, less current portion.
We have collateral agreements with various insurance carriers where either we retain custody of funds in trust accounts which we record as restricted cash and cash equivalents, or remit funds to carriers. Collateral whether held by us, or the carriers, is used to settle our insurance and claim deductible obligations to them. Collateral requirements are established at the policy year and are re-assessed by each carrier annually. Based on the results of each assessment, additional collateral may be required for or paid to the carrier or collateral funds may be released or returned to the Company. Collateral paid to carriers, by agreement permits net settlement of obligations against collateral held, which we record net of our accrued costs (Carrier Collateral Offset). We offset Carrier Collateral Offset against our obligation due within the next 12 months before applying against long term obligations. Collateral balances in excess of accrued costs are recorded as accounts receivable or in other assets.
Accrued Health Insurance Costs
We sponsor and administer a number of fully insured, risk-based employee benefit plans, including group health, dental, and vision as an employer plan sponsor under section 3(5) of the ERISA. In
2018
, 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 independent 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 the subsequent period. These prepaid balances by agreement permit net settlement of obligations and offset the accrued health insurance costs or when the prepaid is in excess of our recorded liability the net asset position is included in prepaid expenses. As of
December 31, 2018
and
2017
, prepayments included in accrued health insurance costs were
$33 million
and
$19 million
, respectively.
Under certain policies, based on plan performance, we may be entitled to receive refunds of premiums which we recognize in accordance with the policy terms. We estimate these refunds based on premium and claims data and record as a reduction in the insurance costs on the consolidated statements of income and comprehensive income and prepaid expenses on the consolidated balance sheets. As of
December 31, 2018
, there were no prepaid insurance premiums. As of
December 31, 2017
, there was
$11 million
included within prepaid expenses as prepaid insurance premiums.
Cash and Cash Equivalents
Cash and cash equivalents include bank deposits and short-term, highly liquid investments. Investments with original maturity dates of three months or less are considered cash equivalents.
Restricted Cash, Cash Equivalents and Investments
Restricted cash, cash equivalents and investments presented on our consolidated balance sheets include:
|
|
•
|
cash and cash equivalents in trust accounts functioning as security deposits for our insurance carriers,
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|
•
|
payroll funds collected representing cash collected in advance from clients which we designate as restricted for the purpose of funding WSE payroll and payroll taxes and other payroll related liabilities, and
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•
|
amounts held in trust for current and future premium and claim obligations with our insurance carriers, which amounts are held in trust according to the terms of the relevant insurance policies and by the local insurance regulations of the jurisdictions in which the policies are in force.
|
Investments
Our investments are primarily classified as available-for-sale and are carried at estimated fair value.
Unrealized gains and losses are reported as a component of accumulated other comprehensive income, net of deferred income taxes. The amortized cost of debt investments is adjusted for amortization of premiums and accretion of discounts from the date of purchase to the earliest call date for premiums or the maturity date for discounts. Such amortization is included in interest income as an addition to or deduction from the coupon interest earned on the investments. We use the specific identification method to determine the realized gains and losses on the sale of available-for-sale securities. Realized gains and losses are included in interest income in the accompanying consolidated statements of income and comprehensive income.
We assess our investments for an other-than-temporary impairment loss due to a decline in fair value or other market conditions. We review several factors to determine whether a loss is other than temporary, such as the length and extent of the fair value decline, the financial condition and near-term prospects of the issuer and whether we have the intent to sell or will more likely than not be required to sell before the securities' anticipated recovery, which may be at maturity. If management determines that a security is impaired under these circumstances, the impairment recognized in earnings is measured as the entire difference between the amortized cost and the then-current fair value.
We have investments within our unrestricted and our restricted accounts. Unrestricted investments are recorded on the balance sheet as current or noncurrent based upon the remaining time to maturity, and investments subject to restrictions are classified as current or noncurrent based on the expected payout of the related liability.
Fair Value of Financial Instruments
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
Our financial assets recorded at fair value on a recurring basis are comprised of cash equivalents, available-for-sale marketable securities and certificates of deposits. We measure certain financial assets at fair value for disclosure purposes, as well as on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. Our other current financial assets and liabilities have fair values that approximate their carrying value due to their short-term nature.
Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market to measure fair value, summarized as follows:
|
|
•
|
Level 1—observable inputs for identical assets or liabilities, such as quoted prices in active markets,
|
|
|
•
|
Level 2—inputs other than the quoted prices in active markets that are observable either directly or indirectly,
|
|
|
•
|
Level 3—unobservable inputs in which there is little or no market data, which requires that we develop our own assumptions.
|
The fair value hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. We classify our cash equivalents, debt securities and debt payable in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.
Unbilled Revenue
We recognize WSE payroll and payroll tax liabilities in the period in which the WSEs perform work. When clients' pay periods cross reporting periods, we accrue the portion of the unpaid WSE payroll where we assume, under state regulations, the obligation for the payment of wages and the corresponding payroll tax liabilities associated with the work performed prior to period-end. These estimated payroll and payroll tax liabilities are recorded in accrued wages. The associated receivables, including estimated revenues, offset by advance collections from clients, are recorded as unbilled revenue. As of
December 31, 2018
and
2017
, advance collections included in unbilled revenue were
$23 million
and
$12 million
respectively.
Accounts Receivable
Our accounts receivable represents outstanding gross billings to clients, net of an allowance for doubtful accounts. We require our clients to prefund payroll and related liabilities before payroll is processed or due for payment. If a client fails to fund payroll or misses the funding cut-off, at our sole discretion, we may pay the payroll and the resulting unfunded payroll is recognized as accounts receivable. When client payment is received in advance of our performance under the contract, such amount is recorded as client deposits. We establish an allowance for doubtful accounts based on historical experience, the age of the accounts receivable balances, credit quality of clients, current economic conditions and other factors that may affect clients’ ability to pay, and charge-off amounts when they are deemed uncollectible.
Property and Equipment
We record property and equipment at historical cost and compute depreciation using the straight-line method over the estimated useful lives of the assets or the lease terms, generally
three
to
five
years for software and office equipment,
five
to
seven
years for furniture and fixtures, and the shorter of the asset life or the remaining lease term for leasehold improvements. We expense the cost of maintenance and repairs as incurred and capitalize leasehold improvements.
We capitalize internal and external costs incurred to develop internal-use computer software during the application development stage. Application development stage costs include license fee paid to third-parties for software use, software configuration, coding, and installation. Capitalized costs are amortized on a straight-line basis over the estimated useful life, typically ranging from
three
to
five
years, commencing when the software is placed into service. We expense costs incurred during the preliminary project stage, as well as general and administrative, overhead, maintenance and training costs, and costs that do not add functionality to existing systems. For the years ended
December 31, 2018
,
2017
and
2016
, internally developed software costs capitalized were
$33 million
,
$29 million
and
$21 million
respectively.
We periodically assess the likelihood of unsuccessful completion of projects in progress, as well as monitor events or changes in circumstances, which might suggest that impairment has occurred and recoverability should be evaluated. An impairment loss is recognized if the carrying amount of the asset is not recoverable and exceeds the future net cash flows expected to be generated by the asset.
Goodwill and Other Intangible Assets
Our goodwill and identifiable intangible assets with indefinite useful lives are not amortized, but are tested for impairment on an annual basis or when an event occurs or circumstances change in a way to indicate that there has been a potential decline in the fair value of the reporting unit. Goodwill impairment is determined by comparing the estimated fair value of the reporting unit to its carrying amount, including goodwill. All goodwill is associated with
one
reporting unit within our one reportable segment.
Annually, we perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit has declined below carrying value. This assessment considers various financial, macroeconomic, industry, and reporting unit specific qualitative factors. We perform our annual impairment testing in the fourth quarter. Based on the results of our reviews,
no
impairment loss was recognized in the results of operations for the years ended
December 31, 2018
,
2017
and
2016
.
Intangible assets with finite useful lives are amortized over their respective estimated useful lives ranging from
two
to
ten
years using either the straight-line method or an accelerated method. Intangible assets are reviewed for indicators of impairment at least annually and evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on the results of our reviews,
no
impairment loss was recognized in the results of operations for the years ended
December 31, 2018
,
2017
and
2016
.
Impairment of Long-Lived Assets
We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is considered impaired if the carrying amount exceeds the undiscounted future net cash flows the asset is expected to generate. An impairment charge is recognized for the amount by which the carrying amount of the assets exceeds its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less selling costs.
Advertising Costs
We expense the costs of producing advertisements at the time production occurs, and expense the cost of running advertisements in the period in which the advertising space or airtime is used as sales and marketing expense. Advertising costs were
$17 million
,
$8 million
, and
$6 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Stock-Based Compensation
Our stock-based awards to employees include time-based and performance-based restricted stock units and restricted stock awards, stock options and an employee stock purchase plan. Compensation expense associated with restricted stock units and restricted stock awards is based on the fair value of common stock on the date of grant. Compensation expense associated with stock options and employee stock purchase plan are based on the estimated grant date fair value method using the Black-Scholes option pricing model. Expense is recognized using a straight-line amortization method over the respective vesting period for awards that are ultimately expected to vest, with adjustments to expense recognized in the period in which forfeitures occur.
Income Taxes
We account for our provision for income taxes using the asset and liability method, under which we recognize income taxes payable or refundable for current year and deferred tax assets and liabilities for future tax effect of events that have been recognized in our financial statements or tax returns. We measure our current and deferred tax assets and liabilities based on provision of enacted tax laws of those jurisdictions in which we operate. The effect of changes in tax laws and regulations, or interpretations, is recognized in our consolidated financial statements in the period that includes the enactment date.
We recognize deferred tax assets and liabilities based on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes, as well as the expected benefits of using net operating loss and other carryforwards. We are required to establish a valuation allowance when it is determined more likely than not that the deferred tax assets will not be realized. Provision for income taxes may change when estimates used in determining valuation allowances change or when receipt of new information indicates the need for adjustment in valuation allowances. Changes in valuation allowances are reflected as a component of provision for income taxes in the period the change is enacted.
We recognize a reserve for uncertain tax positions taken or expected to be taken in a tax return when it is concluded that tax positions are not more likely than not to be sustained upon examination by taxing authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the positions. Assumptions, judgment and the use of estimates are required in determining if the more likely than not standard has been met when developing the provision for income taxes and in determining the expected benefit. The tax benefits of the position recognized in the financial statements are then measured based on the largest amount of benefit that is greater than 50% likely to be realized upon settlement with a taxing authority. Unrecognized tax benefits due to tax uncertainties that do not meet the minimum probability threshold are included as other liabilities and are charged to earnings in the period that such determination is made. We recognize interest and penalties related to uncertain tax positions as a component of income tax expense. Accrued interest and penalties are included in other liabilities on the consolidated balance sheet.
Concentrations of Credit Risk
Financial instruments subject to concentrations of credit risk include cash, cash equivalents and investments (unrestricted and restricted), accounts receivable, and amounts due from insurance carriers. We maintain these financial assets principally in domestic financial institutions. We perform periodic evaluations of the relative credit standing of these institutions. Our exposure to credit risk in the event of default by the financial institutions holding these funds is limited to amounts currently held by the institution in excess of insured amounts.
Under the terms of professional services agreements, clients agree to maintain sufficient funds or other satisfactory credit at all times to cover the cost of their current payroll, all accrued paid time off, vacation or sick leave balances, and other vested wage and benefit obligations for all their work site employees. We generally require payment from our clients on or before the applicable payroll date.
For certain clients, we require an indemnity guarantee payment (IGP) supported by a letter of credit, bond, or a certificate of deposit from certain financial institutions. The IGP typically equals the total payroll and service fee for one average payroll period.
As of
December 31, 2018
,
no
client accounted for over
10%
of total accounts receivable.
One
client accounted for more than
47%
of accounts receivable as of
December 31, 2017
.
No
client accounted for more than
10%
of total revenues in the years ended
December 31, 2018
,
2017
and
2016
. Bad debt expense, net of recoveries was
$1 million
, for each of the years ended
December 31, 2018
,
2017
and
2016
.
Recent Accounting Pronouncements
Recently adopted accounting guidance
Revenue Recognition -
In May 2014, the FASB issued ASU 2014-09-
Revenue from Contracts with Customers
, which replaces most existing revenue recognition guidance under GAAP. The core principle of the guidance is that an entity should recognize revenue for the transfer of promised goods or services to customers that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard provides a five-step analysis of transactions to determine when and how revenue is recognized.
We have adopted the new standard effective January 1, 2018 using the modified retrospective method. For further discussion of our adoption of ASC Topic 606, including our operating results under the new standard, see Revenue Recognition section above.
The impact from the adoption of ASC Topic 606 to our consolidated income statements and balance sheets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
(in millions)
|
As reported
|
Balance Using Previous Standard
|
Increase (Decrease)
|
Balance sheet
|
|
|
|
Assets
|
|
|
|
Cash and cash equivalents
|
$
|
228
|
|
$
|
235
|
|
$
|
(7
|
)
|
Restricted cash, cash equivalents and investments, current
|
942
|
|
935
|
|
7
|
|
Unbilled revenue, net
|
304
|
|
311
|
|
(7
|
)
|
Prepaid expenses
|
48
|
|
44
|
|
4
|
|
Other current assets
|
59
|
|
49
|
|
10
|
|
Other assets
|
78
|
|
67
|
|
11
|
|
Liabilities
|
|
|
|
Accounts payable and other current liabilities
|
$
|
45
|
|
$
|
48
|
|
$
|
3
|
|
Deferred taxes
|
68
|
|
67
|
|
$
|
(1
|
)
|
Other non-current liabilities
|
18
|
|
22
|
|
$
|
4
|
|
Equity
|
|
|
|
Accumulated deficit
|
$
|
(266
|
)
|
$
|
(290
|
)
|
$
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
(in millions, except per share data)
|
As Reported
|
Balance Using Previous Standard
|
Increase (Decrease)
|
Income statement
|
|
|
|
Revenue
|
|
|
|
Professional service revenues
|
$
|
487
|
|
$
|
485
|
|
$
|
2
|
|
Total revenues
|
3,503
|
|
3,501
|
|
2
|
|
Expense
|
|
|
|
Sales and marketing expense
|
|
|
|
Commissions expense
|
22
|
|
53
|
|
(31
|
)
|
Total expense
|
3,252
|
|
3,283
|
|
(31
|
)
|
Income before provision for income taxes
|
241
|
|
208
|
|
33
|
|
Income tax expense
|
49
|
|
40
|
|
9
|
|
Net income
|
$
|
192
|
|
$
|
168
|
|
$
|
24
|
|
Basic earnings per share
|
$
|
2.72
|
|
$
|
2.40
|
|
$
|
0.32
|
|
Diluted earnings per share
|
$
|
2.65
|
|
$
|
2.34
|
|
$
|
0.31
|
|
Statement of Cash Flows -
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic
230): Restricted Cash
. ASU 2016-18 addresses diversity in practice from entities classifying and presenting transfers between cash and restricted cash as operating, investing or financing activities or as a combination of those activities in the statement of cash flows. The ASU requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, transfers between such categories are no longer be presented in the statement of cash flows. We adopted ASU 2016-18 on January 1, 2018 using the retrospective method. See the effects of this adoption under the Impact of Reclassifications and Recently Adopted Accounting Guidance section above.
Recent issued accounting pronouncements
Lease arrangements -
In February 2016, the FASB issued ASU 2016-02-
Leases
(Topic 842) and subsequent amendments to the initial guidance (collectively, ASC Topic 842) to supersede existing guidance on accounting for leases in
ASC 840, Leases
(ASC 840). ASC Topic 842 requires us to recognize on our balance sheet a lease liability representing the present value of future lease payments and a right-of-use asset representing our right to use, or control the use of, a specified asset for the lease term for any operating lease with a term greater than one year. This standard is effective for annual and interim reporting periods beginning after December 15, 2018. Our leases primarily consist of leases for office space. We have an immaterial amount of capitalized leases.
We will adopt the new standard effective January 1, 2019 using the optional transition method, under which we will recognize the cumulative effects of initially applying the standard as an adjustment to the opening balance of retained earnings on January 1, 2019 with unchanged comparative periods.
Additionally, we will elect the practical expedient approach and will not reassess whether any contracts that existed prior to adoption have or contain leases or the classification of our existing leases. We will continue to classify initial indirect costs of existing leases as part of our existing leases and not separate any non-lease components.
On the date of adoption, the consolidated balance sheet will be adjusted by the following amounts:
|
|
|
|
|
(in millions)
|
Increase Under New Guidance
|
Recognizing right-of-use asset
|
|
Long-term right-of-use assets
|
$
|
53
|
|
Recognizing lease liability and derecognizing deferred rent
|
|
Accounts payable and other current liabilities
|
$
|
16
|
|
Other non-current liabilities
|
37
|
|
The impact on the consolidated statements of income is expected to be immaterial.
In addition, ASC Topic 842 requires significant new disclosures, including significant judgments regarding our leasing activities. We have completed our implementation, including a review of the processes and controls to ensure we meet the reporting and disclosure requirements.
NOTE 2. CASH, CASH EQUIVALENTS AND INVESTMENTS
Under the terms of the agreements with certain of our workers' compensation and health benefit insurance carriers, we are required to maintain collateral in trust accounts for the benefit of specified insurance carriers and to reimburse the carriers’ claim payments within our deductible layer. We invest a portion of the collateral amounts in marketable securities. We report the current and noncurrent portions of these trust accounts as restricted cash, cash equivalents and investments on the consolidated balance sheets.
We require our clients to prefund their payroll and related taxes and other withholding liabilities before payroll is processed or due for payment. This prefund is included in restricted cash, cash equivalents and investments as payroll funds collected, which is designated to pay pending payrolls, payroll tax liabilities and other payroll withholdings.
We also invest available corporate funds, primarily in fixed income securities which meet the requirements of our corporate investment policy and are classified as available for sale (AFS).
Our total cash, cash equivalents and investments are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
December 31, 2017
|
(in millions)
|
Cash and cash equivalents
|
Available-for-sale marketable securities
|
Certificate
of
deposits
|
Total
|
Cash and cash equivalents
|
Available-for-sale marketable securities
|
Certificate
of
deposits
|
Total
|
Cash and cash equivalents
|
$
|
228
|
|
$
|
—
|
|
$
|
—
|
|
$
|
228
|
|
$
|
336
|
|
$
|
—
|
|
$
|
—
|
|
$
|
336
|
|
Investments
|
—
|
|
54
|
|
—
|
|
54
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Restricted cash, cash equivalents and investments
|
|
|
|
|
|
|
|
|
Insurance carriers security deposits
|
15
|
|
—
|
|
—
|
|
15
|
|
15
|
|
—
|
|
—
|
|
15
|
|
Payroll funds collected
|
783
|
|
—
|
|
—
|
|
783
|
|
1,095
|
|
—
|
|
—
|
|
1,095
|
|
Collateral for health benefits claims
|
75
|
|
—
|
|
—
|
|
75
|
|
69
|
|
—
|
|
—
|
|
69
|
|
Collateral for workers' compensation claims
|
66
|
|
1
|
|
—
|
|
67
|
|
98
|
|
1
|
|
—
|
|
99
|
|
Collateral to secure standby letter of credit
|
—
|
|
—
|
|
2
|
|
2
|
|
—
|
|
—
|
|
2
|
|
2
|
|
Total restricted cash, cash equivalents and investments, current
|
939
|
|
1
|
|
2
|
|
942
|
|
1,277
|
|
1
|
|
2
|
|
1,280
|
|
Investments, noncurrent
|
—
|
|
135
|
|
—
|
|
135
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Restricted cash, cash equivalents and investments, noncurrent
|
|
|
|
|
|
|
|
|
Collateral for workers' compensation claims
|
182
|
|
5
|
|
—
|
|
187
|
|
125
|
|
37
|
|
—
|
|
162
|
|
Total
|
$
|
1,349
|
|
$
|
195
|
|
$
|
2
|
|
$
|
1,546
|
|
$
|
1,738
|
|
$
|
38
|
|
$
|
2
|
|
$
|
1,778
|
|
NOTE 3. INVESTMENTS
All of our investment securities that have a contractual maturity date greater than three months are classified as AFS. The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of our investments as of
December 31, 2018
and
December 31, 2017
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
(in millions)
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
Asset-backed securities
|
$
|
33
|
|
$
|
—
|
|
$
|
—
|
|
$
|
33
|
|
Corporate bonds
|
99
|
|
—
|
|
—
|
|
99
|
|
U.S. government agencies and government-sponsored agencies
|
7
|
|
—
|
|
—
|
|
7
|
|
U.S. treasuries
|
46
|
|
—
|
|
—
|
|
46
|
|
Exchange traded fund
|
1
|
|
—
|
|
—
|
|
1
|
|
Other debt securities
|
9
|
|
—
|
|
—
|
|
9
|
|
Total
|
$
|
195
|
|
$
|
—
|
|
$
|
—
|
|
$
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
(in millions)
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
U.S. treasuries
|
$
|
37
|
|
$
|
—
|
|
$
|
—
|
|
$
|
37
|
|
Exchange traded fund
|
1
|
|
—
|
|
—
|
|
1
|
|
Total
|
$
|
38
|
|
$
|
—
|
|
$
|
—
|
|
$
|
38
|
|
Investments in a continuous unrealized loss position as of
December 31, 2018
and
December 31, 2017
are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Less than 12 months
|
12 months or more
|
Total
|
(in millions)
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
Asset-backed securities
|
$
|
25
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
25
|
|
$
|
—
|
|
Corporate bonds
|
84
|
|
—
|
|
—
|
|
—
|
|
84
|
|
—
|
|
U.S. government agencies and government-sponsored agencies
|
4
|
|
—
|
|
—
|
|
—
|
|
4
|
|
—
|
|
U.S. treasuries
|
21
|
|
—
|
|
—
|
|
—
|
|
21
|
|
—
|
|
Other debt securities
|
7
|
|
—
|
|
—
|
|
—
|
|
7
|
|
—
|
|
Total
|
$
|
141
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
141
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Less than 12 months
|
12 months or more
|
Total
|
(in millions)
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
U.S. treasuries
|
$
|
5
|
|
$
|
—
|
|
$
|
24
|
|
$
|
—
|
|
$
|
29
|
|
$
|
—
|
|
Total
|
$
|
5
|
|
$
|
—
|
|
$
|
24
|
|
$
|
—
|
|
$
|
29
|
|
$
|
—
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
(in millions)
|
One year or less
|
Over One Year Through Five Years
|
Over Five Years Through Ten Years
|
Over Ten Years
|
Fair Value
|
Asset-backed securities
|
$
|
4
|
|
$
|
26
|
|
$
|
3
|
|
$
|
—
|
|
$
|
33
|
|
Corporate bonds
|
42
|
|
57
|
|
—
|
|
—
|
|
99
|
|
U.S. government agencies and government-sponsored agencies
|
1
|
|
2
|
|
—
|
|
4
|
|
7
|
|
U.S. treasuries
|
12
|
|
34
|
|
—
|
|
—
|
|
46
|
|
Other debt securities
|
—
|
|
1
|
|
—
|
|
8
|
|
9
|
|
Total
|
$
|
59
|
|
$
|
120
|
|
$
|
3
|
|
$
|
12
|
|
$
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
(in millions)
|
One year or less
|
Over One Year Through Five Years
|
Over Five Years Through Ten Years
|
Over Ten Years
|
Fair Value
|
U.S. treasuries
|
$
|
—
|
|
$
|
37
|
|
$
|
—
|
|
$
|
—
|
|
$
|
37
|
|
Total
|
$
|
—
|
|
$
|
37
|
|
$
|
—
|
|
$
|
—
|
|
$
|
37
|
|
The gross proceeds from sales and maturities of AFS securities for the years ended December 31, 2018, 2017 and 2016 are shown below. We had immaterial gross realized gains and losses from sales of investments for the years ended
December 31, 2018
,
2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2018
|
2017
|
2016
|
Gross proceeds from sales
|
$
|
54
|
|
$
|
—
|
|
$
|
—
|
|
Gross proceeds from maturities
|
47
|
|
14
|
|
28
|
|
Total
|
$
|
101
|
|
$
|
14
|
|
$
|
28
|
|
Our asset-backed securities include auto loan/lease, credit card, and equipment leases with investment-grade ratings.
Our corporate bonds include investment-grade debt securities from a wide variety of issuers, industries, and sectors.
Our U.S. government agencies and government-sponsored agency securities primarily include mortgage-backed securities consisting of Federal Home Loan Mortgage Corporation and Federal National Mortgage Association securities with investment-grade ratings.
Our other debt securities primarily include mortgage-backed securities with investment-grade ratings issued by institutions without federal backing.
NOTE 4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following:
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2018
|
December 31, 2017
|
Software
|
$
|
144
|
|
$
|
114
|
|
Office equipment, including data processing equipment
|
27
|
|
23
|
|
Leasehold improvements
|
21
|
|
15
|
|
Furniture, fixtures, and equipment
|
15
|
|
15
|
|
Projects in progress
|
2
|
|
7
|
|
Total
|
209
|
|
174
|
|
Less: Accumulated depreciation
|
(130
|
)
|
(104
|
)
|
Property and equipment, net
|
$
|
79
|
|
$
|
70
|
|
Depreciation expense for the years ended December 31, 2018, 2017 and 2016 was
$35 million
,
$28 million
and
$19 million
, respectively. Projects in progress consist primarily of development costs for internally developed software, which we capitalize and amortize on a straight-line basis over the estimated useful life. We recognized depreciation expense for capitalized internally developed software of
$24 million
,
$17 million
, and
$10 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
The following summarizes goodwill and other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
December 31, 2017
|
(in millions)
|
Weighted Average Amortization Period
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net
Carrying Amount
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net Carrying Amount
|
Goodwill
|
|
$
|
289
|
|
$
|
—
|
|
$
|
289
|
|
$
|
289
|
|
$
|
—
|
|
$
|
289
|
|
Amortizable intangibles:
|
|
|
|
|
|
|
|
Customer contracts
|
10 years
|
90
|
|
(71
|
)
|
19
|
|
210
|
|
(187
|
)
|
23
|
|
Developed technology
|
5 years
|
5
|
|
(3
|
)
|
2
|
|
6
|
|
(3
|
)
|
3
|
|
Total
|
|
$
|
95
|
|
$
|
(74
|
)
|
$
|
21
|
|
$
|
216
|
|
$
|
(190
|
)
|
$
|
26
|
|
Amortization of intangible assets during the years ended
December 31, 2018
,
2017
and
2016
was
$5 million
,
$5 million
and
$16 million
, respectively. As of December 31, 2018, we had
$120 million
of fully amortized customer contracts and
$1 million
of fully amortized developed technology. We evaluate the remaining useful life of intangible assets annually to determine whether events and circumstances warrant a revision to the estimated remaining useful life.
Expense related to intangibles amortization in future periods as of
December 31, 2018
is expected to be as follows:
|
|
|
|
|
Year ending December 31:
|
Amount
(in millions)
|
2019
|
$
|
5
|
|
2020
|
5
|
|
2021
|
4
|
|
2022
|
4
|
|
2023
|
3
|
|
Total
|
$
|
21
|
|
NOTE 6. ACCRUED WORKERS' COMPENSATION COSTS
The following table summarizes the accrued workers’ compensation cost activity for the years ended December 31, 2018, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2018
|
2017
|
2016
|
Total accrued costs, beginning of year
|
$
|
255
|
|
$
|
255
|
|
$
|
190
|
|
Incurred
|
|
|
|
Current year
|
80
|
|
98
|
|
113
|
|
Prior years
|
(28
|
)
|
(6
|
)
|
28
|
|
Total incurred
|
52
|
|
92
|
|
141
|
|
Paid
|
|
|
|
Current year
|
(12
|
)
|
(14
|
)
|
(14
|
)
|
Prior years
|
(57
|
)
|
(78
|
)
|
(62
|
)
|
Total paid
|
(69
|
)
|
(92
|
)
|
(76
|
)
|
Total accrued costs, end of year
|
$
|
238
|
|
$
|
255
|
|
$
|
255
|
|
The following table summarizes workers' compensation liabilities on the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
December 31, 2018
|
December 31, 2017
|
Total accrued costs, end of year
|
|
$
|
238
|
|
$
|
255
|
|
Collateral paid to carriers and offset against accrued costs
|
|
(13
|
)
|
(23
|
)
|
Total accrued costs, net of carrier collateral offset
|
|
$
|
225
|
|
$
|
232
|
|
|
|
|
|
Payable in less than 1 year
(net of collateral paid to carriers of $3 and $6 as of December 31, 2018 and 2017, respectively)
|
|
67
|
|
67
|
|
Payable in more than 1 year
(net of collateral paid to carriers of $10 and $17 as of December 31, 2018 and 2017, respectively)
|
|
158
|
|
165
|
|
Total accrued costs, net of carrier collateral offset
|
|
$
|
225
|
|
$
|
232
|
|
Incurred claims related to prior years represent changes in estimates for ultimate losses on workers' compensation claims. For the year ended
December 31, 2018
, the favorable development was primarily due to lower than expected severity development on claims that had previously been reported, as well as a lower than expected reported claim frequency during 2018. For the year ended
December 31, 2017
, the favorable development was primarily due to lower than expected severity of reported claims associated with office worker WSEs in recent accident years. For the year ended
December 31, 2016
, the adverse development was primarily due to higher than expected severity of reported claims associated with non-office WSEs in recent accident years.
As of
December 31, 2018
and
2017
, we had
$57 million
and
$63 million
, respectively, of collateral held by insurance carriers of which
$13 million
and
$23 million
was offset against accrued workers' compensation costs as the agreements permit and are net settled of insurance obligations against collateral held.
NOTE 7. LONG-TERM DEBT
As of
December 31, 2018
and
2017
, long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31,
2018
|
December 31,
2017
|
Annual
Contractual
Interest Rate
|
Effective Interest Rate
|
Maturity
Date
|
Term Loan A
|
$
|
—
|
|
$
|
303
|
|
3.95
|
%
|
(1)
|
4.07
|
%
|
July 2019
|
Term Loan A-2
|
—
|
|
122
|
|
3.83
|
%
|
(2)
|
3.90
|
%
|
July 2019
|
2018 Term Loan A
|
414
|
|
—
|
|
4.15
|
%
|
(3)
|
4.25
|
%
|
June 2023
|
Total term loans
|
414
|
|
425
|
|
|
|
|
|
Deferred loan costs
|
(1
|
)
|
(2
|
)
|
|
|
|
|
Less: current portion
|
(22
|
)
|
(40
|
)
|
|
|
|
|
Long-term debt, noncurrent
|
$
|
391
|
|
$
|
383
|
|
|
|
|
|
|
|
(1)
|
Bears interest at LIBOR plus
2.25%
or the prime rate plus
1.25%
at our option, subject to certain rate adjustments based upon our total leverage ratio.
|
|
|
(2)
|
Bears interest at LIBOR plus
2.125%
or the prime rate plus
1.125%
at our option, subject to certain rate adjustments based upon our total leverage ratio.
|
|
|
(3)
|
Bears interest at LIBOR plus
1.625%
or the prime rate plus
0.625%
at our option in the first full fiscal quarter of the term loan, thereafter subject to certain rate adjustments based on our total leverage ratio. As of December 31, 2018, the interest rate was based on LIBOR plus
1.625%
.
|
In June 2018 we refinanced approximately
$415 million
of, and repaid in full, our outstanding A and A-2 term loans (together, our 2014 Term Loans) under our previous credit agreement (our 2014 Credit Agreement). Our 2014 Term Loans were replaced with a
$425 million
term loan A (our 2018 Term Loan) under our new credit agreement (our 2018 Credit Agreement). We also replaced our previous
$75 million
revolving credit facility established under our 2014 Credit Agreement with a
$250 million
revolving credit facility under our 2018 Credit Agreement (our 2018 Revolver), which will be used solely for working capital and other general corporate purposes. As part of this approximately
$415 million
refinancing transaction,
$204 million
was recorded as an extinguishment, and
$211 million
was rolled over into the 2018 Term Loan and was treated as a debt modification. As of December 31, 2018,
$414 million
was outstanding under
our 2018 Term Loan and the full amount of our 2018 Revolver, less approximately $
16
million representing an undrawn letter of credit, was available.
We incurred approximately
$4 million
in fees and acquisition costs related to our June 2018 refinancing, of which we capitalized approximately
$3 million
allocated proportionally between our 2018 Term Loan and 2018 Revolver. As a result of this modification, we expensed approximately
$2 million
in new and existing fees.
Interest on our 2018 Term Loan is payable quarterly. We are required to pay a quarterly commitment fee on the daily unused amount of the commitments under our 2018 Revolver, as well as fronting fees and other customary fees for letters of credit issued under our 2018 Revolver, which is subject to adjustments based on our total leverage ratio.
Borrowings under our 2018 Term Loan and 2018 Revolver are secured by substantially all of our assets, other than excluded assets as defined in our 2018 Credit Agreement, which includes certain customary assets, assets held in trusts as collateral and WSE related assets.
We are permitted to make voluntary prepayments at any time without payment of a premium. We are required to make mandatory prepayments of term loans (without payment of a premium) with (i) net cash proceeds from issuances of debt (other than certain permitted debt), and (ii) net cash proceeds from certain non-ordinary course asset sales and casualty and condemnation proceeds (subject to reinvestment rights and other exceptions).
The remaining balance of our 2018 Term Loan will be repaid in quarterly installments in aggregate annual amounts as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
|
(in millions)
|
2019
|
2020
|
2021
|
2022
|
2023
|
Thereafter
|
Term loan repayments
|
$
|
22
|
|
$
|
22
|
|
$
|
22
|
|
$
|
22
|
|
$
|
326
|
|
$
|
—
|
|
Our 2018 Credit Agreement contains customary representations and warranties, and customary affirmative and negative covenants applicable to us, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of indebtedness (other than our 2018 Term Loan and our 2018 Revolver), dividends, distributions and transactions with affiliates.
Our 2018 Credit Agreement restricts our ability to make certain types of payments, including dividends and stock repurchases and other similar distributions, though such payments may generally be made as long as our total leverage ratio remains below
3.00
to
1.00
after the effect of these payments and there exists no default under the 2018 Credit Agreement.
The financial covenants under our 2018 Credit Agreement require us to maintain a minimum consolidated interest coverage ratio of at least
3.50
to
1.00
at each quarter end and a maximum total leverage ratio of
3.50
to
1.00
. In the event of an acquisition the maximum ratio can be raised to
4.00
to
1.00
for four consecutive quarters. We were in compliance with these financial covenants under the credit facilities at
December 31, 2018
.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Lease Commitments
We lease office facilities, including our headquarters and other facilities under non-cancelable operating leases. The schedule of minimum future rental payments under non-cancelable operating leases having initial terms in excess of one year at
December 31, 2018
, is as follows:
|
|
|
|
|
(in millions)
|
Operating Leases
|
Year ending December 31:
|
|
2019
|
$
|
18
|
|
2020
|
17
|
|
2021
|
11
|
|
2022
|
9
|
|
2023
|
8
|
|
Thereafter
|
25
|
|
Minimum lease payments
|
$
|
88
|
|
The lease agreements generally provide for rental payments on a graduated basis and for options to renew, which could increase future minimum lease payments if exercised. We recognize rent expense on a straight-line basis over the lease period and accrue for rent expense incurred but not paid. Rent expense for the years ended
December 31, 2018
,
2017
and
2016
was
$20 million
,
$18 million
and
$17 million
, respectively.
Credit Facilities
We maintain a
$250 million
revolving credit facility which includes capacity for a
$20 million
swingline facility. Letters of credit issued pursuant to the revolving credit facility reduce the amount available for borrowing under the revolving credit facility. The total unused portion of the revolving credit facility was
$234 million
as of
December 31, 2018
.
The terms of the credit agreement governing the revolving credit facility require us to maintain certain financial ratios at each quarter end. We were in compliance with these covenants as of
December 31, 2018
.
We also have a
$5 million
line of credit facility to secure standby letters of credit related to our workers' compensation obligation. At
December 31, 2018
, the total unused portion of the credit facility was
$3 million
.
Standby Letters of Credit
We have
two
standby letters of credit up to an aggregate of
$18 million
provided as collateral for our workers’ compensation obligations. At
December 31, 2018
, the facilities were not drawn down.
Contingencies
In August 2015, Howard Welgus, a purported stockholder, filed a putative securities class action lawsuit, Welgus v. TriNet Group, Inc., et. al., under the Securities Exchange Act of 1934 in the United States District Court for the Northern District of California. The complaint was later amended in April 2016 and again in March 2017. On December 18, 2017, the district court granted TriNet’s motion to dismiss the amended complaint in its entirety, without leave to amend. Plaintiff filed a notice of appeal of the district court’s order on January 17, 2018. Plaintiff-Appellant filed his opening appeal brief before the Ninth Circuit Court of Appeals on April 27, 2018. TriNet filed a responsive brief on June 28, 2018. Plaintiff-Appellant filed his reply brief on August 20, 2018. The Ninth Circuit has scheduled a hearing date for March 14, 2019. We see no basis for a reversal of the district court’s decision. We are unable to reasonably estimate the possible loss or expense, or range of losses and expenses, if any, arising from this litigation.
We are and, from time to time, have been and may in the future become involved in various litigation matters, legal proceedings, and claims arising in the ordinary course of 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 or the above mentioned securities class action 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 9. STOCKHOLDERS' EQUITY
Equity-Based Incentive Plans
Our 2009 Equity Incentive Plan (the 2009 Plan) provides for the grant of stock awards, including stock options, RSUs, RSAs, and other stock awards. Shares available for grant as of
December 31, 2018
were
12 million
.
Stock Options
Stock options are granted to employees under the 2009 Plan at exercise prices equal to the fair market value of our common stock on the dates of grant. Options generally have a maximum contractual term of
10
years. Options are generally vested over
four
years, based on continued service. Stock options are forfeited if the employee ceases to be employed by us prior to vesting.
The following table summarizes stock option activity under our equity-based plan for the year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
Aggregate
Intrinsic
Value
(in millions)
|
Balance at December 31, 2017
|
1,296,863
|
|
$
|
12.27
|
|
5.87
|
$
|
41
|
|
Exercised
|
(617,157
|
)
|
11.00
|
|
|
|
Forfeited
|
(15,694
|
)
|
32.81
|
|
|
|
Canceled
|
(8,497
|
)
|
32.02
|
|
|
|
Balance at December 31, 2018
|
655,515
|
|
$
|
12.90
|
|
4.91
|
$
|
19
|
|
Exercisable at December 31, 2018
|
642,631
|
|
$
|
12.65
|
|
4.94
|
$
|
19
|
|
Vested and expected to vest at December 31, 2018
|
655,515
|
|
$
|
12.90
|
|
4.91
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Additional Disclosures for Stock Options (in millions)
|
2018
|
2017
|
2016
|
Total fair value of options vested
|
$
|
4
|
|
$
|
7
|
|
$
|
7
|
|
Total intrinsic value of options exercised
|
24
|
|
36
|
|
21
|
|
Cash received from options exercised
|
7
|
|
11
|
|
5
|
|
Restricted Stock Units and Restricted Stock Awards
In 2018, the Company granted time-based and performance-based restricted stock awards to the Company's named executive officers. A recipient of RSAs owns the underlying shares of common stock upon grant and some of the benefits of ownership, such as voting and dividend rights, but the recipient may not sell those shares and realize any value on a sale, until all time-based and performance-based restrictions have been satisfied or lapsed.
Time-based RSUs and RSAs generally vest over a
four
-year term. Performance-based RSUs and RSAs are subject to vesting requirements based on certain financial performance metrics as defined in the grant notice. Actual number of shares earned may range from
0%
to
200%
of the target award. Awards granted in 2017 and 2018 are based on single-year performance period subject to subsequent multi-year vesting with
50%
of the shares earned will vest in
one
year after the performance period and the remaining shares in the year after.
Compensation expense is recognized ratably over the vesting period based on the probability of the number of awards expected to vest at each reporting date.
The following table summarizes RSU and RSA activity under our equity-based plans for the year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
RSAs
|
|
Number of Units
|
Weighted-Average
Grant Date
Fair Value
|
Number of Shares
|
Weighted-Average
Grant Date
Fair Value
|
Nonvested at December 31, 2017
|
2,703,335
|
|
$
|
25.82
|
|
—
|
|
$
|
—
|
|
Granted
|
714,358
|
|
47.07
|
|
372,783
|
|
49.02
|
|
Vested
|
(1,273,796
|
)
|
27.26
|
|
(13,683
|
)
|
47.61
|
|
Forfeited
|
(406,343
|
)
|
28.68
|
|
(12,308
|
)
|
47.61
|
|
Nonvested at December 31, 2018
|
1,737,554
|
|
$
|
32.83
|
|
346,792
|
|
$
|
49.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
RSAs
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
Additional Disclosures for equity-based plans
|
2018
|
2017
|
2016
|
|
2018
|
2017
|
2016
|
Total grant date fair value of shares granted (in millions)
|
$
|
34
|
|
$
|
46
|
|
$
|
42
|
|
|
$
|
18
|
|
$
|
—
|
|
$
|
—
|
|
Total grant date fair value of shares vested (in millions)
|
$
|
35
|
|
$
|
21
|
|
$
|
16
|
|
|
$
|
1
|
|
$
|
—
|
|
$
|
—
|
|
Shares withheld to settle payroll tax liabilities related to vesting of shares held by employees
|
451,875
|
|
335,101
|
|
217,769
|
|
|
6,357
|
|
—
|
|
—
|
|
Employee Stock Purchase Plan
Our 2014 Employee Stock Purchase plan (ESPP) offers eligible employees an option to purchase shares of our common stock through a payroll deduction. The purchase price is equal to the lesser of
85%
of the fair market value of our common stock on the offering date or
85%
of the fair market value of our common stock on the applicable purchase date. Offering periods are approximately six months in duration and will end on or about May 15 and November 15 of each year. Employees may contribute a minimum of
1%
and a maximum of
15%
of their earnings. The plan is considered to be a compensatory plan. We issued
175,966
,
224,928
, and
283,644
shares under the ESPP during
2018
,
2017
, and
2016
, respectively. As of
December 31, 2018
, approximately
3 million
shares were reserved for future issuances under the ESPP.
Equity-Based Compensation
|
|
|
|
|
|
|
|
ESPP Assumptions
|
Year Ended December 31,
|
Expected Term (in Years)
|
Expected Volatility
|
Risk-Free Interest Rate
|
Expected Dividend Yield
|
2018
|
0.50
|
27-37%
|
1.42-2.5%
|
0
|
%
|
2017
|
0.50
|
28-37%
|
0.62-1.42%
|
0
|
%
|
2016
|
0.50
|
32-76%
|
0.33-0.62%
|
0
|
%
|
Stock-based compensation expense and other disclosures for stock-based awards made to our employees pursuant to the equity plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2018
|
2017
|
2016
|
Cost of providing services
|
$
|
10
|
|
$
|
8
|
|
$
|
7
|
|
Sales and marketing
|
8
|
|
6
|
|
6
|
|
General and administrative
|
22
|
|
14
|
|
11
|
|
Systems development and programming costs
|
4
|
|
4
|
|
2
|
|
Total stock-based compensation expense
|
$
|
44
|
|
$
|
32
|
|
$
|
26
|
|
Income tax benefit related to stock-based compensation expense
|
$
|
11
|
|
$
|
7
|
|
$
|
9
|
|
Tax benefit realized from stock options exercised and similar awards
|
$
|
23
|
|
$
|
28
|
|
$
|
7
|
|
The table below summarizes unrecognized compensation expense for the year ended
December 31, 2018
associated with the following:
|
|
|
|
|
|
|
Amount
(in millions)
|
Weighted-Average Period (in Years)
|
Nonvested stock options
|
$
|
—
|
|
0.11
|
Nonvested RSUs
|
49
|
|
2.07
|
Nonvested RSAs
|
12
|
|
2.44
|
Stock Repurchases
During 2018, the board of directors did not authorize additional repurchases. During
2017
and
2016
, the board of directors authorized
$120 million
and
$100 million
, respectively, of outstanding common stock to be repurchased with no expiration from the date of authorization. As of
December 31, 2018
, approximately
$75 million
remained available for repurchase pursuant to our stock repurchase program. During
2018
,
2017
, and
2016
, we repurchased
1,190,995
shares,
1,549,434
shares and
3,414,675
shares, respectively.
On February 6, 2019, our board of directors authorized a
$300 million
incremental increase to our ongoing stock repurchase program initiated in May 2014.
NOTE 10. INCOME TAXES
Provision for Income Taxes
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2018
|
2017
|
2016
|
Current:
|
|
|
|
Federal
|
$
|
41
|
|
$
|
46
|
|
$
|
1
|
|
State
|
7
|
|
1
|
|
—
|
|
Total Current
|
48
|
|
47
|
|
1
|
|
Deferred:
|
|
|
|
Federal
|
(3
|
)
|
12
|
|
38
|
|
State
|
4
|
|
3
|
|
5
|
|
Revaluation due to legislative changes
|
—
|
|
(40
|
)
|
(1
|
)
|
Total Deferred
|
1
|
|
(25
|
)
|
42
|
|
Total
|
$
|
49
|
|
$
|
22
|
|
$
|
43
|
|
The U.S. federal statutory income tax rate reconciled to our effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
2017
|
2016
|
(in millions, except percent)
|
Pre-Tax Income
|
Tax Expense/(Benefit)
|
Percent of Pre-Tax Income (Loss)
|
Pre-Tax Income
|
Tax Expense/(Benefit)
|
Percent of Pre-Tax Income (Loss)
|
Pre-Tax Income
|
Tax Expense/(Benefit)
|
Percent of Pre-Tax Income (Loss)
|
|
$
|
241
|
|
|
|
$
|
200
|
|
|
|
$
|
104
|
|
|
|
U.S. federal statutory tax rate
|
|
$
|
51
|
|
21
|
%
|
|
$
|
70
|
|
35
|
%
|
|
$
|
37
|
|
35
|
%
|
State income taxes, net of federal benefit
|
|
18
|
|
8
|
|
|
10
|
|
5
|
|
|
4
|
|
4
|
|
Tax rate change
|
|
—
|
|
—
|
|
|
(40
|
)
|
(20
|
)
|
|
(1
|
)
|
(1
|
)
|
Nondeductible meals, entertainment and penalties
|
|
1
|
|
1
|
|
|
1
|
|
—
|
|
|
4
|
|
4
|
|
Stock-based compensation
|
|
(9
|
)
|
(4
|
)
|
|
(15
|
)
|
(7
|
)
|
|
1
|
|
1
|
|
Uncertain tax positions
|
|
1
|
|
—
|
|
|
4
|
|
2
|
|
|
—
|
|
—
|
|
Tax credits
|
|
(4
|
)
|
(2
|
)
|
|
(3
|
)
|
(1
|
)
|
|
(1
|
)
|
(1
|
)
|
State and tax return to provision adjustment
|
|
(7
|
)
|
(3
|
)
|
|
(5
|
)
|
(3
|
)
|
|
(1
|
)
|
(1
|
)
|
Sec 199 benefits
|
|
—
|
|
—
|
|
|
(3
|
)
|
(1
|
)
|
|
—
|
|
—
|
|
Other
|
|
(2
|
)
|
(1
|
)
|
|
3
|
|
1
|
|
|
—
|
|
—
|
|
Total
|
|
$
|
49
|
|
20
|
%
|
|
$
|
22
|
|
11
|
%
|
|
$
|
43
|
|
41
|
%
|
Our effective income tax rate increased by
9%
to
20%
in
2018
from
11%
in
2017
. The increase was primarily attributable to federal legislative changes enacted in the prior year resulting from non-recurring discrete tax benefits and apportionment changes. The remaining increase consisted of a reduction from excess tax benefits related to stock-based compensation and a one-time qualified production activities deduction for certain software offerings recorded in the prior year. These increases were partially offset by decreases due to changes related to the ongoing litigation and changes in uncertain tax positions.
The revaluation of deferred taxes resulted in a discrete tax benefit representing an immaterial amount in 2018, and
20%
and
1%
for the years ended December 31,
2017
and
2016
, respectively.
Deferred Income Taxes
Significant components of our deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2018
|
2017
|
Deferred tax assets:
|
|
|
Net operating losses (federal and state)
|
$
|
3
|
|
$
|
4
|
|
Accrued expenses
|
8
|
|
6
|
|
Accrued workers' compensation costs
|
9
|
|
8
|
|
Stock-based compensation
|
8
|
|
8
|
|
Tax benefits relating to uncertain positions
|
—
|
|
1
|
|
Tax credits (federal and state)
|
7
|
|
9
|
|
Total
|
35
|
|
36
|
|
Valuation allowance
|
(7
|
)
|
(7
|
)
|
Total deferred tax assets
|
28
|
|
29
|
|
Deferred tax liabilities:
|
|
|
Depreciation and amortization
|
(24
|
)
|
(13
|
)
|
Deferred service revenues
|
(62
|
)
|
(79
|
)
|
Prepaid health plan expenses
|
—
|
|
(3
|
)
|
Prepaid commission expenses
|
(9
|
)
|
—
|
|
Total deferred tax liabilities
|
(95
|
)
|
(95
|
)
|
Net deferred tax liabilities
|
$
|
(67
|
)
|
$
|
(66
|
)
|
We recorded an immaterial change to the valuation allowance in
2018
, related to certain state net operating loss and state tax credit carryforwards. We have
$61 million
in state net operating loss carryforwards as of
December 31, 2018
and have utilized all of the federal net operating loss carryforwards. The state net operating loss carryforwards will begin expiring in 2019.
Excess tax benefits or deficiencies from equity-based award activities are now reflected as a component of the provision for income taxes instead of equity. The provision for income taxes for the year ended
December 31, 2018
included
$10 million
of excess tax benefits resulting from equity incentive plan activities.
We have
$7 million
state tax credit carryforwards (net of federal benefit) available that will begin expiring in
2021
, which are offset by a valuation allowance of
$6 million
as of
December 31, 2018
and
2017
, respectively.
We are subject to tax in U.S. federal and various state and local jurisdictions, as well as Canada. We are not subject to any material income tax examinations in federal or state jurisdictions for tax years prior to January 1, 2012. 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 IRS filed cross motions for summary judgment in this matter in federal district court on February 27, 2018. On September 17, 2018, the district court granted our motion for summary judgment and denied the IRS' motion. On January 18, 2019, the district court entered judgment in favor of TriNet in the amount of
$15 million
, plus interest. The IRS has
60
days to appeal the district court’s decision. We will continue to vigorously defend our position through the litigation process, including the appeal, if necessary. Given the uncertainty of the outcome of any appeal, it remains possible that our recovery of the refund will be less than the total amount in dispute.
Uncertain Tax Positions
As of
December 31, 2018
and
2017
, the total unrecognized tax benefits related to uncertain income tax positions, which would affect the effective tax rate if recognized, were
$6 million
.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2018
|
2017
|
2016
|
Unrecognized tax benefits at January 1
|
$
|
6
|
|
$
|
1
|
|
$
|
3
|
|
Additions for tax positions of prior periods
|
1
|
|
4
|
|
—
|
|
Additions for tax positions of current period
|
—
|
|
1
|
|
—
|
|
Reductions for tax positions of prior period:
|
|
|
|
Settlements with taxing authorities
|
—
|
|
—
|
|
(2
|
)
|
Lapse of applicable statute of limitations
|
(1
|
)
|
—
|
|
—
|
|
Unrecognized tax benefits at December 31
|
$
|
6
|
|
$
|
6
|
|
$
|
1
|
|
As of
December 31, 2018
and 2017, the total amount of gross interest and penalties accrued were immaterial. The unrecognized tax benefit, including accrued interest and penalties are included in other liabilities on the consolidated balance sheet.
It is reasonably possible the amount of the unrecognized benefit could increase or decrease within the next twelve months, which would have an impact on net income.
NOTE 11. EARNINGS PER SHARE
Basic EPS is computed based on the weighted average shares of common stock outstanding during the period. Diluted EPS is computed based on those shares used in the basic EPS computation, plus potentially dilutive shares issuable under our equity-based compensation plans using the treasury stock method. Shares that are potentially anti-dilutive are excluded.
The following table presents the computation of our basic and diluted EPS attributable to our common stock:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions, except per share data)
|
2018
|
2017
|
2016
|
Net income
|
$
|
192
|
|
$
|
178
|
|
$
|
61
|
|
Weighted average shares of common stock outstanding
|
70
|
|
69
|
|
70
|
|
Basic EPS
|
$
|
2.72
|
|
$
|
2.57
|
|
$
|
0.88
|
|
|
|
|
|
Net income
|
$
|
192
|
|
$
|
178
|
|
$
|
61
|
|
Weighted average shares of common stock outstanding
|
70
|
|
69
|
|
70
|
|
Dilutive effect of stock options and restricted stock units
|
2
|
|
2
|
|
2
|
|
Weighted average shares of common stock outstanding
|
72
|
|
71
|
|
72
|
|
Diluted EPS
|
$
|
2.65
|
|
$
|
2.49
|
|
$
|
0.85
|
|
|
|
|
|
Common stock equivalents excluded from income per
diluted share because of their anti-dilutive effect
|
1
|
|
2
|
|
1
|
|
NOTE 12. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
We use an independent pricing source to determine the fair value of our available-for-sale securities included as Level 1 and Level 2. For purposes of valuing our securities, the independent pricing source utilizes the following market approach by investment class:
|
|
•
|
Money market mutual funds are valued on a spread or discount rate basis,
|
|
|
•
|
Asset-backed securities are valued using historical and projected prepayments speed and loss scenarios and spreads obtained from the new issue market, dealer quotes and trade prices,
|
|
|
•
|
U.S. treasuries, corporate bonds, and other debt securities are priced based on dealer quotes from multiple sources, and
|
|
|
•
|
US government agencies and government sponsored agencies are priced using LIBOR/swap curves, credit spreads and interest rate volatilities.
|
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).
On a recurring basis, we did not have any Level 3 financial instruments as of
December 31, 2018
and
December 31, 2017
. There were transfers between levels as of
December 31, 2018
and
December 31, 2017
.
Fair Value Measurements on a Recurring Basis
The following tables summarize our financial instruments by significant categories and fair value measurement on a recurring basis as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Level 1
|
Level 2
|
Total
|
December 31, 2018
|
|
|
|
Cash equivalents:
|
|
|
|
Money market mutual funds
|
$
|
4
|
|
$
|
—
|
|
$
|
4
|
|
U.S. treasuries
|
—
|
|
1
|
|
1
|
|
Total cash equivalents
|
4
|
|
1
|
|
5
|
|
Investments:
|
|
|
|
Asset-backed securities
|
—
|
|
33
|
|
33
|
|
Corporate bonds
|
—
|
|
99
|
|
99
|
|
U.S. government agencies and government-sponsored agencies
|
—
|
|
7
|
|
7
|
|
U.S. treasuries
|
—
|
|
41
|
|
41
|
|
Other debt securities
|
—
|
|
9
|
|
9
|
|
Total investments
|
—
|
|
189
|
|
189
|
|
Restricted cash equivalents:
|
|
|
|
Money market mutual funds
|
48
|
|
—
|
|
48
|
|
Commercial paper
|
20
|
|
—
|
|
20
|
|
Total restricted cash equivalents
|
68
|
|
—
|
|
68
|
|
Restricted investments:
|
|
|
|
U.S. treasuries
|
—
|
|
5
|
|
5
|
|
Exchange traded fund
|
1
|
|
—
|
|
1
|
|
Certificate of deposit
|
—
|
|
2
|
|
2
|
|
Total restricted investments
|
1
|
|
7
|
|
8
|
|
Total investments and restricted cash equivalents and investments
|
$
|
73
|
|
$
|
197
|
|
$
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Level 1
|
Level 2
|
Total
|
December 31, 2017
|
|
|
|
Restricted cash equivalents:
|
|
|
|
Money market mutual funds
|
$
|
199
|
|
$
|
—
|
|
$
|
199
|
|
Commercial paper
|
21
|
|
—
|
|
21
|
|
Total restricted cash equivalents
|
220
|
|
—
|
|
220
|
|
Restricted investments:
|
|
|
|
U.S. treasuries
|
37
|
|
—
|
|
37
|
|
Exchange traded fund
|
1
|
|
—
|
|
1
|
|
Certificate of deposit
|
—
|
|
2
|
|
2
|
|
Total restricted investments
|
38
|
|
2
|
|
40
|
|
Total restricted cash equivalents and investments
|
$
|
258
|
|
$
|
2
|
|
$
|
260
|
|
Restricted Cash Equivalents
The Company's restricted cash equivalents include money market mutual funds and commercial paper. The carrying value of cash equivalents approximate their fair values due to the short-term maturities and are classified as Level 1 in the fair value hierarchy because we use quoted market prices that are readily available in an active market to determine the fair value.
Restricted Investments
The Company's restricted investments include U.S. treasuries, an exchange traded fund and a certificate of deposit. The exchange traded fund is classified as Level 1 in the fair value hierarchy as we use active quoted market prices that are readily available in an active market to determine fair value. The U.S. treasuries are classified as Level 2 in the fair value hierarchy as their prices are based on dealer quotes from multiple sources. The certificate of deposit is classified as Level 2 in the fair value hierarchy as we use a market approach that compares the fair values on certificates with similar maturities.
Fair Value of Financial Instruments Disclosure
Long-Term Debt
The carrying value of our long-term debt at
December 31, 2018
and
2017
was
$414 million
and
$425 million
, respectively. The estimated fair values of our debt payable at
December 31, 2018
and
2017
were
$414 million
and
$428 million
, respectively. On September 30, 2018 we changed our methodology of estimating the fair values of our debt payable to a discounted cash flow, which incorporates credit spreads and market interest rates to estimate the fair value and is considered Level 3 in the hierarchy for fair value measurement. The valuation at
December 31, 2017
is considered Level 2 in the hierarchy for fair value measurement.
NOTE 13. 401(k) PLAN
Under our 401(k) plan, participants may direct the investment of contributions to their accounts among certain investments. Effective July 1, 2018, we matched
100%
of individual employee 401(k) plan contributions, up to
4%
of cash compensation per the calendar year, and made a one-time contribution to certain employees. Prior to July 1, 2018 and in the years ended
December 31, 2017
and
2016
, we matched individual employee 401(k) plan contributions at the rate of
$0.50
for every dollar contributed by employees subject to a cap. We recorded matching contributions to the 401(k) plan of
$11 million
,
$6 million
, and
$5 million
during the years ended December 31,
2018
,
2017
, and
2016
, respectively, which are reflected in various operating expense lines within the accompanying consolidated statements of income and comprehensive income.
We also maintain multiple employer defined contribution plans, which cover WSEs for client companies electing to participate in the plan and for their internal staff employees. We contribute, on behalf of each participating client, varying amounts based on the clients’ policies and serviced employee elections.
NOTE 14. RELATED PARTY TRANSACTIONS
We have service agreements with certain stockholders that we process their employees' payrolls and payroll taxes. From time to time, we also enter into sales and purchases agreements with various companies that have a relationship with our executive officers or members of our board of directors. The relationships are typically an equity investment by the executive officer or board member in the customer / vendor company or our executive officer or board member is a member of the customer / vendor company's board of directors. We have received
$20 million
,
$22 million
, and
$10 million
in total revenues from such related parties during the years ended
December 31, 2018
,
2017
and
2016
, respectively.
We have also entered into various software license agreements with software service providers who have board members in common with us. We paid the software service providers
$5 million
,
$6 million
, and
$7 million
during the years ended
December 31, 2018
,
2017
and
2016
, for services we received, respectively.
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
(in millions, except per share data)
|
March 31
|
June 30
|
September 30
|
December 31
|
2018
|
|
|
|
|
Total revenues
|
$
|
861
|
|
$
|
850
|
|
$
|
875
|
|
$
|
917
|
|
Insurance costs
|
641
|
|
630
|
|
647
|
|
692
|
|
Operating income
|
71
|
|
76
|
|
62
|
|
42
|
|
Net income
|
54
|
|
58
|
|
51
|
|
29
|
|
Basic net income per share
|
$
|
0.77
|
|
$
|
0.82
|
|
$
|
0.73
|
|
$
|
0.41
|
|
Diluted net income per share
|
$
|
0.75
|
|
$
|
0.80
|
|
$
|
0.71
|
|
$
|
0.40
|
|
2017
|
|
|
|
|
Total revenues
|
$
|
808
|
|
$
|
801
|
|
$
|
818
|
|
$
|
848
|
|
Insurance costs
|
609
|
|
600
|
|
613
|
|
644
|
|
Operating income
|
49
|
|
57
|
|
63
|
|
48
|
|
Net income
(1)
|
29
|
|
40
|
|
43
|
|
66
|
|
Basic net income per share
(1)
|
$
|
0.42
|
|
$
|
0.58
|
|
$
|
0.62
|
|
$
|
0.95
|
|
Diluted net income per share
(1)
|
$
|
0.41
|
|
$
|
0.56
|
|
$
|
0.60
|
|
$
|
0.92
|
|
(1) Results of the quarter ended December 31, 2017 included a
$40 million
benefit due to tax rate change as a result of the TCJA enactment on December 22, 2017.
|
|
|
DISCLOSURE CONTROLS AND PROCEDURES
|
|