10-K 1 tnet-123116x10k.htm 10-K Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-K
 
(Mark One)

x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2016
or
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-36373
 
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TRINET GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
 
95-3359658
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1100 San Leandro Blvd., Suite 400, San Leandro, CA
 
94577
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (510) 352-5000
 
Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.000025 Per Share; Common stock traded on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o    No  x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  o    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o (do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The New York Stock Exchange on June 30, 2016, was $865,320,029.
The number of shares of Registrant’s Common Stock outstanding as of February 23, 2017 was 68,268,207.
Portions of the Registrant’s Definitive Proxy Statement to be issued in connection with its Annual Meeting of Stockholders, scheduled to be held on May 18, 2017, are incorporated by reference into Part III of this Form 10-K.
 




TRINET GROUP, INC.
Form 10-K - Annual Report
For the Year End December 31, 2016

TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 



BUSINESS
 


Cautionary Note Regarding Forward-Looking Statements
For purposes of this Annual Report, the terms “TriNet," "the Company," “we,” “us” and “our" refer to TriNet Group, Inc., and its consolidated subsidiaries. This Annual Report on Form 10-K contains statements that are not historical in nature, are predictive in nature, or that depend upon or refer to future events or conditions or otherwise contain forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. Examples of forward-looking statements include, among others, TriNet’s expectations regarding: the growth of our customer base, our ability to roll out additional product offerings as and when planned, our ability to make enhancements to our technology platform, our ability to remediate the material weaknesses in our internal controls over financial reporting, our ability to execute on our vertical market strategy and penetrate the market for human resources (HR) solutions for small to midsize businesses, and other expectations, outlooks and forecasts on our future business, operational and financial performance.
Forward-looking statements are not guarantees of future performance, but are based on management’s expectations as of the date of this report and assumptions that are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from our current expectations and any past results, performance or achievements. Important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements include:
risks associated with the market acceptance of outsourcing the HR function, and the anticipated benefits associated with the use of a bundled HR solution;
changes to and our ability to comply with laws and regulations, including both those applicable to the co-employment relationship as well as those applicable to our clients’ businesses and their employees;
the amendment, repeal, replacement or continuing implementation of the Affordable Care Act and other health care reform, which may be more challenging in a changing political environment;
our ability to maintain the security of our information technology (IT) infrastructure against cyber-attacks and security breaches;
our ability to manage unexpected changes in workers’ compensation and health insurance claims by worksite employees;
the unpredictable nature of our costs and operating expenses, in particular our workers’ compensation and health insurance costs;
our ability to remediate the material weaknesses in our internal controls over financial reporting;
our ability to effectively acquire and integrate new businesses;
our ability to gain new clients, and our clients’ ability to grow and gain more employees;
volatility in the financial and economic environment to small and mid-sized businesses;
the effects of increased competition and our ability to compete effectively; and
our ability to comply with the restrictions of our credit facility and meet our debt obligations.
Any of these factors, as well as such other factors as discussed in Item 1A, and throughout Part II, Item 7 of this Annual Report on Form 10-K (Form 10-K), as well as in our periodic filings with the Securities and Exchange Commission (SEC), could cause our actual results to differ materially from our anticipated results. The information provided in this Form 10-K is based upon the facts and circumstances known at this time, and any forward-looking statements made by us in this Form 10-K speak only as of the date on which they are made. All information provided in this report is as of the date of this report and we undertake no duty to update this information except as required by law.

 
 
 
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PART I
Item 1. Business
General
TriNet is a leading provider of human resources (HR) solutions for small to midsize businesses (SMBs). Under our co-employment model, we assume many of the complex and burdensome responsibilities of being an employer, helping our clients minimize employer-related risks and manage administrative and compliance responsibilities associated with employment. We provide an HR technology platform with online and mobile tools that allow our clients and their worksite employees (WSEs) to efficiently store, view and manage their core HR-related information and conduct a variety of HR-related transactions anytime and anywhere. We utilize our size and scale to provide our clients with a broad range of employee benefit and insurance programs generally not available to individual SMBs. In addition, our service teams help with talent management, recruiting and training, performance management, employee onboarding and terminations, benefits enrollment and support, claims administration and employment practices risk management. We also monitor employer-related developments and assist clients in complying with applicable local, state and federal regulations.
Our strategy is to provide industry-specific products and services to help clients address their HR needs and allow them to focus on operating and growing their businesses. We believe our industry-oriented (vertical) approach is a key differentiator for us and delivers significant benefits to our clients. This allows our sales force, product development and service teams to tailor product and service offerings to the specific industry needs of our clients. As of December 31, 2016, we have introduced four verticals - TriNet Financial Services, TriNet Life Sciences, TriNet Nonprofit and TriNet Technology - and we intend to continue to develop and offer new industry vertical products in the future.
TriNet was founded in 1988 and has significantly grown the number of clients we serve, both organically and through strategic acquisitions, including our acquisitions of SOI Holding, Inc. (SOI) and Park Avenue Holding, Inc. (Accord) in 2012 and Ambrose Employer Group, LLC (Ambrose) in 2013. For the year ended December 31, 2016, we processed $34 billion in payroll payments for approximately 13,900 clients with about 338,000 WSEs in all 50 states, the District of Columbia and Canada.
Products and Services
We deliver a comprehensive suite of products and services which allow our clients and their WSEs to administer and manage HR-related compensation and benefits, including payroll, health insurance and worker's compensation programs, through our technology platform.
Our comprehensive HR products and solutions include the following common capabilities:
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TECHNOLOGY
PLATFORM
 
HR EXPERTISE
 
BENEFITS
 
COMPLIANCE
 
 
 
 
 
 
 
Technology Platform
Our HR technology platform, with online and mobile tools allows our clients and WSEs to store, view and manage core HR information and administer a variety of HR transactions, such as payroll processing, tax administration, employee onboarding and termination, compensation reporting, expense management, and benefits enrollment and administration.
Our strategy is to continue to invest in product development and improve the functionality, experience and ease of use of our products and services for clients and their WSEs. We have transformed the way we deliver our products and services though a full-service online and mobile platform, with standard Application Programming Interfaces (API) for integrating selected third-party software offerings and with an improved client experience for key processes. We will continue to integrate functionality and retire legacy software systems inherited from acquisitions and migrate clients to our primary TriNet software system. We believe the continued improvement of our technology platform and the

 
 
 
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consolidation of legacy systems allows us to drive operating efficiencies and improve the user experience by providing a unified view of all pertinent HR information.
During 2016, 2015 and 2014 we invested approximately $52.7 million, $38.7 million and $32.4 million, respectively, developing our technology solutions.
HR Expertise
We use the collective insights and experience of our teams of HR, benefits, risk management and compliance professionals to help clients mitigate many of the administrative, regulatory and practical risks associated with their responsibilities as employers, including talent management, recruiting and training, performance management, employee onboarding and terminations, benefits enrollment and support, claims administration and employment practices risk management. Our HR teams provide access to templates, handbooks, process guidelines, employee relations consultation, investigation support, and employee communications. Each of our clients and WSEs have access to varying levels of service and support from our HR experts ranging from call center support for basic questions to pooled specialized resources and to onsite consulting and services, depending on the needs of the client and their WSEs. In addition, our teams of in-house HR professionals can also provide additional, incremental consulting and other services upon request.
Under our vertical strategy, we continue to tailor our product and service offerings to specific industries by identifying common needs and leveraging scale and shared experience to provide more efficient, relevant offerings. For example, our fourth vertical product, TriNet Technology, is specifically targeted to help support the talent recruiting, equity compensation and foreign employee immigration needs with applicant tracking systems, immigration services for employees requiring work visas and online tools to help clients manage equity compensation plans that SMBs in other industries do not face. We now offer four industry specific product offerings: TriNet Technology, TriNet Financial Services, TriNet Life Sciences and TriNet Nonprofit.
Benefits
We offer our clients and WSEs access to a broad range of TriNet-sponsored benefit and insurance programs that many of our clients may be unable to obtain for their WSEs on their own and that are compliant with state, local, and federal regulations. Our insurance services offerings include plan design and administration, enrollment management, and WSE and client communications relating to our sponsored benefits and insurance programs.
We pay premiums to third-party insurance carriers for WSE insurance benefits and reimburse the insurance carriers and third-party administrators for claims payments made on our behalf within our insurance deductible layer, where applicable.
Employee Benefit Plans: We sponsor and administer several fully-insured, risk based employee benefit plans, including group health, dental, vision and life insurance as an employer plan sponsor under Section 3(5) of the Employee Retirement Income Security Act (ERISA). We also offer other benefit programs to our clients and WSEs, including flexible spending accounts, retirement plans, Consolidated Omnibus Budget Reconciliation Act (COBRA) benefits, individual life insurance, a legal services plan, commuter benefits, home insurance, critical illness insurance, pet insurance and auto insurance. For further discussion of our fully-insured programs including policies where we reimburse our carriers for certain amounts relating to claims, refer to Note 1 in Part II, Item 8 of this Form 10-K.
Workers' Compensation: We provide fully-insured workers' compensation insurance coverage for our clients and WSEs through insurance policies that we negotiate with our third-party insurance carriers. Additionally, we help clients manage their risk by providing risk management services, including performing workplace assessment, safety consultation, accident investigation and other risk management services at our client locations to help prevent workplace accidents that could lead to claims. We also provide services to help remediate such claims when they occur.
We manage the deductible risk that we assume in connection with these policies by being selective in the types of businesses that we take on as new clients, by monitoring claims data and the performance of our carriers and third-party claims management services and vendors and by providing risk management services for existing clients.
Employment Practices Liability Insurance (EPLI): We provide EPLI coverage for our clients through insurance policies that we obtain from our third-party EPLI insurance carrier. These policies provide coverage for certain claims that arise in the course of the employment relationship such as discrimination, harassment, and certain other employee claims,

 
 
 
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with a per-claim retention amount. For most of our clients, the retention amount is split between the client and TriNet, with the client paying its portion of the retention amount first.
While we do not provide legal representation to our clients, our clients can benefit from the extensive experience of our employment law specialists and HR professionals who assist clients in implementing HR best practices to avoid employment practices liability claims and in managing, processing and responding to such claims. For claims covered by our EPLI insurance, actual litigation defense is conducted by one of several outside employment law firms with whom we and our EPLI carriers have previously negotiated rates, established billing guidelines and invoice review processes. We have also developed a case management protocol to efficiently and effectively defend such claims.
Compliance
Our products and services are designed to help our clients comply with local, state and federal employment and benefit laws. Often these changes are staggered and require additional guidance from a variety of local, state or federal agencies, making compliance a continuous challenge. We monitor employer-related developments and assist clients in complying with changing regulations and requirements at all levels, from changes in local minimum wage and family leave ordinances to sweeping reforms such as the Patient Protection and Affordable Care Act (ACA).  Each component of our HR solutions is designed with compliance in mind, whether it is payroll processing and tax administration, HR services focused on creating a compliant workplace, or offering ACA-compliant benefit plans.
Our Co-Employment Model
We operate under a co-employment business model, under which employment-related responsibilities are contractually allocated between us and our clients. This model allows clients and WSEs to receive the full benefit of our employee benefit plan offerings. Each of our clients enters into a client service agreement with us that defines the suite of professional and insurance services and benefits to be provided by us, the fees payable to us, and the division of responsibilities between us and our clients as co-employers. The division of responsibilities under our client service agreements is typically as follows:
TriNet Responsibilities
We assume responsibility for, and manage certain risks associated with:
remittance to WSEs of salaries, wages and certain other compensation, as reported and paid to us by the client, related tax reporting and remittance to tax authorities and processing of garnishment and wage deduction orders. Unlike a payroll service provider, we issue each WSE a payroll check drawn on our bank accounts,
report the wages, withhold and deposit the associated payroll taxes as the employer on information reporting and payroll tax returns,
maintenance of workers' compensation insurance and workers' compensation claims processing,
provision and administration of group health, welfare, and retirement benefits to WSEs under TriNet-sponsored insurance plans,
compliance with applicable law for employee benefits offered to WSEs,
processing of unemployment claims, and
provision of certain HR policies, including an employee handbook describing the co-employment relationship.
Client Responsibilities
Our clients are responsible for employment-related responsibilities that we do not assume, including:
day-to-day management of their worksites and WSEs,
compliance with laws associated with the classification of employees as exempt or non-exempt, such as overtime pay and minimum wage law compliance,
accurate and timely reporting to TriNet of compensation and deduction information, including information relating to hours worked, rates of pay, salaries, wages and certain other compensation,
accurate and timely reporting to TriNet of information relating to workplace injuries, employee hires and termination, and certain other information relevant to TriNet’s services,

 
 
 
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provision and administration of any employee benefits not provided by TriNet (e.g., equity incentive plans),
compliance with all laws and regulations applicable to the clients' workplace and business, including work eligibility laws, laws relating to workplace safety or the environment, laws relating to family and medical leave, laws pertaining to employee organizing efforts and collective bargaining and employee termination notice requirements,
payment of TriNet invoices which include wages to WSEs and applicable employment taxes and service fees, and
all other matters for which TriNet does not assume responsibility under the client service agreement, such as intellectual property ownership and protection and liability for products produced and/or services provided.
As a result of our co-employment relationship with each of our WSEs, we are liable for payment of salary, wages and certain other compensation to the WSEs as reported and paid to us by the client and are responsible for providing specified employee benefits to such persons to the extent provided in each client service agreement and under federal and state law. In most instances, clients are required to remit payment prior to the applicable payroll date by wire transfer or automated clearinghouse transaction (ACH).
We also assume responsibility for payment and liability for the withholding and remittance of federal and state income and employment taxes with respect to salaries, wages and certain other compensation paid to WSEs, although we reserve the right to seek recourse against our clients for any liabilities arising out of their conduct. We perform these functions as the employer for federal employment tax purposes, since our clients transfer legal control over these payroll functions to us. Except to the extent applicable federal and state laws otherwise provide, the client may be held ultimately liable for those obligations if we fail to remit taxes and the bonding security provided by the Employer Services Assurance Corporation (ESAC) is not sufficient to satisfy the obligation. 
Sales and Marketing
We sell our solutions primarily through our direct sales organization. We have aligned our sales organization by industry vertical with the goal of growing profitable market share in our targeted industries. This vertical approach deepens our network of relationships and gives us an understanding of the unique HR needs facing SMBs in those industries.
The number of sales representatives in the field has grown substantially in recent years, through both internal hiring and through onboarding sales representatives from acquired businesses, from 224 sales representatives as of December 31, 2012 to 452 sales representatives as of December 31, 2016. We recruit and seek to hire sales professionals who have experience in specific industry vertical markets, and with a background in selling business services such as accounting, HR or sales solutions. As of December 31, 2016, we had 49 regional field sales offices.
We sponsor and participate in associations and events around the country and utilize these forums to target specific vertical and geographic markets. We also generate sales opportunities within key industry verticals, through marketing alliances and other indirect channels, such accounting firms, venture capital firms, incubators, insurance brokers, and other vertical market industry associations. Additionally, we utilize digital marketing programs, including digital advertising, search and email marketing, to create awareness and interest in our products.
Recently, we have expanded our focus on various channel relationships and alliances that drive referrals to our direct sales force. Finally, our sales representatives benefit from building strong relationships with prospects during the sales and client service processes, resulting in referrals to new prospects as well as direct support through providing reference calls in regard to our products and services.
Legal and Regulatory
Our business operates in a complex environment created by the numerous federal, state and local laws and regulations relating to labor and employment matters, benefit plans and income and employment taxes. The following summarizes what we believe are the most important legal and regulatory aspects of our business:
Federal Regulations
Employer Status
We sponsor our employee benefit plan offerings as the “employer” of our WSEs under the Internal Revenue Code of 1986 (the Code), and ERISA. The multiple definitions of “employer” under both the Code and ERISA are not clear and most are defined in part by complex multi-factor tests under common law. We believe that we qualify as an “employer” of our WSEs in the U.S. under both the Code and ERISA, as well as various state regulations, but this status could

 
 
 
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be subject to challenge by various regulators. For additional information on employer status and its impact on our business and results of operations, refer to Item 1A of this Form 10-K, under the heading - If we are not recognized as an employer of worksite employees under federal and state regulations, or are deemed to be an insurance agent or third-party administrator, we and our clients could be adversely impacted.
Affordable Care Act and Health Care Reform
The Patient Protection and Affordable Care Act (ACA) was signed into law in March 2010. The ACA implemented sweeping health care reforms with staggered effective dates from 2010 through 2020, and many provisions in the Act require the issuance of additional guidance from the U.S. Department of Labor (DOL), the Internal Revenue Service (IRS), the U.S. Department of Health and Human Services and the states. There could be significant changes to the ACA and health care in general in 2017 and beyond, including the potential modification, amendment or repeal of the ACA. For additional information on the ACA and its impact on our business and results of operations, refer to Item 1A of this Form 10-K, under the heading - Our business is subject to numerous complex state and federal laws, and changes in, uncertainty regarding, or adverse application of these laws could adversely affect our business.
Health Insurance Portability and Accountability Act
Maintaining the security of our WSEs information is important to TriNet as we sponsor employee benefit plans and may have access to personal health information of our WSEs. The manner in which we manage protected health information (PHI) is subject to the Health Insurance Portability and Accountability Act of 1996 (HIPAA), and the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH Act). HIPAA contains substantial restrictions and health data privacy, security and breach notification requirements with respect to the use and disclosure of PHI. Further, under the HITECH Act there are steep penalties and fines for HIPAA violations. Our health plans are covered entities under HIPAA, and we are therefore required to comply with HIPAA's portability, privacy, and security requirements.
However, only our Flexible Spending Accounts and SOI dental plans come into direct contact with PHI. The other health information we possess is anonymized and accessed through a secured third-party database. For additional information on how we maintain the confidentiality of our clients' and WSEs' personal data and PHI and the potential impact to our business if we fail to protect our WSEs' PHI, refer to Item 1A of this Form 10-K, under the heading - Cyber-attacks or security breaches could result in reduced revenue, increased costs, liability claims or damage to our reputation.
Certified Professional Employer Organization (PEO)
With passage of the Small Business Efficiency Act in 2014, the U.S. Congress clarified the employer status of PEOs who voluntarily become certified under this law for federal tax purposes under the Code. The IRS has started accepting applications for certification under the Code, and we intend to apply for certification, even though final regulations for the certification program have not yet been issued.
State Regulations
Forty-two states have adopted provisions for licensing, registration, certification or recognition of co-employers, and others are considering such regulation. Such laws vary from state to state but generally provide for monitoring or ensuring the fiscal responsibility of PEOs, and in some cases codify and clarify the co-employment relationship for unemployment, workers' compensation and other purposes under state laws. We believe we are in compliance in all material respects with the requirements in all 42 states.
We must also comply with state unemployment tax requirements where our clients are located. State unemployment taxes are based on taxable wages and tax rates assigned by each state. The tax rates vary by state and are determined, in part, based on our prior years’ compensation and unemployment claims experience in each state. Certain rates are also determined, in part, by each client’s own compensation and unemployment claims experience. In addition, states have the ability under law to increase unemployment tax rates, including retroactively, to cover deficiencies in the unemployment tax funds.

 
 
 
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Strategic Acquisitions
Historically, we have pursued strategic acquisitions to both expand our product capabilities and supplement our growth across geographies and certain industry verticals. Our acquisition targets have included other bundled HR providers as well as technology companies or technology product offerings to supplement or enhance our existing HR solutions. We intend to continue to pursue strategic acquisitions that will enable us to add new clients and WSEs, expand our presence in certain geographies or industry verticals and offer our clients and WSEs more comprehensive and attractive products and services.
Client Industries and Geographies
Our clients are distributed across a variety of industries including technology, life sciences, not-for-profit, professional services, financial services, property management, retail, manufacturing, and hospitality. Our clients execute annual service contracts with us that automatically renew. Generally, our clients may cancel these contracts with thirty to ninety days' notice and we may cancel these contracts with thirty days' notice.
We conduct our business primarily in the United States of America (U.S.), with more than 99% of our total revenues being attributable to WSEs in the U.S. and the remainder being attributable to WSEs in Canada. Substantially all our long-lived assets are located in the U.S.
Seasonality
Our business is affected by seasonality in business activity and WSE behavior. Clients generally change their payroll service providers at the beginning of the payroll tax year and as a result, we have historically experienced our highest volumes of new and exiting clients in the month of January. Other periods of client changes coincide with a client's benefit program renewal.
Competition
Our competitors include large PEOs such as the TotalSource unit of Automatic Data Processing, Inc. and Insperity, Inc., as well as specialized and smaller PEOs and similar HR service providers with PEO operations. If and to the extent that we and other companies providing these services are successful in growing our businesses, we anticipate that future competitors will enter this industry.
In addition to competition from other PEOs, we also face significant competition from companies that serve part of a clients’ HR needs. These forms of competition include providers of endpoint HR services, employee benefit exchanges that provide benefits administration services and insurance brokers who allow third-party HR systems to integrate with their insurance services platform. Such competitors may have greater marketing and financial resources than we have, and may be better positioned than we are in certain markets. Increased competition in our industry could result in price reductions or loss of market share, any of which could harm our business. We expect that we will continue to experience competitive pricing pressure.
We believe the principal competitive factors in our market include client satisfaction, ease of client setup and on-boarding, breadth and depth of benefit plans, vertical market expertise, total cost of service, brand awareness and reputation, ability to innovate and respond to client needs rapidly, online and mobile solutions, and subject matter expertise. We believe that we compete favorably on the basis of each of these factors.
Intellectual Property
We own or license from third parties' various computer software, as well as other intellectual property rights, used in our business. Generally, we protect our intellectual property rights through the use of confidentiality and non-disclosure agreements and policies with our employees and third-party partners and vendors, although we currently have one pending U.S. patent application covering our technology. We also own registered trademarks in the U.S., Canada and the European Union covering our name and other trademarks and logos that we believe are materially important to our operations.
Corporate Employees
We refer to our employees that we do not co-employ with our clients as our corporate employees. We had approximately 2,600 corporate employees as of December 31, 2016. None of our corporate employees are covered by a collective bargaining agreement.

 
 
 
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Corporate and Other Available Information
We were incorporated in 1988 as TriNet Employer Group, Inc., a California corporation. We reincorporated as TriNet Merger Corporation, a Delaware corporation, in 2000 and during that year changed our name to TriNet Group, Inc. Our principal executive offices are located at 1100 San Leandro Blvd., Suite 400, San Leandro, CA 94577 and our telephone number is (510) 352-5000. Our website address is www.trinet.com. Information contained in or accessible through our website is not a part of this report.
On the Investor Relations page of our Internet website at http://www.trinet.com, we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this report and are not part of this report.

 
 
 
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RISK FACTORS
 


Item 1A. Risk Factors
Our business is subject to numerous complex laws, and changes in, uncertainty regarding, or adverse application of these laws could negatively affect our business.
The products and services we provide to our clients are governed by numerous complex federal, state and local laws and regulations, including those described under the heading "Legal and Regulatory" in Item 1 of this Form10-K. Many of these laws (such as ERISA and federal and state employment tax laws, wage and hour laws, anti-discrimination laws, etc.) may not result in a consistent approach at the federal, state and local level, do not specifically address PEOs and co-employment relationships or may allow significant regulatory interpretation and discretion in enforcement. As a result, there is uncertainty in how they might be applied to our operations and those of our clients and WSEs.
New laws, changes in existing laws, or adverse application or interpretation (in courts, agencies or otherwise) of new or existing laws regarding our co-employment relationship with our clients and WSEs could reduce or eliminate the need for, or benefit provided by, some or all of the services we provide or require us to make significant changes in our methods of doing business and providing services, which could have a material adverse effect on our financial condition and results of operations. Regulatory changes could affect the extent and type of employee benefits employers can or must provide employees, the amount and type of taxes employers and employees are required to pay or the time within which employers must remit taxes to the applicable tax authority. For example, continued uncertainty regarding the implementation and future of health care reform in the U.S. under the ACA, any successor to the ACA, related or similar state laws, and the regulations adopted or to be adopted thereunder, has the potential to substantially change the health insurance market for SMBs and how such employers provide health insurance to their employees, which could have a materially adverse effect on our ability to attract and retain our clients. In addition, there could be significant changes to the ACA in 2017 and beyond, including the potential modification, amendment or repeal of the ACA. Changes to the ACA could also result in new or amended regulations being introduced at the state or local level. Changes in, or uncertainty regarding, the ACA and other health care reforms could impact our business and we are not able to predict the direction or ultimate impact of health care reform on our business operations.
Similarly, state regulatory authorities generally impose licensing requirements on companies acting as insurance agents or third-party administrators, such as those that handle health or retirement plan funding and claim processing. We do not believe that our current activities require such licensing, but if regulatory authorities in any state determine that we are acting as an insurance agent or as a third-party administrator, we may need to hire additional personnel to manage regulatory compliance and become obligated to pay annual regulatory fees, which could have a material adverse effect on our financial condition and results of operations.
Our co-employment relationship with our worksite employees exposes us to business risks.
We are the co-employer of our WSEs. As the co-employer of our WSEs, we assume certain obligations and responsibilities of an employer. For instance, we are responsible for providing benefits to our WSEs regardless of whether the cost of providing benefits exceeds the fees received from our clients. Under certain circumstances, it could be argued that we are, or we may be found to be, responsible for paying salaries, wages and related payroll taxes of our WSEs, regardless of whether our client timely remits payments to us.
We co-employ people in our clients' workplaces. Our ability to control the workplace environment of our clients is limited. As a co-employer of our WSEs, there is a possibility that we may be subject to liability for violations of employment or other laws and other acts and omissions by our clients or WSEs, who may be deemed to be our agents, even if we do not participate in any such acts or violations.
We seek to mitigate these risks through our client agreements and with employment practices liability insurance coverage. Our agreements with our clients establish the contractual division of responsibilities between us and our clients and that they will indemnify us for any liability attributable to their own or our WSEs' conduct, however, we may not be able to effectively enforce or collect on these contractual obligations. In addition, we maintain employment practices insurance to limit our and our clients' exposure to various WSE related claims, but we are still responsible for any deductible layer under such insurance and such insurance generally excludes coverage for claims relating to the classification of employees as exempt or non-exempt, other wage and hour issues, and employment contract disputes, among other things. We cannot assure you that our insurance will be sufficient in amount or scope to cover all claims that may be asserted against us and for which we are unable to obtain indemnification from our clients. Negative publicity relating to events or activities attributed to us, our corporate employees, our WSEs, or others associated with any of these parties, whether or not justified, may tarnish our reputation and reduce the value of our

 
 
 
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brand. In addition, if our brand is negatively impacted, it may have a material adverse effect on our business, including creating challenges in retaining clients or attracting new clients and hiring and retaining employees. 
If we are not recognized as an employer of worksite employees under federal and state regulations, or are deemed to be an insurance agent or third-party administrator, we and our clients could be adversely impacted.
In order to sponsor our employee benefit plan offerings for our WSEs, we must qualify as an employer of our WSEs for certain purposes under the Code and ERISA. In addition, our status as an employer is important for purposes of ERISA’s preemption of certain state laws. The definition of employer under various laws is not uniform, and under both the Code and ERISA, the term is defined in part by complex multi-factor tests.
Generally, these tests are designed to evaluate whether an individual is an independent contractor or employee and they provide substantial weight to whether a purported employer has the right to direct and control the details of an individual's work. Some factors that the IRS has considered important in the past have included the employer’s degree of behavioral control (the extent of instructions, training and the nature of the work), the financial control and the economic aspects of the relationship, and the intent of the parties, as evidenced by the specific benefit, contract, termination and other similar arrangements between the parties and the on-going versus project-oriented nature of the work to be performed. However, a definitive judicial interpretation of “employer” in the context of PEOs has not been established. For ERISA purposes, for example, courts have held that test factors relating to ability to control and supervise an individual are less important, while the U.S. Department of Labor has issued guidance that certain entities in the HR outsourcing industry do not qualify as common law employers for ERISA purposes. Although we believe that we qualify as an employer of our WSEs under ERISA and the U.S. Department of Labor has not provided guidance otherwise, we are not able to predict the outcome of any future regulatory challenge.
If we were found not to be an employer for ERISA purposes, it could adversely affect the manner in which we are able to provide employee benefits to our WSEs. Similarly, to qualify for favorable tax treatment under the Code, certain employee benefit plans such as 401(k) retirement plans and cafeteria plans must be established and maintained by an employer for the exclusive benefit of its employees. All of our 401(k) retirement plans are operated pursuant to guidance provided by the IRS and we have received favorable determination letters from the IRS confirming the qualified status of the plans. However, the IRS uses its own complex, multi-factor test to ascertain whether an employment relationship exists between a worker and a purported employer. Although we believe that we qualify as an employer of our WSEs under the Code, we cannot assure you that the IRS will not challenge this position or continue to provide favorable determination letters. Moreover, the IRS' 401(k) guidance and qualification requirements are not applicable to the operation of our cafeteria plans.
If we are not recognized as an employer under the Code or ERISA, we may be required to change the method by which we report and remit payroll taxes to the tax authorities and the method by which we provide, or discontinue providing, certain employee benefits to our WSEs, which could have a material adverse effect on our business and results of operations.
We must also qualify as an employer of our WSEs under state regulations, which govern licensing, certification and registration requirements for PEOs. Forty-two states have passed such laws and other states may implement such requirements in the future. While we believe that we qualify as an employer of our WSEs under these state regulations, these requirements vary from state to state and change frequently and if we are not able to satisfy existing or future licensing requirements or other applicable regulations of any states, we may be prohibited from doing business in that state.
Cyber-attacks or security breaches could result in reduced revenue, increased costs, liability claims or damage to our reputation.
Maintaining the security of our IT infrastructure and the confidentiality of our, our clients' and WSEs' personal data and information is paramount for us and our clients. Clients using our technology platform rely on the security of our IT infrastructure to ensure the reliability of our products and services and the protection of their and their WSEs data. We use and store significant personal data and confidential information about our clients, WSEs and employees, including bank account and social security numbers, tax return data, certain medical information, retirement account information and payroll data. Threats to security can take a variety of forms. Hackers may develop and deploy viruses, worms and other malicious software programs that attack our networks and data centers. Sophisticated organizations or individuals may launch targeted attacks using novel methods to gain access to our networks, applications and confidential data. Although we rely on standard security systems, development practices and third-party assessment service to provide the security and authentication necessary to effect secure transmission of data, these threats may result in breaches of ou

 
 
 
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r network or data security, disruptions of our internal systems and business applications, impairment of our ability to provide services to our customers, product development delays, harm to our competitive position from the compromise of confidential business information, or other negative impacts on our business.
Maintaining the security of our WSEs' information is particularly important to us as a sponsor of employee benefit plans with access to certain personal health information. The manner in which we manage protected health information (PHI) is subject to HIPAA and the HITECH Act. Although we maintain, and actively seek to improve, security measures and infrastructure designed to protect against unauthorized access to this sensitive data, cyber-attacks and security breaches remain a significant threat to our business. Any security breach could result in the access, public disclosure, loss or theft of the confidential and personal data of our clients and WSEs, which could negatively affect our ability to attract new clients, cause existing clients to terminate their agreements with us, result in reputational damage and subject us to lawsuits, regulatory fines, or other actions or liabilities which could materially and adversely affect our business and operating results.
In providing our services, we also rely on third-party service providers and products, such as insurance carriers, to process sensitive information about our clients, WSEs and employees. Through contractual provisions, we take steps to require that our service providers protect sensitive information. However, we cannot provide assurances as to the security steps taken by such providers. Any security breach or other disruption of our third-party service providers that results in an inadvertent disclosure or loss of confidential information could adversely affect our reputation and our business.
We devote resources to defend against security threats, both to our internal IT systems and those of our customers. We focus our defense efforts on the following cyber-security discipline areas:
security threat detection and prevention,
data loss prevention,
identity and access management,
audit, policies and controls, and
product security.
The cost of these precautionary measures could reduce our operating margins.
Any cyber-attack or security breach that accesses or discloses sensitive data may affect negatively our reputation and our client relationships, and the cost of remediating any attack, breach or disclosure could have a material adverse effect on our business.
Unexpected changes in workers' compensation and health insurance claims by worksite employees could harm our business.
Our insurance costs, which make up a significant portion of our overall costs, are impacted significantly by our WSEs’ health and workers' compensation insurance claims experience. We establish reserves to provide for the estimated costs of reimbursing our workers' compensation and health insurance carriers under our insurance policies, but the volume and severity of claims activity is inherently unpredictable. If we experience a sudden or unexpected increase in claim activity, our costs could increase, and it could be more difficult to secure replacement insurance policies on competitive terms once our current policies expire. Estimating these reserves involves our consideration of a number of factors and requires significant judgment. If there is an unexpected increase in the severity or frequency of claims activity of our WSEs (including activity arising from any of a number of factors that affect claim activity levels, such as changes in general economic conditions, claims differing significantly from expectations for new and existing clients, proposed and enacted regulatory changes, and terrorism, disease outbreaks or other catastrophic events ), or if we subsequently receive updated information indicating insurance claims were higher than previously estimated and reported, our insurance costs could be higher in that period or subsequent periods as we adjust our reserves accordingly, which could have a material adverse effect on our business. We have experienced insurance cost variability due to claims activity in the past and could have similar or worse experience in the future.
Our fully-insured agreements with our health insurance carriers include non-guaranteed cost policies that typically include limits to our exposure for individual claims, which are referred to as pooling limits, and limits to our maximum aggregate exposure for claims in each policy year. Refer to Note 1 in Part II, Item 8 of this Form 10-K for further

 
 
 
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discussion of these policies. We have experienced variability, and may experience variability in the future, in the amounts that we are required to pay our health insurance carriers for group health insurance expenses incurred by WSEs within our deductible layer under non-guaranteed cost policies, based on continually changing trends in the frequency and severity of claims. These historical trends may change, and other seasonal trends and variability may develop, which may make it more difficult for us to manage this aspect of our business and which may have a material adverse effect on our business.
Client unemployment tax rates can change based on factors outside of our control, which could adversely affect client retention and growth.
We must comply with federal unemployment tax regulations and state unemployment tax regulations where our clients are located. Unemployment taxes are generally based on taxable wages. The tax rates vary by state and are determined, in part, based on our prior years’ compensation and unemployment claims experience in each state. Certain rates are also determined, in part, by each client’s own compensation and unemployment claims experience. In addition, some states can retroactively increase unemployment tax rates to cover deficiencies in the unemployment tax funds, and federal unemployment taxes can be retroactively increased in states that have failed to timely repay federal unemployment loans. It may be difficult for us to recover increased taxes from our clients in the event of such retroactive tax increases.
In addition, adverse U.S. economic conditions and associated reductions in employment levels can place strain on unemployment systems, which has resulted in substantial increases in state and federal unemployment tax rates over the past few years and this trend may continue. In some states, our clients may face higher rates as a result of these increases under a co-employment relationship with us than they would alone. While we have taken steps to mitigate the risk of fluctuations in state and federal unemployment tax rates, including reporting and remitting unemployment insurance taxes or contributions at the client level and/or under the client’s own account number in approximately 40 states, unexpected state and federal unemployment tax increases or regulatory changes could adversely affect our ability to retain existing clients or attract new clients.
Our results of operations may fluctuate as a result of numerous factors, many of which are outside of our control.
Our future operating results are subject to quarterly variations based upon a variety of factors, many of which are not within our control, including, without limitation:
the volume and severity of health and workers' compensation insurance claims by our WSEs, recorded as part of our insurance costs, and the timing of related claims information provided by our insurance carriers,
the amount and timing of our other insurance costs, operating expenses and capital expenditures
the number of our new clients initiating service and the number of WSEs employed by each new client,
the loss or merger of existing clients,
reduction in the number of WSEs employed by existing clients,
the timing of client payments and payment defaults by clients,
costs associated with our acquisitions of companies, assets and technologies,
payments or drawdowns on our credit facility,
unanticipated expenses such as litigation or other dispute-related settlement payments,
expenses we incur for geographic and service expansion,
changes in laws or adverse interpretation of laws increasing our regulatory compliance costs,
changes in our effective tax rate, and
the impact of new accounting pronouncements.
Many of the above factors are discussed in more detail elsewhere in this “Risk Factors” section and in Part II, Item 7 of this Form 10-K. Many of these factors are outside our control, and the variability and unpredictability of these factors

 
 
 
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have in the past and could in the future cause us to fail to meet our expectations and the expectations of investors and any industry analysts who cover our shares for revenues or other results of operations for a given period, which could result in a decline in our share price and reduced liquidity in our shares. In addition, the occurrence of one or more of these factors might cause our results of operations to vary widely, which could lead to negative impacts on our margins, short-term liquidity or ability to retain or attract key personnel, and could cause other unanticipated issues, including a downgrade of our shares by or change in opinion of industry analysts and a related decline in our share price. Accordingly, we believe that quarter-to-quarter and annual comparisons of our revenues, results of operations and cash flows may not be meaningful and should not be relied upon as an indication of our future performance.
Any failure in our business systems could reduce the quality of our business services, which could harm our reputation and expose us to liability.
Our business systems rely on the complex integration of numerous hardware and software subsystems to manage client transactions including the processing of employee, payroll and benefits data. These systems can be disrupted by, among other things, equipment failures, computer server or systems failures, network outages, malicious acts, software errors or defects, vendor performance problems, power failures, natural disasters, terrorist actions or similar events. Any delay or failure in our systems that impairs our ability to communicate electronically with our clients, employees or vendors or our ability to store or process data could harm our reputation and our business. For example, errors in our products and services, such as the erroneous denial of healthcare benefits or delays in making payroll, could expose our clients to liability claims from improperly serviced WSEs, for which we may be contractually obligated to provide indemnification.

In addition, the software, hardware and networking technologies we use must be frequently and rapidly upgraded in response to technological advances, competitive pressures and consumer expectations. To succeed, we need to effectively develop, or license from third parties, and integrate these new technologies as they become available to improve our services. We rely on enterprise software applications licensed from third parties that are upgraded from time to time. Any difficulties we encounter in adapting application upgrades to our systems could harm our performance, delay or prevent the successful development, introduction or marketing of new services.

New products or upgrades may not be released according to schedule, or may contain defects when released. Difficulties in integrating new technologies could result in adverse publicity, loss of sales, delay in market acceptance of our services, or client claims against us, any of which could harm our business. We could also incur substantial costs in modifying our services or infrastructure to adapt to these changes. In addition, we could lose market share if our competitors develop technologically superior products and services.
We have identified material weaknesses in our internal control over financial reporting that could, if not remediated, result in material misstatements in our financial statements.
In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2016, we have identified and concluded that we continue to have material weaknesses relating to our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Refer to Part II, Item 9A in this Form 10-K for more details. While the material weaknesses described in that section create a reasonable possibility that an error in financial reporting may go undetected, after extensive review and the performance of additional analysis and other procedures, no material adjustments, restatement or other revisions to our previously issued financial statements were required.
As further described in Part II, Item 9A of this form 10-K below, we are taking specific steps to remediate the material weaknesses that we identified by implementing and enhancing our control procedures. These material weaknesses will not be remediated until all necessary internal controls have been implemented, repeatably tested and determined to be operating effectively. In addition, we may need to take additional measures, including system migration and automation, to address the material weaknesses or modify the remediation steps, and we cannot be certain that the measures we have taken, and expect to take, to improve our internal controls will be sufficient to address the issues identified, to ensure that our internal controls are effective or to ensure that the identified material weaknesses will not result in a material misstatement of our annual or interim consolidated financial statements. Implementing any appropriate changes to our internal controls may distract our officers and employees and require material cost to implement new process or modify our existing processes. Moreover, other material weaknesses or deficiencies may develop or be identified in the future. If we are unable to correct material weaknesses or deficiencies in internal controls

 
 
 
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in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission, will be adversely affected. This failure could negatively affect the market price and trading liquidity of our common stock, lead to delisting, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition.
We have acquired, and may in the future acquire, other businesses and technologies, which can divert management's attention and create integration risks and other risks for our business.
We have completed numerous acquisitions of other businesses and technologies, and we expect that we will continue to grow through similar future acquisitions. Such acquisitions involve numerous other risks, including:
identifying attractive acquisition candidates,
over-valuing and over-paying for acquisition candidates,
integrating the operations, systems, technologies, services and personnel of the acquired companies, including the migration of WSEs from an acquired company’s technology platform to ours,
establishing or maintaining internal controls, procedures and policies relating to the acquired systems and processes, including the potential for actual or perceived control weaknesses associated with or arising from the acquisitions and integration of acquired systems,
diversion of management’s attention from other business concerns,
litigation resulting from activities of the acquired company, including claims from terminated employees, clients, former stockholders and other third parties,
insufficient revenues to offset increased expenses associated with the acquisitions and unanticipated liabilities of the acquired companies,
insufficient indemnification or security from the selling parties for legal liabilities that we may assume in connection with our acquisitions,
entering markets in which we have no prior experience and may not succeed,
risks associated with foreign acquisitions, such as communication and integration problems resulting from geographic dispersion and language and cultural differences, compliance with foreign laws and regulations and general economic or political conditions in other countries or regions,
potential loss of key employees of the acquired companies, and
impairment of relationships with clients and employees of the acquired companies or our clients and employees as a result of the integration of acquired operations and new management personnel.
If we fail to integrate newly acquired businesses effectively, we might not achieve the growth, service enhancement or operational efficiency objectives of the acquisitions, and our business, results of operations and financial condition could be harmed.

 
 
 
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We may pay for acquisitions by issuing additional shares of our common stock, which would dilute our stockholders, or by issuing debt, which could include terms that restrict our ability to operate our business or pursue other opportunities and subject us to meaningful debt service obligations. We may also use significant amounts of cash to complete acquisitions. To the extent that we complete acquisitions in the future, we likely will incur future depreciation and amortization expenses associated with the acquired assets. We may also record significant amounts of intangible assets, including goodwill, which could become impaired in the future. Any such impairment charges would adversely affect our results of operations.
Our SMB clients are particularly affected by volatility in the financial and economic environment, which could harm our business.
Our clients are small and mid-sized businesses that we believe can be particularly susceptible to changes in the level of overall economic activity in the markets in which we operate. During periods of weak economic conditions, small business failures tend to increase and employment levels tend to decrease. Current or potential clients may react to weak or forecasted weak economic conditions by reducing employee headcount or wages, bonuses or benefits levels, any of which would affect our revenues, and may affect our margins, because we may be unable to reduce our operating expenses sufficiently enough or quickly enough to offset the drop in revenues. It is difficult for us to forecast future demand for our services due to the inherent difficulty in forecasting the direction, strength and length of economic cycles. These conditions may affect the willingness of our clients and potential clients to pay outside vendors for services like ours, and may impact their ability to pay their obligations to us on time, or at all. In addition, as a result of macroeconomic factors, interest rates may become more volatile. Rising interest rates may negatively affect our net income due to increased interest expense. Increased interest rate volatility could also negatively impact our clients' and prospects' access to credit. If businesses have difficulty obtaining credit, business growth and new business formation may be impaired, which could also harm our business.
Even modest downturns in economic activity on a regional or national level could have a material adverse effect on our financial condition or results of operations.
Our business and operations have experienced rapid growth in recent periods, and if we are unable to effectively manage this growth, our business and results of operations may suffer.
We have experienced rapid growth and have significantly expanded our operations in recent periods, which has placed a strain on our management and our administrative, operational and financial infrastructure. Managing this growth requires us to further refine our operational, financial and management controls and reporting systems and procedures.
Our ability to effectively manage any significant growth of our business will depend on a number of factors, including our ability to do the following:
effectively recruit, integrate, train and motivate new employees, while retaining our existing employees, maintaining the beneficial aspects of our corporate culture and effectively executing our business plan,
satisfy our existing clients and identify and acquire new clients,
enhance the breadth and quality of our services,
continue to improve our operational, financial and management controls, and
make sound business decisions in light of the scrutiny associated with operating as a public company.
These activities will require significant operating and capital expenditures and allocation of valuable management and employee resources, and we expect that our growth will continue to place significant demands on our management and on our operational and financial infrastructure.
Our future financial performance and our ability to execute on our business plan will depend, in part, on our ability to effectively manage any future growth. We cannot assure you that we will be able to do so in an efficient or timely manner, or at all. In particular, any failure to successfully implement systems enhancements and improvements will likely negatively impact our ability to manage our expected growth, ensure uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public companies. If we fail to manage our growth effectively, our costs and expenses may increase more than we expect them to, which in turn could harm our business, financial condition and results of operations.



 
 
 
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If our vertical strategy is unsuccessful, we may not be able to grow our business at historical rates we experienced.
We have developed an industry vertical business strategy and we plan to continue to devote significant resources and time in pursuit of this strategy. Under our industry vertical strategy, our sales force, product development, and service teams are increasingly focused on specific business sectors. We cannot assure you that our industry vertical approach will resonate with our existing and prospective clients or that we will target the right industries or implement our strategy in a timely and effective manner. If our vertical strategy is unsuccessful, our business may not grow at the rate that we anticipate, which could have a material adverse effect on our financial condition and results of operations.
We have rapidly grown our direct sales force historically and we currently expect to rely on this sales force to promote our industry vertical strategy and sell our solutions. Competition for skilled sales personnel is intense, and we cannot assure you that we will be successful in attracting, training and retaining qualified sales personnel, or that our newly hired sales personnel will function effectively, either individually or as a group. In addition, our newly hired sales personnel are typically not productive for some period of time following their hiring. This results in increased near-term costs to us relative to the sales contributions of these newly hired sales personnel. If we are unable to effectively train our sales force and benefit from greater productivity of our sales representatives, or if our sales force is otherwise unable to sell our solutions as we anticipate, our revenues likely will not increase at the rate that we anticipate, which could have a material adverse effect on our business, financial condition and results of operations.
We are subject to legal proceedings that may result in adverse outcomes.
We are subject to claims, suits, government investigations, and proceedings arising from the ordinary course of our business. Refer to Note 13 in Part II, Item 8 of this Form 10-K for additional information about the legal proceedings we are currently involved in and future proceedings that we may face. Current and future legal proceedings may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, results of operations, financial condition and liquidity.
Changes in our income tax positions or adverse outcomes resulting from on-going or future tax audits, which could harm our business, operating results, financial condition and prospects.
Significant judgments and estimates are required in determining our provision for income taxes and other tax liabilities. Our provision for income taxes, results of operations and cash flows may be impacted if any of our tax positions are challenged and successfully disputed by the tax authorities. In determining the adequacy of our tax provision, we assess the likelihood of adverse outcomes that could result if our tax positions were challenged by the IRS and other tax authorities. The tax authorities in the U.S. regularly examine our income and other tax returns. Refer to Note 12 in Part II, Item 8 of this Form 10-K for additional details regarding our on-going tax examinations and disputes. The ultimate outcome of tax examinations and disputes cannot be predicted with certainty. Should the IRS or other tax authorities assess additional taxes as a result of these or other examinations, we may be required to record charges to operations that could have a material impact on our results of operations, financial position or cash flows.
Adverse changes in our relationships with key vendors, particularly our employee benefit and workers' compensation insurance carriers, could harm our business.
Our success depends in part on our ability to establish and maintain arrangements and relationships with the key vendors that supply us with essential components of our services, particularly including the insurance carriers that provide health and workers' compensation insurance coverage for our WSEs. Failure by these service providers, for any reason, to deliver their services in a timely or cost effective manner could result in material interruptions to our operations, impact client relations, and result in significant penalties or other liabilities to us. If any of these vendors decide to terminate their relationship with us, particularly our employee benefit carriers, we may have difficulty obtaining replacement services at reasonable rates or on a timely basis, if at all. The loss of any one or more of our key vendors, or our inability to partner with certain vendors that are better-known or more desirable to our clients or potential clients, could have a material adverse effect on our financial condition and results of operations.
For example, if we are unable to maintain and offer competitive health and/or workers' compensation insurance rates to our clients through well-known insurance carriers, it could affect our ability to attract and retain clients, which would have a material adverse effect on our business. Where we offer our clients and their WSEs group health insurance policies with respect to which our carriers set the premiums and for which we are not responsible for any deductible, the rates set by our carriers on such policies may not be competitive. Further, for policies with respect to which we agree to reimburse our carriers for any claims that they pay within an agreed-upon deductible layer, we may not be able to control costs through the deductible layer in a way that would make our rates competitive. In addition, broad

 
 
 
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adoption of our services in certain geographies or industries may make it more difficult for us to obtain competitive health and/or workers' compensation insurance rates due to concentration of clients within a particular geography or industry.
We are subject to client attrition.
We regularly experience client attrition due to a variety of factors, including cost, client merger and acquisition activity, increases in administrative fees and insurance costs, client business failure, effects of competition and clients deciding to bring their HR administration in-house. Our standard client service agreement can be cancelled by us or by the client without penalty with 30 days’ prior written notice. Clients who intend to cease doing business with us often elect to do so effective as of the beginning of a calendar year. As a result, we have historically experienced our largest concentration of client attrition in the first quarter of each year. In addition, we experience higher levels of client attrition in connection with renewals of the health insurance we provide for WSEs in the event that such renewals result in increased premiums that we pass on to our clients. If we were to experience client attrition in excess of our historic annual attrition rate, it could have a material adverse effect on our business, financial condition and results of operations.
The terms of our credit facility may restrict our current and future operations, which would impair our ability to respond to changes in our business and to manage our business.
Our credit facility contains, and any future indebtedness of ours would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us subject to customary exceptions, including restricting our ability to:
incur, assume or guarantee additional debt,
pay dividends or distributions or redeem or repurchase capital stock,
incur or assume liens,
make loans, investments and acquisitions,
engage in sales of assets and subsidiary stock,
enter into sale-leaseback transactions,
enter into certain transactions with affiliates,
enter into certain hedging agreements,
enter into new lines of business,
prepay certain indebtedness,
transfer all or substantially all of our assets or enter into merger or consolidation transactions with another person, and
enter into agreements that prohibit the incurrence of liens or the payment by our subsidiaries of dividends and distributions.
Our failure to comply with these restrictions and the other terms and conditions under our credit facility could result in a default, which in turn could result in the termination of the lenders’ commitments to extend further credit to us under our credit facility and acceleration of a substantial portion of our indebtedness then outstanding under our credit facility. If that were to happen, we may not be able to repay all of the amounts that would become due under our indebtedness or refinance our debt, which could materially harm our business and force us to seek bankruptcy protection.
Atairos, our largest stockholder, may have significant influence over our Company, and the existing ownership of capital stock, and thus the voting control, remains concentrated in our executive officers, directors and their affiliates, which limits your ability to influence corporate matters.
On February 1, 2017, an entity affiliated with Atairos Group, Inc. (together with its affiliates, “Atairos”) became our largest stockholder when it acquired the shares of TriNet common stock previously held by General Atlantic. In connection with this transaction, we appointed Michael J. Angelakis, the Chairman and CEO of Atairos, to our board

 
 
 
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of directors and agreed to nominate Mr. Angelakis or another designee of Atairos reasonably acceptable to our Nominating and Corporate Governance Committee for election at future annual meetings until Atairos’ beneficial ownership falls below 15% of our common stock. As of February 1, 2017, Atairos beneficially owned approximately 28.5% of our outstanding common stock, and all of our directors, officers and their affiliates, including Atairos, beneficially own, in the aggregate, approximately 41.1% of our outstanding common stock. As a result, of the foregoing, Atairos, particularly when acting with our executive officers, directors and their affiliates who beneficially owned in the aggregate, approximately 41.1% of our outstanding common stock, will be able to exert substantial influence on all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit the ability of other stockholders to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and bylaws include provisions that:
establish a classified board of directors so that not all members of our board of directors are elected at one time;
permit our board of directors to establish the number of directors,
provide that directors may only be removed “for cause”,
require super-majority voting to amend some provisions in our certificate of incorporation and bylaws,
authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan,
eliminate the ability of our stockholders to call special meetings of stockholders,
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders,
provide that our board of directors is expressly authorized to make, alter or repeal our bylaws, and
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for our stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any holder of at least 15% of our capital stock for a period of three years following the date on which the stockholder became a 15% stockholder.
Most of our clients are concentrated in certain geographies and a relatively small number of industries, making us vulnerable to downturns in those geographies and industries.
Most of our clients are concentrated in certain geographies and operate in a relatively small number of industries, including the technology, life sciences, not-for-profit, professional services, financial services, real estate, retail, manufacturing, and hospitality industries. As a result, if any of those geographic regions or specific industries suffers a downturn, the portion of our business attributable to clients in that region or industry could be adversely affected, which could have a material adverse effect on our financial condition or results of operations.

 
 
 
20

RISK FACTORS
 


Our industry is highly competitive, which may limit our ability to maintain or increase our market share or improve our results of operations.
We face significant competition on a national and regional level from a number of companies purporting to deliver a range of bundled services that are generally similar to the services we provide, including large professional employer organizations such as the TotalSource business unit of Automatic Data Processing, Inc. and Insperity, Inc., as well as specialized and small professional employer organization service providers. If and to the extent that we and other companies providing these services are successful, we anticipate that future competitors will enter this industry. Some of our current, and any future, competitors have or may have greater marketing and financial resources than we have, and may be better positioned than we are in certain markets. Increased competition in our industry could result in price reductions or loss of market share, any of which could harm our business. We expect that we will continue to experience competitive pricing pressure. If we cannot compete effectively, our market share, business, results of operations and financial condition may suffer.
In addition to competition from other professional employer organizations, we also face significant competition in the form of companies serving their HR needs in both traditional and non-traditional manners. These forms of competition include:
HR and information systems departments and personnel of companies that perform their own administration of employee benefits, payroll and HR,
providers of certain endpoint HR services, including payroll, employee benefits and business process outsourcers with high-volume transaction and administrative capabilities, such as Automatic Data Processing, Inc., Paychex, Inc. and other third-party administrators,
employee benefit exchanges that provide benefits administration services over the Internet to companies that otherwise maintain their own employee benefit plans; and
insurance brokers who allow third party HR systems to integrate with their platform.
We believe that our services are attractive to many SMBs in part because of our ability to provide access to TriNet-sponsored workers' compensation, health care and other benefits programs to them on a cost-effective basis. We compete with insurance brokers and other providers of this coverage in this regard, and our offerings must be priced competitively with those provided by these competitors in order for us to attract and retain our clients.
We may not be successful in convincing potential clients that the use of our services is a superior, cost-effective means of satisfying their HR obligations relative to the way in which they currently satisfy these obligations.
If we cannot compete effectively against other professional employer organizations or against the alternative means by which companies meet their HR obligations, or if we are unable to convince clients or potential clients of the advantages of our offerings, our market share and business may suffer, resulting in a material, adverse effect on our financial condition and results of operations.
Our stock price may be volatile or may decline regardless of our operating performance, resulting in substantial losses for our stockholders.
The market price of our common stock has been, and is likely to continue to be, volatile for the foreseeable future. Since shares of our common stock were sold in our initial public offering in March 2014 at a price of $16.00 per share, the daily closing price of our common stock in 2016 ranged from $11.10 to $26.64 per share through December 31, 2016. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including the factors listed below and other factors described in this “Risk Factors” section:
actual or anticipated fluctuations in our results of operations,
any financial projections we provide to the public, any changes in these projections or our failure to meet these projections,
failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors,

 
 
 
21

RISK FACTORS
 


ratings changes by any securities analysts who follow our company,
announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures or capital commitments,
changes in operating performance and stock market valuations of other business services companies generally, or those in our industry in particular,
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole,
changes in our board of directors or management,
sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders,
lawsuits threatened or filed against us,
short sales, hedging and other derivative transactions involving our capital stock,
general economic conditions in the United States and abroad, and
other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many business services companies. Stock prices of many business services companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. Securities litigation could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, results of operations and financial condition.
Item 1B. Unresolved Staff Comments
None.

 
 
 
22

PROPERTIES
 


Item 2. Properties
We lease space for 53 offices in various states in the U.S., including the following:
Corporate:
Client Service Centers:
• San Leandro, California
• Pleasanton, California
 
• Bradenton, Florida
Technology Center:
• Reno, Nevada
• Austin, Texas
• Fort Mill, South Carolina
All of these leases expire at various times up through 2024. We believe that our leases are sufficient for our current purposes and long term growth and expansion goals.
Item 3. Legal Proceedings
For the information required in this section, refer to Note 13 in Part II, Item 8 of this Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.


 
 
 
23

STOCK ACTIVITIES
 


PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders of Record
Our common stock has been listed on the New York Stock Exchange under the symbol “TNET” since March 2014. The following table sets forth for the periods indicated the high and low sale prices per share of our common stock as reported on the New York Stock Exchange:
 
Year 2016
Year 2015
 
High
Low
High
Low
First Quarter
$
18.78

$
12.28

$
37.88

$
30.04

Second Quarter
$
20.86

$
14.57

$
37.27

$
25.23

Third Quarter
$
22.65

$
20.53

$
26.88

$
16.33

Fourth Quarter
$
26.32

$
17.80

$
20.05

$
16.79

On February 23, 2017, the last reported sales price of our common stock on the New York Stock Exchange was $26.35 per share. As of February 23, 2017, we had 42 holders of record of our common stock per Computershare Trust Company N.A., our transfer agent. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividend Policy
We have not declared or paid cash dividends in 2016 or 2015. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions under our credit facility (refer to Note 8 in Item 8 of this Form 10-K), capital requirements, business prospects and other factors our board of directors may deem relevant.

 
 
 
24

STOCK ACTIVITIES
 


Performance Graph
The following graph compares the cumulative return on our common stock since the initial public offering in March 2014 with the cumulative return on the S&P 500 Index and a Peer Group Index.
COMPARISON OF 33 MONTH CUMULATIVE TOTAL RETURN
Among TriNet Group, Inc., the S&P 500 Index, and a Peer Group*
tnet-123116_chartx20538.jpg

* The Peer Group Index consists of the following companies:
Automatic Data Processing, Inc.
Insperity, Inc.
Paychex, Inc.

Barrett Business Services, Inc.
Intuit, Inc.
 
Heartland Payment Systems Inc. historically was included in the Peer Group Index. It is excluded from the graph above because it was acquired in April 2016 and ceased to be an SEC registrant.

 
 
 
25

STOCK ACTIVITIES
 


Issuer Purchases of Equity Securities
The following table provides information about our purchases of TriNet common stock during the fourth quarter of 2016:
Period
Total Number of
Shares Purchased
Average Price
Paid Per Share
Total Number of
Shares Purchased as Part of Publicly
Announced Plans
Approximate Dollar Value
of Shares that May Yet Be Purchased
Under the Plans
October 1 - October 31, 2016
850,935

$
20.47

849,790

$
20,483,156

November 1 - November 30, 2016
59,621

$
22.20


$
70,483,156

December 1 - December 31, 2016
419,852

$
25.14

414,675

$
60,024,244

Total
1,330,408

 
1,264,465


In 2016, our board of directors approved a $100 million incremental increase to our ongoing stock repurchase program with no expiration date. We repurchased a total of approximately $71.6 million of our outstanding common stock in 2016. As of December 31, 2016, approximately $60.0 million remained available from previous authorizations approved by the board of directors. Stock repurchases under the program are primarily intended to offset the dilutive effect of share-based employee incentive compensation. In 2016, we repurchased shares using a Rule 10b5-1 plan. The purchases were funded from existing cash and cash equivalents balances.
Our stock repurchases and dividends are subject to certain restrictions under the terms of our credit facility. For more information about our stock repurchases and dividends, refer to Note 8 and Note 9 in Item 8 of this Form 10-K.


 
 
 
26

SELECTED FINANCIAL DATA
 


Item 6. Selected Financial Data
The following selected consolidated financial and other data should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as our audited consolidated financial statements and related notes included in Item 8 of this Form 10-K.
 
Year Ended December 31,
(in thousands, except per share data)
2016
2015
2014
2013
2012
Income Statement Data:
 
 
 
 
 
Total revenues
$
3,060,313

$
2,659,288

$
2,193,531

$
1,644,275

$
1,019,061

Operating income
123,958

78,317

86,791

66,337

61,828

Net income
61,406

31,695

15,497

13,147

31,832

Diluted net income per share of common stock
0.85

0.44

0.22

0.24

0.63

Non-GAAP measures (1):
 
 
 
 
 
Net Service Revenues (1)
646,561

546,912

507,216

417,690

269,036

Net Insurance Service Revenues (1)
199,806

145,625

165,142

145,318

120,803

Adjusted EBITDA (1)
186,554

151,340

165,319

136,027

95,362

Adjusted Net income (1)
86,694

70,720

74,392

57,456

47,431

 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
Cash and cash equivalents
$
184,004

$
166,178

$
134,341

$
94,356

$
63,749

Working capital
156,771

112,428

121,290

81,528

61,340

Total assets
2,095,143

2,092,449

2,340,580

1,434,738

887,727

Notes and capital leases payable
459,054

493,935

545,150

818,877

301,334

Total liabilities
2,060,553

2,084,368

2,366,339

1,705,100

830,407

Convertible preferred stock



122,878

122,878

Total stockholders’ equity (deficit)
34,590

8,081

(25,759
)
(393,240
)
(65,558
)
 
 
 
 
 
 
Cash Flow Data:
 
 
 
 
 
Net cash provided by operating activities
$
144,532

$
130,599

$
151,899

$
100,721

$
80,542

Net cash used in investing activities
(27,122
)
(37,689
)
(45,427
)
(212,438
)
(262,608
)
Net cash provided by (used in) financing activities
(99,371
)
(60,752
)
(66,372
)
142,377

214,190

(1)
Refer to Non-GAAP Financial Measures section below for definition and reconciliation from GAAP measures.

 
 
 
27

SELECTED FINANCIAL DATA
 


Significant Transactions Affecting Comparability Between Periods
 
 
Business Acquisitions
Equity and Debt Activities
2014
 
None
• In March, we completed our initial public offering (IPO) by issuing 15,000,000 shares of common stock and received $216.8 million net proceeds.
• As a result of the IPO, all our preferred shares were converted into common stock.
• With the IPO proceeds, the outstanding second lien term loan of $190.0 million was fully paid off.
 
 
 
 
 
 
 
 
2013
 
• We acquired Ambrose for a total of $195.0 million.
• The board of directors declared and paid total special dividends of $357.7 million.
• In August, the outstanding credit facility was amended and restated with:
- A $750.0 million first lien credit facility including a $175.0 million three-year term loan (B-1 term loan), a $455.0 million seven-year term loan (B-2 term loan) and a $75.0 million revolving facility, and
- A $190.0 million second lien seven-year-six-month term loan.
 
 
 
 
 
 
 
 
2012
 
• We acquired SOI, Accord, and App7, Inc. (ExpenseCloud), for a total of $220.0 million.
• The board of directors declared and paid total special dividends of $75.0 million.
• In March, we entered into a credit facility with a $140.0 million five-year term loan and a $35.0 million five-year revolving facility.
• In October, our then outstanding credit facility was amended and restated with a $150.0 million five-year term loan, a $150.0 million six-year term loan and a $50.0 million revolving facility.
 
 
 
 
Non-GAAP Financial Measures
In addition to the selected financial measures presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP), we monitor other non-GAAP financial measures to manage our business, make planning decisions, allocate resources and as performance measures in our executive compensation plan. These key financial measures provide an additional view of our operational performance over the long term and provide useful information in order to maintain and grow our business.
The presentation of the non-GAAP financial measures is to enhance the understanding of certain aspects of our financial performance. It is not meant to be considered in isolation, superior to, or as a substitute for the directly comparable financial measures prepared in accordance with GAAP.

 
 
 
28

SELECTED FINANCIAL DATA
 


Non-GAAP Measure
Definition
How We Use The Measure
Net Service Revenues
• Sum of professional service revenues and Net Insurance Service Revenues, or total revenues less insurance costs.
• Provides a comparable basis of revenues on a net basis. Professional service revenues are represented net of client payroll costs whereas insurance service revenues are presented gross of insurance costs for financial reporting purposes.
• Acts as the basis to allocate resources to different functions and evaluates the effectiveness of our business strategies by each business function, and
• Provides a measure, among others, used in the determination of incentive compensation for management.
Net Insurance Service Revenues
• Insurance revenues less insurance costs.
• Is a component of Net Service Revenues, and
• Provides a comparable basis of revenues on a net basis. Professional service revenues are represented net of client payroll costs whereas insurance service revenues are presented gross of insurance costs for financial reporting purposes. Promotes an understanding of our insurance services business by evaluating insurance service revenues net of our WSE related costs which are substantially pass-through for the benefit of our WSEs. Under GAAP, insurance service revenues and costs are recorded gross as we have latitude in establishing the price, service and supplier specifications.
Adjusted EBITDA
• Net income, excluding the effects of:
- income tax provision,
- interest expense,
- depreciation,
- amortization of intangible assets,
- stock-based compensation expense and,
- in 2014, secondary offering costs related to offering of shares from existing stockholders.
• Provides period-to-period comparisons on a consistent basis and an understanding as to how our management evaluates the effectiveness of our business strategies by excluding certain non-cash charges such as depreciation and amortization that have fluctuated significantly over the past five years, and stock-based compensation recognized based on the estimated fair values. We believe these charges are not directly resulting from our core operations or indicative of our ongoing operations.
• Enhances comparisons to prior periods and, accordingly, facilitates the development of future projections and earnings growth prospects, and
• Provides a measure, among others, used in the determination of incentive compensation for management.
Adjusted Net Income
• Net income, excluding the effects of:
- effective income tax rate (1),
- stock-based compensation,
- amortization of intangible assets,
- non-cash interest expense (2),
- debt prepayment premium,
- in 2014, secondary offering costs related to offering of shares from existing stockholders, and
- the income tax effect (at our effective tax rate (1)) of these pre-tax adjustments.
• Provides information to our stockholders and board of directors to understand how our management evaluates our business, to monitor and evaluate our operating results, and analyze profitability of our ongoing operations and trends on a consistent basis by excluding certain non-cash charges as described above, debt payment premiums and our secondary offering costs as these are not directly resulting from our core operations or indicative of our ongoing operations.




(1)
For purposes of our non-GAAP financial presentation, as a result of a 2015 increase in New York City tax rates and an increase in blended state rates, we have adjusted the non-GAAP effective tax rate to 42.5% for 2016, from 41.5% for 2015 and 39.5% for 2014. These non-GAAP effective tax rates exclude income tax on non-deductible stock-based compensation and discrete items including the cumulative effect of state legislative changes.
(2)
Non-cash interest expense represents amortization and write-off of our debt issuance costs.

 
 
 
29

SELECTED FINANCIAL DATA
 


Reconciliation of GAAP to Non-GAAP Measures

The table below presents a reconciliation of total revenues to Net Service Revenues:
 
Year Ended December 31,
(in thousands)
2016
2015
2014
2013
2012
Total revenues
$
3,060,313

$
2,659,288

$
2,193,531

$
1,644,275

$
1,019,061

Less: Insurance costs
2,413,752

2,112,376

1,686,315

1,226,585

750,025

Net Service Revenues
$
646,561

$
546,912

$
507,216

$
417,690

$
269,036

The table below presents a reconciliation of insurance service revenues to Net Insurance Service Revenues:
 
Year Ended December 31,
(in thousands)
2016
2015
2014
2013
2012
Insurance service revenues
$
2,613,558

$
2,258,001

$
1,851,457

$
1,371,903

$
870,828

Less: Insurance costs
2,413,752

2,112,376

1,686,315

1,226,585

750,025

Net Insurance Service Revenues
$
199,806

$
145,625

$
165,142

$
145,318

$
120,803

The table below presents a reconciliation of net income to Adjusted EBITDA:
 
Year Ended December 31,
(in thousands)
2016
2015
2014
2013
2012
Net income
$
61,406

$
31,695

$
15,497

$
13,147

$
31,832

Provision for income taxes
43,046

28,315

17,579

7,937

20,344

Stock-based compensation
26,497

17,923

10,960

6,113

4,360

Interest expense and bank fees
20,257

19,449

54,193

45,724

9,709

Depreciation
19,351

14,612

13,843

11,737

11,676

Amortization of intangible assets
15,997

39,346

52,302

51,369

17,441

Secondary offering costs


945



Adjusted EBITDA
$
186,554

$
151,340

$
165,319

$
136,027

$
95,362


The table below presents a reconciliation of net income to Adjusted Net Income:
 
Year Ended December 31,
(in thousands)
2016
2015
2014
2013
2012
Net income
$
61,406

$
31,695

$
15,497

$
13,147

$
31,832

Effective income tax rate adjustment
(1,346
)
3,411

4,514



Stock-based compensation
26,497

17,923

10,960

6,113

4,360

Amortization of intangible assets
15,997

39,346

52,302

51,369

17,441

Non-cash interest expense
3,827

3,610

21,880

13,577

3,768

Debt prepayment premium


3,800



Secondary offering costs


945



Income tax impact of pre-tax adjustments
(19,687
)
(25,265
)
(35,506
)
(26,750
)
(9,970
)
Adjusted Net Income
$
86,694

$
70,720

$
74,392

$
57,456

$
47,431



 
 
 
30

MANAGEMENT'S DISCUSSION AND ANALYSIS
 


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
We are a leading provider of comprehensive HR solutions for SMBs under a co-employment, or PEO model. We offer a comprehensive HR solution to our clients using cloud based software systems, enabled with our HR professionals and expertise in combination with competitive benefit offerings, insurance coverage and risk mitigation services. In 2016 we:
served over 13,900 clients, co-employed approximately 338,000 WSEs and we increased our Total WSEs 4% over 2015,
processed over $34 billion in payroll and payroll tax payments for our clients in 2016 with an increase of 12% over 2015,
reorganized our sales force by adding national vertical sales leaders and focused our marketing and product development efforts on an industry vertical basis,
launched three vertical products - TriNet Technology, TriNet Nonprofit and TriNet Financial Services, and
completed the consolidation of the Accord and Ambrose legacy platforms through the migration of our clients to the TriNet platform and retirement of these legacy software platforms.
Our financial highlights for the 2016 year include:
Total revenues increased 15% to $3.1 billion, while Net Service Revenues increased 18% to $646.6 million,
Operating Income increased 58% to $124.0 million,
Net income increased 94% to $61.4 million, or $0.85 per diluted share, while Adjusted Net Income increased 23% to $86.7 million,
Adjusted EBITDA increased 23% to $186.6 million, and
Cash provided by operating activities increased 11% to $144.5 million.
Our Vertical Approach
Our vertical approach enables us to provide better HR solutions and services tailored to the specific needs of clients in these verticals. In addition to sales and marketing, our client services and product development teams are increasingly focused on specific industry verticals. We believe this vertical approach is an important competitive differentiator for TriNet.
We sell our services primarily through our direct sales organization, which consists of sales representatives who focus on serving clients in specific industry vertical markets. Our sales representatives are supported by marketing, inside sales, lead generation and lead incubation efforts as well as referral networks.
Historically, year over year comparison of our Total Sales Representatives has served as an indicator of our success in growing our business. During 2016, the vertical sales leaders consciously slowed down hiring while they assessed, recalibrated, and realigned their sales teams. Going forward, we expect to grow the salesforce strategically within the assigned vertical markets. While having a productive direct sales force is important to the success of our business, we no longer rely on the absolute number of sales representatives by itself as an indicator of the growth of our revenues or our business overall.

 
 
 
31

MANAGEMENT'S DISCUSSION AND ANALYSIS
 


Our Technology
We made significant investments in our proprietary, cloud-based HR systems, including implementing client information and management software to provide our clients with enhanced features and functionality. In addition, we invested in a common technology platform as it is an important enabler of our products. It allows us to offer industry–specific solutions in a scalable manner while delivering frequent enhancements that benefit all clients. In 2016, we completed the consolidation and retirement of two of our three legacy platforms that we acquired (Accord and Ambrose). We plan to consolidate our remaining legacy acquired platform (SOI) onto our TriNet platform in 2017.
For 2016, our systems development and programming costs were $31.4 million, representing 1% of our total revenues and 5% of our Net Service Revenues. Combined with our technology related capital expenditures, our total technology investment was $62.1 million, representing 2% of our total revenues and 10% of our Net Service Revenues.
We plan to continue to invest to upgrade and improve technology offerings, including enhancements of our online interface and mobile applications to provide better client and individual WSE experience.
Insurance
We have added senior insurance management and in-house actuarial capabilities to allow us to improve our risk monitoring and management of our insurance pricing with the expectation that we can continue to provide a cost effective and competitive solution to clients that is priced to the risk incurred. In 2015, we started an effort to reprice our insurance service offerings to our clients. With this substantially complete, total revenues increased 15% to $3.1 billion and Net Insurance Service Revenue increased 37% to $199.8 million in 2016.
Our People
As we grow, we continue to invest in our employees and their capabilities. In 2016, for example, we increased our in-house Risk Management expertise, most notably through investing in our actuarial pricing and claims management employees as well as in our internal financial control functions. We also continued to invest in growing our sales functions, hiring and retaining sales reps with industry experience, which resulted in a direct sales organization of over 450 direct sales representatives. From 2015 to 2016, we incurred additional salary and salary related costs of $51 million.
We will continue to search, select and hire people to serve our current clients and find new clients as our business grows and add to our skills and capabilities in order to provide innovative HR solutions for our clients.
We expect our employee-related expenses will continue to grow in absolute dollar amounts in the foreseeable future as we continue to drive our growth through vertical product delivery and platform integrations, while also working to improve our systems and processes and gain efficiencies.



 
 
 
32

MANAGEMENT'S DISCUSSION AND ANALYSIS
 


Results of Operations
The following table summarizes our results of operations for the three years ended December 31, 2016. For details of the critical accounting judgments and estimates that could affect the Results of Operations, see the Critical Accounting Judgments and Estimates section within Management's Discussion and Analysis (MD&A).
 
Year Ended December 31,
% Change
(in thousands, except operating metrics data)
2016
2015
2014
2016 vs. 2015
2015 vs. 2014
Consolidated Statements of Income:
 
 
 
 
 
Professional service revenues
$
446,755

$
401,287

$
342,074

11
 %
17
 %
Insurance service revenues
2,613,558

2,258,001

1,851,457

16

22

Total revenues
3,060,313

2,659,288

2,193,531

15

21

Insurance costs
2,413,752

2,112,376

1,686,315

14

25

Cost of providing services (exclusive of depreciation and amortization of intangible assets)
190,444

150,694

134,256

26

12

Sales and marketing
173,714

166,759

139,997

4

19

General and administrative
91,659

69,626

53,926

32

29

Systems development and programming
31,438

27,558

26,101

14

6

Amortization of intangible assets
15,997

39,346

52,302

(59
)
(25
)
Depreciation
19,351

14,612

13,843

32

6

Total costs and operating expenses
2,936,355

2,580,971

2,106,740

14

23

Operating income
123,958

78,317

86,791

58

(10
)
Other income (expense):
 
 
 


Interest expense and bank fees
(20,257
)
(19,449
)
(54,193
)
4

(64
)
Other, net
751

1,142

478

(34
)
139

Income before provision for income taxes
104,452

60,010

33,076

74

81

Income tax expenses
43,046

28,315

17,579

52

61

Net income
$
61,406

$
31,695

$
15,497

94
 %
105
 %
 
 
 
 


Non-GAAP measures (1):
 
 
 


Net Service Revenues (1)
$
646,561

$
546,912

$
507,216

18
 %
8
 %
Net Insurance Service Revenues (1)
199,806

145,625

165,142

37

(12
)
Adjusted EBITDA (1)
186,554

151,340

165,319

23

(8
)
Adjusted Net income (1)
86,694

70,720

74,392

23

(5
)
 
 
 
 
 
 
Operating Metrics:
 
 
 
 
 
Total WSEs payroll and payroll taxes processed (in billions)
$
34.3

$
30.6

$
25.6

12
 %
20
 %
Total WSEs
337,885

324,399

288,312

4

13

Average WSEs
326,850

303,917

261,431

8

16

(1)
Refer to Non-GAAP measures definitions and reconciliations from GAAP measures in Item 6. Selected Financial Data.

 
 
 
33

MANAGEMENT'S DISCUSSION AND ANALYSIS
 


Revenues and Income
    tnet-123116_chartx21986.jpg                tnet-123116_chartx22622.jpg
2016 - 2015 Commentary
Total revenues were $3.1 billion, a 15% increase from 2015:
Professional service revenues were $446.8 million an increase of 11% over 2015 as a result of an Average WSEs growth of 8% with the remainder due to price increases.
Insurance service revenues grew 16% over 2015 to $2.6 billion. Service price increases in combination with the 8% growth in Average WSEs accounted for the year over year growth.
Net Service Revenues was $646.6 million representing an 18% increase from 2015. Net Insurance Service revenues represented 31% of Net Service Revenues and grew 37% over 2015 with Insurance Service revenues per Average WSE increasing by 8% but Insurance Costs per Average WSE increasing by only 6%.
Operating Income was $124.0 million and 58% better than 2015, primarily due to improvement in our service revenues, especially our insurance services business as noted above, partially offset by a 12% increase in operating expenses used to support our growth as detailed below.
Net Income increased 94% to $61.4 million, or $0.85 per diluted share.
Adjusted Net Income increased $16.0 million, a 23% increase from 2015, primarily due to increased operating income as described above, offset by higher income tax expenses.
2015 - 2014 Commentary
Total revenues in 2015 were $2.7 billion, a 21% increase from 2014:
Professional service revenues was $401.3 million an increase of 17% over 2014. The increase was mainly attributable to our 16% growth in Average WSEs and an increase in WSEs from verticals with higher average revenue per WSE.
Insurance revenues grew 22% over 2014 to $2.3 billion. The increase was primarily due to our WSEs growth and an increase of 5% in average insurance service revenues per WSE.
Net Service Revenues was $546.9 million, an 8% increase from 2014. This was the result of a 17% growth in professional service revenues, partially offset by a 12% decrease in Net Insurance Service Revenues which represented 27% of the total. In 2015, we recorded an increase of 25% in insurance costs primarily related to medical claims which exceeded our 16% growth in Average WSEs and 22% increase in Insurance Service Revenues overall.
Operating Income was $78.3 million, 10% decrease from 2014, primarily due to 23% increase in total cost and operating expenses compared to growth of only 21% in total revenues as described above.
Net Income increased 105% to $31.7 million, or $0.44 per diluted share, primarily due to reduction of $34.7 million in interest expense and bank fees, partially offset by decrease in operating income as described above.

 
 
 
34

MANAGEMENT'S DISCUSSION AND ANALYSIS
 


Adjusted Net Income decreased 5% from 2014, primarily due to decrease in the income before provision for income taxes after adjusting the non-GAAP reconciling items, and increase of non-GAAP tax rate from 39.5% for 2014 to 41.5% for 2015 as a result of an increase in New York City tax rates and blended state rates in 2015.
Average WSE
 
Total WSE
 
   lefta01.jpg
Average WSE growth
     righta02.jpg
 
2016

 
2015
 
8
%
 
16%
 
 
 
 
 
Average monthly total revenue per WSE
 
2016
2015
2014
 
$780
$729
$699
 
 
 
 
 
 
 
 
 
Historically, year over year Total WSEs comparison has served as an indicator of our success in growing our business, both organically and through the integration of acquired businesses, and retaining clients. Average WSE growth is another volume measure we use to monitor the performance of our business. However, anticipated revenues for future periods can diverge from total WSEs paid due to pricing differences across our HR solutions and services. In addition to driving the growth in WSE count, we also focus on pricing strategies and product differentiation to maximize our revenue opportunities. Average monthly total revenues per WSE, as a measure to monitor the success of such pricing strategies, has increased 7% in 2016 versus 4% in 2015.
Professional Service Revenues (PSR)
tnet-123116_chartx23240.jpg
 
Revenue Growth
 
2016

 
2015
 
11
%
 
17%
 
 
 
 
 
Monthly PSR per Average WSE
 
2016
2015
2014
 
$114
$110
$109
 
 
 
 
 
Payroll and payroll taxes processed
 
2016
2015
2014
 
$34 billion
$31 billion
$26 billion
 
 
 
 
 
 
 
tnet-123116_chartx23962.jpg
In 2016, our professional service revenues represented 15% of total revenues unchanged from 2015 and 69% of Net Service Revenues which is a reduction of 4% over 2015 reflecting our improved performance of Net Insurance Service Revenues from our repricing efforts.
Our clients are billed either based on a fee per WSE per month, per transaction or a percentage of the WSEs’ payroll. Our investment in a vertical approach provides us the flexibility to offer clients in different industries with different services at different prices. This vertical approach will allow us to address specific needs for different vertical clients, improve our revenue retention rate but potentially reduce the value of WSEs as a leading indicator of future revenue performance.

 
 
 
35

MANAGEMENT'S DISCUSSION AND ANALYSIS
 


Insurance Service Revenues (ISR)
tnet-123116_chartx24808.jpg
 
 Insurance Service Revenues Growth
 
2016

 
2015
 
16
%
 
22%
 
 
 
 
 
Monthly ISR per Average WSE
 
2016
2015
2014
 
$666
$619
$590
 
 
 
 
 
 
 
 
tnet-123116_chartx25551.jpg
Insurance service revenues represented 85% of total revenues with growth of 16% in 2016 versus 22% in 2015. The slower growth in insurance service revenues was mainly attributable to an 8% growth in Average WSEs for 2016 compared with 16% growth in Average WSEs for 2015.
In 2016, we strengthened our insurance offering with new leadership and a new actuarial team to improve our pricing and operating effectiveness. We completed the repricing of medical insurance for our existing clients in 2016 which now fully reflects our insurance experience in 2015. Average insurance service revenues per WSE increased by 8% in 2016 and 5% in 2015.
Insurance Costs
tnet-123116_chartx26140.jpg
 Insurance Costs Growth
2016

 
2015
14
%
 
25
%
 
 
 
 Insurance Costs per Average WSE
2016
2015
2014
$615
$579
$538
 
 
 
 
 
 
 
tnet-123116_chartx26691.jpg                
2016 - 2015 Commentary
Insurance costs increased 14% in 2016 as a result of an 8% increase in Average WSEs, increased workers' compensation costs per WSE, including $28.2 million of workers' compensation costs from loss development relating to prior accident years.
2015 - 2014 Commentary
Insurance costs increased 25% in 2015 as a result of a 16% increase in Average WSEs, increases in the volume and severity of medical claims and $26.4 million in workers' compensation costs from loss development relating to prior accident years.

 
 
 
36

MANAGEMENT'S DISCUSSION AND ANALYSIS
 


Other Operating Expenses (OOE)
Other operating expenses includes cost of providing services (COPS), sales and marketing (S&M), general and administrative (G&A), systems development and programming (SD&P) expenses.

tnet-123116_chartx27398.jpg
Operating Expense Growth
2016

 
2015
18
%
 
17%
 
 
 
% of Total Revenues
2016
2015
2014
16%
16%
16%
 
 
 
% of Net Service Revenue
2016
2015
2014
75%
76%
70%
 
 
 
 
tnet-123116_chartx27990.jpg
We have approximately 2,600 corporate employees as of December 31, 2016 in 53 offices across the U.S. Our corporate employees' compensation related expenses represent 70% of our operating expenses in 2016 and 2015 and 72% in 2014.
We manage our expenses and allocate resources across different business functions based on percentage of Net Service Revenues which has increased from 70% in 2014 to 76% in 2015 and 75% in 2016. The increase was primarily due to lower revenue in 2015, and increased expenses in the following:
tnet-123116_chartx28636.jpg

 
 
 
37

MANAGEMENT'S DISCUSSION AND ANALYSIS
 


2016 - 2015 Commentary
Operating costs increased $72.6 million or 18% as part of our continued investment in supporting our infrastructure and our capabilities to our clients. Specific costs increased as follows:
Compensation costs for our corporate employees includes payroll, payroll taxes, stock-based compensation, bonuses, commissions and other payroll and benefits related costs. Total compensation costs increased $51.0 million or 15% primarily due to increases in our
client services functions to support the growth and migration of clients from legacy platforms to TriNet platform,
risk services functions to strengthen our insurance business management by hiring new leaders and actuarial teams,
technology function to support product delivery and platform integration, and
other supporting functions as a result of increased operational and compliance requirement for a growing public company.
Accounting and other professional fees increased $8.1 million in 2016 in connection with significant time and resources required for our internal control remediation efforts and audit of our internal controls as required by Section 404 of the Sarbanes-Oxley Act.
Consulting expenses included costs associated with reviewing and administering our insurance programs, as well as consulting firms engaged in enhancing our product offerings.
Costs capitalized as internally developed software increased $10.1 million in 2016 primarily associated with product delivery and platform integration.
Other expenses increased $13.8 million in 2016 and included office leases and IT infrastructure costs to support the increased operational requirements.
We expect our operating expenses to continue to increase in the foreseeable future due to expected growth, our strategy to develop new vertical products and platform integrations. We will continue to improve our systems, processes and internal controls to gain efficiencies. These expenses may fluctuate as a percentage of our total revenues from period to period depending on the timing of those expenses.

 
 
 
38

MANAGEMENT'S DISCUSSION AND ANALYSIS
 


2015 - 2014 Commentary
Operating costs increased $60.4 million or 17% in 2015. Significant increases include:
Total compensation costs for our corporate employees increased $37.0 million primarily in
sales and marketing function as a result of our growth in direct sales channels, primarily the addition of new sales representatives,
client services professionals to support the growth of our clients and WSEs, and
stock-based compensation costs to attract and retain our people.
Accounting and other professional fees increased $7.2 million in 2015 including in connection with implementation of Section 404 of the Sarbanes-Oxley Act.
Consulting expenses included costs associated with consulting firms engaged in enhancing our product offerings.
Costs capitalized as internally developed software increased $4.8 million in 2015 primarily associated with product delivery and platform integration initiatives.
Other expenses increased $14.9 million in 2015 and included
IT infrastructure costs to support the increased operational requirements,
marketing events to focus on market verticals and penetration,
travel expenses, meetings, recruiting expenses to support growth in sales force, and
broker commission costs resulted from increased revenues.
Amortization of Intangible Assets
Amortization of intangible assets represents costs associated with acquired companies' developed technologies, client lists, trade names and contractual agreements. Amortization expenses decreased 59% in 2016 and 25% in 2015, as a result of the 2016 revision to the expected useful life of certain client lists and trademarks related to our previous acquisitions and expiration of other acquisition related intangible assets.
Depreciation
Depreciation expense increased 32% in 2016 and 6% in 2015 which was a result of our continuous investment in technology products and platforms.
Other Income (Expense)
Other income (expense) consists primarily of interest expense under our credit facility and capital leases, and non-cash debt issuance cost amortization. It increased 4% in 2016 due primarily to the write-off of debt issuance costs resulting from the refinance of our term loan in July 2016; and decreased 64% in 2015 which was primarily due to lower outstanding debts. Interest expense for 2014 was significantly higher due to the acceleration of loan fee amortization resulting from our refinancing activities, and a prepayment premium related to our partial repayment of the credit facilities.
We may seek to amend our credit facility, including if available terms become more favorable. We may also seek additional borrowings to fund acquisitions or accelerate the payment of principal on outstanding debt. As such, our interest expense may fluctuate as a percentage of our total revenues from period to period depending on the timing of those borrowing and or repayment activities.
Provision for Income Taxes
Our effective tax rates (ETR) were 41.2% for 2016, 47.2% for 2015 and 53.2% for 2014.

 
 
 
39

MANAGEMENT'S DISCUSSION AND ANALYSIS
 


tnet-123116_chartx29987.jpg
2016 - 2015 Commentary
Our ETR decreased 6.0% in 2016 from 47.2% in 2015 primarily due to the following:
5.7% decrease attributable to revaluation of deferred taxes resulting from state legislative changes enacted in 2015,
2.4% decrease in state income taxes from an increase in excludable income for state income tax purposes,
1.2% decrease from discrete benefits recorded in 2016 associated with prior year state income tax expense resulting from a state tax return to provision (RTP) adjustment relating to audit premiums paid for worker’s compensation insurance, partially offset by a
1.5% increase from net operating loss adjustment recorded in 2015.
We anticipate our ETR to be consistent going forward provided there are no significant tax reforms enacted or excess tax benefits from our equity incentive plans when we adopt ASU 2016-09.

2015 - 2014 Commentary
The ETR decrease from 53.2% for 2014 to 47.2% for 2015 includes:
3.2% decrease attributable to disqualifying dispositions on previously non-deductible stock-based compensation,
2.6% decrease due to a revaluation of deferred taxes resulting from state legislative changes enacted in 2014,
1.5% decrease from net operating loss adjustments due to apportionment changes, partially offset by a
2.8% increase in state income taxes resulting from state legislative changes.



 
 
 
40

MANAGEMENT'S DISCUSSION AND ANALYSIS
 


Liquidity and Capital Resources
Liquidity
We manage our liquidity separately between assets and liabilities that are WSE related from our corporate assets and liabilities.
WSE related assets and liabilities primarily consist of current assets and liabilities resulting from transactions directly or indirectly associated with WSEs, including payroll and related taxes and withholdings, our sponsored workers' compensation and health insurance programs, and other benefit programs. Our cash flows related to WSE payroll and benefits is generally matched by advance collection from our clients which is reported as payroll funds collected within WSE related assets.
We reported our corporate cash and cash equivalents on the consolidated balance sheets separately from WSE related assets. We rely on our corporate cash and cash equivalents and cash from operations to satisfy our operational and regulatory requirements and fund capital expenditures. Our credit facilities have been primarily used to fund acquisitions. We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to clients, creditors and debt holders.
Our liquid assets are as follows:
 
Year Ended December 31,
(in thousands)
2016
2015
Cash and cash equivalents
$
184,004

$
166,178

Working capital:




Corporate working capital
151,295

108,539

WSE related assets, net of WSE related liabilities
5,476

3,889

We had corporate cash and cash equivalents of $184.0 million and $166.2 million as of December 31, 2016 and 2015, respectively. The increase was primarily due to the cash generated from operations during the year ended December 31, 2016. We believe that our existing corporate cash and cash equivalents, working capital and cash provided by operating activities will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.
We manage our sponsored benefit and workers' compensation insurance obligations by maintaining funds in restricted cash, cash equivalents and investments as collateral. As of December 31, 2016, we had $129.8 million of restricted cash, cash equivalents and investments included in WSE related assets and $130.5 million of marketable securities designated as long-term restricted cash, cash equivalents and investments on the consolidated balance sheets. These collateral amounts are generally determined at the beginning of each plan year and we may be required by our insurance carriers to adjust the balance when facts and circumstances change. We regularly review the collateral balances with our insurance carriers, and anticipate funding further collateral as needed based on program development.
Capital Resources
Sources of Funds
We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments through existing liquid assets, continuing cash flows from operations, our borrowing capacity under the revolving credit facility and the potential issuance of debt or equity securities.
In July 2016, we refinanced our existing tranche B term loan, originally scheduled to mature in July 2017, with tranche A-2 term loans, pursuant to an amendment to the Amended and Restated First Lien Credit Agreement (Credit Agreement). As of December 31, 2016, $462.9 million of the term loans were outstanding including a $330.5 million term loan A at 3.250% per annum and $132.5 million term loan A-2 at 3.125% per annum maturing in July 2019.
We also have available a $75.0 million revolving credit facility. The total unused portion of the revolving credit facility was $59.5 million as of December 31, 2016. This revolving credit facility is expected to be used for working capital and other general corporate purposes.

 
 
 
41

MANAGEMENT'S DISCUSSION AND ANALYSIS
 


Uses of Funds
In 2016, we repurchased approximately 3.4 million shares of our common stock for $71.6 million. As of December 31, 2016, $60.0 million remained available for repurchase under the program, which is not subject to an expiration date.
Cash Flows
We generated positive cash flows from operating activities during 2016, 2015 and 2014. We also have the ability to generate cash through our financing arrangements under our credit facility to meet short-term funding requirements. The following table presents our cash flows activities for the stated periods:
 
Year Ended December 31,
(in thousands)
2016
2015
2014
Net cash provided by (used in):
 
 
 
Operating activities
$
144,532

$
130,599

$
151,899

Investing activities
(27,122
)
(37,689
)
(45,427
)
Financing activities
(99,371
)
(60,752
)
(66,372
)
Effect of exchange rates on cash and cash equivalents
(213
)
(321
)
(115
)
Net increase in cash and cash equivalents
$
17,826

$
31,837

$
39,985

Operating Activities
Components of net cash provided by operating activities are as follows:
 
Year Ended December 31,
(in thousands)
2016
2015
2014
Operating income
$
123,958

$
78,317

$
86,791

Depreciation and amortization
39,175

52,817

84,403

Stock-based compensation expense
26,497

17,923

10,960

Payment of interest
(15,420
)
(15,224
)
(32,051
)
Income taxes (payments) refunds, net
(39,285
)
(2,005
)
3,809

Collateral (paid to) refunded from insurance carriers, net
(25,057
)
9,918

(8,408
)
Changes in deferred taxes
41,772

14,954

43,842

Changes in other operating assets and liabilities
(2,469
)
(5,431
)
(27,784
)
Excess tax benefits from equity incentive plan activity
(4,639
)
(20,670
)
(9,663
)
Net cash provided by operating activities
$
144,532

$
130,599

$
151,899

The period to period fluctuation in changes in other operating assets and liabilities is primarily driven by timing of payments related to WSE related assets and liabilities, our accounts payable and accrued expenses related to our trade creditors, and corporate employee compensation related payables.

 
 
 
42

MANAGEMENT'S DISCUSSION AND ANALYSIS
 


Investing Activities
Net cash used in investing activities primarily consists of cash paid for capital expenditures, and purchases of investments, offset partially by proceeds from the sales of investments.
 
Year Ended December 31,
(in thousands)
2016
2015
2014
Capital expenditures:
 
 
 
Software and hardware
$
30,677

$
12,830

$
13,798

Office furniture, equipment and leasehold improvements
8,973

5,727

5,363

Cash used in capital expenditures
$
39,650

$
18,557

$
19,161

 
 
 
 
Investments:
 
 
 
Purchases of restricted investments
$
(14,959
)
$
(41,939
)
$
(24,875
)
Proceeds from maturity of restricted investments
27,787

27,557


Cash provided by (used in) investments
$
12,828

$
(14,382
)
$
(24,875
)
Our most significant capital expenditures have been investments in our software and hardware to introduce new products, enhance existing products and platforms, as well as platform integrations. In 2016, we introduced TriNet Technology, TriNet Nonprofit, and TriNet Financial Services vertical products. In addition, we completed integrating our legacy Accord and Ambrose platforms into the TriNet platform. We expect such capital investment will continue in the future.
We invest cash held as collateral to satisfy our long-term obligation towards the workers' compensation liabilities in U.S. long-term treasuries and mutual funds. Such investments are classified as available for sale investments and included as restricted cash, cash equivalents and investments in the balance sheet. The amount of investment and the anticipated holding period is reviewed regularly in conjunction with our estimated long-term workers' compensation liabilities and anticipated claims payment trend.
Financing Activities
Net cash used in financing activities consisted primarily of repayment of debt and repurchases of our common stock, partially offset by proceeds from new borrowings and exercises of stock options.
Historically we funded business acquisitions and special dividends through borrowings under credit facilities which may fluctuate from period to period. We may seek to amend the current credit facilities as they expire, as needed by the business or if market conditions become more favorable, with interest rates or terms that may not necessarily be more favorable than the current interest rates or terms.
The board of directors from time to time authorizes stock repurchases of our outstanding common stock in order to offset dilution from the issuance of stock under our equity-based incentive plan and employee stock purchase plan. Refer to Note 9 in Item 8 of this Form 10-K for details of our equity plans. As of December 31, 2016, approximately $60.0 million remained available for repurchase.
 
Year Ended December 31,
 
2016
2015
2014
Shares repurchased under the plan
3,414,675

1,895,625

490,419

Amounts (in thousands)
$
71,604

$
48,364

$
15,009

In 2014, we received $216.8 million net proceeds from our IPO and it was used to pay off a portion of then outstanding credit facilities.

 
 
 
43

MANAGEMENT'S DISCUSSION AND ANALYSIS
 


Covenants
The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to us and our subsidiaries. It also contains financial covenants that require us to maintain: (1) a minimum consolidated interest coverage ratio of at least 3.50 to 1.00 and (2) a maximum total leverage ratio of 4.25 to 1.00 through December 31, 2016, 3.75 to 1.00 through December 31, 2017 and 3.50 to 1.00 thereafter. As of December 31, 2016, we were in compliance with these financial covenants.
In order to meet various states’ licensing requirements and maintain accreditation by the ESAC, we are subject to various minimum working capital and net worth requirements. As of December 31, 2016 and 2015, we believe we have fully complied in all material respects with all applicable state regulations regarding minimum net worth, working capital and all other financial and legal requirements. Further, we have maintained positive working capital throughout each of the periods covered by the financial statements.
Contractual Obligations
The following table summarizes our significant contractual obligations as of December 31, 2016:
 
Payments Due by Period
(in thousands)
Total
Less than 1 year
1-3 years
3-5 years
More than 5 years
Debt obligations (1)
$
503,323

$
53,715

$
449,608

$

$

Workers' compensation obligations (2)
277,853

96,110

84,678

35,726

61,339

Operating lease obligations (3)
64,644

15,274

25,649

16,839

6,882

Purchase obligations (4)
11,505

5,078

6,427



Total
$
857,325

$
170,177

$
566,362

$
52,565

$
68,221

(1) Includes principal and the projected interest payments of our term loans, see Note 8 in Item 8 of this Form 10-K for details.
(2) Represents estimated payments that are expected to be made to carriers for various workers' compensation program under the contractual obligations. These obligations include the costs of reimbursing the carriers for paying claims within the deductible layer in accordance with the workers' compensation insurance policy as well as premiums and other liabilities.
(3) Includes various facilities and equipment leases under various operating lease agreements.
(4) Our purchase obligations primarily consist of software licenses, maintenance agreements and sales and marketing events pertaining to various contractual agreements.
In the normal course of business, we make representations and warranties that guarantee the performance of services under service arrangements with clients. Historically, there have been no material losses related to such guarantees. In addition, in connection with our IPO, we have entered into indemnification agreements with our officers and directors, which require us to defend and, if necessary, indemnify these individuals for certain pending or future legal claims as they relate to their services provided to us. Such indemnification obligations are not included in the table above.
Off-Balance Sheet Arrangements
As of December 31, 2016, we did not have any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.



 
 
 
44

MANAGEMENT'S DISCUSSION AND ANALYSIS
 


Critical Accounting Judgments and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP, which require us to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Some of the assumptions are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial statements could be materially affected. For additional information about our accounting policies, refer to Note 1 in Item 8 of this Form 10-K.
Recent Accounting Pronouncements
Refer to Note 1 in Item 8 of this Form 10-K for additional information related to recent accounting pronouncements.
Insurance Loss Reserves
We have purchased fully-insured workers' compensation and health benefits coverage for our employees and WSEs. As part of these insurance policies, we bear claims costs up to a defined deductible amount and as a result, we establish insurance reserves including both known and incurred but not reported (IBNR) costs. As workers' compensation costs for a particular period are not known for many years after the losses have occurred these loss reserves represent our best estimate of unpaid claim losses and loss adjustment expenses within the deductible layer in accordance with our insurance policies.
We have appointed external actuaries to evaluate, review and recommend estimates of our workers' compensation and health benefits loss reserves. The loss reserve studies performed by these qualified actuaries analyze historical claims data to develop a range of potential ultimate losses using loss development, expected loss ratio and frequency/severity methods in accordance with Actuarial Standards of Practice. Loss methods are applied to classes or segments of the loss data organized by policy year and risk class.
Key judgments and evaluations in arriving at loss estimates by segment and the reserve selection overall include:
the selection of models used and the relative weights given to selection model used for each policy year,
the underlying assumptions of loss development factor (LDF) used in these models,
the effect of any changes claims handling processes,
evaluation of loss (medical and indemnity) cost trends, costs from changes in the risk exposure being evaluated and any applicable changes in legal, regulatory or judicial environment.
We review and evaluate these judgments and the associated recommendations in concluding the adequacy of loss reserves. Where adjustments are necessary these are recorded in the period in which the adjustments are identified.
Workers' Compensation Loss Reserves
Under our policies, we are responsible for reimbursing the insurance carriers for workers' compensation losses up to $1 million per claim occurrence (Deductible Layer). We use external actuaries to evaluate, review and recommend workers' compensation loss reserves on a quarterly basis. The data is segmented by class and state and analyzed by policy year; states where we have small exposure are aggregated into a single segment.
We use a combination of loss development, expected loss ratio and frequency/severity methods which include the following inputs, assumptions and analytical techniques:
TriNet historical loss experience, exposure data and industry loss experience,
inputs of WSEs’ job responsibilities and location,
historical frequency and severity of workers' compensation claims,
an estimate of future cost trends to establish expected loss ratios for subsequent accident years,
expected loss ratios for the latest accident year or prior accident years, adjusted for the loss trend, the effect of rate changes and other quantifiable factors, and
loss development factors to project the reported losses for each accident year to an ultimate basis.

 
 
 
45

MANAGEMENT'S DISCUSSION AND ANALYSIS
 


Final claim settlements may vary materially from the present estimates, particularly when those payments may not occur until well into the future. In our experience, plan years related to workers' compensation programs may take 10 years or more to be fully settled. Certain assumptions used in estimating these reserves are highly judgmental. Our loss reserves, results of operations and financial condition can be materially impacted if actual experience differs from the assumptions used in establishing these reserves.
Health Benefits Loss Reserves
We sponsor and administer a number of fully-insured, risk based employee benefit plans, including group health, dental, vision and life insurance as an employer plan sponsor under section 3(5) of the ERISA. Approximately 62% by premium of our 2016 policies relate to fully-insured policies where we reimburse our health insurers for claims incurred within a per person deductible layer up to a maximum aggregate exposure limit per policy. These deductible dollar limits and maximum limits vary by carrier and year.
Costs covered by these insurance plans generally develop on average within three to six months so loss reserves include estimates of reported losses and claims incurred but not yet paid (IBNP). Data is segmented and analyzed by insurance carrier.
To estimate health benefits loss reserves we use a number of inputs, assumptions and analytical techniques:
TriNet historical loss claims payment patterns,
per employee per month claims costs, and
plan enrollment and medical trend rates.
These reserves may vary in subsequent quarters from the amount estimated. Our loss reserves, results of operations and financial condition can be materially impacted if actual experience differs from our key assumptions used in establishing these reserves.

 
 
 
46

QUANTITATIVE AND QUALITATIVE DISCLOSURES
 


Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We had restricted investments and interest bearing receivables in connection with workers' compensation premiums totaling $56.3 million as of December 31, 2016. Included in this amount were $53.6 million in time deposits and U.S. Treasuries. Our investments are made for capital preservation purposes and these interest-earning instruments carry a degree of interest rate risk. Our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities prior to maturity or declines in fair value are determined to be other-than-temporary. Fluctuations in the value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized only if we sell the underlying securities. To date, fluctuations in interest income have not been significant.
We had total outstanding indebtedness of $462.9 million as of December 31, 2016, of which $38.3 million is due within 12 months. We are exposed to market risk from changes in interest rates on our debt. Depending upon the borrowing option chosen, the interest charged is generally based upon the prime lending rate or LIBOR plus an applicable margin. If interest rates in effect at December 31, 2016 increased or decreased 100 basis points, our interest expense for 2017 through 2019 would correspondingly increase or decrease by $10.7 million.


 
 
 
47

FINANCIAL STATEMENTS
 

Item 8. Financial Statements and Supplementary Data

TRINET GROUP, INC.
Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



 
 
 
48

FINANCIAL STATEMENTS
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of TriNet Group, Inc.
We have audited the accompanying consolidated balance sheet of TriNet Group, Inc. and subsidiaries (the "Company") as of December 31, 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity (deficit), and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 15, pertaining to the year ended December 31, 2016. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of TriNet Group, Inc. and subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule pertaining to the year ended December 31, 2016, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2017 expressed an adverse opinion on the Company's internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 28, 2017


 
 
 
49

FINANCIAL STATEMENTS
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of TriNet Group, Inc.
We have audited the accompanying consolidated balance sheet of TriNet Group, Inc. as of December 31, 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TriNet Group, Inc. at December 31, 2015, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Francisco, California
March 31, 2016


 
 
 
50

FINANCIAL STATEMENTS
 

TRINET GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, 2016
December 31, 2015
Assets
 
 
Current assets:
 
 
Cash and cash equivalents
$
184,004

$
166,178

Restricted cash and cash equivalents
14,569

14,557

Prepaid income taxes
42,381

4,105

Prepaid expenses
10,784

8,579

Other current assets
2,145

1,359

Worksite employee related assets
1,281,471

1,373,386

Total current assets
1,535,354

1,568,164

Workers' compensation collateral receivable
31,883

29,204

Restricted cash, cash equivalents and investments
130,501

101,806

Property and equipment, net
58,622

37,844

Goodwill
289,207

289,207

Other intangible assets, net
31,074

46,772

Other assets
18,502

19,452

Total assets
$
2,095,143

$
2,092,449

Liabilities and stockholders’ equity
 

 
Current liabilities:
 

 
Accounts payable
$
22,541

$
12,904

Accrued corporate wages
30,937

28,963

Notes and capital leases payable, net
36,559

32,970

Other current liabilities
12,551

11,402

Worksite employee related liabilities
1,275,995

1,369,497

Total current liabilities
1,378,583

1,455,736

Notes and capital leases payables, net, noncurrent
422,495

460,965

Workers' compensation loss reserves
(net of collateral paid $22,377 and $15,129 at December 31, 2016 and 2015, respectively)
159,301

105,481

Deferred income taxes
92,373

54,641

Other liabilities
7,801

7,545

Total liabilities
2,060,553

2,084,368

Commitments and contingencies (see Note 13)




Stockholders’ equity:
 
 
Preferred stock
($0.000025 par value per share; 20,000,000 shares authorized; no shares issued and outstanding at December 31, 2016 and 2015)


Common stock and additional paid-in capital
($0.000025 par value per share; 750,000,000 shares authorized; 69,015,690 and 70,371,425 shares issued and outstanding at December 31, 2016 and 2015, respectively)
535,132

494,397

Accumulated deficit
(499,938
)
(485,595
)
Accumulated other comprehensive loss
(604
)
(721
)
Total stockholders’ equity
34,590

8,081

Total liabilities and stockholders’ equity
$
2,095,143

$
2,092,449

See accompanying notes.

 
 
 
51

FINANCIAL STATEMENTS
 

TRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
 
Year Ended December 31,
(In thousands, except share and per share data)
2016
2015
2014
Professional service revenues
$
446,755

$
401,287

$
342,074

Insurance service revenues
2,613,558

2,258,001

1,851,457

Total revenues
3,060,313

2,659,288

2,193,531

Insurance costs
2,413,752

2,112,376

1,686,315

Cost of providing services (exclusive of depreciation and amortization of intangible assets)
190,444

150,694

134,256

Sales and marketing
173,714

166,759

139,997

General and administrative
91,659

69,626

53,926

Systems development and programming
31,438

27,558

26,101

Amortization of intangible assets
15,997

39,346

52,302

Depreciation
19,351

14,612

13,843

Total costs and operating expenses
2,936,355

2,580,971

2,106,740

Operating income
123,958

78,317

86,791

Other income (expense):
 
 
 
Interest expense and bank fees
(20,257
)
(19,449
)
(54,193
)
Other, net
751

1,142

478

Income before provision for income taxes
104,452

60,010

33,076

Income tax expenses
43,046

28,315

17,579

Net income
$
61,406

$
31,695

$
15,497

Net income per share:
 
 
 
Basic
$
0.88

$
0.45

$
0.24

Diluted
$
0.85

$
0.44

$
0.22

Weighted average shares:
 
 
 
Basic
70,159,696

70,228,159

56,160,539

Diluted
71,972,486

72,618,069

59,566,773

 
See accompanying notes.

 
 
 
52

FINANCIAL STATEMENTS
 

TRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Year Ended December 31,
(In thousands)
2016
2015
2014
Net income
$
61,406

$
31,695

$
15,497

Other comprehensive income (loss), net of tax
 
 
 
Unrealized gains (losses) on investments
47

(86
)
(8
)
Foreign currency translation adjustments
70

(321
)
(115
)
Total other comprehensive income (loss), net of tax
117

(407
)
(123
)
Comprehensive income
$
61,523

$
31,288

$
15,374

 
See accompanying notes.

 
 
 
53

FINANCIAL STATEMENTS
 

TRINET GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
 
Preferred Stock

Common Stock and Additional Paid-In Capital
Accumulated Deficit
Accumulated Other Comprehensive Loss
Total Stockholders’ Equity (Deficit)
(In thousands, except per share data)
Shares
Amount
Shares
Amount
Balance at December 31, 2013
9,516,427

$
122,878

15,259,540

$
74,160

$
(467,209
)
$
(191
)
$
(393,240
)
Net income




15,497


15,497

Other comprehensive loss





(123
)
(123
)
Issuance of common stock for vested restricted stock units


4,250





Issuance of common stock under employee stock purchase plan


249,494

3,393



3,393

Conversion of preferred stock
(9,516,427
)
(122,878
)
38,065,708

122,878



122,878

Issuance of common stock from exercise of stock options


1,712,278

2,193



2,193

Issuance of common stock, net of IPO cost


15,091,074

217,796

 
 
217,796

Stock-based compensation expense



10,660



10,660

Repurchase of common stock


(490,419
)

(15,009
)

(15,009
)
Awards effectively repurchased for required employee withholding taxes


(80,599
)

(1,431
)

(1,431
)
Excess tax benefits from equity incentive plan activity



9,663



9,663

Realized tax benefit of deductible IPO transaction costs



1,939



1,939

Special dividend




25


25

Balance at December 31, 2014


69,811,326

442,682

(468,127
)
(314
)
(25,759
)
Net income




31,695


31,695

Other comprehensive loss





(407
)
(407
)
Issuance of common stock for vested restricted stock units


106,136





Issuance of common stock under employee stock purchase plan


272,836

5,315



5,315

Issuance of common stock from exercise of stock options


2,112,131

7,166



7,166